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FDIC Enforcement Decisions and Orders

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   [11,684] In the Matter of First Mountain Bank, Big Bear Lake, California, Docket No. 99-140b (12-27-99)

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices.

(This order teriminated by order of the FDIC issued 3-24-03; see ¶16,333.)

   [.1] Management—Qualifications Specified
   [.2] Assets—Tier 1 Capital
   [.3] Assets—Adversely Classified Assets—Reduction Required
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   [.4] Loan Policy—Preparation or Revision of Policy Required
   [.5] Violations of Law—Correction of Violations Required
   [.6] Bank Operations—Compliance with Tax Code
   [.7] Bank Operations—Compliance with Garnishments, Levies, Seizures and/or Attachments Required
   [.8] Financial Recording Regulations—Taxpayer Identification Number Requirements
   [.9] Bank Offices—New Openings Restricted
   [.10] Board of Directors—Trustee for Bank's ESOP
   [.11] Bank Operations—Internal Routine and Control Procedures—Written Plan Required
   [.12] Audit—Independent Auditors Required
   [.13] Shareholders—Disclosure of Cease and Desist Order Required

In the Matter of

FIRST MOUNTAIN BANK
BIG BEAR LAKE, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO
CEASE AND DESIST

FDIC-99-140b

   First Mountain Bank, Big Bear Lake, California ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violation of laws and/or regulations alleged to have been committed by the Bank and of its right to a hearing on the alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(b)(1), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated December 13, 1999, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violation of laws and/or regulations, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.

The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had committed violations of laws and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12 U.S.C. §1813(u), and its successors and assigns cease and desist from the following unsafe and unsound banking practices and violation of laws and/or regulations:
   (a) operating with inadequate management;
   (b) operating with inadequate equity capital and reserves in relation to the volume and quality of assets and contingent liabilities held by the Bank;
   (c) following hazardous lending and lax collection practices;
   (d) operating with inadequate internal routine and controls;
   (e) operating in such manner as to produce low earnings;
   (f) operating in violation of laws and regulations made applicable to all legal entities, including the Bank, as more fully described on pages 30–48 of the Report of Examination as of March 31, 1999; and
   (g) operating in violation of laws and regulations specifically made applicable to insured depository institutions, including state nonmember insured institutions, as more fully described on pages 30–48 of the Report of Examination as of March 31, 1999.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:
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   [.1]1. The Bank shall have and retain qualified management.
   (a) Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. Management shall include a chief executive officer with proven ability in managing a bank of comparable size, improving earnings, complying with laws and regulations and addressing other matters needing particular attention. Management shall also include a chief financial officer with proven ability in managing the financial affairs of a bank of comparable size and complying with applicable laws and regulations. Management shall also include a senior lending officer with significant appropriate lending, collection, and loan supervision experience. Each member of management shall be provided appropriate written authority from the Bank's board of directors to implement the provisions of this ORDER.
   (b) The qualifications of management shall be assessed on its ability to:

       (i) comply with the requirements of this ORDER;
       (ii) operate the Bank in a safe and sound manner;
       (iii) comply with applicable laws and regulations; and
       (iv) restore and/or maintain all aspects of the Bank in a safe and sound condition, including risk management, asset quality, capital adequacy, earnings, management effectiveness, liquidity and sensitivity to market risk.
   (c) During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Commissioner, California Department of Financial Institutions ("Commissioner") in writing when it proposes to add any individual to the Bank's board of directors or employ any individual as a senior executive officer. The notification must be received at least 30 days before such addition or employment is intended to become effective and should include a description of the background and experience of the individual or individuals to be added or employed.
   (d) The Bank may not add any individual to its board of directors or employ any individual as a senior executive officer if the Regional Director issues a notice of disapproval pursuant to section 32 of the Act, 12 U.S.C. §1831i.

   [.2]2. (a) Within 120 days from the effective date of this ORDER, and thereafter during the life of the ORDER, the Bank shall have Tier 1 capital in such an amount as to equal or exceed seven and one-quarter (7.25) percent of the Bank's total assets.
   (b) Within 60 days from the effective date of this ORDER, the Bank shall achieve and, thereafter during the life of the ORDER, maintain risk-based capital ratios sufficient to meet the definition of "well-capitalized" set forth in subsections 325.103(b)(1)(i) and 325.103(b)(1)(ii) of the FDIC Rules and Regulations, 12 C.F.R. §§325.103(b)(1)(i) & 325.103(b)(1)(ii).
   (c) The level of Tier 1 capital to be maintained during the life of this ORDER pursuant to Subparagraph 2(a) shall be in addition to a fully funded allowance for loan and lease losses, the adequacy of which shall be satisfactory to the Regional Director as determined at subsequent examinations and/or visitations.
   (d) Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 2 of this ORDER may be accomplished by the following:

       (i) the sale of common stock; or
       (ii) the sale of noncumulative perpetual preferred stock; or
       (iii) the direct contribution of cash by the board of directors, shareholders, and/or parent holding company; or
       (iv) any combination of the above means.
Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 2 of this ORDER may not be accomplished through a deduction from the Bank's allowance for loan and lease losses.
   (e) If all or part of the increase in Tier 1 capital required by Paragraph 2 of this ORDER is accomplished by the sale of new securities, the board of directors shall forthwith take all necessary steps to adopt and implement a plan for the sale of such additional securities, including the voting of any shared owned or proxies held or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare offering materials fully describing the {{2-29-00 p.C-4859}}securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the federal securities laws. Prior to the implementation of the plan and, in any event, not less than fifteen (15) days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Section, 550 - 17th Street, N.W., Washington, D.C., 20429, for review. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination. If the increase in Tier 1 capital is provided by the sale of noncumulative perpetual preferred stock, then all terms and conditions of the issue, including but not limited to those terms and conditions relative to interest rate and convertibility factor, shall be presented to the Regional Director for prior approval.
   (f) In complying with the provisions of Paragraph 2 of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities, a written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of Bank securities. The written notice required by this paragraph shall be furnished within ten (10) days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.
   (g) For the purposes of this ORDER, the terms "Tier 1 capital" and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. §§325.2(t) and 325.2(v).

   [.3]3. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets and contingent liabilities classified "Loss" in the Report of Examination as of March 31, 1999, that have not been previously collected or charged off. Elimination of these assets or contingent liabilities through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.
   (b) Within 120 days from the effective date of this ORDER, the Bank shall have reduced the assets and contingent liabilities classified "Substandard" in the Report of Examination as of March 31, 1999 that have not previously been charged off to not more than $800,000.
   (c) Within 240 days from the effective date of this ORDER, the Bank shall have reduced the assets and contingent liabilities classified "Substandard" in the Report of examination as of March 31, 1999 that have not previously been charged off to not more than $400,000.
   (d) The requirements of subparagraphs 3(a), 3(b), and 3(c) of this ORDER are not to be construed as standards for future operations and, in addition to the foregoing, the Bank shall eventually reduce the total of all adversely classified assets and contingent liabilities. Reduction of these assets and contingent liabilities through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph. As used in subparagraphs 3(b), 3(c), and 3(d) the word "reduce" means:

       (i) to collect;
       (ii) to charge-off; or
       (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC at subsequent examinations and/or visitations.
   [.4]4. Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement a written lending and collection policy to provide effective guidance and control over the Bank's lending function. In connection with its revision of the written lending and collection policy, the Bank shall address and correct the deficiencies and exceptions which are more fully set forth on pages 19–20 of the Report of Examination of the Bank as of March 31, 1999. Specifically, the Bank shall include in its revised policy minimum underwriting standards including requirements for complete, detailed and current financial statements on borrowers; appraisals of collateral; verification of income and/or sources of repayment; and the submission of copies of income tax returns to substantiate borrowers' self-reported income. The policy shall contain a procedure for documenting any exceptions to the policy, including board of directors'
{{2-29-00 p.C-4860}}approval of the exception. In addition, the Bank shall include in its revised policy the requirement that Bank officers shall recluse themselves from participating in the submission, review and/or approval of any loan in which the officer has a financial or legal interest or business association with the borrower or any other conflict of interest. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.5]5. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violation of laws which are more fully set out on pages 30–48 of the Report of Examination of the Bank as of March 31, 1999. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.6]6. (a) During the life of this ORDER, the Bank shall fully comply with all federal and state laws and regulations, including 26 U.S.C. §§3402 and 3102 and California Revenue and Taxation Code §18663, which concern withholding from employees' compensation amounts required for income, social security and Medicare taxes. The Bank shall also comply with related provisions of law that govern the payment of employer matching contributions for social security and Medicare taxes. Withholding from employee compensation shall be calculated on all taxable income, including auto allowances, bonuses and the like.
   (b) During the life of this ORDER, the Bank shall obtain and maintain on file for each and every employee a valid and current withholding exemption certificate (Form W-4).
   (c) Any employee claiming to be exempt from the payment of income taxes shall so certify on a valid withholding exemption certificate (Form W-4) which shall include the employee's signature and social security number. Upon receipt of a withholding exemption certificate claiming that an employee is tax exempt, the Bank shall immediately forward the certificate to the Internal Revenue Service ("IRS"). A list of all current employees who claim to be exempt from the payment of income taxes along with their withholding exemption certificate shall be provided to the Regional Director within 30 days of the effective date of this ORDER. Thereafter, during the life of this ORDER, the Bank shall provide written notice and a withholding exemption certificate to the Regional Director for any employee who claims to be exempt from the payment of income taxes, within 30 days of such claim being made.
   (d) The Bank shall seek reimbursement from all former employees who did not have income, social security and Medicare taxes withheld from their Bank compensation, to the extent that the Bank has reimbursed the IRS or the California Franchise Tax Board ("FTB") for such taxes and/or penalties or fines in connection with the employee's failure to pay said taxes. Bank reimbursement shall be pursued by means of legal action, if necessary.
   (e) The Bank shall take all steps necessary to quantify its contingent tax liabilities, and thereafter, take all legally available methods to satisfy and eliminate its contingent tax liabilities.

   [.7]7. During the life of this ORDER, the Bank shall fully comply with any and all garnishments, levies, seizures and/or attachments, however denominated, which are issued by federal, state or local tax collection agencies, including the IRS, FTB, California Board of Equalization and county tax collectors or assessors. If the Bank believes that there is a legally valid reason why it cannot honor a garnishment, levy, seizure or attachment, it shall promptly obtain a written opinion from Bank legal counsel, before it takes any action which would result in a failure to timely honor said garnishment, levy, seizure or attachment.

   [.8]8. (a) During the life of this ORDER, in accordance with 31 C.F.R. §103.34(a)(1) of the Financial Recordkeeping and Reporting of Currency and Foreign Transactions Regulations ("Financial Recordkeeping Regulations") and Part 326.8(b) of the FDIC's Rules and Regulations, the Bank shall maintain, as to each of its deposit accounts, a taxpayer identification number ("TIN") of the customer involved or a written record of the Bank's good faith efforts to obtain a TIN.
   (b) During the life of this ORDER, the Bank shall provide to the Regional Director, every 30 days, a list of deposit accounts without TINs and a copy of the written record of the Bank's good faith effort to obtain said TIN.
   (c) Upon the effective date of this ORDER, the Bank shall not participate in any manner in providing materials to its deposi- {{2-29-00 p.C-4861}}tors or prospective depositors which in any way encourages or condones the failure of a depositor to provide a TIN to the Bank.
   (d) During the life of this ORDER, the Bank shall not open any deposit account except upon personal presentment of valid identification by the depositor.
   (e) Upon the effective date of this ORDER, the Bank shall not provide to any third party or organization, any official Bank documents, letterhead, powers of attorney or internal Bank procedures for opening deposit accounts. In addition, to the extent that the Bank is aware of third parties or organizations that currently have official Bank documents, letterhead, powers of attorney or internal Bank procedures, the Bank shall seek the return of said documents.
   (f) During the life of this ORDER, in accordance with 31 C.F.R. §103.21(a) of the Financial Recordkeeping Regulations and Part 353.3(a) of the FDIC's Rules and Regulations, the Bank shall file Suspicious Activity Reports when required by statute or regulation.

   [.9]9. During the life of this ORDER, the Bank shall not, without having received the prior written approval of the Regional Director, operate any office, directly or indirectly through any person or organization, which would constitute a branch under section 18(d) of the Act.

   [.10]10. (a) Upon the effective date of this ORDER, the Bank's board of directors shall serve as the trustee for the Bank's Employee Stock Ownership Plan ("ESOP"). During the life of this ORDER, the Regional Director shall approve any proposed appointment of a successor trustee, before the appointment becomes effective.
   (b) The Bank shall correct the apparent violation of the Employee Retirement Income Security Act of 1974 ("ERISA") resulting from the ESOP loan discussed at pages 26 and 44 of the Examination of the Bank as of March 31, 1999.
   (c) Purchases of Bank stock for the ESOP and 401(k) plans shall only be made for the exclusive benefit of plan participants as more fully discussed at page 43 of the Report of Examination of the Bank as of March 31, 1999.
   (d) Annual Bank stock valuations for the ESOP and 401(k) plans shall be conducted by a fully independent entity, as required by ERISA, as more fully discussed at page 46 of the Report of Examination of the Bank as of March 31, 1999.

   [.11]11. Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a policy for the operation of the Bank in such a manner as to provide adequate internal routine and control policies consistent with safe and sound banking practices as more fully discussed at page 22 of the Report of Examination of the Bank as of March 31, 1999. Such policy and its implementation shall be satisfactory to the Regional Director as determined at subsequent examinations and/or visitations.

   [.12]12. Within 60 days of the effective date of this ORDER, the Bank shall retain the services of a professional certified public accounting firm to conduct external audits of the Bank and to certify its financial statements.

   [.13]13. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Bank's next shareholder communication and also in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Registration and Disclosure Section, 550 - 17th Street, N.W., Washington, D.C., 20429, at least fifteen (15) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.
   14. Within 30 days of the end of the first quarter following the effective date of this ORDER, and within thirty (30) days of the end of each quarter thereafter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports shall include a copy of the Bank's Report of Condition and the Bank's Report of Income. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Bank in writing from making further reports.
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   This ORDER shall become effective ten (10) days from the date of its issuance.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Pursuant to delegated authority.
   Dated and issued at San Francisco, California, this 27th day of December, 1999.

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