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   [11,971] In the Matter of Frontier State Bank, Show Low, Arizona, Docket No. 02-081b (9-19-02).

   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 terminated by order of the FDIC dated 1-16-03; see ¶16,326.)

   [.1] Management—Qualifications Specified

   [.2] Compliance Program—Increase Supervision

   [.3] Capital—Maintain Tier 1 Capital

   [.4] Assets—Charge-off or Collection

   [.5] Loan Policy—Preparation or Revision of Policy Required

   [.6] Profit Plan—Preparation of Plan Required

   [.7] Violations of Law—Correction of Violations Required

   [.8] Bank Operations—Internal Routine and Control Procedures—Establish

   [.9] Market Risk—Plan to Monitor Risk Required

   [.10] Audit—Internal Audit—Risk Assessment Required

   [.11] Audit—Internal Technology Information Systems Audit Required

   [.12] Audit—Program Required

   [.13] Consumer Laws and Regulations—Compliance Procedures Required

   [.14] Consumer Laws and Regulations—Internal Review System—Minimum Requirements

   [.15] Consumer Laws and Regulations—Training Required

   [.16] Reports of Condition and Income—Amendment Required

   [.17] Shareholders—Disclosure of Cease and Desist Order Required
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In the Matter of
FRONTIER STATE BANK
SHOW LOW, ARIZONA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-02-081b

   Frontier State Bank, Show Low, Arizona ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violations of law 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 September 11, 2002, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law 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 law 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 violations of law and/or regulations listed below which refer specifically to practices and violations described in the FDIC Safety and Soundness Report of Examination dated April 8, 2002 ("Report of Examination") and/or the FDIC Compliance Report of Examination dated June 18, 2001 ("Compliance Report") and/or the FDIC Information Technology Report of Examination dated March 4, 2002 ("Information Systems Report"):

   (a) operating with inadequate management;

   (b) operating with inadequate capital in relation to the kind and quality of assets held by the Bank;

   (c) operating with a large volume of poor quality loans;

   (d) engaging in unacceptable lending and lax collection practices;

   (e) operating in such a manner as to produce operating losses;

   (f) operating with inadequate internal routine and controls policies referred to in the Report of Examination;

   (g) operating with policies and internal routines and controls which are insufficient to ensure compliance with the laws and regulations referred to in the Compliance Report;

   (h) failing to provide adequate supervision by the Bank's Board of Directors over, and direction to, the Bank's management in order to ensure compliance with the laws and regulations referred to in the Compliance Report;

   (i) operating with officers and employees who do not have adequate knowledge and/or sufficient allocated time to ensure compliance with the laws and regulations referred to in the Compliance Report; and

   (j) operating in violation of the following laws and/or regulations:

       (i) Section 103.22(b)(1); 103.27(a)(1); and 103.27(d) of the Rules and Regulations of the Department of the Treasury, 31 C.F.R. §103.22(b)(1); 103.27(a)(1); and 103.27(d), as more fully described on Page 23 of the Report of Examination;

       (ii) Section 326.8 of the Rules and Regulations of the Department of the Treasury, 12 C.F.R. §326.8, as more fully described on Page 23 of the Report of Examination;

       (iii) Part 365 of the FDIC's Rules and Regulations, 12 C.F.R. Part 365, as more fully described on Page 24 of the Report of Examination;

       (iv) Section 206.5(b) of Regulation F of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 206.5(b), as more fully described on Page 24 of the Report of Examination;

       (v) Section 6-245 of the Arizona Revised
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       Statutes, Ariz. Rev. Stat. Ann. §6-245, as more fully described on Page 25 of the Report of Examination;

       (vi) Section 1691, et seq. of the Equal Credit Opportunity Act, 15 U.S.C. §1691 et seq., and corresponding Section 202.4 of Regulation B of the Board of Governors of the Federal Reserve System, 12 C.F.R. §202.4, as more fully described on Page 7 of the Compliance Report;

       (vii) Part 226 of Regulation Z of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 226, as more fully described on Pages 7-9 and Pages 12-13 of the Compliance Report;

       (viii) Section 623(a) of the Fair Credit Reporting Act, 15 U.S.C. §1681s-2, as more fully described on Pages 10-11 of the Compliance Report;

       (ix) Part 229 of Regulation CC of the Board of Governors of the Federal Reserve System, C.F.R. Part 229, as more fully described on Pages 13-14 of the Compliance Report;

       (x) Part 205 of Regulation E of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 205, as more fully described on Pages 14-15 of the Compliance Report; and

       (xi) Section 3(e) of the Homeowners Protection Act of 1998, 12 U.S.C. §4901, as more fully described on Page 16 of the Compliance Report.

   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1]1. Within 90 days from the effective date of this ORDER, the Bank shall have and thereafter 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 the following:

       (i) a chief executive officer with proven ability in managing a Bank of comparable size, experience in upgrading a low quality loan portfolio, improving earnings, and other matters needing particular attention;

       (ii) a chief financial officer with appropriate experience in investments and liquidity and funds management;

       (iii) a senior lending officer with significant appropriate lending, collection, and loan supervision experience and experience in upgrading a low quality loan portfolio;

       (iv) a qualified senior compliance officer who shall be provided with the necessary time, training, authority, resources, and responsibility to effectively administer the Bank's compliance program and to train and supervise personnel in compliance matters. The senior compliance officer shall report to the Bank's Board of Directors on a quarterly basis and such report shall be documented in the minutes of the Bank's Board of Directors' meeting. In addition, the Bank shall review the number and type of Bank personnel that is needed to manage and supervise its compliance program.

   (b) Each member of management shall be provided appropriate written authority from the Bank's Board of Directors to implement the provisions of this ORDER.

   (c) 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 all aspects of the Bank to a safe and sound condition, including assets quality, capital adequacy, earnings, management effectiveness, and liquidity.

   (d) During the life of this ORDER, the Bank shall notify the Regional Office ("Regional Director") and the Superintendent of the Arizona State Banking Department ("Superintendent") 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.

   [.2]2. Upon the effective date of this ORDER, the Bank's Board of Directors shall increase its supervision and oversight of the Bank's compliance program. The Bank's actions as required by this Paragraph shall be in a form and manner acceptable to the Regional
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   Director as determined at subsequent examinations and/or visitations.

   [.3]3. (a) Within 90 days from the effective date of this ORDER, the Bank shall have Tier 1 capital in such an amount as to equal or exceed seven and one-half (7.5) percent of the Bank's total assets. Thereafter, during the life of this ORDER, the Bank shall maintain Tier 1 capital in such an amount as to equal or exceed seven and one-half (7.5) percent of the Bank's total assets.

   (b) The level of Tier 1 capital to be maintained during the life of this ORDER pursuant to Subparagraph 3(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 and Superintendent as determined at subsequent examinations and/or visitations.

   (c) Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 3 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 and/or shareholders of the Bank; or

       (iv) any other means acceptable to the Regional Director and the Superintendent; or

       (v) any combination of the above means.

   Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 3 of this ORDER may not be accomplished through a deduction from the Bank's allowance for loan and lease losses.

   (d) If all or part of the increase in Tier 1 capital required by Paragraph 3 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 shares 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 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, Accounting and Securities Section, 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 and the Superintendent for prior approval.

   (e) In complying with the provisions of Paragraph 3 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.

   (f) 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).

   [.4]4. (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 classified "Loss" and one-half of the assets classified "Doubtful" dated April 8, 2002, that have not been previously collected or charged off. Elimination of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.

   (b) Beginning with the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has
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   a loan or other extension of credit from the Bank that has been classified, in whole or in part, "Substandard" or "Doubtful" without the prior approval of a majority of the Board of Directors or the Loan Committee of the Bank.

   (c) Within 90 days from the effective date of this ORDER, the Bank shall have reduced the items classified "Substandard" and "Doubtful" as of April 8, 2002 that have not previously been charged off to not more than $6.8 million.

   (d) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the items classified "Substandard" and "Doubtful" as of April 8, 2002 that have not previously been charged off to not more than $4.0 million.

   (e) Within 270 days from the effective date of this ORDER, the Bank shall have reduced the items classified "Substandard" and "Doubtful" as of April 8, 2002 that have not previously been charged off to not more than $3.0 million.

   (f) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the items classified "Substandard" and "Doubtful" as of April 8, 2002 that have not previously been charged off to not more than $2.3 million.

   (g) The requirements of Subparagraphs 4(a) through 4(g) 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. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph. As used in Subparagraphs 4(c) through 4(g) 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 and/or the Arizona State Banking Department.

   [.5]5. (a) Within 90 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies to correct deficiencies noted on Pages 4 through 7 of the Report of Examination and provide effective guidance and control over the Bank's lending function. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   (b) The Board of Directors shall adopt procedures whereby compliance with the revised loan policy is monitored and responsibility for exceptions thereto assigned. The procedures adopted shall be reflected in minutes of a board of directors meeting at which all members are present and the vote of each is noted.

   [.6]6. Within 90 days from the effective date of this ORDER, the Bank shall formulate and implement a written profit plan. This plan shall be forwarded to the Regional Director and to the Superintendent for review and comment and shall address, at a minimum, the following:

   (a) goals and strategies for improving and sustaining the earnings of the Bank, including:

       (i) an identification of the major areas in, and means by which, the Board of Directors will seek to improve the Bank's operating performance;

       (ii) realistic and comprehensive budgets;

       (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and

       (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

   (b) coordination of the Bank's loan, investment, and operating policies, and budget and profit planning, with the funds management policy.

   [.7]7. (a) Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and/or regulations as described on Pages 23 through 25 of the Report of Examination and Pages 7 through 16 of the Compliance Report. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   (b) Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all contraventions of FDIC policy statements as described on Page 25 of the Report of Examination. In addition, the Bank shall take all necessary steps to ensure
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   future compliance with all applicable FDIC policy statements.

   [.8]8. (a) Within 90 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. Such policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   (b) The initial revisions to the Bank's internal routine and controls policy, required by this Paragraph, at a minimum, shall include the following:

       (i) provisions requiring that the Bank shall comply in all material respects with the Bank Secrecy Act and its rules and regulations;

       (ii) provisions requiring that all issues and weaknesses set forth in the Information Systems Report are addressed and corrected.

   [.9]9. Within 90 days from the effective date of this ORDER, the Bank shall develop and adopt a plan which implements a system for monitoring the Bank's sensitivity to market risk. Such plan should address recommendations on Page 10 of the Report of Examination and its implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.10]10. Within 90 days from the effective date of this ORDER, the Bank shall perform an internal risk assessment of its internal audit program. The Bank's actions as required by this Paragraph shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.11]11. Within 90 days from the effective date of this ORDER, the Bank shall perform a full scope audit of its information technology area, incorporating into such audit a consideration of the issues and weaknesses addressed in the Information Systems Report. The Bank's actions as required by this Paragraph shall be satisfactory to the Regional Director as determined at subsequent examinations and/or visitations.

   [.12]12. Within 90 days from the effective date of this ORDER, the Bank shall develop and implement a compliance audit and review program that provides for, at a minimum, an annual audit or review to ensure that the Bank's policies, procedures and practices are in compliance with all consumer laws and regulations. Written reports documenting the results and providing recommendations for improvement shall be presented to the Board of Directors. The Bank's actions as required by this Paragraph shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.13]13. Within 90 days from the effective date of this ORDER, the Bank shall continue to develop and implement written compliance procedures and policies to ensure compliance with all applicable consumer laws and regulations. Such procedures and policies shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.14]14. Within 90 days from the effective date of this ORDER, the Bank shall develop and implement an effective internal review and monitoring system to ensure that the Bank is operating in compliance with all consumer laws and regulations. Such system should be designed, at a minimum, to detect and identify any weaknesses that may exist in the Bank's compliance efforts prior to audits and/or examinations; to include periodic reviews of disclosures and standardized forms and calculations for various loan and deposit products; and to provide for periodic reviews of document filing and retention procedures. Such system and its implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.15]15. Within 90 days from the effective date of this ORDER, the Bank shall provide for on-going training in consumer compliance laws and regulations for all appropriate personnel, including both operation and lending staff, and shall develop and implement a system to test employees on their knowledge of compliance-related laws and regulations to monitor training effectiveness. The Bank shall document the training activities for its recordkeeping purposes. The training should be updated to ensure that appropriate personnel are provided with the
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   most current and up-to-date information. The Bank's actions as required by this Paragraph shall be satisfactory to the Regional Director as determined at subsequent examinations and/or visitations.

   [.16]16. Within 30 days after eliminating from its books any asset in compliance with Paragraph 14 of this ORDER, the Bank shall file with the FDIC amended Consolidated Reports of Condition and Income which shall accurately reflect the financial condition of the Bank as of March 31, 2002. Thereafter, during the life of this ORDER, the Bank shall file with the FDIC Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Bank as of the end of the period for which the Reports are filed, including any adjustment in the Bank's books made necessary or appropriate as a consequence of any Arizona State Banking Department or FDIC examination of the Bank during that reporting period. The Bank shall insure that all filings required by this Paragraph are accurate and that personnel at the Bank who are required to prepare such filings are properly trained to do so.

   [.17]17. 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, Accounting and Securities Section, 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.

   18. 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 Superintendent 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 and the Superintendent have released the Bank in writing from making further reports.

   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 at San Francisco, California, this 19th day of September, 2002.

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