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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] ManagementQualifications Specified
[.2] Compliance ProgramIncrease Supervision
[.3] CapitalMaintain Tier 1 Capital
[.4] AssetsCharge-off or Collection
[.5] Loan PolicyPreparation or Revision of Policy Required
[.6] Profit PlanPreparation of Plan Required
[.7] Violations of LawCorrection of Violations Required
[.8] Bank OperationsInternal Routine and Control ProceduresEstablish
[.9] Market RiskPlan to Monitor Risk Required
[.10] AuditInternal AuditRisk Assessment Required
[.11] AuditInternal Technology Information Systems Audit Required
[.12] AuditProgram Required
[.13] Consumer Laws and RegulationsCompliance Procedures Required
[.14] Consumer Laws and RegulationsInternal Review SystemMinimum
Requirements
[.15] Consumer Laws and RegulationsTraining Required
[.16] Reports of Condition and IncomeAmendment Required
[.17] ShareholdersDisclosure 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.