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FDIC Enforcement Decisions and Orders

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   [11,705] In the Matter of Bank of Sierra Blanca, Sierra Blanca, Texas, Docket No. 99-142b (5-3-00)

   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 was terminated by order of the FDIC dated 2-1-02; see ¶16,304.)

   [.1] Management—Qualifications Specified

   [.2] Loan Loss Reserve—Establishment of or Increase Required

   [.3] Assets—Adversely Classified Assets—Reduction Required

   [.4] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credits

   [.5] Technical Exceptions—Correction of Technical Exceptions Required

   [.6] Bank Operations—Policy Review and Revision Required

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

   [.8] Board of Directors—Committee to Review Loan Portfolio

   [.9] Board of Directors—Review Written Loan Policies

   [.10] Profit Plan—Preparation of Plan Required

   [.11] Dividends—Dividends Restricted

   [.12] Capital—Increase Required

   [.13] Liquidity Ratio—Written Plan Required

   [.14] Shareholders—Disclosure of Cease and Desist Order Required

   [.15] Board of Directors—Committee to Review Compliance with Cease and Desist Order Required

In the Matter of
BANK OF SIERRA BLANCA
SIERRA BLANCA, TEXAS
(Insured State Nonmember Bank)

ORDER TO CEASE AND DESIST

FDIC-99-142b

   The Bank of Sierra Blanca, Sierra Blanca, Texas ("Bank"), through its board of directors, having been advised of its right to the issuance and service of 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) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. 1818(b), 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 May 3, 2000, 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 violated of law and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:
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ORDER TO CEASE AND DESIST

   IT IS ORDERED, that the Bank and institution-affiliated parties of the Bank cease and desist from the following unsafe or unsound banking practices and violations of law and/or regulations:

    (a) Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;

    (b) Operating the Bank without adequate supervision and direction by the board of directors over the management of the Bank;

    (c) Operating the Bank with an excessive level of adversely classified assets;

    (d) Engaging in hazardous lending and ineffective and lax collection practices;

    (e) Failing to provide an adequate allowance for loan and lease losses;

    (f) Operating the Bank in contravention of written loan policies and procedures;

    (g) Renewing or extending credit without adequate and appropriate supporting documentation;

    (h) Operating the Bank with inadequate earnings; and

    (i) Operating the Bank in violation of applicable laws and regulations as more fully set forth on page 21 of the Report of Examination of the Bank as of September 28, 1999.

   IT IS FURTHER ORDERED, that the Bank take affirmative action as follows:

[.1] 1. The Bank shall have and retain qualified management. The qualifications of management shall be assessed on its ability to:

    (i) comply with the requirements of the 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 asset quality, capital adequacy, earnings, management effectiveness, liquidity, and market risk.

   2. Within 60 days from the effective date of this Order, the Board will conduct a study of the management and personnel structure of the Bank to determine whether additional personnel are needed for the safe and profitable operation of the Bank. Such study will include a review of the duties, responsibilities, qualifications and remuneration of the Bank's officers. A copy of the study should be submitted to the Regional Director of the Federal Deposit Insurance Corporation (Regional Director) and the Banking Commissioner of the State of Texas (Commissioner) for review and comment. Once comments are received from the Regional Director and the Commissioner, the Bank will immediately initiate action to implement the changes recommended by the study as modified by the Regional Director and the Commissioner.

   3. During the life of the ORDER, the Bank shall notify the Regional Director and the Commissioner in writing of any changes in management. The notification must include the name(s) and background(s) of any replacement personnel and must be provided prior to the individual(s) assuming the new position(s).

[.2] 4. Within 30 days after the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate allowance for loan and lease losses. Such allowance shall be funded by charges to current operating income. Prior to the end of each calendar quarter, the board of directors of the Bank shall review the adequacy of the Bank's allowance for loan and lease losses. Such reviews shall include, at a minimum, the Bank's loan loss experience, an estimate of potential loss exposure in the portfolio, trends of delinquent and non-accrual loans and prevailing and prospective economic conditions. The minutes of the board meetings at which such reviews are undertaken shall include complete details of the reviews and the resulting recommended increases in the allowance for loan and lease losses.

[.3] 5. (a) Upon the effective date of this ORDER, the Bank shall, to the extent that it has not previously done so, eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss and one-half of the assets classified Doubtful by the FDIC as a result of its examination of the Bank as of September 28, 1999. Reduction of these assets through proceeds of loans made by the Bank shall not be considered "collection" for the purpose of this paragraph.

   (b) Within 60 days after the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Commissioner to reduce the remaining as-
{{7-31-00 p.C-4917}} sets classified Doubtful and Substandard as of September 28, 1999. The plan shall address each asset so classified with a balance of $50,000 or greater and provide the following:

    (i) The name under which the asset is carried on the books of the Bank;

    (ii) Type of asset;

    (iii) Actions to be taken in order to reduce the classified asset; and

    (iv) Timeframes for accomplishing the proposed actions.

   (c) The Bank shall present the plan to the Regional Director and the Commissioner for review. Within 30 days after their response, the plan, including any modifications or amendments requested by the Regional Director and the Commissioner, shall be adopted by the board of directors of the Bank. The Bank shall then immediately initiate measures detailed in the plan to the extent such measures have not been initiated.

   (d) For purposes of the plan, the reduction of the level of adversely classified assets as of September 28, 1999 may be accomplished by:

    (i) charge-off;

       (ii) collection;

       (iii) sufficient improvement in the quality of adversely classified assets so as to warrant removing any adverse classification, as determined by the FDIC and the Texas Department of Banking ("State"), or

       (iv) increase of total equity capital and reserves.

   While this ORDER is in effect, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss as determined at any examination conducted by the FDIC or the State at such time as the report of examination is received by the Bank.

[.4] 6. (a) While this ORDER is in effect, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who has an extension of credit with the Bank that has been classified Loss, either in whole or in part, and is uncollected, or to any borrower who is already obligated in any manner to the Bank on any extension of credit, including any portion thereof, that has been charged off the books of the Bank and remains uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing credit already extended to a borrower after full collection, in cash, of interest due from the borrower.

   (b) While this ORDER is in effect, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower whose extension of credit is classified Doubtful and/or Substandard, either in whole or in part, and is uncollected, unless the Bank's board of directors has signed a detailed written statement giving reasons why failure to extend such credit would be detrimental to the best interests of the Bank. The statement shall be placed in the appropriate loan file and included in the minutes of the applicable board of directors' meeting.

[.5] 7. Within 90 days after the effective date of this ORDER, the Bank shall eliminate and/or correct all technical exceptions with regard to loan documentation existing in the Bank as more fully set out on pages 42 and 43 of the September 28, 1999, Report of Examination.

[.6] 8. Within 60 days after the effective date of this ORDER, the bank shall review and revise its written policies, incorporating the recommendations listed in the September 28, 1999, Report of Examination. These revisions shall include changes to the Credit Risk Policy, to the Capital Planning Policy, to the Capital Policy, to the Contingency Planning and Disaster Recovery Policy, the Bank Secrecy Act Policy, the Wire Transfer Policy, as outlined on pages 14 through 20 in the September 28, 1999, Report of Examination.

[.7] 9. After the effective date of this ORDER, the Bank, consistent with sound banking practices, shall eliminate and/or correct all violations of laws and/or regulations existing in the Bank as of September 28, 1999, as more fully set forth on page 21 of the September 28, 1999, Report of Examination. In addition, the Bank shall ensure its future compliance with all applicable laws and regulations.

[.8] 10. Within 60 days after the effective date of this ORDER, the board of directors shall establish a loan review committee to periodically review the Bank's loan portfolio and identify and categorize problem credits. The committee shall file a report with the board of directors. This report shall include the following information:
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    (a) The overall quality of the loan portfolio;

    (b) The identification, by type and amount, of each problem or delinquent loan; and,

    (c) The identification of all loans not in conformance with the Bank's lending policy.

[.9] 11. (a) Within 90 days of the effective date of this ORDER, the Bank's board of directors shall establish a written loan policy with regard to extensions of credit that would increase aggregate indebtedness of a borrower or related interests. Such policy shall establish approval limits for each officer. Any extension of credit proposed to be made over the individual approval limit shall require the approval of either the Bank's loan committee or the Bank's board of directors.

   (b) The Bank's board of directors shall also establish a written policy governing extensions of credit in the form of customer overdrafts. The policy shall, at a minimum, establish a dollar amount and a time period for extending such credit without the prior approval of the Bank's loan committee or the Bank's board of directors.

   (c) The Bank shall submit the foregoing policies to the Regional Director and the Commissioner for comment. After the Regional Director and the Commissioner have responded to the plan, the Bank's board of directors shall adopt the policies as amended or modified by the Regional Director and the Commissioner. The policies will be implemented immediately to the extent that they are not already in effect at the Bank.

[.10] 12. Within 60 days of the effective date of the ORDER, the Board shall develop a written profit plan which includes a projected budget for at least twelve consecutive quarters. The plan shall require that the Board periodically review all general ledger items to determine methods for expense reduction or income enhancement. The Board's consideration of these areas shall be recorded in the official minutes.

[.11] 13. While this ORDER is in effect, the Bank shall neither declare nor pay, directly or indirectly, any cash or property dividend to shareholders without the prior written consent of the Regional Director and the Commissioner.

[.12] 14. Within 30 days after the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Commissioner to increase the Tier 1 capital by no less than $50,000. The capital plan shall also cause the Bank to achieve and maintain adjusted Tier 1 capital, after establishing an adequate allowance for loan and lease losses, equal to or greater than 7 percent of the Bank's adjusted total assets. After the Regional Director and Commissioner respond to the plan, the board of directors of the Bank shall adopt the plan, including any modifications or amendments requested by the Regional Director and the Commissioner. The Bank shall initiate measures detailed in the plan, to the extent such measures have not previously been initiated to effect compliance with the plan, as amended or modified by the Regional Director or the Commissioner.

[.13] 15. Within 90 days after the effective date of this ORDER, the Board shall prepare a written plan to improve the Bank's liquidity posture through the maintenance of adequate liquid reserves to meet the ordinary needs of the Bank. A copy of this plan will be submitted to the Regional Director and the Commissioner for their review and comment. After the Regional Director and Commissioner respond to the plan, the Board of Directors of the Bank shall adopt the plan, including any modifications or amendments requested by the Regional Director and the Commissioner.

[.14] 16. After the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER, (1) in conjunction with the Bank's next shareholder communication, and also (2) 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, Disclosure, and Securities Unit, Washington, D.C. 20429, for review at least 20 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.

[.15] 17. Within 60 days after the effective date of this ORDER, the board of directors shall establish a committee of the board of directors charged with the responsibility of ensuring that the Bank complies with the provisions of this ORDER. The committee shall report monthly to the entire board of
{{10-31-00 p.C-4919}} directors, and a copy of the report and any discussion relating to the report or the ORDER shall be included in the minutes of the board of directors. Nothing contained herein shall diminish the responsibility of the entire board of directors to ensure compliance with the provisions of this ORDER.

   18. Within 30 days after the end of the first calendar quarter following the effective date of this ORDER, and within 30 days after the end of each successive calendar quarter, 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 may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Commissioner have released the Bank in writing from making additional reports.

   19. The effective date of this ORDER shall be 10 days after the date of its issuance. This ORDER shall be binding upon the Bank and all institution-affiliated parties of the Bank. The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.

   Pursuant to delegated authority.

   Dated at Dallas, Texas, this 3rd day of May, 2000.

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