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   [11,919] In the Matter of High Desert State Bank, Albuquerque, New Mexico, Docket No. 02-013b (5-1-02).

(This order was terminated by order of the FDIC dated 4-26-04; see ¶16,380.)

   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.

   [.1] Capital—Increase Required

   [.2] Dividends—Dividends Restricted

   [.3] Assets—Charge-off or Collection

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

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

   [.6] Management—Qualifications Specified

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

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

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

   [.10] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required

   [.11] Loans—Concentration of Credit—Reduction Required

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

   [.13] Bank Operations—Internal Controls, Correction of Weaknesses Required

   [.14] Interest Rate Risk Policy—Preparation or Revision of Policy Required

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

In the Matter of
HIGH DESERT STATE BANK
ALBUQUERQUE, NEW MEXICO
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-02-013b

   The High Desert State Bank, Albuquerque, New Mexico ("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 and 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 Article 1, section 34 of Chapter 58 of the New Mexico Statutes, N.M. Stat. Ann. §58-1-34 (Matthew Bender 1978), 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") and a representative of the Financial Institutions Division for the State of New Mexico (the "State") dated May 1, 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 and the State.

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

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
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   banking practices and violations of laws and/or regulations:

       (a) Operating the Bank with an inadequate level of capital protection for the kind and quality of assets held by the Bank;

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

       (c) Purchasing loans or participations in loans from construction loan brokers without proper pre-purchase analysis and post-purchase monitoring;

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

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

       (f) Engaging in hazardous lending practices;

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

       (h) Failing to properly monitor the Bank's level of interest rate risk;

       (i) Operating the Bank in violation of applicable Federal and State laws and regulations;

       (j) Operating the Bank without proper regard for funds management; and

       (k) Creating concentrations of credit.

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

   [.1]1. (a) Within 60 days after the effective date of this ORDER, and for so long thereafter as this ORDER is outstanding, the Bank shall achieve and maintain an 8 percent leverage ratio as defined in section 325.2 of the FDIC Rules and Regulations and also maintain a 10 percent total risk-based capital ratio as defined in Section 325.2 of the FDIC Rules and Regulations.

   (b) If such ratios are less than set forth above as determined at an examination by the FDIC or the State or filed in a call report, the Bank shall, within 30 days after receipt of a written notice of the capital deficiency from the Regional Director of the FDIC's Dallas Regional Office ("Regional Director") or the Director of Financial Institutions Division for the State of New Mexico ("Director"), present to the Regional Director and the Director a plan to increase the leverage ratio and the total risk-based capital ratio of the Bank or to take other measures to bring the ratios to the required percentages. After the Regional Director and Director 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 Director.

   Thereafter, to the extent such measures have not previously been initiated, the Bank shall immediately initiate measures detailed in the plan, to increase its leverage ratio and total risk-based capital ratio by an amount sufficient to bring the ratios to the required percentages set forth above within 30 days after the Regional Director and Director respond to the plan. Such increases in capital and any increase in capital necessary to meet the ratios required by this ORDER may be accomplished by:

       (i) the sale of securities in the form of common stock; or

       (ii) The direct contribution of cash subsequent to September 10, 2001 by the directors and/or shareholders of the Bank or by the Bank's holding company; or

       (iii) Receipt of an income tax refund or the capitalization subsequent to September 10, 2001 of a bona fide tax refund certified as being accurate by a certified public accounting firm; or

       (iv) Any other method accepted by the Regional Director and the Director.

   (c) If all or part of the increase in capital required by this ORDER is to be accomplished by the sale of new securities, the Bank's board of directors shall adopt and implement a plan for the sale of such additional securities, including soliciting proxies and the voting of any shares or proxies owned 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 Federal securities laws. Prior to the implementation of the plan, and in any event, not less than 20 days prior to the dissemination of such materials, the plan and any materials used in the sale of the
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   securities shall be submitted to the FDIC, Registration, Disclosure and Securities Operation Unit, Washington, D.C. 20429, for review. Any changes requested to be made in the plan or the materials by the FDIC shall be made prior to their dissemination. If the increase in capital is to be provided by the sale of noncumulative perpetual preferred stock, then all terms and conditions of the issue shall be presented to the Regional Director and the Director for prior approval.

   (d) In complying with the provisions of this ORDER and until such time as any such public offering is terminated, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities written notice of any planned or existing development or other change which is materially different from the information reflected in any offering materials used in connection with the sale of the Bank's securities. The written notice required by this paragraph shall be furnished within 10 days after the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber who received or was tendered the information contained in the Bank's original offering materials.

   (e) In addition to the requirements of subparagraphs 1(a) and (b), the Bank shall comply with the FDIC's Statement of Policy on Risk-Based Capital found in Appendix A to Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, App. A.

   [.2]2. While this ORDER is in effect, the Bank shall neither declare nor pay, directly or indirectly, any cash dividend to shareholders without the prior written consent of the Regional Director and the Director.

   [.3]3. (a) Within 30 days after 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 and/or State as a result of its examination of the Bank as of September 10, 2001. 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 Director to reduce the remaining assets classified Doubtful and Substandard as of September 10, 2001. The plan shall address actions to be taken in order to reduce the classified assets and timeframes for accomplishing the proposed actions.

   The plan shall be formulated so that, within 180 days after the effective date of this ORDER, the Bank shall achieve a reduction in the volume of the adversely classified assets reflected in the September 10, 2001 Report of Examination, to a level not to exceed 100% percent of Tier 1 capital plus the allowance for loan and lease losses as determined at the end of the 180 day period. The plan may include a provision for increasing capital where necessary to achieve the prescribed ratio.

   (c) The Bank shall present the plan to the Regional Director and the Director for review. Within 30 days after their response, the plan, including any modifications or amendments requested by the Regional Director and the Director, shall be adopted by the Bank's board of directors. 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 10, 2001, to a specified percentage of Tier 1 capital plus the allowance for loan and lease losses 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; or

       (iv) Increase of Tier 1 capital.

   (e) 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 future examination conducted by the FDIC or the State.

   (f) Upon the effective date of this ORDER, the purchase of loans or participations in loans from construction loan brokers without proper pre-purchase analysis shall cease. Servicing and monitoring for all owned loans, whether participations purchased from other regulated and unregulated banking entities or originated internally, shall be performed internally.
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   (g) Within 60 days after the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Director to address each loan adversely classified and each Listed for Special Mention in the September 10, 2001 Report of Examination. The plan shall detail specific actions and timetables for improvement. The plan shall address and provide the following:

       (i) The name under which the loan is carried on the Bank's books;

       (ii) An assessment by management and the board of directors, based on consultation with recommendations of legal counsel, regarding the adequacy and enforceability of loan documents.

       (iii) An assessment of the bank's beneficial interest in title policies insuring the lien interest of the Bank;

       (iv) An analysis of current market value of underlying real estate in its current condition supported by a current appraisal report which may be an in-house appraisal;

       (v) A description of the Bank's interim construction property inspections conducted as required for prudent loan supervision.

       (vi) A description of the Bank's strategies for acquisition, management, and disposition of all real estate collateral, including additional collateral which has been received since the inception of the loans; and

       (vii) A chronology of actions already undertaken and projected actions as to the referenced loans including loans that have been paid off to date.

   [.4]4. Within 60 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 Bank's board of directors 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 Bank's board of directors' 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.

   [.5]5. (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 Bank's board of directors' meeting.

   [.6]6. (a) Within 90 days after the effective date of this ORDER, an outside consultant reporting to the Bank's board of directors 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 a study shall include, at a minimum, a review of the duties, responsibilities, qualifications, and remuneration of the Bank officers.

   (b) Each Bank officer shall possess qualifications and experience commensurate with his or her duties and responsibilities at the Bank. The qualifications of the Bank loan officers shall further include an appropriate level of lending, collections, and loan supervision experience for the type and quality of the Bank's loan portfolio. The qualifications of Bank management personnel shall be evaluated on their ability to:

       (i) Comply with the requirements of this ORDER;
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       (ii) Operate the Bank in a safe and sound manner;

       (iii) Comply with all applicable laws and regulations; and

       (iv) Comply with and correct, as necessary, all policies, procedures, and internal control recommendations in examination reports.

       (v) Provide increased effort to accurately prepare regulatory reports, especially with respect to unfunded loan commitments;

       (vi) Implement all policy guidelines, especially in the area of loan examination; and

       (vii) Restore all aspects of the Bank to a safe and sound condition, including as appropriate, asset quality, capital adequacy, earnings, management effectiveness, and liquidity.

   (c) A copy of the study shall be submitted to the Regional Director and the Director for review and comment. Once comments have been received from the Regional Director and the Director, the Bank shall immediately initiate actions to implement the recommendations of the study as amended or modified by the Regional Director and the Director.

   (d) While this ORDER is in effect, the Bank shall notify the Regional Director and the Director in writing of any changes in Bank management. The notification must include the name(s) and background(s) of any replacement personnel and must be provided to the Regional Director and the Director prior to the individual(s) assuming the position(s) with the Bank.

   [.7]7. Within 60 days after the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending, loan origination and loan administration policies and procedures to 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 Director, as determined at subsequent examinations, and shall include, at a minimum, the following:

       (a) Full implementation of Loan Policy guidelines;

       (b) A requirement for improved analysis and documentation of borrower repayment ability;

       (c) A provision for reduction of out-of-territory lending;

       (d) A provision for standards setting forth appropriate limitations on concentrations of credit;

       (e) A provision establishing and enforcing repayment programs;

       (f) A requirement for improved monitoring of collateral, construction budgets, and borrower equity which shall include:

   (i) Inspections

       (1) All internal and external parties should utilize a standardized inspection report.

       (2) Loan administration staff shall compare site inspection reports to construction plans and specifications, preferably prior to disbursement.

       (3) Inspection reports shall state compliance with plans and specifications, support disbursements, and state whether or not the project is progressing as anticipated.

       (4) Inspections should be conducted on a timely basis in order to allow monitoring of the project during all stages of construction.

       (5) Inspectors shall have sufficient expertise to determine compliance with plans and specifications.

       (6) Bank personnel shall periodically spot check inspector reports by performing an on-site visit.

   (ii) Disbursements

       (1) Disbursements shall be properly authorized and supported by a written inspection report prior to disbursement and compared to the undisbursed loans in process account to determine that there are sufficient funds to complete the project.

       (2) Receipted bills of work performed and materials furnished, and lien waivers, should be obtained during the course of construction. A release of mechanic's liens should be obtained from the general contractor at the time construction is completed and before final disbursement.

       (3) Appropriate Bank personnel shall compare draws with cost estimates to ensure that budgets are met or cost overruns are provided for.

   (iii) Loan Administration

       (1) Utilize a standardized checklist to control documentation of individual files.
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       (2) Maintain current financial statements and credit checks for the borrower.

       (3) Perform due diligence on the builder including trade checks.

       (4) Monitor the status of take-out commitments and insurance expiration dates.

       (g) A provision for elimination of inappropriate interest accrual;

       (h) A requirement for improved documentation at origination and thereafter;

       (i) A provision that accrual of interest when principal or interest is uncertain shall cease and loan advances to pay accrued interest shall only be permitted upon a determination that such accrual is appropriate and within project budgets; and

       (j) A provision for improved ongoing internal risk identification systems to permit pro-active management of problem areas.

   [.8]8. Within 60 days 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 10, 2001, as more fully set forth on pages 35 and 36 of the September 10, 2001 Report of Examination. In addition, the Bank shall ensure its future compliance with all applicable laws and regulations.

   [.9]9. Within 60 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 of September 10, 2001, as more fully set out on pages 57 through 60 of the September 10, 2001 Report of Examination.

   [.10]10. Within 60 days after the effective date of this ORDER, the Bank shall amend its written funds management policy and shall submit its amended policy to the Regional Director and the Director. The funds management policy shall provide for:

       (a) A reduction of the Bank's reliance on out-of-territory Certificates of Deposit as a funding source; and

       (b) Close monitoring of unfunded loan obligations and a reduction of loan obligation to a level supported by capital accounts and funding ability.

   [.11]11. Within 60 days after the effective date of this ORDER, the Bank shall submit a plan to the Regional Director and the Director to reduce the concentrations of credit as reported on page 61 of the Report of Examination dated September 10, 2001. If not approved by the Regional Director and the Director, the Board of Directors of the Bank shall make revisions to the plan taking into consideration the suggested changes of the Regional Director and the Director and resubmit the plan.

   [.12]12. Within 60 days after the effective date of this ORDER, the Bank's board of directors shall establish a subcommittee of the board of directors of the Bank charged with the responsibility of ensuring that the Bank complies with the provisions of this ORDER. At least 50 percent of the members of such subcommittee shall be directors not employed in any capacity by the Bank other than as a director. The committee shall report monthly to the full board of directors of the Bank and a copy of the report and any discussion relating to the report or the ORDER shall be noted in the minutes of the Bank's board of directors' meetings. The establishment of this subcommittee shall not diminish the responsibility or liability of the entire board of directors of the Bank to ensure compliance with the provisions of this ORDER.

   [.13]13. Within 60 days after the effective date of this ORDER, the Bank's board of directors shall revise its internal control program to address the internal control deficiencies detailed on pages 22 through 30 of the September 10, 2001, Report of Examination.

   [.14]14. Within 60 days after the effective date of the ORDER, the Bank shall develop, adopt, and implement an interest rate risk policy and procedures that shall include, at a minimum:

       (a) Measures designed to control the nature and amount of interest rate risk the Bank takes including those that specify risk limits and define lines of responsibilities and authority for managing risk;

       (b) A system for identifying and measuring interest rate risk;

       (c) A system for monitoring and reporting risk exposures; and

       (d) A system of internal controls, review, and audit to ensure the integrity of the overall risk management process.

   [.15]15. After the effective date of this ORDER, the Bank shall send to its shareholders
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   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 Operations Unit, Washington, D.C. 20429 and the Director of Financial Institutions Division for the State of New Mexico, P.O. Box 25101, Santa Fe, New Mexico 87504 for review at least 20 days prior to dissemination to shareholders. Any changes requested by the FDIC or the State shall be made prior to dissemination of the description, communication, notice, or statement.

   16. Within 60 days after the effective date of this ORDER, and within 30 days after the end of each successive quarter, the Bank shall furnish written progress reports to the Regional Director and the Director 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 Director have released the Bank in writing from making additional reports.

   17. The effective date of this ORDER shall be 10 days after the date of its joint issuance. The 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 and the Director, pursuant to authority delegated to the Regional Director and the authority of the Director under the New Mexico Statutes.

   Dated at Dallas, Texas, this 1st day of May, 2002.

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