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FDIC Enforcement Decisions and Orders

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   [12,060] In the Matter of American Heritage Bank, Clovis, New Mexico, Docket No. 03-048b (6-16-03).

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

   [.1] Capital—Maintain Tier 1 Capital

   [.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] Loan Policy—Review Committee Established

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

   [.10] Report of Examination—Correction of Exceptions Required

   [.11] Asset/Liability Management—Improve Balance Between Investments and Funding Sources

   [.12] Loan Concentrations—Reduction Required

   [.13] Budget Plan—Preparation Required

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

   [.15] Board of Directors—Written Plan Required

   [.16] Interest Rate Risk Policy—Plan Required

   [.17] Bank Secrecy Act—Compliance

   [.18] Subprime Lending Allowed—Restrictions Specified

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

   [.20] Progress Report—Written Report Required

In the Matter of
AMERICAN HERITAGE BANK
CLOVIS, NEW MEXICO
(Insured State Nonmember Bank)
CONSENT ORDER TO CEASE AND DESIST

FDIC-03-048b

   The American Heritage Bank, Clovis, 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 or unsound banking practices and violations of law and/or regulations alleged to have been committed by the Bank and of
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   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 A CONSENT 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 ("State") dated June 13, 2003, 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 a CONSENT 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 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 poor quality assets;

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

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

       (e) Renewing or extending credit which is inadequately secured;

       (f) Refinancing credits to borrowers in weak financial positions without improving collateral margins or establishing structured repayment programs;

       (g) Renewing or extending the due dates of loans without collection in cash of interest due or obtaining adequate additional collateral to secure credit advanced for the purpose of paying interest;

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

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

       (j) Engaging in hazardous lending practices;

       (k) Engaging in lax collection practices;

       (l) Operating the Bank without adequate written loan policies and procedures;

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

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

       (o) Operating the Bank in contravention of the Order dated November 20, 2000, granting Federal Deposit insurance;

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

       (q) Operating the Bank with a heavy reliance on short-term potentially volatile deposits as a source for funding longer-term investments;

       (r) Operating the Bank without adequate liquidity or proper regard for funds management;

       (s) Creating a concentration of credit;

       (t) Operating the Bank with inadequate earnings to fund growth, support dividend payments and augment capital;

       (u) Operating the Bank with uncontrolled growth without regard to capital protection;

       (v) Operating the Bank with inadequate internal review policies or procedures;

       (w) Operating the Bank with excessive level of interest rate risk;

       (x) Engaging in subprime lending as described in The Interagency Guidance on Subprime Lending and The Expanded Guidance for Subprime Lending issued by the Federal Financial Institutions Examination
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       Council in March 1999 ("FFIEC Guidelines") without FDIC approval.

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

   [.1]1. (a) By September 30, 2003, the Bank shall increase its Tier 1 capital to no less than 9 percent of the Bank's adjusted average total assets after establishing an adequate allowance for loan and lease losses. By December 31, 2003, the Bank shall increase its Tier 1 capital to no less than 9.5 percent and for so long thereafter as this ORDER is outstanding, the Bank shall maintain Tier 1 capital, after establishing an adequate allowance for loan and lease losses, equal to or greater than 9.5 percent of the Bank's adjusted average total assets. Such increase in Tier 1 capital and any increase in Tier 1 capital necessary to meet the ratio 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 December 2, 2002, by the directors and shareholders of the Bank; or

       (iii) Receipt of an income tax refund or the capitalization subsequent to December 2, 2002, of a bona fide tax refund certified as being accurate by a certified public accounting firm; or

       (iv) Earnings retained subsequent to December 2, 2002; or

       (v) Any other method approved by the Regional Director of the FDIC's Dallas Regional Office ("Regional Director") and the Director of Financial Institutions Division for the State of New Mexico ("Director").

   (b) If the ratio of Tier 1 capital to adjusted average total assets as defined in the FDIC Call Report is less than 9.5 percent as determined at an examination by the FDIC or the State, the Bank shall, within 60 days after receipt of a written notice of the capital deficiency from the Regional Director or the Director, present to the Regional Director and the Director a plan to increase the Tier 1 capital of the Bank or to take other measures to bring the ratio to 9.5 percent. After the Regional Director and Director respond to the plan, the Bank's board of directors shall adopt the plan, including any modifications or amendments requested by the Regional Director and Director. Thereafter, the Bank shall immediately initiate measures detailed in the plan, to the extent such measures have not previously been initiated, to increase its Tier 1 capital by an amount sufficient to bring the ratio to 9.5 percent within 30 days after the Regional Director and the Director respond to the plan.

   [.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 60 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 the State as a result of its examination of the Bank as of December 2, 2002. 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 December 2, 2002. At a minimum, the plan shall include the following:

       (i) A schedule providing quarterly goals to reduce the remaining adversely classified assets as of December 2, 2002, to levels representing not more than a specified percentage of Tier 1 capital plus the allowance for loan and lease losses as reported each quarter by the Bank in its Consolidated Reports of Condition and Income and shall include no less than six consecutive quarterly target dates;

       (ii) An explanation showing the complete rationale used by the Bank in constructing the reduction schedule; and,

       (iii) A provision requiring, at a minimum, quarterly reviews by the Bank's board of directors whereby the extent of the Bank's compliance with the plan is expressly addressed, with the results of each review to be recorded in the corporate minutes of the Bank's board of directors.

   (c) Upon written notice from the Regional Director or the Director that the submitted plan is not acceptable, the Bank shall, within 30 days after receipt of such notice, submit
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   amendments to the plan to the Regional Director and the Director, including any modifications or amendments requested by the Regional Director or Director. Upon written notice that the plan is accepted, it 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 December 2, 2002, 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.

   [.4]4. (a) 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.

   (b) Within 30 days after the effective date of this ORDER, the Bank shall review Consolidated Reports of Condition and Income filed with the FDIC on or after December 31, 2002, and amend said reports if necessary to properly reflect the financial condition of the Bank as of the date of each such report. In particular, such reports shall contain an adequate allowance for loan and lease losses. Reports filed after the effective date of this ORDER shall also accurately reflect the financial condition of the Bank as of the reporting date.

   [.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. The Bank shall have and retain qualified management as determined by the Bank's board of directors. At a minimum, such management shall include senior officers with proven ability in managing a bank of comparable size and experience in upgrading a low quality loan portfolio. Such persons shall be provided the necessary written authority to implement the provisions of this ORDER. The qualifications of management shall be assessed on its ability to:

       (a) Comply with the requirements of the ORDER;

       (b) Operate the Bank in a safe and sound manner;

       (c) Comply with applicable laws and regulations, and

       (d) Restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management
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       effectiveness, and liquidity. While this ORDER is in effect, the Bank shall notify the Regional Director and the Director 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).

   [.7]7. Within 30 days after the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection 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) A requirement that the Bank shall not purchase loan participations until the Bank has obtained complete financial information and the participations are in full compliance with the Bank's lending policies and procedures;

       (b) Standards for extending credit to out-of-territory borrowers;

       (c) Standards for extending credit to Bank directors, officers, shareholders and their related interests which take into account applicable Federal and State laws governing such extensions of credit;

       (d) A provision that deviations from the written lending policies and procedures require prior approval of the Bank's board of directors;

       (e) A provision that establishes the lending limit of each loan officer;

       (f) A requirement that extensions of credit shall not be refinanced, reworked or renewed unless current financial information and documentation have been obtained;

       (g) A requirement that all loans in excess of $150,000 shall be reviewed and receive the prior approval of the Bank's board of directors;

       (h) Standards setting forth appropriate limitations on concentrations of credit;

       (i) A requirement that all loans shall have written repayment understandings;

       (j) Standards under which unsecured loans may be granted;

       (k) Guidelines under which loans are renewed or have their due dates extended:

         (i) Without full collection of interest thereon;

         (ii) By acceptance of separate notes in payment of interest;

         (iii) By capitalization of interest to the balance of the note;

       (l) Limitations on the amount advanced in relation to the value of the collateral securing the credit and the documentation required by the Bank for each type of secured credit;

       (m) A provision specifically outlining the collection procedures to be taken by the Bank when borrowers fail to make timely payments;

       (n) Guidelines for determining what rate of interest will be charged on all secured and unsecured loans; and

       (o) A provision outlining the documentation required on all secured loans.

       (p) Standards for engaging in subprime lending within FFIEC Guidelines.

   [.8]8. (a) Within 60 days after the effective date of this ORDER, the Bank's 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 Bank's board of directors at each board meeting. This report shall include the following information:

       (i) The overall quality of the loan portfolio;

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

       (iii) The identification of all loans not in conformance with the Bank's lending policy; and

       (iv) The identification of all loans to officers, directors, principal shareholders or their related interests.

   (b) At least 50 percent of the members of the loan review committee shall be directors not employed in any capacity by the Bank other than as a director.

   [.9]9. 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 December 2, 2002, as more fully set forth on pages 17 and 18 of the December 2, 2002
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   Report of Examination. In addition, the Bank shall ensure its future compliance with all applicable laws and regulations.

   [.10]10. Within 90 days after the effective date of this ORDER, the Bank shall eliminate and/or correct to the extent possible the technical exceptions with regard to loan documentation existing in the Bank as of December 2, 2002, as more fully set out on pages 38 through 42 of the December 2, 2002 Report of Examination.

   [.11]11. (a) Within 30 days after the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Director for their review to reduce the dependence upon short-term funding sources to fund longer-term assets and to reduce the volume of loans in relation to deposits.

   (b) The funds management policy shall be in a form and manner acceptable to the Regional Director and the Director and shall include, at a minimum, the following.

       (i) An asset/liability management strategy to achieve an acceptable rate sensitivity balance between investments and funding sources;

       (ii) A plan to decrease the reliance of the Bank on short-term, potentially volatile liabilities for funding longer-term assets; and

       (iii) Procedures which will enable the Bank's board of directors and the management to monitor the Bank's liquidity position and maintain liquidity at an adequate level.

   (c) Within 30 days after the Regional Director and the Director have issued their response, the policy including any modifications or amendments requested by the Regional Director or Director, shall be adopted by the Bank's board of directors. Thereafter, the Bank shall immediately initiate the measures detailed in the policy to the extent such measures have not been previously initiated.

   [.12]12. Within 30 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 43 of the Report of Examination dated December 2, 2002.

   [.13]13. Within 60 days after the effective date of this ORDER, the Bank's board of directors shall develop a projected budget for the Bank encompassing at least twelve consecutive quarters. The Bank's board of directors shall periodically review all general ledger items to determine methods for expense reduction and/or income enhancement. The Bank's board of directors' consideration of these areas shall be recorded in the official minutes of the Bank's board of directors meetings.

   [.14]14. Within 30 days after the effective date of this ORDER, the Bank's board of directors shall establish a subcommittee of the board of directors charged with the responsibility of ensuring that the Bank complies with the provisions of this ORDER. The subcommittee shall report monthly to the entire board of directors of the Bank and a copy of the report and any discussion related to the report or the ORDER shall be included in the minutes of the Bank's board of directors' meeting. Nothing contained herein shall diminish the responsibility of the entire board of directors of the Bank to ensure compliance with the provisions of this ORDER.

   [.15]15. Within 60 days after the effective date of this ORDER, the Bank's board of directors shall do the following:

       (a) Develop, adopt, and implement a written strategic business plan outlining the Bank's future scope of operations and direction that shall include, at a minimum:

         (i) Short-term goals to comply with the terms of this ORDER and correct all regulatory criticisms;

         (ii) An operating plan for the next 36 months in order to accomplish short-term goals; and

         (iii) Long-term goals for growth, capital maintenance, profitability, and service to the community.

       (b) Submit the plan to the Regional Director and the Director for their review and comment.

       (c) Within 30 days after the Regional Director and Director have issued their comments to the plan, the Bank shall adopt the plan including any modifications requested by the Regional Director and Director. Thereafter, the Bank shall initiate the measures detailed in the plan to the extent such measures have not been previously initiated.

   [.16]16. Within 60 days after the effective
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   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 defines 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.

   [.17]17. (a) Within 60 days after the effective date of this ORDER, the Bank shall review its procedures for monitoring the Bank Secrecy Act compliance program to ensure compliance with section 326.8(c) of the FDIC's Rules and Regulations. 12 C.F.R. §326.8(c).

   (b) The Bank shall further ensure that all Bank employees involved in activities concerning compliance with the Bank Secrecy Act program and the U.S. Department of the Treasury's Financial Recordkeeping Regulations are adequately trained. Further, the Bank shall implement a program to periodically retrain all such Bank employees to ensure compliance with the program.

   [.18]18. While this Order is in effect, the Bank shall obtain FDIC and State approval before engaging in any new subprime lending as described in FFIEC Guidelines.

   [.19]19. 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 Operations Unit, Washington, D.C. 20429 and the Director, for review at least 20 days prior to dissemination to shareholders. Any changes requested by the FDIC and the Director shall be made prior to dissemination of the description, communication, notice, or statement.

   [.20]20. 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 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.

   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 June 16, 2003.

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Last Updated 11/16/2003 legal@fdic.gov