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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] CapitalMaintain Tier 1 Capital
[.2] DividendsDividends Restricted
[.3] AssetsCharge-off or Collection
[.4] Loan Loss ReserveEstablishment of or Increase Required
[.5] LoansExtensions of CreditTo Borrowers with Existing Adversely
Classified Credits
[.6] ManagementQualifications Specified
[.7] Loan PolicyPreparation or Revision of Policy Required
[.8] Loan PolicyReview Committee Established
[.9] Violations of LawCorrection of Violations Required
[.10] Report of ExaminationCorrection of Exceptions Required
[.11] Asset/Liability ManagementImprove Balance Between Investments and
Funding Sources
[.12] Loan ConcentrationsReduction Required
[.13] Budget PlanPreparation Required
[.14] Board of DirectorsCommittee to Review Compliance with Cease and
Desist Order Required
[.15] Board of DirectorsWritten Plan Required
[.16] Interest Rate Risk PolicyPlan Required
[.17] Bank Secrecy ActCompliance
[.18] Subprime Lending AllowedRestrictions Specified
[.19] ShareholdersDisclosure of Cease and Desist Order Required
[.20] Progress ReportWritten 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.