(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
{{7-31-02 p.C-5417}}
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
{{7-31-02 p.C-5418}}
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.
{{7-31-02 p.C-5419}}
(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;
{{7-31-02 p.C-5420}}
(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.
{{5-31-04 p.C-5421}}
(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
{{5-31-04 p.C-5422}}
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.
