AMARILLO, Texas (KAMR/KCIT) — According to a Cease and Desist order issued by the US Federal Reserve System in late June, the company controlling Herring Bank in Amarillo will need to restructure how it deals with oversight, risk management, assets, and reporting after not fully correcting issues identified in 2022.

While the ordered changes to Herring Bancorp, Inc. (HBI) had not appeared to have impacted most day-to-day banking needs for account holders as of early July, some assets, investments, loans, and wealth management services could be impacted.

What does the Cease and Desist say?

The Federal Reserve order said that in October 2021, the Federal Deposit Insurance Corporation and the Texas Department of Banking issued an order to improve Herring Bank’s board and management oversight, its policy on affiliate transactions, internal controls, information technology, and its asset and liability management.

Meanwhile, the order said that the Federal Reserve found pre-existing problems with HBI’s board oversight and financial reporting that were never fully corrected. Then, in 2022, it further found problems with HBI’s “board and management oversight, liquidity and funds management practices, and affiliate transaction policies.”

In light of that and the “common goals” to get HBI to a place where it can run Herring Bank while following the law, the documents ordered the company to “cease and desist and take affirmative action” with measures including:

• Source of Strength:
  • HBI will need to take steps to “fully utilize” its resources to make sure Herring Bank complies with the order from October 2021;
• Board Oversight:
  • By the end of August, HBI will need to submit a plan to the Federal Reserve and Texas Department of Banking (TDB) to adjust the board oversight and management of itself and its nonbank subsidiaries, including;
    • How HBI will improve and control its major operations;
    • Steps to monitor that policies and laws are being followed; and
    • Establishing risk tolerance guidelines and limits.
• Risk Management:
  • By the end of August, HBI will need to submit a plan addressing its risk management policies.
• Corporate Governance and Management Review:
  • By the end of July, HBI will have an independent third party approved by the Federal Reserve and TDB “assess the effectiveness of HBI’s corporate governance, board and management structure, and staffing” and prepare a report of findings and recommendations;
  • Submit an engagement letter to require the independent report within 90 days, with drafts also provided to the Reserve Bank and TDB; and
  • Within 30 days of getting the independent report, HBI will submit a plan to address the findings and recommendations.
• Internal Controls:
  • Before the end of August, HBI will need to submit policies and procedures covering areas such as strengthening its audit function and how it will prevent insiders from taking corporate funds for personal use.
• Asset Management:
  • Before the end of July, HBI will need to submit “a complete accounting of its assets,”;
  • HBI will need to submit the value of its assets after each calendar quarter;
  • HBI will not enter into an agreement to sell an asset or lease HBI property without the approval of the Federal Reserve and TBD; and
  • The Chairman of the Audit Committee for HBI will need to review all expenses paid to or on behalf of the chairman and senior officers of HBI.
• Dividends and Distributions:
  • HBI will need to have written approval before;
    • Declaring or paying dividends;
    • Taking dividends “representing a reduction in capital” from Herring Bank;
    • Making distributions of “interest, principal, or other sums on subordinated debentures, shareholder loans, or trust preferred securities.”
• Debt and Stock Redemption:
  • HBI will not “incur, increase, or guarantee any debt,” without the approval of the Federal Reserve and the TBD; and
  • HBI will not “purchase or redeem any shares of its stock” without the approval of the Federal Reserve and the TBD.
• Liquidity and Funds Management:
  • HBI will need to submit a policy and funding plan before the end of August that covers items such as liquidity and dependency reporting, as well as measures to ensure that it can finance its activities and repay debts without negatively impacting Herring Bank.
• Compliance with Laws and Regulations:
  • HBI will need to comply with notice provisions and guidelines when appointing a new director or senior officer or changing their responsibilities.
• Affiliate Transactions:
  • HBI will need to make sure that Herring Bank complies with the law when interacting with its affiliates, including HBI and its nonbank subsidiaries, and submit a plan regarding affiliate service agreements.

What does that mean for Herring Bank customers?

For Herring Bank customers in Amarillo, most of the court order covers HBI on a higher corporate level. Day-to-day checking and saving account services appear unaffected by the order, as well as mobile banking.

However, as HBI readjusts its policies and continues to be subject to heavier scrutiny by federal and state government offices, some businesses with Herring Bank and HBI may be impacted. For instance, taking out loans, buying or selling stocks related to the company could be slower or more complicated.