American Patriot Financial Group, Inc., announced Tuesday in a news release that its subsidiary American Patriot Bank has entered into a cease-and-desist order with the Federal Deposit Insurance Corporation (FDIC), one of the federal agencies responsible for banking industry regulation.

Under the cease-and-desist order, the release states, the bank is required to take certain actions.

Among the purposes of those actions, according to the release, are to strengthen the bank's management and its capital position and lending policies; reduce its concentration of construction and development loans; and reduce its level of "criticized assets."

The Internet Web site InvestorDictionary.com defines "criticized assets" as "loans with payments in arrears that are rated by government examiners as substandard, doubtful, loss or special mention."

According to the bank's news release, the cease-and-desist order also limits the ability of the bank to pay dividends to American Patriot Financial Group, the parent company of the bank, without the consent of the bank's regulators.

American Patriot Financial Group had consolidated total assets of approximately $128 million as of March 31, 2009, the release states.

American Patriot Bank itself offers a broad range of traditional banking services from its corporate headquarters in Greeneville and its three other branch offices.

Bank regulation is one part of the FDIC's responsibility, according to the agency's Web site. Other federal agencies are also involved in banking regulation.

The FDIC Web site states that the FDIC is "an independent agency created by the Congress to maintain stability and public confidence in the nation's financial system"

Specifically, the Web site says, the agency carries out its mission "by insuring deposits, examining and supervising financial institutions for safety and soundness and consumer protection, and managing receiverships."

An FDIC spokesman said Wednesday in an interview that the FDIC is the federal agency responsible for regulation of American Patriot Bank.

The spokesman also noted that the text of the cease-and-desist order would be available on the agency's Web site (www.fdic.gov) in mid-July, in keeping with the agency's regular policies for posting its orders.

Willam J. Smead, interim chief executive officer of American Patriot Bank, is quoted in the bank news release as stating that, "We believe that the actions required under the order are appropriate to improve our processes and procedures, and have already begun to initiate many of the steps that we are required to take under the order to improve our core operations, including our ongoing search for a new chief executive officer that can return the bank to a level of solid performance while maintaining a community-oriented and customer-centered organization."

Smead added, "We greatly appreciate the continued support of our customers and our employees who remain committed to providing our customers with the highest level of service and believe that by taking the mandated measures we should become a stronger institution."

He said that the order will not affect depositors, whose accounts remain fully insured to the maximum FDIC coverage limits, including NOW accounts and non-interest bearing checking accounts which are currently insured without limit.

As a result of the order, the bank agreed to submit a capital plan to the FDIC and to maintain a "Tier 1 capital ratio" of at least 8 percent, a Tier 1 risk-based capital ratio of at least 10 percent, and a Total risk-based capital ratio of at least 11 percent.

All of these percentages are above the regulatory minimums for a bank to be considered "well-capitalized," according to Dr. Smead's statement.

He said American Patriot Financial Group is considering a variety of alternatives to strengthen the bank's capital position.

The order further requires the bank improve its loan review policies and procedures, strengthen its allowance for loan losses, and take action to reduce delinquent loans and the concentration of loans made to borrowers involved in residential real estate construction and development.

The bank news release did not define the term "Tier 1 capital ratio," but the Briefing.com Internet Web site explains the term in this way:

"Risk-weighted assets are calculated by assigning assets and off-balance sheet items to a risk category of 0 percent, 20 percent, 50 percent, or 100 percent.

"Cash, for instance, is without risk, while a letter of credit carries substantially more risk.

"The greater the proportion of dependable assets compared with risk-weighted assets, the more stable and efficient the institution and the more protection it offers depositors and investors.

"The preferred measure of capital adequacy takes into account a firm's core capital, or Tier 1 capital, relative to its risk-weighted assets.

"Tier 1 includes capital stock, undivided profits, and qualified preferred stock less intangibles. More simply, it includes capital stock, reserves, and retained earnings or undivided profits.

"Dividing Tier 1 capital by risk-weighted assets results in its Tier 1 Capital Ratio.

"An institution's Tier 1 Capital Ratio is used by regulators to grade its capital adequacy.

"There are five rankings: Well-Capitalized, Adequately Capitalized, Undercapitalized, Significantly Undercapitalized, and Critically Undercapitalized.

"To be classified as 'Well-Capitalized,' a firm must boast a Tier 1 Capital Ratio of 6 percent or more, and may not pay dividends or distributions that would change its ranking.

" 'Adequately Capitalized' grades are given to firms that have a Tier 1 ratio greater than or equal to 4 percent, while firms classified as 'Undercapitalized' have a Tier 1 ratio below 4 percent.

"A 'Significantly Undercapitalized' grade is given to companies with a Tier 1 Capital Ratio below 3 percent.

"Any firm ranked 'Undercapitalized' or below is restricted from paying any dividends or management fees and must file a capital restoration plan.

"Firms graded 'Critically Undercapitalized' have a ratio of tangible equity capital to average assets equal to 2 percent or below and are placed in receivership unless regulators desire alternative action."

The press release noted that the release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 about American Patriot Financial Group's plans and anticipated results of operations and financial condition.

"These statements relate primarily, but are not limited, to statements about management's present plans and intentions to address the obligations we have assumed by entering into the cease-and-desist order, and our expectations of success in those endeavors. ..."

"Because forward-looking statements are, in part, an attempt to project future events and explain management's current plans and expectations, they are subject to various risks and uncertainties that could cause our actions and our financial and operational results to differ materially from those set forth in such statements.

"These risks and uncertainties include, without limitation, our ability to increase our regulatory capital to required levels and to maintain those levels during the pendency of the regulatory order; our ability to estimate accurately the potential for losses inherent in our loan portfolio; our sensitivity to local and regional economic and other factors that affect the collectability of our loans and the value of collateral underlying our secured loans; our ability to hire and retain qualified and experienced senior managers; and our ability to satisfy the terms and conditions of the regulatory order and to satisfy applicable banking laws and regulations.

"Information presented in this release is accurate as of the date of the release, and we cannot undertake to update our forward-looking statements or the factors that may cause us to deviate from them, except as required by law."