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FDIC Enforcement Decisions and Orders

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   [5025] FDIC Docket No. FDIC-82-73a (6-18-84)

   FDIC terminated the insured status of a state nonmember bank, and ordered the bank to give notice of such termination to its depositors for operating in an unsafe and unsound condition by having a high amount (17%) of adversely classified loans, and operating with a dangerously low level of equity capital and reserves.

   [.1] Unsafe or Unsound Banking Practice—Cease by Case Determination
   A determination of unsafe or unsound condition can be made only after a consideration of the circumstances surrounding the operation of each particular bank.

   [.2] Unsafe or Unsound Banking Practice—Deference to FDIC
   The FDIC's interpretation of what constitutes an unsafe or unsound banking practice is entitled to great deference.

   [.3] Net Worth Certificate Assistance Program—Implementation of Program
   Neither the Garn-St Germain Act nor the Administrative Procedure Act requires the FDIC to publish any regulation to implement the net worth certificate assistance program.

   [.4] Practice and Procedure—Rulemaking Procedings
   Even if publication of a proposed rule would normally be required under the Administrative Procedure Act, actual and timely notice of the terms of the rule to a person affected by the rule has an equally binding effect.

   [.5] Net Worth Certificates—Eligibility
   The FDIC may only purchase net worth certificates from a qualified institution in an amount equal to a percentage of its operating losses not occasioned by mismanagement. If an institution's total losses result from mismanagement, the FDIC can grant no net worth assistance even though they may be technically qualified.

   [.6] Assets—Losses—Management
   By choosing to invest heavily in long-term, fixed rate assets, a bank exposes itself to operating losses that it could avoid if it more prudently matches its assets to liabilities.

   [.7] Asset—Unsafe or Unsound Practices
   Low asset quality and a position of high risk to interest rates changes evidences that a bank is in an unsafe or unsound condition.

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   [.8] Unsafe or Unsound Banking Practice—FDIC Authority to Define
   Congress has delegated the duty of defining the term "unsafe or unsound banking practices" to the FDIC.

In the Matter of * * * (INSURED
STATE NONMEMBER BANK)


FDIC-82-73a
DECISION AND ORDER
TERMINATING DEPOSIT
INSURANCE STATUS

   On August 16, 1982, the Federal Deposit Insurance Corporation ("FDIC") found that * * * Bank, * * * ( * * * "Bank"), had been operating in an unsafe or unsound condition as of June 30, 1982, and ordered * * * to correct this condition within 120 days. On January 8, 1983, the FDIC again examined * * * and on May 31, 1983, issued a Notice of Intention to Terminate Insured Status and Notice of Time and Place of Hearing ("Notice of Intent"). After discovery was completed, a hearing commenced on August 22, 1983, in * * * The Administrative Law Judge ("ALJ") submitted his Recommended Decision on February 27, 1984, upholding the FDIC's contentions, along with a Proposed Order terminating * * * deposit insurance. On May 14, 1984, the FDIC's Board of Directors ("Board") denied a request by counsel for * * * to present oral arguments to the Board in connection with its review of the Recommended Decision in this matter.
   The ALJ's Recommended Decision concluded as follows:

       "On this record, * * * still has a dangerously low level of equity capital and reserves. It sustained significant losses in 1981 and 1982, and continued to suffer operating losses on June 30, 1983.
       " * * * has had two main problems: low asset quality and a position of high risk to interest rates changes. These resulted from mismanagement by officials of * * * , and when the economy ran into trouble and interest rates rose the bank began to have serious earnings problems.
       "In 1981, * * * brought in new managers to replace senior officials. They have promulgated new lending and investment policies, reduced costs and the size of the assets, and generally improved the condition of the bank, and along with much improved interest rates the bank's decline has been slowed.
       "The new management points to encouraging trends, but these favorable figures are misleading and may well be reversed in the near future. * * * continued to lose money in the first six months of 1983.
       "I find that the preponderance of the evidence establishes that * * * was in an unsafe or unsound condition on January 8, 1983 and on June 30, 1983."
   On March 21, 1984, * * * filed exceptions to the Recommended Decision alleging, among other things, that the FDIC has failed to articulate standards defining what is an unsafe or unsound condition. * * * denied that it was or is in an unsafe or unsound condition and asserted that it is steadily increasing in profitability and that its condition is improved.
   * * * further argued that FDIC wrongfully denied it net worth assistance because FDIC failed to publish legislative-type rules governing the granting of such assistance under the Garn-St Germain Act and because it impermissibly added a criterion of eligibility to the five conditions that Congress provided in the statute, requiring that a financial institution may not have incurred its losses as a result of mismanagement. * * * claimed that the statutory provision limiting the amount of assistance to a percentage of a bank's losses not occasioned by mismanagement is not an eligibility provision and merely governs the amount of aid provided once an institution satisfies the eligibility requirements. * * * also claimed that FDIC procedures in handling the applications of commercial banks and mutual savings banks discriminate against commercial banks by making it more difficult for commercial banks to receive assistance.
   These exceptions of * * * based on general legal considerations are discussed below. * * * 's detailed, specific exceptions are treated in the Addendum to this Order.
   Requirement of Articulated Standards. FDIC has continually indicated to the reasons supporting its determination that * * * is operating in an unsafe or unsound condition. By virtue of FDIC's two examinations and the Notice of Intent issued against it, * * * was apprised fully of {{4-1-90 p.A-251}}FDIC's concerns as to * * * inadequate capital and insufficient loan loss reserves.

   [.1,.2] A determination of an unsafe or unsound condition can be made only after a consideration of the surrounding circumstances of the operation of each particular bank. It is well settled that the term unsafe or unsound condition generally encompasses conduct that is contrary to accepted standards of prudent banking. See First National Bank of Eden v. Department of the Treasury, 568 F.2d 610 (8th Cir. 1978); Groos National Bank v. Comptroller of the Currency, 573 F.2d 889 (5th Cir. 1978). However, the term unsafe or unsound condition, like other generic terms, may be applied differently depending on the circumstances. Since the FDIC is the only Federal agency responsible for the interpretation and application of section 8(a), the FDIC's interpretation of what constitutes an unsafe or unsound condition under this section is entitled to great deference. See, e.g., City Federal Savings & Loan Ass'n v. Federal Home Loan Bank Board, 600 F.2d 681, 688 (7th Cir. 1979); FTC v. UniversalRundle Corp., 387 U.S. 244, 251–52 (1967). Deference to any agency's determination is particularly appropriate when, as is true in the instant proceeding, the agency has fully informed the respondent of the reasons supporting its actions.

       [.3] Net Worth Assistance. * * * argued that FDIC was obliged to publish "legislative-type rules" setting forth the eligibility requirements for assistance under section 203 of the Garn-St Germain Act (12 U.S.C. § 1823(i)). However, neither the Garn-St Germain Act nor the Administrative Procedure Act ("APA") requires FDIC to publish any regulation to implement the net worth certificate assistance program. The APA expressly exempts interpretative rules and general statements of policy, such as that which FDIC issued in connection with net worth assistance, from the Act's rulemaking requirements. 5 U.S.C. § 553(b)(A).

   [.4] In addition, the APA provides that, even if publication of a proposed rule would normally be required thereunder, "actual and timely notice of the terms thereof" to a person affected thereby has an equally binding effect. 5 U.S.C. § 552a(1). In this case the record shows that * * * December 23, 1982 letter to FDIC's * * * Regional Office applying for net worth assistance did, in fact, acknowledge receipt, in the first paragraph thereof, of a copy of FDIC Chairman Isaac's December 7, 1982 speech to the National Association of Mutual Savings Banks. An attached Appendix to that speech sets out in detail the FDIC's newly announced Capital Assistance Program which clearly states that an institution will not qualify for assistance if its losses result from mismanagement.

   [.5] * * * also argued that FDIC exceeded the authority granted by Congress by adding as a condition of eligibility for assistance that losses may not have been incurred as a result of mismanagement. The Garn-St Germain Act provides that a qualified bank must, inter alia, have incurred losses during the two previous quarters. 12 U.S.C. § 1823(i)(2)(B). Further, it states that such losses must not result from speculative transactions in "futures or forward contracts," management actions designed solely to meet assistance qualifications, or excessive operating expenses. 12 U.S.C. § 1823(i)(2)(C). However, with respect to the amount of assistance that FDIC can provide, the Act expressly states that the FDIC may only purchase net worth certificates from a qualified institution "in an amount equal to [a percentage] of its operating losses (not occasioned by mismanagement...)". 12 U.S.C. § 1823(i)(5) (emphasis added). Moreover, if an institution's total losses result from mismanagement, as in the present case, FDIC can grant no net worth assistance even though they may be technically qualified. In its policy statement, therefore, FDIC incorporated this limitation (relating to all types of mismanagement losses) in the definition of "qualified institution" to avoid the anomaly of concluding that a "qualified" institution under the statutory definition is in fact actually disqualified by the amount limitation quoted above. In view of this and the fact that, under the Act, assistance is to be given at FDIC's "sole discretion" and "on such terms and conditions as [FDIC] may prescribe," * * * contention is without merit.

   [.6] In another argument, * * * appears to claim that FDIC discriminated against * * * as a commercial bank, in that FDIC {{4-1-90 p.A-252}}found * * * acquisition of long-term assets with short-term deposits to be mismanagement while not applying similar standards to mutual savings banks. This contention is also fallacious. FDIC reviewed * * * application for assistance under the same statutory criteria as apply to mutual savings banks. The distinction is that, as a commercial bank, * * * had opportunities for investing in business, consumer, and other variable rate assets and/or short-term loans not generally available to mutual savings banks. By choosing instead to invest heavily in long-term, fixed rate assets, * * * exposed itself to operating losses that it could have avoided had it more prudently matched its assets to its liabilities. Nevertheless, its management chose the strategy of investing heavily in high risk real estate development loans and long-term, low yield bonds. * * * management's speculative lending and investing resulted in massive loan charge-offs and heavy market depreciation in its bond portfolio. The FDIC denied * * * net worth assistance because its losses were caused by this mismanagement.
   After thorough review of the record, therefore, the FDIC hereby adopts the Administrative Law Judge's Recommended Decision, with the two typographical corrections noted by underlining below,* including the findings of fact and conclusions of law contained therein. That Recommended Decision is attached hereto and is hereby incorporated by reference herein.
   NOW, THEREFORE, in conformity with the findings of fact and conclusions of law in the Recommended Decision and pursuant to section 8(a) of the Federal Deposit Insurance Act:
   IT IS HEREBY ORDERED:
   FIRST, that the insured status of * * * be, and the same hereby is, terminated effective as of the close of business on July 31, 1984.
   SECOND, that * * * , not later than July 15, 1984, shall give notice to its depositors of the termination of its status as an insured bank, such notice to be mailed by First Class United States Mail to each depositor at the depositor's last address of record as shown upon its books, and * * * shall furnish the FDIC with a copy of the notice mailed, together with an affidavit executed by the person who mailed the same, which affidavit shall further state the fact of mailing said notice and the date of the mailing thereof, and shall further state that the said notice was mailed to each depositor of * * * at his/her last address as shown upon the records of * * * as of the date the notice was mailed, and upon the refusal or failure of * * * to give such notice as specified hereinabove, the FDIC is authorized to so notify the depositors. The said notice shall be in the form as follows:

NOTICE

   1. The status of the * * * Bank, * * * , as an insured bank under the provisions of the Federal Deposit Insurance Act, will terminate as of the close of business on the thirty-first day of July, 1984;
   2. Any deposits made by you after that date, either new deposits or additions to existing deposits, will not be insured by the Federal Deposit Insurance Corporation;
   3. Insured deposits in the bank on the thirty-first day of July 1984 will continue to be insured, as provided by the Federal Deposit Insurance Act, for two years after the close of business on the thirty-first day of July, 1984: Provided, however, that any withdrawals after the close of business on the thirty-first day of July 1984, will reduce the insurance coverage by the amount of such withdrawals.
   * * * Bank [Address] There may be included in such notice, with the written approval of the FDIC, any additional information or advice * * * may deem desirable.
   THIRD, that * * * , not later than July 15, 1984, shall publish in not less than two issues of a local newspaper of general circulation the said notice and shall furnish the FDIC with proof of publication of such notice in the form of a certification from the publisher and a tear sheet or clipping evidencing such publication.
   FOURTH, that the Executive Secretary of the FDIC be, and hereby is, directed to immediately send a copy of this Order, by Registered Mail, Return Receipt Requested, to * * * , to the Commissioner of Banks and Trust Companies for the State of


* The context of the first sentence on page 11 of the Recommended Decision requires that it be amended to read as follows:
   The FDIC found on August 16, 1982 that * * * was operating in an unsafe or unsound condition, with inadequate equity capital and reserves, and ordered correction." (Underlining shows corrections.)
{{4-1-90 p.A-253}}* * * , and to the Counsel for * * * and FDIC participating in these proceedings.
   FIFTH, that if* * *is closed for liquidation prior to the time of the opening for business on July 16, 1984, the notices prescribed in Paragraphs SECOND and THIRD of this Order shall not be given to the depositors.
   SIXTH, that the Board of Directors of the FDIC retains full jurisdiction over these proceedings during the interim between the date hereof and the effective termination date, as fixed hereinabove, with full power and authority to amend, modify, alter, or rescind the Order of Termination of the insured status of * * * , except as may otherwise be required by Section 8(h)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(h)(1)).
   Dated at Washington, D.C. June 18, 1984.
   By direction of the Board of Directors.
/s/ Hoyle L. Robinson
Executive Secretary

ADDENDUM

   Following are the FDIC Board conclusions with respect to * * * detailed, specific exceptions to the "Findings," "Conclusions" and "Merits of the Case" portions of the ALJ's Recommended Decision for this case.

"FINDINGS"

(addressed as numbered in the ALJ's Recommended Decision)
   12. The ALJ found that on February 27, 1982, seventeen percent of * * * 's loans were adversely classified, whereas in a wellrun bank this ratio is under three percent and examiners are concerned when the ratio reaches five to seven percent, nine percent indicating substantial problems. * * * excepts to this finding as being testimony for which no foundation was laid and upon speculative opinion, there being no evidence in the record of the identity or financial status of comparable, banks.
   CONCLUSION: The testimony was provided by an FDIC examiner who was qualified as an expert witness by virtue of his extensive knowledge, skills, experience, training and education with respect to banking matters, especially concerning the condition of banks. It is unclear whether the Bank is challenging the admissibility of the testimony or the weight of the testimony given to the testimony by the ALJ. With respect to its admissibility, the testimony was properly admitted since Section 7(c) of the Administrative Procedures Act ("APA") (5 U.S.C. 556(d)) authorized the admission of any relevant oral testimony that is not unduly repetitious. Moreover, no elaborate, detailed foundation is required for the admission of expert testimony at administrative hearings; nor is such a foundation required for expert testimony under the Federal Rules of Evidence for United States Courts and Magistrates (See Rule 705).
   Regarding the weight given to the testimony by the ALJ, the hearing transcript shows that the witness' testimony is based upon broad experience acquired, among other things, during the examination of approximately 250 banks (including the bank in question) and that neither the witness' qualifications nor judgment concerning the testimony in question was discredited by * * * . For these reasons, the Board concludes that the ALJ's finding was proper. Further, as a general rule, the assessment of the credibility of witnesses and the weight of evidence by the administrative trier of fact is given great deference. Wheatley v. Shields, 292 F. Supp. 608 (S.D.N.Y. 1968); Penasguitos Village, Inc. v. N.L.R.B., 565 F.2d 1074 (9th Cir. 1977).
   18–20. In Finding 18 the ALJ found that a financially sound bank, operating in this same market area, would have a ratio of adjusted capital and reserves to adjusted gross assets of from six to eight percent. Finding 19 states that on February 27, 1982, * * * adversely classified assets represented 227.4 percent of its total capital and reserves, whereas banks in this market usually have a ratio of 25 to 35 percent. Finding 20 states that on February 27, 1982, * * * reserve for loan losses was inadequate in relation to existing potential loss in its loan portfolio. * * * excepts to these three findings as being testimony for which no foundation was laid and because they are based on speculative opinion.
   CONCLUSION: The findings are supported by relevant expert testimony as cited in the ALJ's Recommended Decision. This includes expert opinions which can be as- {{4-1-90 p.A-254}}serted without the establishment of a detailed foundation.
   23. The ALJ found that on February 27, 1982, loans overdue six months or more totalled $4,392,900. * * * excepts to this finding because the dollar amount of overdue loans is incorrect.
   CONCLUSION: The February 27, 1982 examination report confirms that the correct dollar amount is $4,391,900.
   26–27. The ALJ found that * * * suffered $1,782,000 operating loss in 1981 and a net loss of $2,533,000 after securities losses were included. It was also found that within the industry, peer banks earned 1.07 percent on the bank's assets whereas * * * lost 1.22 percent on its assets in 1981. * * * excepts to these findings as being misleading in that they purport to contain information about * * * for a time period before 1982.
   CONCLUSION: The first FDIC examination finding * * * to be in an unsafe or unsound condition was conducted as of June 30, 1982. Data as of the close of the preceding calendar year six months prior to the examination date are relevant and probative with respect to the seriousness of * * *'s financial condition on June 30 in that it reflects that asset losses had deteriorated over the six month period.
   28–29. In Finding 28 the ALJ found that * * * net interest margin as a percentage of its earnings assets was 1.19 percent as of December 31, 1981, whereas peer banks' net interest margin in 1981 was 4.74 percent. Finding 29 stated that * * * operating losses resulted from charge-offs, low yielding assets and a relatively high cost of funding and that its earnings prospects on February 27, 1982 were poor. * * * excepts to these findings as being testimony for which no foundation was laid and upon speculative opinion, there being no evidence in the record of the identity or financial status of comparable banks.
   CONCLUSION: The findings are supported by relevant expert testimony, including expert opinions which are not required to be based on a detailed foundation established at a hearing (see comments on Finding 12).
   31. The ALJ found that on February 27, 1982, 13.8 percent of * * * total assets were in tax-exempt securities with relatively low rates of return and that, since * * * had no income to tax, this was not a wise investment. * * * excepts to this finding alleging that the portion of the transcript cited does not support the conclusion drawn in the finding and also because the testimony constitutes speculation on the part of the witness.
   CONCLUSION: The expert testimony as cited in the Recommended Decision does, in fact, support the conclusion in this finding.
   33. The ALJ found that on February 27, 1982, the maturity distribution of * * * securities was relatively long term in that less than one percent matured in one year, 10 percent matured in one-two years, 13 percent from two-three years, three percent from three-four years, 26 percent from four-five years, 19 percent from five-ten years, 25 percent from 10–20 years and four percent over twenty years. * * * excepts to this finding as not being supported by the percentages cited.
   CONCLUSION: According to expert testimony in the hearing transcript (p. 89), many banks in recent years have tended to shorten up their portfolios so as to keep all purchases within five years and as much as 30 to 40 percent in the under-one-year category. In the context of this testimony, therefore, * * * portfolio appears to be "relatively long term," as the ALJ concluded.
   34. The ALJ found that on February 27, 1982, * * * had an extremely low liquidity ratio of 12 percent, with an extremely high liability dependency ratio of 35 percent based on an absence of time accounts with other banks, the long term nature of the securities portfolio and the substantial depreciation therein, poor quality of the loan portfolio and dependency on "hot money" liabilities. * * * excepts to this finding as being testimony for which no foundation was laid and because it was based on speculative opinion.
   CONCLUSION: The litany of diagnostic symptoms in the findings is fully supported in the expert testimony.
   37. The * * * found that rate sensitive assets and liabilities have interest rates which change as the market changes. * * * excepts to this finding because the definition is inaccurate.
   CONCLUSION: The finding does not contain a definition. Further, * * * does not cite in what respect the finding is inaccurate, and no such inaccuracy is apparent on the face thereof.
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   38. The ALJ found that acceptable banking practice calls for rate sensitive assets and rate sensitive liabilities to be balanced on no more than five percent in either direction. * * * excepts to this finding as being testimony for which no foundation was laid and speculative opinion and because there is no explanation in the record of acceptable banking practice.
   CONCLUSION: The finding is based upon the testimony of three FDIC examiners with long experience in bank examination who are capable of expressing an expert opinion as to what "acceptable banking practice" requires.
   41. The ALJ found that * * * gap ratio was a textbook example of a mismatched position. * * * excepts to this finding alleging that the portion of the transcript cited fails to support the finding and as being testimony for which no foundation was laid and based on speculative opinion.
   CONCLUSION: The cited testimony from the transcript does, in fact, support the finding as stated and is an appropriate subject of expert testimony. See comments under Finding 12.
   42&44. The ALJ found in Finding 42 that * * * was in an unsafe or unsound condition on February 27, 1982. In Finding 44, the ALJ found that on June 30, 1982 * * * total equity capital and reserves of $4,369,000 was 3.3 percent of total assets of $133,408,000, indicating a deterioration from the ratio at the February 27, 1982 examination. * * * excepts to these two findings as being testimony for which no foundation was laid and because they are based upon speculative opinion.
   CONCLUSION: There is certainly a glut of evidence in the record as to the unsafe or unsound condition of * * * on February 27, 1982, and the data in Finding 44 are based upon * * * June 30, 1982 report of condition prepared by * * * officials and certified by its directors to be accurate.
   45. The ALJ found that * * * net loss before securities transactions for the first six months of 1982 was $2,496,000. * * * states that the citations are incorrect without explaining its reasons for the assertion.
   CONCLUSION: A review of the record cited by the ALJ in the Recommended Decision indicates that the citations are, in fact, correct.
   46–48. Finding 46 states that on June 30, 1982, * * * total loans equalled $75,487,000. Finding 47 states that on that date, * * * reserve for loan losses was 0.2 percent of its total loans, which is inadequate in relation to the potential loss in * * * loan accounts. Finding 48 states that * * * was in an unsafe or unsound condition as of June 30, 1982. * * * excepts to the findings as being testimony for which no foundation was laid and because they are based on speculative opinion.
   CONCLUSION: The record, as cited to in the Recommended Decision, abundantly supports the findings as stated.
   53, 58 and 63. Finding 53 states that on January 8, 1983, the dollar amount of * * * total capital and reserves was $3,845,000, a decline of $524,000 since June 30, 1982, and that between February 27, 1982 and January 8, 1983, * * * total capital and reserves declined by 47.5 percent. Finding 58 states that on January 8, 1983, * * * loan valuation reserve of $341,000 was inadequate in relation to the high volume of adversely classified loans and the history of loans charged off. Finding 63 states that on January 8, 1983, * * * overdue loan ratio was twice as large as other banks in the market and that seventy percent of overdue commercial loans were not accruing interest. * * * excepts to these three findings as being testimony for which no foundation was laid and being based upon speculative opinion and because the witness did not identify the other banks in the market or their ratios of overdue loans.
   CONCLUSION: The record, as cited to in the Recommended Decision, abundantly supports the findings as stated. The expert opinions expressed regarding the ratios cited in the findings can be asserted without establishing an elaborate foundation which includes the names of particular banks or extensive statistical analysis. See comments under Finding 12 above.
   66. The ALJ found that on January 8, 1983, the maturity distribution of * * * securities portfolio was long term in that the average maturity of U.S. Treasury and Agency Securities was approximately 15 years and the average maturity of its municipal securities was approximately nine years. * * * excepts to this finding alleging that the transcript reference does not support the conclusion drawn.
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   CONCLUSION: The transcript reference cited in the Recommended Decision does, in fact, support the finding as stated.
   67. The ALJ stated that on January 8, 1983, the maturity distribution of * * * securities portfolio deviated substantially from prudent banking practices. * * * excepts to the finding as being testimony for which no foundation was laid and because it is based on speculative opinion.
   CONCLUSION: The evidence in the record, as cited in the Recommended Decision, supports the finding as stated. The expert opinion requires no detailed foundation as * * * suggests. See comments regarding Finding 12.
   73. The ALJ found that * * * rate sensitivity ratio and its gap ratio did not improve between February 27, 1982 and January 8, 1983, thereby exposing the * * * to risk in shifts in interest rates. * * * excepts to this finding alleging the conclusion drawn is incorrect and contrary to the facts adduced at the hearing.
   CONCLUSION: The finding as stated is correct and is supported by facts adduced at the hearing as cited to in the Recommended Decision.
   75–77. The ALJ, in Finding 75, stated that * * * net interest margin as of December 31, 1982 was .54 percent, which is inadequate to permit * * * to operate on a profitable basis since peer banks had a net interest margin of 5.51 percent. Finding 76 states that the earnings prospects of * * * on January 8, 1983 were unfavorable. Finding 77 states that on January 8, 1983, * * * was in an unsafe or unsound condition. * * * excepts to these findings as being testimony for which no foundation was laid and being based upon speculative opinion and because the witness never defined prudent banking practices.
   CONCLUSION: These findings are supported by the record, as cited to in the Recommended Decision. The expert opinions expressed therein do not require an elaborate foundation of supporting data as * * * suggests. See comments under Finding 12.
   78. The ALJ found that the January 8, 1983 examination showed that * * * , did not comply with the provision of the Order of Correction directing * * * to inject $6,000,000 in new equity capital and that it did not make adequate provision for loan losses. * * * excepts to this finding alleging that the provisions of the corrective order were unreasonable and impossible to meet.
   CONCLUSION: The finding merely states that * * * did not comply with the Order of Correction and draws no conclusion as to the Order's reasonableness. If, in fact, it was actually impossible to comply with the Order, this would simply be further evidence of the unsafe or unsound condition of the bank since capital could not likely be obtained under such circumstances.
   79. The ALJ found that in a 1980 examination the FDIC reported capitalization of interest (writing new notes including past due interest) by * * * and that * * * board of directors told the bank's president to discontinue this practice. * * * excepts to this finding because the definition of capitalization of interest is incomplete and inaccurate.

       CONCLUSION: The definition of capitalization of interest as parenthetically set forth in the finding appears to be reasonably accurate and complete. In any event, it is the subject of very extensive discussion and testimony in the record and there could be no misunderstanding as to what was involved.
   85. The ALJ found that since August 1981, Mr. * * * has reduced the number of employees, which is the second largest expense of * * * that he has also increased fee charges and reduced the amounts spent by * * * on donations, supplies and officer benefits and salaries, amounting to an annual savings from improved operations of close to $1,000,000. The finding cites as an example that the salary of * * * , a major stockholder in the bank, went from an annual payment of $90,000 for a few hours a month to zero. * * * excepts to the finding regarding * * * alleging that the record fails to support the assertions made, fails to state the position for which Mr. * * * received the salary and inaccurately states his duties in that position, and fails to support the implication that Mr. * * * effected the change in salary.
   CONCLUSION: The record as cited to in the Recommended Decision does, in fact, support the assertions made and the finding is accurate as stated.
   88. The ALJ stated that in November 1981, * * * entered into a Memorandum of Understanding with the FDIC providing that * * * would raise $1,000,000 in new {{4-1-90 p.A-257}}capital and that, after the FDIC's 1982 examination, the new capital requirement was raised to $6,000,000. The ALJ further states that * * * considered raising capital through a stock offering, through the use of capital notes, and by means of a multi-bank holding company, but that none of these methods was successful. * * * excepts to this finding alleging that all of the methods for raising capital attempted by the bank are not listed.
   CONCLUSION: The finding is accurate as stated. An additional method considered was the sale and lease-back by * * * of its headquarters building. This was not pursued because FDIC advised that the capital gain could be taken into income only on a pro rata basis over the life of the lease-back.
   90–91. The ALJ stated in Finding 90 that * * * capital reserves to assets ratio is so low as to constitute an unsafe or unsound condition and that on June 30, 1983, * * * had about $28,000,000 in unrealized depreciation in assets, about $3,000,000 in equity capital, almost no loan valuation reserves and continued operating losses. Finding 91 states that * * * continued to be in an unsafe or unsound condition on June 30, 1983. * * * excepts to the findings as being testimony for which no foundation was laid and because they are based on speculative opinion.
   CONCLUSION: The factual findings are supported by evidence in the record and the opinions therein are from expert testimony which requires no detailed foundation of supporting data.

"CONCLUSIONS"

   93. The ALJ concluded that * * * has failed to comply with the Order of Correction issued by the FDIC on August 16, 1982. * * * excepts to this conclusion alleging that the provisions of the Order were unreasonable and impossible to meet.
   CONCLUSION: The ALJ merely concluded that the Order of Correction was not complied with; he did not offer an opinion as to its reasonableness.
   94. The ALJ concluded that, considering the condition of the bank's loan portfolio, the size of its interest rate gap and its continual operating losses, the bank's business was being operated without sufficient capital and without adequate reserves to protect depositors against potential losses and was in an unsafe or unsound condition on February 27, 1982, June 30, 1982, January 8, 1983, and June 30, 1983. * * * excepts to this conclusion as being testimony for which no foundation was laid and because it is based upon speculative opinion.
   CONCLUSION: This conclusion is solidly based on appropriate and abundant expert testimony.

"MERITS OF THE CASE"

("Page" refers to page in ALJ
Recommended Decision)
   Paragraph 1 (Page 11)—* * * excepts to the reference to its failure to comply with FDIC's order to obtain additional capital because the provision was unreasonable and impossible to meet.
   CONCLUSION: If this requirement was impossible to comply with, it would only serve to confirm the plight of * * * since it would clearly be difficult to attract additional capital when it is unlikely that an investor will see any return on his investment for many years, if at all. Further, the record shows that even the $6 million additional capital required by FDIC is a very conservative estimate of what is needed to make the bank viable (see Transcript, pages 450-52).
   Paragraph 2 (Page 11)—* * * excepts to the characterization of its capitalization as "dangerously low," alleging that this finding ignores extensive testimony of * * * witnesses regarding marked improvements in the bank's condition.
   CONCLUSION: Testimony of FDIC witnesses, as cited in the Recommended Decision, clearly substantiates the characterization of * * * capitalization as being "dangerously low." In fact, at page 982 of the transcript an FDIC examiner testified that * * * capital was only 2.5 percent of assets and, indeed, was actually declining "at a rate far exceeding the rate of drop in the bank's assets."
   Paragraph 3 (Page 11)—* * * disputes the statement that its problems resulted from mismanagement.
   CONCLUSION: Evidence in the record clearly supports this conclusion. The issue is discussed at greater length in the body of the Order.
   Paragraph 4 (Page 11)—* * * excepts to the characterization of its improvement as {{4-1-90 p.A-258}}merely a slowing of its decline, alleging that this characterization is contrary to the evidence adduced at the hearing by the * * * witnesses.
   CONCLUSION: This characterization is adequately supported by testimony in the record taken as a whole. The difference between * * * rate sensitive assets and its rate sensitive liabilities ("gap") is one of the biggest problems looming on * * * horizon. Its forecast of a diminishing gap ignores changes to the liability side of its balance sheet brought about by further deposit deregulation. The size of * * * gap as of July 1983 continued to be excessive. In addition, further reduction of * * * long-term bond portfolio may not be practical without significant loss to the bank and further reduction of capital. Moreover, the risk to FDIC is most significantly demonstrated by the maturity of * * * gap, which is estimated to be in excess of ten years. As a result, * * * must hope that for the next ten years, it experiences no upward fluctuations in interest rates. Any such fluctuation would impact negatively on its earnings and capital. * * * ignores its bleak potential for earnings, relying instead on the hoped for sale of other real estate, collection of interest on some substandard loans, estimated conversion of nonaccrual loans to accrual status, and the leasing of the bank premises. These projections are mostly conjectural and are not supported by objective analysis.
   Paragraph 5 (Page 11)—* * * excepts to statements regarding the misleading nature of apparent improvements in * * * condition and to the statement that it continued to lose money in the first six months of 1983.
   CONCLUSION: The statements are based on direct, expert testimony in the transcript of the hearing in this case, as cited to in the Recommended Decision.
   * * * also excepts to the ruling referred to in footnote 1 on page 11 of the Recommended Decision. The footnote states as follows:

       In their case-in-chief, counsel for the FDIC relied on * * * report of condition of June 30, 1983, and had discovery opportunity until that time.... However, * * * attempted to introduce financial data up to December 31, 1983 (* * * affidavit dated January 18, 1984 attached to * * * Reply Brief) long after the record was closed.... The motion to strike the affidavit is granted.
    * * * states that—
       it was error for the Administrative Law Judge to strike the * * * affidavit dated and filed January 18, 1984. Until the administrative law judge rendered his recommended decision, he should have considered and made a part of the record all relevant evidence that could affect his decision. The evidence of the greatly improved condition of * * * is relevant to the question of whether its insured status should be terminated.
   CONCLUSION: The line has to be drawn someplace. Otherwise, insurance termination proceedings could never be adjudicated because there would always be more recent evidence of some kind that could be introduced. In our opinion, the Administrative Law Judge was very lenient with * * * in this regard and his granting of the motion to strike the * * * affidavit was correct.
   Paragraph 1 (Page 12)—* * * excepts to the conclusion that it was in unsafe or unsound condition on January 8, 1983 and June 30, 1983.
   CONCLUSION: The record supports this conclusion which is more fully discussed in the body of this Order and the Recommended Decision as incorporated therein.

FDIC-82-73a

RECOMMENDED DECISION

James P. Timony,
Administrative Law Judge

Preliminary Statement

   In this action, the Federal Deposit Insurance Corporation ("FDIC") is attempting to terminate the insured status of * * * Bank ("* * *") based on its allegedly unsafe or unsound condition. The FDIC has proceeded pursuant to Section 8(a) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(a).
   On August 16, 1982, the FDIC found that * * * had been operating in an unsafe or unsound condition as of June 30, 1982, and ordered * * * to correct this condition within 120 days. On January 8, 1983, the FDIC again examined * * *. On May 31, 1983, the FDIC issued a notice of intent of terminate * * * insured status.
   In its answer, * * * denied that it was or is in an unsafe or unsound condition, and asserted affirmatively that it was required {{4-1-90 p.A-259}}by the FDIC to charge off certain loans that were collectible, thereby reducing its capital. * * * also asserted that it is steadily increasing in profitability and that its condition is improve. * * * further asserted that the FDIC selectively enforced the Federal Deposit Insurance Corporation Act against it, and erroneously denied its request for assistance under the Garn-St. Germain Depository Institutions Act of 1982, 12 U.S.C. § 1823(i).
   By a letter dated July 11, 1983, I was assigned to hear this matter. After discovery was completed, the hearing commenced on August 22, 1983. A stipulation correcting the transcript was submitted on October 18, 1983. The record contains lists, dated February 2, 1984 and February 16, 1984, describing the exhibits and showing where each exhibit is discussed in the record.

Abbreviations

Ex. exhibit
f. finding
fs. findings
Federal Deposit Insurance
FDIC     Corporation
p.f. proposed finding
Tr. transcript
* * * * * * Bank

FINDINGS

   1. * * * is an * * * corporation and has its principal place of business at * * * ( * * * Answer)
   2. In the course of examining a bank, FDIC's examiners gather information from the bank's records. In analyzing loans, information is derived from credit files, and discussions with management of the bank. (* * * Tr. 50, 58–59)
   3. Usual bank assets include cash due from bank accounts, securities, loans, the bank premises, other real estate, income not collected, and prepaid expenses. Chief earning assets include loans and securities. (* * * Tr. 45; FDIC Ex. 2 at 2)
   4. FDIC examiners evaluate bank assets with respect to credit quality, maturity, and yield. (* * * Tr. 45–46)
   5. FDIC examiners classify bank assets according to risk of loss. The three categories are "Substandard" (weaknesses which could jeopardize the orderly liquidation of the debt), "Doubtful" (more sever weakness in credit), and "Loss' (little or not value). (* * * Tr. 46–47)

February 27, 1982 examination

   6. * * * was examined as of the close of business February 27, 1982 by FDIC examiner * * * ( * * * Tr. 38) The total dollar amount of * * * assets subject to adverse classification was $16,658,400. (* * * Tr. 47; FDIC Ex. 2 at 2)
   7. On February 27, 1982, the dollar amounts of the * * * assets subject to adverse classification were $14,062,600 Substandard, $276,900 Doubtful, and $2,318,900 Loss. (* * * Tr. 47–48; FDIC Ex. 2 at 2)
   8. On February 27, 1982, the total dollar amount of loans which were subject to adverse classification was $15,115,000. (* * * Tr. 48; FDIC Ex. 2 at 2)
   9. On February 27, 1982, the total dollar amounts of the bank's loans subject to adverse classifications were $13,143,700 Substandard, $276,900 Doubtful, and $1,694,400 Loss. (* * * Tr. 48; FDIC Ex. 2 at 2)
   10. On February 27, 1982, the total amount of the * * * loans were $89,008,900. (* * * Tr. 59; FDIC Ex. 2 at 6)
   11. On February 27, 1982, adversely classified loans increased by $4,034,768 from the previous FDIC examination. (FDIC Ex. 2 at 3e)
   12. On February 27, 1982, 17% of * * * 's loans were adversely classified. (* * * Tr. 59; FDIC Ex. 2 at 6) In a wellrun bank this ratio is under 3%. Examiners are concerned when the ratio reaches 5 to 7%. Nine percent indicates substantial problems. Seventeen percent was the highest Examiner * * * had ever seen. ( * * * Tr. 59–60)
   13. On February 27, 1982, * * * 's total assets were $143,745,000. (FDIC Ex. 2 at 2)
   14. On February 27, 1982, * * * , adjusted gross assets were $142,167,500. Adjusted gross assets were computed by subtracting from * * * total assets (plus loan valuation reserve) 100% of assets classified Loss, 50% of assets classified Doubtful and differences in accounts. ( * * * Tr. 74–75; FDIC Ex. 2 at 2)
{{4-1-90 p.A-260}}
   15. On February 27, 1982, the * * * total unadjusted capital and reserves were $7,324,100. (FDIC Ex. 2 at 2)
   16. On February 27, 1982, * * * adjusted capital and reserves were $4,857,200. Adjusted capital and reserves were computed by subtracting from the bank's total capital and reserves 100% of assets classified Loss, 50% of assets classified Doubtful and differences in accounts. (* * * Tr. 78; FDIC Ex. 2 at 2)
   17. On February 27, 1982, the amount of * * * 's adjusted capital and reserves as a percent of adjusted gross assets was 3.4% ( * * * Tr. 78; FDIC Ex. 2 at 2)
   18. A financially sound bank, operating in this same market area, would have a ratio of adjusted capital and reserves to adjusted gross assets of from 6 to 8%. ( * * * Tr. 79)
   19. On February 27, 1982, * * * , adversely classified assets of $16,658,400 represented 227.4% of * * * total capital and reserves. ( * * * Tr. 47, 62) A 227.4% classified assets ratio is extremely high relative to comparable banks. When this ratio gets to 60% the FDIC requires the bank to submit monthly reports concerning the status of classified assets. Banks in this market usually have a ratio of 25 to 35%. ( * * * Tr. 47, 63–64)
   20. On February 27, 1982, contrary to standard banking procedures, * * * reserve amount of $889,400, against which it charges loan losses, was inadequate in relation to existing and potential loss in * * * loan portfolio. ( * * * Tr. 76–77)
   21. On February 27, 1982, the dollar amount of overdue loans was $11,133,100. ( * * * Tr. 66; FDIC Ex. 2 at 6, 6a)
   22. On February 27, 1982, 32 loans were overdue six months or more. (FDIC ex 2 at 6)
   23. On February 27, 1982, loans overdue six months or more totalled $4,392,900. ( * * * Tr. 68; FDIC Ex. 2 at 6, 6a)
   24. On February 27, 1982, the ratio of the dollar amount of overdue loans to the dollar amount of total loans was 12.5%. ( * * * Tr. 66–67; FDIC Ex. 2 at 6, 6a)
   25. On February 27, 1982, 34.8% of the bank's commercial loans were overdue. ( * * * Tr. 67; FDIC Ex. 2 at 6a)
   26. * * * suffered a $1,782,000 operating loss in 1981 and a net loss of $2,533,000 after securities losses were included. ( * * * Tr. 119; FDIC Ex. 2 at 4)
   27. Within the industry, peer banks earned 1.07% on the bank's assets. * * * lost 1.22% on its assets in 1981. ( * * * Tr. 122; FDIC Ex. 2 at 4)
   28. * * * net interest margin (net income less net interest expense) as a percentage of its earning assets, was 1.19% as of December 31, 1981. Interest income is like an industrial company's sales. Interest expense is like cost of goods sold. Net interest margin is, in effect, the gross profit. A peer bank's operating expenses normally are about 3% of assets. Peer banks' net interest margin in 1981 was 4.74%. A net interest margin of 1.19% would not cover expenses or loan losses, and would erode capital and eventually render the bank insolvent. ( * * * Tr. 117-19; FDIC Ex. 2 at 1-b)
   29. * * * operating losses resulted from asset charge-offs, low yielding or noninterest accruing assets, and a relatively high cost of funding. * * * earnings prospects on February 27, 1982 were poor. ( * * * Tr. 121–22; FDIC Ex. 2 at 1a, 4)
   30. On February 27, 1982, * * * had two concentrations of credit, one to restaurants in an amount equal to 55% of equity capital and another to real estate developers and speculators equal to 140.4% of equity capital. ( * * * Tr. 72–73; FDIC Ex. 2 at 3-d, 3-d-1)
   31. On February 27, 1982, of * * * total assets, 13.8% was in tax-exempt securities, with relatively low rates of return. Since * * * had no income to tax, this was not a wise investment. ( * * * Tr. 84)
   32. On February 27, 1982, market depreciation in * * * securities portfolio represented 261% of its adjusted capital and reserves and, if a significant number of securities were sold, losses would eliminate * * * capital accounts and render it insolvent. ( * * * Tr. 83; FDIC Ex. 2 at 1-a; Bank Ex. 16)
   33. On February 27, 1982, the maturity distribution of * * * securities was relatively long term in that less than 1% matured in 1 year, 10% matured within 1–2 years, 13% from 2–3 years, 3% from 3–4 years, 26% from 4–5 years, 19% from 5–10 years, 25% from 10–20 years, and 4% over 20 years. ( * * * Tr. 86–89; FDIC Ex. 2 at 5)
   34. On February 27, 1982, * * * liquidity (its ability to convert assets into cash quickly with little or no loss while meeting {{4-1-90 p.A-261}}the credit needs of the community) was very low, based on an absence of time accounts with other banks, the long term nature of a securities account with substantial depreciation, poor quality of the loan account, dependence on "hot money" (large dollar amount deposits in excess of $100,000 paying high interest) with an extremely high liability dependency ratio of 35%, and an extremely low liquidity ratio of 12%. ( * * * Tr. 92–98; FDIC Ex. 2 at 2, 8, 9-c)
   35. On February 27, 1982, on a six month basis, * * * rate sensitive assets of $14,464,000 were 20.8% of rate sensitive liabilities of $69,700,000. ( * * * Tr. 101; FDIC Ex. 2 at 9-e)
   36. On February 27, 1982, on a 12-month basis, * * * rate sensitive assets of $17,656,000 were 23.8% of rate sensitive liabilities of $74,087,000. ( * * * Tr. 100-01; FDIC Ex. 2 at 9-e-1)
   37. Rate sensitive assets and rate sensitive liabilities have interest rates which change as the market changes. ( * * * Tr. 99–100, 110–12)
   38. Acceptable banking practice calls for rate sensitive assets and rate sensitive liabilities to be balanced on no more than 5% in either direction. ( * * * Tr. 108; * * * Tr. 322; * * * Tr. 452)
   39. On February 27, 1982, on a six month basis, * * * gap ratio, that is, it's rate sensitive liabilities minus its rate sensitive assets divided by its total assets, was 38.4%. The gap ratio measures * * * exposure to interest rate risk. ( * * * Tr. 102-03; FDIC Ex. 2 at 9-e)
   40. On February 27, 1982, on a 12-month basis, * * * gap ratio was 39.3%. ( * * * Tr. 102; FDIC Ex. 2 at 9-e)
   41. * * * gap ratio was a textbook example of a mismatched position. ( * * * Tr. 108; * * * Tr. 322)
   42. * * * was in an unsafe or unsound condition on February 27, 1982. ( * * * Tr. 125–27)

June 30, 1982 report of condition.

   43. * * * submitted a report of condition as of June 30, 1982. On that date * * * total equity capital was $4,180,000 and its reserves were $189,000. (FDIC ex 3 at 3-2)
   44. On June 30, 1982, * * * total equity capital and reserves of $4,369,000 was 3.3% of its total assets of $133,408,000. This indicates a deterioration from the ratio at the February 27, 1982 FDIC examination. ( * * * Tr. 131; FDIC Ex. 3 at 3-2)
   45. * * * net loss before securities transactions for the first six months of 1982 was $2,496,000. ( * * * Tr. 132–33; FDIC Ex. 3 at 3-b)
   46. On June 30, 1982, * * * total loans equalled $75,487,000. (FDIC Ex. 3 at 3-2)
   47. On June 30, 1982, * * * reserve for loan losses was 0.2% of its total loans. This reserve is inadequate in relation to the potential for loss in * * * loans. ( * * * Tr. 132; FDIC Ex. 3 at 3-2)
   48. * * * was in an unsafe or unsound condition as of June 30, 1982. ( * * * Tr. 133)

January 8, 1983 examination

   49. Following the FDIC's Order of Correction of August 16, 1982 and after the expiration of the 120-day corrective period, * * * was examined as of the close of business on January 8, 1983. ( * * * Tr. 282) On that date the total dollar amount of * * * assets subject to adverse classifications was $13,097,000. The dollar amounts of * * * assets subject to adverse classification were $12,158,000 Substandard, $325,000 Doubtful and $614,000 Loss. ( * * * Tr. 287; FDIC Ex. 6 at 2)
   50. On January 8, 1983, the total dollar amount of loans subject to adverse classification was $9,639,000. (FDIC Ex. 6 at 2)
   51. On January 8, 1983, the dollar amounts of * * * loans subject to adverse classifications were $8,953,000 Substandard, $325,000 Doubtful and $361,000 Loss. (FDIC Ex. 6 at 2)
   52. On January 8, 1983, * * * adversely classified loans were 14.16% of * * * total loans. (FDIC Ex. 6 at 2)
   53. On January 8, 1983, the dollar amount of * * * total capital and reserves was $3,845,000 showing a decline of $524,000 in this figure since June 30, 1982. ( * * * Tr. 284-85; FDIC Ex. 6 at 3) Between February 27, 1982 and January 8, 1983, * * * total capital and reserves declined by 47.5%. (* * * Tr. 284)
   54. On January 8, 1983, * * * adversely classified assets of $13,097,000 were 340.62% of it's total capital and reserves of $3,845,000. ( * * * Tr. 286)
{{4-1-90 p.A-262}}
   55. On January 8, 1983, * * * adjusted capital and reserves were $3,008,000. (FDIC Ex. 6 at 3) This amount represents a decrease in adjusted capital and reserves of $1,849,000 from February 27, 1982. (* * * Tr. 303-04)
   56. On January 8, 1983, * * * adjusted gross assets were $119,498,000. (* * * Tr. 299; FDIC ex 6 at 3)
   57. On January 8, 1983, * * * adjusted capital ratio (adjusted capital and reserves to adjusted gross assets) was 2.52%. (* * * Tr. 304; FDIC Ex. 6 at 3)
   58. On January 8, 1983, * * * loan valuation reserve of $341,000 was inadequate in relation to the high volume of adversely classified loans and history of loans charged off. (* * * Tr. 300-02)
   59. On January 8, 1983, * * * dollar amount of overdue loans was $8,080,000. (* * * Tr. 290; FDIC Ex. 6 Supp. at 2-h)
   60. On January 8, 1983, 11.19% of * * * gross loans were overdue. (* * * Tr. 291; FDIC Ex. 6 Supp. at 2-h)
   61. On January 8, 1983, * * * gross loans overdue six months or more amounted to $5,178,000. * * * had 29 such loans. ( * * * Tr. 291; FDIC Ex. 6 Supp. at 2-h)
   62. On January 8, 1983, 40.75% of * * * commercial loans were overdue. ( * * * Tr. 292; FDIC Ex. 6 Supp at 2-h-1)
   63. On January 8, 1983, * * * overdue loan ratio was twice as large as other banks in the market. ( * * * Tr. 294) Seventy percent of overdue commercial loans were not accruing interest. ( * * * Tr. 294)
   64. On January 8, 1983, * * * had two concentrations of credit, one to restaurants in an amount equal to 199.54% of * * * total equity capital, and another to real estate developers and speculators in an amount equal to 163.76% of equity capital. ( * * * Tr. 295; FDIC ex 6 Supp. at 2-e). The loans to real estate developers and speculators have resulted in significant losses. ( * * * Tr. 297-98)
   65. On January 8, 1983, market depreciation in * * * securities portfolio equalled $5,478,000 or 182% of its adjusted capital and reserves. ( * * * Tr. 308: FDIC Ex. 6 Supp. at 1-a-2)
   66. On January 8, 1983, the maturity distribution of * * * securities portfolio was long term in that the average maturity of U.S. Treasury and Agency Securities was approximately 15 years and the average maturity of its municipal securities was approximately 9 years. ( * * * Tr. 311-12; FDIC Ex. 6 Supp. at 2-i-1)
   67. On January 8, 1983, the maturity distribution of * * * security portfolio deviated substantially from prudent banking practice. ( * * * Tr. 311-13)
   68. On January 8, 1983, * * * liquidity was inadequate in that its liquidity ratio was 16.41% and its large liability dependency was 28.22%. ( * * * Tr. 315, 318)
   69. On January 8, 1983, on a six-month basis * * * rate sensitive assets of $11,330,000 were 16.84% of rate sensitive liabilities of $67,290,000. ( * * * Tr. 321; FDIC Ex. 6 Supp. at 5-c-1)
   70. On January 8, 1983, on a 12-month basis, * * * rate sensitive assets of $17,415,000 were 25.05% of rate sensitive liabilities of $69,554,000. (FDIC Ex. 6 Supp. at 5-c-2)
   71. On January 8, 1983, on a six-month basis, * * * gap ratio was 46.64% ( * * * Tr. 323; FDIC Ex. 6 Supp at 5-c-1)
   72. On January 8, 1983, on a 12-month basis, * * * gap ratio was 43.45%. (FDIC Ex. 6 Supp. at 5-c-2)
   73. * * * rate sensitivity ratio (rate sensitive assets as a percentage of rate sensitive liabilities) and its gap ratio did not improve between the February 27, 1982 and January 8, 1983 examinations, exposing * * * to risk in shifts in interest rates. ( * * * Tr. 321-24; Bank Ex. 22, 29)
   74. * * * had a net operating loss in 1982 of $3,236,000. (FDIC Ex. 6 at 4)
   75. * * * net interest margin as of December 31, 1982 was .54%. ( * * * Tr. 324; FDIC Ex. 6 at 4) A net interest margin of .54% is inadequate to permit * * * to operate on a profitable basis. ( * * * Tr. 324-28) Peer banks had a net interest margin of 5.51%. (FDIC Ex. 6 at 4)
   76. The earnings prospects of * * * on January 8, 1983 were unfavorable. ( * * * Tr. 329-30)
   77. On January 8, 1983, * * * was in an unsafe or unsound condition. ( * * * Tr. 335)
   78. The examination on January 8, 1983, showed that the bank did not comply with the provision of the Order of Correction directing * * * to inject $6,000,000 in new equity capital ( * * * Tr. 334); and * * * did not make adequate provision for loan losses. ( * * * Tr. 335)

{{4-1-90 p.A-263}}
Management changes

   79. In a 1980 examination the FDIC reported capitalization of interest (writing new notes including past due interest) by * * * (* * * Tr. 744, 746) The Board of Directors told * * * , President of * * * , to stop the practice. ( * * * Tr. 779)
   80. In a 1981 examination, the FDIC reported increased capitalization of interest and that classified assets had increased by ten million dollars in one year. ( * * * Tr. 777, 780)
   81. In late August or early September of 1981, the Board replaced the senior officers of * * * with * * * as President and * * * as Vice President. ( * * * Tr. 788, 811; * * * exs. 1, 4 and 5) Mr. * * * has been on the bank's board of directors since 1971. ( * * * Tr. 721) Mr. * * * left the bank in July 1982. ( * * * Ex. 1 at 2)
   82. On September 1, 1981, * * * adopted an interim loan policy prohibiting loans to non-customers, real estate loans, and speculative and unsecured loans, and imposing reduced lending limits on all officers, including the President, and the amount of all loan lines. ( * * * Tr. 792-97; * * * Ex. 15)
   83. * * * also adopted a new investment policy in October of 1981 to address * * * rate sensitivity exposure, whereby the bank would liquidate as rapidly as market conditions permitted the portion of its existing portfolio having a loan maturity. ( * * * Tr. 797–800; * * * Ex. 16)
   84. A collection policy for substandard loans was also adopted effective October 23, 1981. ( * * * Tr. 800-01)
   85. Since August of 1981, Mr. * * * has reduced the number of bank employees, which is the second largest expense of * * *. He has also increased charges and reduced the amounts spent by * * * on donations, supplies and officer benefits and salaries. For example, the salary of * * * , a major stockholder in the bank ( * * * Tr. 722), went from an annual payment of $90,000 for a few hours a month to zero. (FDIC Ex. 6 at 1-a-3) The annual savings from improved operations were close to $1,000,000. ( * * * Tr. 849-51)
   86. Under Mr. * * * management, * * * employees improved their documentation of loans. ( * * * Tr. 852-53)
   87. Several trends at * * * between August 1, 1981 and July 31, 1983 evidence * * * shrinkage during that period. * * * assets fell from $165,300,000 on August 1, 1981 to $115,300,000 on July 31, 1983, a 30.3% decline. Total loans also dropped from $96,804,000 to $62,373,000, which was a 35.57% decline. Long term bonds decreased from $53,408,000, to $36,195,000, which was a 32.33% decline. Large certificates of deposit and public funds decreased 76.53% from $45,667,000 to $10,717,000. ( * * * Tr. 819-21; * * * Ex. 19)
   88. In November of 1981, after the 1981 examination, * * * entered into a Memorandum of Understanding with the FDIC, which provided that * * * would raise $1,000,000 in new capital. After the FDIC's 1982 exam, the FDIC required that $6,000,000 in new capital be injected. * * * considered raising capital through a stock offering, through the use of capital notes, and by means of a multi-bank holding company. None of these methods has been successful. ( * * * Tr. 872–84)

June 30, 1983 report of condition

   89. * * * had losses of $343,000, equity capital and reserves of $3,106,000, and a loan valuation reserve of $16,000 on June 30, 1983. (FDIC Ex. 7A; * * * Tr. 979-80)
   90. * * * capital and reserves to assets ratio is so low as to constitute an unsafe or unsound condition. On June 30, 1983, * * * had about $28,000,000 in unrealized depreciation in assets, about $3,000,000 in equity capital, almost no loan valuation reserve and continued operating losses. ( * * * Tr. 450, 567, 980; FDIC Ex. 7A at 4)
   91. * * * continued to be in an unsafe or unsound condition on June 30, 1983. ( * * * Tr. 978-87)

CONCLUSIONS

   92. The FDIC has jurisdiction over the bank and the subject matter of the proceeding. (Stipulated)
   93. * * * has failed to comply with the Order of Correction issued on August 16, 1982. (F. 78)
   94. Considering the condition of the bank's loan portfolio, the size of its interest rate gap, and its continual operating losses, the bank's business was being operated {{4-1-90 p.A-264}}without sufficient capital and without adequate reserves to protect its depositors against potential losses and was in an unsafe or unsound condition on February 27, 1982 (f. 42), June 30, 1982 (f. 48), January 8, 1983 (f. 77), and June 30, 1983 (f. 91).

DISCUSSION

Merits of the Case

   The FDIC found on August 16, 1982 that * * * was operating in an unsafe or unsound condition, with adequate equity capital and reserves, and ordered correction. At the end of the correction period * * * failed to comply with the order to obtain additional capital. (fs. 78, 88)
   On this record, * * * still has a dangerously low level of equity capital and reserves. (fs. 15–18, 20, 44, 47, 53, 55–58, 90, 92) It sustained significant losses in 1981 and 1982, (fs. 26–29, 45, 74), and continued to suffer operating losses on June 30, 1983.1 (fs. 89–91)

   [.7] * * * has had two main problems: low asset quality (fs. 6–14, 19, 21–25, 30–34, 49–52, 54, 60–68) and a position of high risk to interest rates changes. (fs. 35–41, 69–73) These resulted from mismanagement by officials of * * * , and when the economy ran into trouble and interest rates rose the bank began to have serious earnings problems. ( * * * Ex. 11)
   In 1981, * * * brought in new managers to replace senior officials.2 (f.81) They have promulgated new lending and investment policies, reduced costs and the size of the assets, and generally improved the condition of the bank, and along with much improved interest rates ( * * * Ex. 11 at 9), the bank's decline has been slowed. (fs. 82–86)
   The new management points to encouraging trends (f. 87), but these favorable figures are misleading ( * * * Tr. 971, 980-81) and may well be reversed in the near future. ( * * * Tr. 563-64, 973-74) * * * continued to lose money in the first six months of 1983. (f. 90)
   I find that the preponderance of the evidence3 establishes that * * * was in an unsafe or unsound condition on January 8, 1983 and on June 30, 1983. (fs. 77, 91)

Legal Arguments

   * * * presents two legal arguments.4 First, that the FDIC has failed to articulate standards defining what is an unsafe or unsound condition. And, second, that the FDIC wrongfully denied * * * net worth assistance under the Garn-St. Germain Act. These arguments lack merit for the following reasons.
   1. Requirement of articulated standards

   [.8] * * * argues that the determination that it was in an unsafe or unsound condition is invalid because the FDIC failed to articulate standards defining that term. The term unsafe or unsound condition is undefined in the statute, legislative history, or, as yet, in the reported cases. Congress has delegated the duty of defining the term to the FDIC, with judicial review. Cf. Federal Trade Commission v. R.F. Keppel & Bro, Inc., 291 U.S. 304, 310-12 (1934) Here, the FDIC has informed * * * of the details of its condition, found to be unsafe or unsound, in two investigation reports as well as in the Findings and Order of Correction dated August 16, 1982. Furthermore, three expert witnesses creditably testified that according to standards of prudent banking operation articulated in those documents, the bank is in an unsafe or unsound condition.5
   * * * argues that the FDIC had no standard for requiring that the bank increase its capital by six million dollars. Since it would take nine or ten million dollars in added capital for * * * to earn half as much on investment as the average bank, the order is not arbitrary or capricious. ( * * * Tr. 450-51)


1 In their case-in-chief, counsel for the FDIC relied on * * * report of condition of June 30, 1983, and had discovery opportunity until that time. (FDIC Ex. 8B-C; * * * Tr. 567, 821-25) However, * * * attempted to introduce financial data up to December 31, 1983 ( * * * affidavit dated January 18, 1984 attached to * * * Reply Brief) long after the record was closed. (Tr. 891) The motion to strike the affidavit is granted.

2 Several directors, including the controlling stockholder, remain the same. ( * * * Tr. 572)

3 The standard of proof required in administrative adjudication, unless changed by statute, is the traditional preponderance of the evidence. Steadman v. SEC, 450 U.S. 91, 102 (1981)

4 Respondent's other arguments are dismissed for failure of evidence or lack of legal merit, e.g., respondent introduced no evidence to support its first affirmative defense; and, concerning the net worth assistance defense, even if the bank received assistance its financial problems would remain. (* * * Tr. 637)

5 * * * cites a few off-hand remarks by FDIC personnel, praising the bank's new management in their attempts to save the bank, as evidence of inconsistent standards. ( * * * p.f. 26) These remarks, when put in context, carry little weight. ( * * * Ex. 5 p. 2)
{{4-1-90 p.A-265}}
   2. Net worth assistance
   a. legislative-type rules
   * * * argues that the FDIC was required to publish in the Federal Register its policy regarding net worth assistance under the Garn-St. Germain Depository Institutions Act of 1982 (12 U.S.C. § 1823(i)), citing Morton v. Ruiz, 415 U.S. 199, 232-36 (1974) which held that a person without notice may not be adversely affected by an agency's statement of general policy where that policy was required to be published in the Federal Register and it was not.
   Pursuant to delegated power,6 the FDIC on December 7, 1982 announced details of the net worth certificate program. (FDIC Ex. 1A) Included in that announcement was the provision that before an applicant would be qualified for assistance under the Act: "[a]ny supervisory action under Section 8 of the FDIC Act must be resolved." (FDIC Ex. 1A at 3 of appendix)
   Even assuming, however, that the FDIC's announcement was a "legislative-type rule"7 subject to rulemaking requirements,8 * * * had actual and timely notice of the requirements of the announcement.9 Yassini v. Crosland, 618 F.2d 1356, 1361 (9th Cir. 1980); Whelan v. Brinegar, 538 F.2d 924, 927 (2d Cir. 1976)
   b. expansion of the statute
   * * * argues that the FDIC exceeded the authority granted in the statute by adding as a condition for net worth asistance that losses may not have been incurred as a result of mismanagement. The statute specifically states, however, that net worth assistance shall be granted to a qualified institution in an amount equal to a percentage of its operating losses "not occasioned by mismanagement." (12 U.S.C. § 1823 (i)(5)(A), (B) and (C))
   c. discrimination against commercial banks
   * * * argues that the FDIC discriminated against it in favor of mutual savings banks in the administration of the Garn-St. Germain Act. The evidence relied on, however, proves only that different laws and regulations have applied to thrifts and to commercial banks. The legislative history of Garn-St. Germain describes that difference, specifying the congressional intent to help thrifts by net worth assistance. (1982 United States Congressional and Administrative News, Sen. Report No. 97–536, at 3054, 3063) There was no proof that * * * was denied assistance because it was a bank.
   d. mismanagement
   The FDIC does not provide net worth assistance under Garn-St. Germain if a regulatory action for mismanagement is pending against the applicant. * * * argues that the FDIC's August 16, 1982 Findings and Correction Order did not list mismanagement as a reason for the Section 8(a) proceeding. It is obvious, however, that the thrust of this proceeding is mismanagement. Mr. * * * , President of * * * , through his own testimony, showed that he was well aware that the bank's capital problems were brought on by mismanagement. ( * * * Tr. 787-89; * * * Ex. 11)

DECISION

   I therefore conclude that the preponderance of the evidence shows that respondent * * * was, on June 30, 1983, as well as earlier dates, in an unsafe or unsound condition. A Proposed Order is attached.
/s/ James P. Timony
Administrative Law Judge
February 27, 1984

PROPOSED ORDER

   NOW, THEREFORE, in conformity with the above Findings of Fact and Conclusions of Law, and pursuant to section 8(a) of the Federal Deposit Insurance Act:
   IT IS HEREBY ORDERED:
   FIRST, That the insured status of the * * * Bank, * * * (the "Bank") be and the same hereby is terminated effective as of the close of business ________, 19________.
   SECOND, That the Bank, not later than ________, 19________, shall give notice to its depositors of the termination of its status as an insured bank, such notice to be mailed by First Class United States mail to each depo-


6 The Garn-St. Germain Act states that the FDIC "in its sole discretion and on such terms and conditions as it may prescribe, is authorized" to implement the policy of the Act. (12 U.S.C. § 1823(i) (1) (A))

7 The FDIC's announcement, excluding net worth assistance to banks subject to a supervisory action, affected * * * individual rights, apparently making the announcement a legislative-type rule. Chrysler Corp. v. Brown, 441 U.S. 281, 301–302 (1979)

8 5 U.S.C. § 553,

9 ( * * * Ex. 11 at 8)
{{4-1-90 p.A-266}}sitor at the depositor's last address of record as shown upon the books of the Bank, and that the Bank furnish the FDIC with a copy of the notice mailed, together with an affidavit executed by the person who mailed the same, which affidavit shall further state the fact of mailing said notice and the date of the mailing thereof, and shall further state that the said notice was mailed to each depositor of the Bank at his last address as shown upon the records of the Bank as of the date the notice was mailed, and upon the refusal or failure of the Bank to give such notice as specified hereinabove, the FDIC is authorized to so notify the depositors. The said notice shall be in the form as follows:

NOTICE                    (Date)

   1. The status of the * * * , as an insured bank under the provisions of the Federal Deposit Insurance Act, will terminate as of the closed of business on the Blank day of ________, 19________;
   2. Any deposits made by you after that date, either new deposits or additions to existing deposits, will not be insured by the Federal Deposit Insurance Corporation;
   3. Insured deposits in the bank on the day of ________ 19________ will continue to be insured, as provided by the Federal Deposit Insurance Act, for two years after the close of business on the day of ________, 19________: Provided, however, that any withdrawals after the close of business on the day of ________, 19________, will reduce the insurance coverage by the amount of such withdrawals. * * * Bank [Address]
   There may be included in such notice, with the written approval of the FDIC any additional information or advice the Bank may deem desirable.
   THIRD, That the Bank, not later than ________, 19________, shall publish in not less than two issues of a local newspaper of general circulation the said notice and shall furnish the FDIC with proof of publication of such notice in the form of a certification from the publisher and a tear sheet or clipping evidencing such publication.
   FOURTH, That the Executive Secretary of this FDIC be, and hereby is, directed to immediately send a copy of the Findings of Fact, Conclusions of Law, and this Order, by Registered Mail, Return Receipt Requested, to the * * * Bank, * * * , to the Honorable * * * , Commissioner of Banks & Trust Companies for the State of * * * , and to the Counsel for the Bank participating in these proceedings.
   FIFTH, That if the Bank is closed for liquidation prior to the time of the opening for business on ________, 19________, the notices prescribed in paragraphs SECOND and THIRD of this Order shall not be given to the depositors.
   SIXTH, That the Board of Directors of the FDIC retains full jurisdiction over these proceedings during the interim between the date hereof and the effective termination date, as fixed hereinabove, with full power and authority to amend, modify, alter, or rescind the Order of Termination or the insured status of the subject Bank.
   Dated at Washington, D.C., ________, 19________.
   By direction of the Board.
/s/ Hoyle L. Robinson
Executive Secretary

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