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FDIC Enforcement Decisions and Orders |
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[.1] CapitalAdequacyUnsafe or Unsound Practices
[.2] Call ReportsAmending Required
[.3] Lending and Collection Policy and ProceduresUnsafe or Unsound Practices
[.4] AssetsUnsafe or Unsound Practices
[.5] ManagementAdequacy
[.6] Cease and Desist OrdersCessation of Violation No Defense
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I. STATEMENT OF THE CASE
This proceeding arises under Section 8(b) of the Federal Deposit Insurance Act (the "Act") (12 U.S.C. § 1818(b)). On February 12, 1986, the Board of Review of the Federal Deposit Insurance Corporation (the "FDIC") issued a written Notice of Charges and of Hearing ("Notice") against * * * ("Bank"), pursuant to Section 8(b) of the Act and the FDIC's Rules of Practice and Procedures (12 CFR Part 308). The Notice charged the Bank with having engaged in unsafe or unsound banking practices and violating laws, rules and regulations. The Notice alleged that as of a June 21, 1985, Examination: (A) the Bank was operating with insufficient capital in that the Bank's adjusted equity capital and reserves equaled only 3.56 percent of the Bank's adjusted total assets; (B) the Bank had failed to properly reflect a sale and leaseback transaction involving the Bank's * * * Branch building as of the Bank's March 31, 1985, Consolidated Report of Condition and Income; (C) hazardous lending practices were present in that the Bank had extended loans without adequate sources of repayment, with insufficient collateral, with inadequate documentation and without adequate credit analysis; and (D) the Bank had an excessive volume of adversely classified assets, had a large volume of overdue loans and had inadequate loan valuation reserves. The Notice also charged that (E) the Bank had extended credit to certain directors and principal shareholders of the Bank in excess of lending limits imposed by section 23A of the Federal Reserve Act (12 U.S.C. §371c) and Regulation O (12 CFR 215.4(a) and 215.4(b)), and the Bank had violated certain other laws.
II. DECISION
The Bank's Exceptions concede that
A. The Bank Was Inadequately
[.1] The evidence shows that the Bank's adjusted capital was an inadequate 3.56% of adjusted assets (Findings 17-18) while the minimum required capital for a bank whichunlike this Bankhas no significant loan or other problems is 5.5% primary capital and 6.0% total capital. 12 CFR 325.3(b). Further, a bank with the asset quality, and other problems found here needs far more than that minimum level of capital. This greater need for capital provides the basis for the capital requirements found in the accompanying Order.
B. The Bank Improperly Accounted for the
[.2] Prior to March 1, 1985, the Bank's book value of its Branch building was $96,000. On that date the Bank sold the building to a limited partnership controlled by the Bank's two principal stockholders,3 both of whom are also directors of the Bank. Several other Bank directors are limited partners in this venture. When the partnership bought the building, it paid $60,000 down and borrowed the remainder of the $600,000 sale price under a non-recourse mortgage from a wholly-owned subsidiary of the Bank. The partnership then leased the building back to the Bank on a net lease that required a rental payment sufficient to cover the monthly payments due to the Bank's subsidiary on the $540,000 loan. The Bank reported a $504,000 profit on that sale in its March 31, 1985, Consolidated Report of Condition and Income. This had the effect of sharply increasing Bank's reported capital. However, applicable accounting principles require that the profit from a sale and leaseback of this type be spread over time.4 Consequently, the Bank's Consolidated Reports of Condition and Income from March 31, 1985, forward should reflect recognition of only a limited portion of the $504,000 reported profit. Accordingly, the Order requires the Bank to amend its call reports from March 31, 1985, forward to accurately reflect this transaction.
C. The Bank Engaged in Hazardous
[.3] As set forth in Findings 6566, the Bank engaged in hazardous lending practices including extending credit without prior adequate credit analysis, without first obtaining proper documentation, and without determining that there were adequate sources of repayment and/or that loans were adequately secured.5 For example, the Bank extended credit totaling $144,137 to * * * without having current financial information on file when the credit was extended. Available information now indicates that the business has a negative net worth, has overdrawn bank accounts, and made a profit of only $10,000 on sales of almost $1 million. Finally, most of the security for this credit consists of third and fourth mortgages on the guarantor's home. These unsafe or unsound banking practices require correction.
[.4] The Bank's adversely classified assets were 225.2% of Bank's adjusted capital and reserves. An excessive 9.3% of the Bank's loans were overdue. The Bank's loan valuation reserve as of June 21, 1985, was $220,000, while assets classified "Loss" plus half of "Doubtful" totaled $617,000. Those adversely classified assets, which should be written off, were greatly in excess of the Bank's reserves. These facts, including the facts set forth in Findings 67-73, demonstrate that the Bank was operating in an unsafe or unsound manner that requires correction.6
E. There Were Violations of Law
The Bank argues that the directors had not violated Regulation O because, according to the Bank, prior approval was given by the board of directors of the Bank for certain loans and because certain loan guarantees executed by directors of the Bank were not extensions of credit within the meaning of Regulation O.
[.5] Based on the evidence in the record, we find that the Bank violated Regulation O in that certain loans to Directors * * * , * * * , * * * and * * * were made prior to the board of directors approval required by 12 CFR 215.4(b). The Bank also extended credit, including the guarantees by members of the board of directors of certain loans, in amounts that exceeded the applicable State lending limit (* * * Revised Statutes Section 6.415A). Findings 76-83 set these matters out in more detail. Additionally, the Bank made a low quality and inadequately secured extension of credit involving affiliates of the Bank in violation of 12 U.S.C. 371c(b)(10)(A), (c)(1)(6) (Findings 84-85), and failed to maintain on the Bank's records required information concerning related interests of the Bank's executive officers, directors and principal shareholders, and of the Bank's loans thereto, in violation of the requirements of 12 U.S.C. 375(b) and 12 CFR 215.7 (Finding 86).
[.6] Assuming arguendo that the Bank had effected all needed corrective measures during the pendency of this proceeding, that would still not eliminate the need for a corrective order. Without a cease and desist order, the FDIC has "no valid assurance that if the Bank were free of the FDIC's restraint it would not continue its former course." Bank of Dixie v. FDIC, 766 F.2d 175, 178 (5th Cir. 1985) citing Zale Corp. v. FTC, 473 F.2d 1317, 1320 (5th Cir. 1973); see also First National Bank v. Comptroller, 697 F.2d 674, 683 (5th Cir. 1983). Further, in this case the Bank concedes that its capital problem has not been solved. Indeed, according to the Exceptions, the Bank's capital deficiency has worsened since June, 1985. In short, a corrective Order is both appropriate and necessary.8
III. CONCLUSION
The Bank has engaged in numerous unsafe or unsound banking practices and violations of law. The overall condition of the Bank placed the depositors and the FDIC at substantial risk. To address these problems the Board issues the accompanying Order. That Order generally tracks the order recommended by the ALJ, but incorporates a limited number of changes, the bulk of which are technical or clarifying in nature.
APPENDIX A
A. Bank's Capital
14. As of June 21, 1985:
B. Accounting for the Sale and Leaseback
19. Instructions (and glossary updates) for Preparation of Reports of Condition and Income ("call reports"), published by the Federal Financial Institutions Examination Council ("FFIEC"), are forwarded periodically to each insured state nonmember bank regulated by the FDIC, including this Bank. (Tr. at 304-305, 314-315.)
C. Lending Practices
65. The Bank has engaged in unsafe or unsound practices in that the Bank has engaged in hazardous lending and lax collection practices as evidenced by the following:
D. Excessive Poor Quality Loans and Inadequate Reserves
67. In the course of an examination of a bank, examines review and classify loans or other assets of the bank and assign loan classifications of "Substandard," "Doubtful" and "Loss." In general terms, "Substandard" loans are inadequately protected by current sound worth and paying capacity of the obligor or of the collateral pledged. Loans classified "Doubtful" have all of the weaknesses inherent in those classified "Substandard" with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. (Tr. at 61-62; FDIC Ex. 1 at 5.) Loans classified "Loss" are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value
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(Admitted in paragraph 4 of Answer; Tr. at 87-88; FDIC Ex. 1); and
E. Violations of Law and Regulations
76. As of the March 31, 1985 call date, the Bank's reported total capital, surplus
ORDER TO CEASE AND DESIST
FDIC-86-41b
ORDER
IT IS HEREBY ORDERED that the * * * ("Bank"), its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from the following unsafe or unsound banking practices and violations of law:
/s/Hoyle L. Robinson
RECOMMENDED DECISION,
FDIC-86-41b
I. RECOMMENDED DECISION
The Administrative Law Judge has considered the proposed findings of fact, conclusions of law, proposed orders and memoranda submitted by the parties in this case, including the reply briefs of the parties and the tender of proof submitted by the respondent under cover of the letter of March 18, 1987 signed by the respondent's representative. The petitioner's opposition submitted in response to this tender has also been considered. The Administrative Law Judge, having considered these and being otherwise advised in the premises, having carefully considered the testimony adduced at the oral hearing held in the case, and having further carefully considered the exhibits admitted into the evidence in the case, concludes that the petitioner has established a prima facie case that the respondent, as of the examination conducted by the petitioner on June 21, 1985, was engaging in unsafe and unsound practices (as described more fully below) within the meaning of Section 8 of the Federal Deposit Insurance Act (hereinafter referred to as the Act) (12 U.S.C., Section 1818(b)(1)). Further, the petitioner has satisfied its burden of going forward to prove the existence of such unsafe and unsound practices as of the date of the aforementioned examination and has further sustained its burden of persuading the Administrative Law Judge as to existence of such practices. The respondent has failed to show that it was not in fact engaged in most of the specific practices for which it was cited. It has interposed the defense that its actions and capital structure subsequent to the aforementioned examination should have a significant bearing on the decision in this case. The Administrative Law Judge has carefully considered this argument and the applicable cases and agrees with the petitioner that this case surrounds not developments subsequent to the examination but the status of the respondent as of the date of that examination. Bank of Dixie v. FDIC, 776 F.2d 175 (5th Cir., 1985) and cases cited. Events subsequent to the examination might well have a bearing on the specific relief to be accorded the petitioner and the same have been considered by the Administrative Law Judge in formulating the proposed order in this case. But such events, it is clear, are not proximately material to the resolution of the basic issue of whether the petitioner is entitled to the entry of the order that is seeks.
II. RECOMMENDED FINDINGS OF
Consistent with the recommended decision set forth above, the Administrative Law Judge herewith issues the following recommended findings of fact:
III. RECOMMENDED CONCLUSIONS
1. The FDIC has jurisdiction over the Bank and the subject matter of this proceeding and has the authority to issue an order to Cease and Desist against the Bank pursuant to Section 8(b)(1) of the Act.
IV. PROPOSED ORDER
IT IS HEREBY ORDERED that the * * * Bank, * * * , its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct
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Last Updated 6/6/2003 | legal@fdic.gov |