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FDIC Enforcement Decisions and Orders

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   [5136] Docket No. FDIC-87-120a (6-27-89).

   Bank's insurance terminated upon determination that Bank was operating with inadequate capital and reserves and with an excessive volume of poor quality assets; Bank's financial condition had deteriorated; and Bank failed to comply with Order of Correction.

   [.1] Termination of Insurance—Failure to Comply with Order of Correction
   FDIC may terminate a Bank's insured status on the basis that the Bank's overall financial condition is unsafe or unsound.

   [.2] Capital—Adequacy—Capitalization Should Reflect Risk
   The ratio of capital to assets is only one element in the assessment of overall capital adequacy. Banks with high levels of adversely classified assets should hold capital commensurate with the level and nature of the risks to which they are exposed.

   [.3] Practice and Procedure—Petitions—Independent Review by FDIC
   FDIC has discretion to review Respondent's defenses even though Respondent did not file exceptions to the ALJ's Recommended Decision.

   [.4] Termination of Insurance—Management Responsibility
   Management of Bank bears ultimate responsibility for, among other things, the severe problems in Bank's lending operation, its dangerously low capital-to-assets ratio, its large volume of classified assets, and its inadequate earnings.

   [.5] Termination of Insurance—Failure to Comply with Order of Correction
   Even though an Order for Termination of Insurance can be supported by the mere non-compliance with an Order of Correction, given the seriousness of the remedy, FDIC may analyze current information to determine whether or not Bank continues to operate in an unsafe or unsound manner.

{{4-1-90 p.A-1443}}
In the Matter of
* * * BANK


(Insured State Nonmember Bank)
DECISION AND ORDER
TERMINATING FEDERAL DEPOSIT
INSURANCE

Introduction

   This proceeding seeks to terminate the insured status of * * * Bank * * * (the "Bank" or "Respondent"), upon findings made by the Board of Directors (the "Board") of the Federal Deposit Insurance Corporation (the "FDIC") pursuant to section 8(a) of the Federal Deposit Insurance Act (the "FDI Act"), 12 U.S.C. §1818(a), that the Bank is in an unsafe or unsound condition to continue operations as an insured bank. After two examinations of the Bank by the FDIC as of January 2, and October 25, 1987, it was determined that: (1) the Bank was operating with inadequate capital and reserves and with an excessive volume of poor quality assets; (2) during this period the financial condition of the Bank had deteriorated; and (3) the Bank had failed to comply with the Order of Correction issued by the FDIC. For the reasons set forth below, the Board concludes that termination of insurance is warranted as found by the Administrative Law Judge (the "ALJ") in his Recommended Decision which is adopted1and incorporated herein.

Procedural History

   As a result of its examination of the Bank as of January 2, 1987, the FDIC issued its Findings of Unsafe and Unsound Practices and Condition ("Findings") and Order of Correction on June 17, 1987.2The Findings charged that the Bank had engaged in unsafe or unsound practices in the conduct of its business and was in an unsafe or unsound condition to continue operations as an insured bank by reason of its inadequate capital and reserves and its excessive volume of poor quality assets.
   The Order of Correction required that the Bank be restored to a safe and sound condition and take certain corrective action in order to continue its insured status, including: (1) increasing its primary capital by $1.4 million; (2) eliminating from its books, by charge-off or otherwise, 100 percent of its assets classified "Loss" and 50 percent of its assets classified "Doubtful" within 20 days of receipt of the Order of Correction; (3) making certain changes in management necessary to comply with specific provisions of the Order of Correction; and (4) providing its shareholders a description of the Order of Correction with its next shareholder communication and with its notice or proxy statement preceding the Bank's next shareholder meeting. In accordance with section 8(a) of the FDI Act, the Bank was given 120 days to comply with the Order of Correction.
   At the expiration of the corrective period, an examination of the Bank as of October 25, 1987, revealed that the Bank had not complied with the requirements of the Order of Correction, that the Bank's capital remained significantly inadequate, and that the Bank continued to operate in an unsafe or unsound condition. Accordingly, on April 13, 1988, the FDIC issued a Notice of Intention to Terminate Insured Status and Order Setting Hearing ("Notice and Order").3A hearing was held on November 1-3, 1988, in * * *. The parties filed briefs, reply briefs, and proposed findings of fact and conclusions of law. On March 14, 1989,


1The Board adopts the ALJ's Recommended Decision with one modification. The Board does not adopt the ALJ's discussion of Standards of Proof at pages 4-10 thereof. The burden of proof is initially on the FDIC to prove the allegations of its Notice by substantial evidence. Further, the Board specifically disagrees with the ALJ (at 5) when he states: "Since the Respondent is entitled to have its rights to continue insurance determined following an APA hearing, it follows that agency judgments are entitled to no particular weight." The Board disagrees with this statement in part because it could be construed to conflict with the deference due FDIC examiner classification decisions recognized in the Sunshine decision. 1 P-H FDIC Enf. Dec. ¶5049 (1985).

2The Bank is also under an October 17, 1985, FDIC Cease and Desist Order. Although the Bank accomplished most of the requirements concerning policies and procedures, compliance has yet to be achieved in the areas of capital protection, classified asset reduction, correction of technical exceptions, and violations of law. June 17, 1988, State examination report at 1.


3A subsequent examination of the Bank was made by the * * * State Department of Banking ("State") as of the close of business June 17, 1988. (FDIC Exhibit 28). The State assigned the Bank the lowest possible rating for every individual element as well as for the composite rating, and indicated that the Bank's condition remained precarious and that it needed to make an immediate injection of not less than $1.1 million. The State concluded that the Bank "is in a failing condition . . . losing approximately $10,000 per month . . . given the serious condition of the bank, this office has elected to issue an Order to Cease and Desist . . . ." Id.

{{4-1-90 p.A-1444}}ALJ James L. Rose issued his Recommended Decision which recommended termination of the insured status of the Bank. No exceptions to the Recommended Decision were filed by either party, thus, any objections are waived by operation of 12 C.F.R. §308.14(b). The Board finds that the ALJ's Recommended Decision is in all material respects fully supported by the law and evidence.

Discussion

   A. Statutory and Regulatory Requirements

   [.1] It is uncontested that the FDIC has the power under section 8(a) of the FDI act to terminate a bank's insured status upon a finding that it is in an unsafe or unsound condition. The FDIC seeks to terminate the Bank's insured status based upon the Bank's overall financial condition. Factors that can affect a bank's financial condition include interest rate exposure; liquidity; funding and market risks; the quality and level of earnings; investment or loan portfolio concentrations; the quality of loans and investments; the effectiveness of loan and investment policies; and management's overall ability to monitor and control financial and operating risks. Of particular concern to the Board in this case is the Bank's precariously high volume of adversely classified assets and its capital inadequacy.
   A bank's capital-to-asset ratio is one measure of its capital adequacy. FDIC regulations provide that "any insured bank with a ratio of primary capital to total assets that is less than three percent is deemed to be operating in an unsafe or unsound condition pursuant to section 8(a) of the Federal Deposit Insurance Act," 12 C.F.R. §325.4(c).4Subsection (c)(2) of this section provides further that a bank with a primary capital to asset ratio equal to or greater than three percent may nonetheless be operating in an unsafe or unsound condition, and that the FDIC is not precluded from bringing an action to terminate insurance under section 8(a) of the FDI Act with regard to such a bank.

   [.2] A complete assessment of capital adequacy must take account of various considerations, including, the level and severity of problem and adversely classified assets. The capital ratio is but one element in the assessment of overall capital adequacy, and the final judgment regarding a bank's capital adequacy may differ significantly from conclusions that might be drawn solely from the absolute level of the bank's capital ratio. Banks with high or inordinate levels of adversely classified assets should hold capital commensurate with the level and nature of the risks to which they are exposed. Given the numerous problems facing the Bank, the capital ratio is merely the starting point of a capital adequacy analysis. The ALJ found, and the Board agrees, that the Bank "continues to operate with substantially inadequate capital even for a well-managed bank without problems." Recommended Decision ("R.D.") at 15. Even the Bank's own evidence shows that as of October 1988, the most recent month for which figures are available in the record, 26 percent of its loans were adversely classified, the percentage of classified loans to total assets was 18.3 percent, and the Bank forecast a $54,000 loss.

   B. The Bank's Contentions.

   [.3] By failing to file exceptions to the ALJ's Recommended Decision, the Bank has waived any objections to the proposed findings. However, given the serious nature of a section 8(a) sanction, the Board has reexamined the Bank's assertions before the ALJ. The testimony and documentary evidence demonstrate that the condition of the Bank was unsafe or unsound based on its capital position and the quality of its assets. The Bank does not seriously contest any of the underlying facts. Its defense essentially consists of four elements: (1) it is no longer in an unsafe or unsound condition; (2) its continued operation does not present a substantial risk to the insurance fund because its situation has improved since 1987 and the Board should make its determination based upon the Bank's current condition; (3) the Bank's problems were a direct result of a severe Christmas 1983 freeze affecting the local citrus crop and 1984 peso devaluations by the Mexican government affecting local retail volume; therefore, the Bank should not be penalized for events beyond its control; and (4) four lines of credit were improperly classified and written-off the Bank's books which if rebooked into the Bank's capital account, and added to the $520,000 booked to capital on May 31,


4Part 325 of the FDIC's regulations defines total assets as the average of total assets taken from the Call Reports submitted by a bank, plus the allowance for loan or lease losses, minus assets classified loss, and minus intangible assets other than mortgage servicing rights. 12 C.F.R. §325.2(k).
{{4-1-90 p.A-1445}}1988, would substantially improve the Bank's capital position. While not challenging the underlying findings made by the FDIC examiners or the * * * State examiners, Respondent disagrees with the conclusions reached by the ALJ that it is in an unsafe or unsound condition.
   The Bank's assertion that it is not operating in an unsafe or unsound condition simply ignores the regulatory definition contained in Part 325 as applied to its own data. It also notably fails to provide sufficient explanation of or justification for its failure to comply with the Order of Correction. The sole basis for the assertion appears to be management's statements regarding the four "misclassified" lines of credit and the May 31, 1988, addition of $520,000 to capital.
   The Bank's assertion regarding its booking of $520,000 to capital as of May 31, 1988, is essentially too little and too late. It is true that some improvement in the Bank's condition occurred upon the addition of $520,000 to capital in May of 1988, since the revised primary capital to total assets ratio became 3.91 percent. However, the State examination of June 17, 1988, indicates that the capital addition was achieved from several nonrecurring accounting transactions and was significantly offset by operational losses. State examination, FDIC Ex. 28 at 1-b.5Although the State determined the ratio of primary capital to total assets, as defined in Part 325, to be 3.2 percent, it assigned the lowest possible composite rating to the Bank. The State concluded that the Bank's condition remained precarious and that it needed to make an immediate capital injection of $1.1 million. Regarding the overall condition of the Bank, the State examination concluded:
    [a]n insolvent position is approaching as operating losses are rapidly eroding equity capital. Classified assets remain at an unmanageable level, and liquidity is inadequate considering the overall poor condition of the bank. Numerous violations of legal lending limit are again cited. Intensive efforts to resolve these problems are warranted and, if left unchecked, an insolvent condition will likely result. State Examination at 1.

   Regarding the four lines of credit6the Bank asserts that by adding the improperly charged off amounts back into capital and subtracting the losses ordered by the State's examination, adjusted primary capital to total assets would become 4.96 percent as of June 17, 1988.
   The ALJ found, and the Board agrees, that the four lines of credit were not misclassified. R.D. at 16–17. The Bank did not challenge the underlying facts regarding these loans. Instead, it introduced evidence of financial statements and payment histories not among the Bank's records at the time of the examinations. The ALJ properly concluded (citing Sunshine, FDIC Enf. Dec. P-H ¶5049 (1985)), that it is not appropriate to consider post-examination evidence in determining the accuracy of the examiner's classifications. R.D. at 17. Significantly the ALJ also found (Id. at 15) that "even resolving the four disputed loans in its favor . . . [the Bank] continues to operate with substantially inadequate capital even for a well-managed bank without problems. And the Respondent's evidence does not support a conclusion that the Bank is well managed and without substantial loan problems." The Board agrees with the ALJ's analysis of this issue.
   A major focus of the Bank's case-in-chief is its urging of the Board to view its condition in light of the devastating, "hundred-year freeze of 1983" which destroyed the citrus crop and the peso devaluation of 1984 which severely affected local retailers whose businesses are largely patronized by neighboring * * *. Transcripts ("Tr.") at 284. In making these arguments the Bank attempts to absolve its own management of responsibility for its financial difficulties, stating: "no evidence whatsoever support[s] a conclusion that the Bank's problems were caused by such factors as poor management, hazardous lending practices, violations of law or the like." Bank's Post-trial brief at 6. These contentions ignore the uncontested evidence in the record, present in the two examination reports by the
5The findings of the State Department of Banking are not binding upon the Board. However, they may be considered as relevant evidence.

6The four lines of credit the Bank claims were misclassified and the amounts in dispute are: * * * loan $51,864; * * * loan, $145,000; * * * $87,241; and * * *, $38,000. R.D. at 12.
{{4-1-90 p.A-1446}}FDIC, and the examination report by the State of * * *.

   [.4] In each examination report, management was admonished for lax policies and practices, particularly with regard to numerous, high risk transactions involving affiliated banks, the Bank's holding company, other affiliated organizations and insiders. In the January 2, 1987, Report of Examination, following a discussion of the relationship between affiliated and insider transactions and the Bank's problem assets and losses, the directors of the Bank were specifically reminded "that the safe and sound operation of [the Bank] primarily entrusted to their care must be considered first and foremost to prevent further erosion of capital and the total jeopardy of the [B]ank's financial health." FDIC Ex. 5 at 1. Ten months later, in the October 25, 1987, Report of Examination, the examiner stated: "[I]n summary, unsatisfactory relationships with insiders, the bank holding company, and affiliates appear to have contributed significantly to the weakened condition of the institution." FDIC Ex. 6 at 1-a-1. Management bears ultimate responsibility for, among other things, the severe problems in the Bank's lending operation, its dangerously low capital to assets ratio, its large volume of classified assets, and its inadequate earnings. In any case, the purpose of an action to terminate insurance is not to penalize management or the Bank. Rather, it is a remedial action whose purpose is to protect the integrity of the FDIC's insurance fund. Finally, the State examination had the following comment on management's efforts to improve the Bank's condition: "... Unfortunately, these efforts have been ineffective in solving the massive problems. Most of the unsatisfactory conditions noted at previous examinations remain. It is incumbent on the Board to take the necessary steps to correct the unfavorable aspects and restore a safe and sound condition."
   The undisputed facts detailed in the January 1987, examination report are that the ratio of primary capital to total assets was 4.05 percent with approximately 16 percent of the Bank's total assets adversely classified and approximately 29 percent of its loans and leases adversely classified. The ratio of adversely classified assets to total equity capital and reserves was 276 percent, which means that if one-third of the classified assets proved uncollectible, the Bank would become insolvent.
   Upon re-examination by the FDIC in October 1987 to determine whether the Bank had complied with the 120-day Order of Correction, the ratio of primary capital to total assets had fallen to 1.7 percent. The ratio of adversely classified assets to total assets increased to nearly 21 percent, and the adversely classified loans amounted to 29 percent of the total loans. Between the two examinations the Bank's liquidity ratio declined from 36 percent to 24 percent, and it lost $663,000 which was approximately 50 percent of its remaining capital. Its ratio of adversely classified assets to total equity capital and reserves grew during this period to a dangerously high 903 percent.
   Thus, notwithstanding the arguments presented to the ALJ, the Board finds that the Bank continues to operate in an unsafe or unsound condition. It is undisputed that the Bank failed to infuse the $1.4 million required by the Order of Correction. Because of the poor asset quality, the poor loan portfolio, the inadequate loan loss reserves, and the management problems identified in the FDIC and State examination reports, the continued viability of this Bank is highly suspect. Nothing in the record indicates that a sound corrective period would result in substantial improvement of the Bank's condition. In fact, the State Examination states: "[t]he Board indicated no additional capital could be raised at this time." State examination, FDIC Ex. 28 at 1-a. Accordingly, the risk the Bank presents to the insurance fund remains substantial.

CONCLUSION

   The Board has examined the record in light of Respondent's contentions and finds the Bank to be in an unsafe or unsound condition to continue operations as an insured bank. Accordingly, it presents an undue risk to the insurance fund and the Board finds that it is appropriate to issue an Order terminating the insured status of the Bank. This Order requires the Bank to provide notice of such termination of insured status to its depositors pursuant to section 308.30 of the FDIC Rules and Regulations, 12 C.F.R. §308.30.

ORDER TERMINATING FEDERAL
DEPOSIT INSURANCE

   IT IS HEREBY ORDERED, that the insured status of * * * Bank, * * *, is termi- {{4-1-90 p.A-1447}}nated effective as of the close of business ninety days from the date of this Order Terminating Federal Deposit Insurance ("Order").
   IT IS FURTHER ORDERED, that pursuant to 12 C.F.R. §308.30, the Bank, not later than thirty days from the date of this Order, shall give notice to its depositors of the termination of its status as an insured bank. Such notice shall be mailed to each depositor at the depositor's last address of record as shown upon the books of the Bank. The Bank shall furnish the FDIC with a copy of the notice mailed, together with an affidavit executed by the person who mailed the same. The affidavit shall state that said notice has been mailed to each depositor of the Bank at the depositor's last address of record as shown upon the books of the Bank and the date thereof. Such notice shall meet the requirements of section 308.30 of the FDIC Rules of Practice and Procedures, 12 C.F.R. §308.30, as follows:

NOTICE

   ____, 1989
   1. The status of * * * Bank
   * * *, as an insured bank under the provisions of the Federal Deposit Insurance Act, will terminate as of the close of business on the ____ day of ____, 1989,
   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 ____, 1989, will continue to be insured, as provided by the Federal Deposit Insurance Act, for two years after the close of business, provided, however, that any withdrawals after the close of business on the ____ day of ____, 1989, will reduce the insurance coverage by the amount of such withdrawals.

* * * Bank

There may be included in such notice, with the written approval of the FDIC, any additional information or advice the Bank may deem desirable. The Board strongly urges that the Bank provide and publish the above notice to all depositors, in both English and Spanish. The Board strongly suggests that the Bank post the above notice in English and Spanish on its doors and at all locations at which its customers make deposits and withdrawals.
   IT IS FURTHER ORDERED, that the Bank, not later than thirty days from the date of this Order, shall publish in not less than two issues of a local newspaper of general circulation in * * *, 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 each such publication.
   IT IS FURTHER ORDERED, that if the Bank is closed for liquidation prior to the time of the opening for business thirty days from the date of this Order, the notices described herein shall not be given to depositors.
   The Board retains full jurisdiction over these proceedings during the interim between the date hereof and the effective termination date, as fixed above, with full power and authority to amend, modify, alter, or rescind this Order Terminating Federal Deposit Insurance of the Bank. The provisions of this Order shall remain effective and enforceable except to the extent that, and until such time as, any provision of the Order shall be modified, terminated, suspended, or set aside by the FDIC.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 27th day of June, 1989.

In the Matter of
THE * * * BANK
(Insured State Nonmember Bank)





RECOMMENDED DECISION

   JAMES L. ROSE, Administrative Law Judge: This matter is before me upon an action by the Federal Deposit Insurance Corporation under 12 U.S.C. §1818(a), to terminate the Federal Deposit Insurance of the * * * Bank * * * (herein the Bank or the Respondent). A formal hearing was held at * * *, on November 1–3, 1988, both the FDIC and the Respondent appearing by counsel.
   Following close of the hearing, counsel submitted extensive briefs, proposed findings and conclusions and exceptions to the findings and conclusions submitted by the opposition party. Upon the record thus made, including my observation of the wit- {{4-1-90 p.A-1448}}nesses, briefs and arguments of counsel, I hereby issue the following findings and conclusions:

I. Statement of the Case

   The Respondent is a small commercial bank with its principal place of business at * * *, in the extreme southeastern portion of the state. The Bank does business pursuant to the laws and regulations of the State of * * * and at all material times has been a "state nonmember bank" within the meaning of 12 U.S.C. §1813(b), and has been insured by the Federal Deposit Insurance Corporation. This matter began with an examination by the FDIC as of January 2, 1987. As a result of that examination it was determined that the Bank was operating in an unsafe and unsound condition principally because of inadequate capital. Accordingly, the FDIC issued an Order of Correction giving the Bank 120 days to take certain corrective action, including increasing its primary capital by $1,400,000. The Order issued on June 22, 1987, with the corrective period ending on or about October 20, 1987.
   Inasmuch as the Bank did not comply with the Order of Correction, as revealed by the FDIC examination as of October 25, 1987, a notice to terminate the Bank's insured status was filed on April 13, 1988.
   As will be set forth in more detail below, in essence the FDIC contends the Bank was, and continues to be, in an unsafe and unsound condition due to inadequate capital, thus jeopardizing the interests of depositors as well as the insurance fund. The Bank contends that its capital position has continued to improve since the January 1987 examination, and that to terminate its insurance would cause it to go out of business. Therefore, argues the Respondent, rather than protecting the depositors and insurance fund, the remedy sought by the FDIC would have the opposite effect.
   Whether to order termination of a bank's insurance in a proceeding such as this is a current decision which, given the nature of these matters, must be based upon past information notwithstanding that the institution involved is an ongoing operation. The examinations are fixed in time and provide a "snapshot" of the Bank's condition as of a particular day. The purpose of this proceeding, however, is to determine whether the Bank as an ongoing institution should continue to have the protection of Federal Deposit Insurance. This is like trying to hit a moving target. Further, given the seriousness of the proposed remedy and accepting the Respondent's argument that to terminate its insurance would be its knell, these matters must be decided with much circumspection.
   The record here includes FDIC examinations in January and October 1987, and examination by the * * * State Department of Banking as of June 1988, and current records of the Bank including its admissions, and projections. These contain specifics at certain times over a period of nearly two years which, I conclude, establish a definite trend as to the Bank's viability and its entitlement to continued insurance. Upon the record as a whole, I conclude that the Bank continues to operate with inadequate capital such that, given its other problems including management, asset quality, liquidity, and the like, its insurance should be terminated.
   The Bank's problems are long standing and it has been unable to solve them. There is no sound basis on the record to conclude that the Bank would be in significantly better shape after another corrective period. The Bank did establish that there had been a major turndown in the local economy as a result of a disastrous freeze in December 1983, affecting the citrus fruit industry, and a devaluation of the Mexican peso which affected local retail sales. Nevertheless, the Bank's difficulties, as will be described below, seem to transcend these problems, and notwithstanding that the economy is improving, the Bank's condition has not improved significantly.
   In short, the Bank's condition has been questionable for quite some time, and it has been given substantial opportunity to correct its capital problem. While management appears to have made good faith efforts to do so and has to some extent succeeded, its success has been minimal. The Bank's recent performance has been insufficient to conclude that at any time in the foreseeable future its capital will be at a level to be considered adequate under the regulations and case authority promulgated by the Corporation Board.

A. Standards of Proof

   The purpose of this proceeding is to determine whether the Bank's insured status should be terminated. Since the Bank did not comply with the Order of Correction, {{4-1-90 p.A-1449}}FDIC counsel argues that termination must be ordered unless the Bank can prove that the FDIC as an administrative agency did not have a reasonable basis for entering the Order of Correction. Counsel for the FDIC contends that the Bank has the burden of proving that the FDIC's action in entering the Order of Correction was arbitrary or capricious.
   I reject counsel's argument. I conclude that the burden is and remains with the FDIC to prove by a preponderance of the credible evidence all of the factors necessary to support the issuance of an Order of Termination. Steadman v. SEC, 450 U.S. 91 (1981). In effect counsel equates an administrative action of an agency with a final order following an Administrative Procedure Act hearing, and my function with that of a reviewing court.
   As with most regulatory agencies, the FDIC has multiple functions, including supervision of the banks under its jurisdiction and enforcement of the National Bank Act, as amended, as to those banks. Supervision is administrative in nature. Enforcement is quasi-judicial.
   Under §1818(a), when certain conditions are found by the FDIC the bank may be required to make corrections and if it does not its insurance may be terminated following a hearing at which evidence is to be taken upon which the Corporation Board may enter an Order of Termination. The hearing referred to is one conducted pursuant to the Administrative Procedure Act, 5 U.S.C. §554 et seq. (12 U.S.C. §1818(h)).
   Agency activity leading to the Order of Correction is administrative. If further proceedings are necessary, then the appropriate division of the agency becomes a prosecutor in an APA hearing. Since the Respondent is entitled to have its rights to continued insurance determined following an APA hearing, it follows that agency judgments are entitled to no particular weight. The ultimate findings of the Board must be based on credible evidence produced at the hearing.
   There is no doubt that following an APA hearing, the decision of the Corporation Board on review would be entitled to the deference argued for by counsel for the FDIC under the cited cases. However, this review standard does not apply to preliminary administrative determinations by divisions of the FDIC. To accept counsel's argument would be to nullify the basis for an APA hearing—the Respondent's right to have the case against it proved by a preponderance of credible evidence in an adversary proceeding.
   The Administrative Procedure Act sets the framework in which the moving administrative agency must establish by a preponderance of the credible evidence the factual predicate for issuance of a rule, order, or decision, allowing the affected respondent to call, examine, and cross-examine witnesses, submit evidence, and make argument. The burden is on the FDIC to establish all of the facts necessary to support the proposed order of termination.
   In like respect, counsel argues that the administrative determination of the FDIC that the Bank has been operating in an unsafe and unsound condition is entitled to deference, citing Sunshine State Bank v. Federal Deposit Insurance Corporation, 783 F.2d 1580 (11th Cir., 1986). In Sunshine, which involved the review of a decision by the Board, the Court held that a bank examiner's opinion is entitled to deference and should not be disregarded in the absence of compelling evidence that it was without a rational basis. One of the disputed matters in Sunshine was the FDIC examiner's loan classifications, some of which had been changed by the ALJ in his recommended decision. Said the Court: "The ALJ may not substitute his own subjective judgment for that of the examiner, but may set aside the classification if it is without objective factual basis or shown to be arbitrary and capricious." 783 F.2d at 1583.
   In giving deference to the examiner's opinion regarding the loan classifications rather than to the ALJ's opinion, the Court adopted the Board's rationale, and distinguished between facts objectively verifiable and those which require the exercise of subjective judgment. As to objective verifiable facts, the ALJ may reach his own de novo conclusions. However, as to judgments involving factors not subject to proof, such as the risk potential in the loan portfolio, the unique training and experience of an FDIC examiner requires that deference be given to his predictions.
   Sunshine, as applied to this matter, establishes that as to the four loan classifications which the Respondent disputes, the objec- {{4-1-90 p.A-1450}}tively verifiable facts (the amount of loan, when payments were made, appraisal of collateral, and the like) can be contested by the Respondent and found by the undersigned to be different from those alleged by the FDIC. Further, accepting the facts upon which the examiner based his decision, his conclusions can be tested for being within "the zone of reasonableness."
   But, absent a dispute concerning the objectively verifiable facts, and the rational basis of the examiner's decision, his conclusion as to whether or not a particular loan should be classified, as substandard or doubtful for instance, must be accepted.
   This does not mean, however, that his conclusion that the Bank is operating in an unsafe and unsound condition is entitled to deference. What is unsafe and unsound is ultimately a conclusion of law which is central to the Financial Institutions Supervisory Act in general, and to the termination of insurance in specific.
   Courts have interpreted the Congressional intent behind §1818 as granting bank supervisory agencies broad authority to define the term "unsafe or unsound." Thus, as the Court observed in Groos National Bank v. Comptroller of the Currency, 573 F.2d 889, 897 (5th Cir., 1978), "the phrase `unsafe or unsound banking practice' is widely used in regulatory statutes and in case law, and one of the purposes of the banking acts is clearly to commit the progressive definition and eradication of such practices to the expertise of appropriate regulatory agencies."
   The authoritative definition of "unsafe and unsound" was given by then Chairman of the Federal Home Loan Bank Board, John Horne, in his submission to Congress in connection with the Financial Institutions Supervisory Act of 1966, of which §1818(a) is part. Mr. Horne stated, inter alia:

       Generally speaking, an "unsafe and unsound practice" embraces any action or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or agencies administering the insurance funds. See 112 Cong. Rec. 26474 (1966) (remarks of Senator Robinson).
   While there is, of course, a difference between a practice and a condition, the one being an event leading to the other, the operative words are "unsafe and unsound." As it relates to capital adequacy, this phrase has been refined in the rules and regulations of the FDIC. Thus, in 12 C.F.R. §325.4(c):
       Unsafe or unsound condition. Any insured bank with a ratio of primary capital to total assets that is less than three percent is deemed to be operating in an unsafe or unsound condition pursuant to section 8(a) of the Federal Deposit Act (12 U.S.C. 1818(a)).
And in §325.4(c)(2):
       An insured bank with a ratio of primary capital to total assets that is equal to or greater than three percent may be operating in an unsafe or unsound condition. The FDIC is not precluded from bringing an action pursuant to 12 U.S.C. 1818(a) where an insured bank has a ratio of primary capital to total assets that is equal to or greater than three percent.
As material to this matter, §325.3 reads:
       (a) General. Banks must maintain at least the minimum capital requirement set forth in this section. The capital standards in this part are the minimum acceptable for banks whose overall financial condition is fundamentally sound, which are well-managed and which have no material or significant financial weaknesses ....
       (b) Calculation of minimum capital requirement. The minimum capital requirement for a bank (or an insured bank making an application to the FDIC) shall consist of a ratio of total capital to total assets of not less than 6 percent and a ratio of primary capital to total assets of not less than 5.5 percent.
   The principal issue in this case is whether or not the level of the Bank's capital is and has been such that it can be concluded the Bank is operating in an unsafe and unsound condition and that termination of its insurance is therefore appropriate.

B. The Facts

   The facts are largely undisputed. In brief, the January 1987 examination revealed that the ratio of primary capital (there was no secondary capital) to total assets was 4.05 percent, about 16 percent of the Bank's total assets were adversely classified, and {{4-1-90 p.A-1451}}about 29 percent of the Bank's loans and leases were adversely classified. The ratio of adversely classified assets to total equity capital and reserves was 276 percent, meaning that in the event of default of all adversely classified assets, all the equity capital would be dissipated and there would be substantial losses to the depositing public. Another way to say this is that the Bank would become insolvent if anything in excess of one-third of its classified assets went into default. As a result of this examination the FDIC concluded that the Bank was in danger of failure and that corrective measures were urgent. The Bank was assigned a composite uniform financial institution's (CAMEL) rating of 5, which is the lowest possible. And the Order of Correction issued.
   Upon re-examination by the FDIC in October 1987, following the 120-day corrective period, the ratio of primary capital to total assets was 1.7 percent, the total capital declining from $1.2 million on January 2, 1987, to $426,000 on October 26, 1987. The ratio of adversely classified assets to total assets increased to nearly 21 percent, and the adversely classified loans amounted to 29 percent of the total loans. The Bank's loans increased from 49 percent of total assets in January to 62 percent in October, while earning assets declined from 88 to 82 percent of the Bank's total assets. The Bank's liquidity ratio declined from 36 to 24 percent, and the volume of temporary investments was reduced. Between the January and October examinations the Bank lost $663,000 which was approximately 50 percent of its remaining capital, and the ratio of adversely classified assets to total equity capital and reserves was 903 percent.
   As a result of a visitation by the FDIC of May 31, 1988, it was concluded that the primary capital to Part 325 total assets was 3.91 percent.
   As of June 17, 1988, the Bank was examined by the * * * Department of Banking. As a result the examiner assigned a composite CAMEL rating of 5 to the Bank and a 5 rating for each of the components of capital, assets, management, earnings, and liquidity. The equity capital to asset ratio at that time was 1.1 percent. In short, as of the State examination in June 1988, the Bank's condition remained precarious. The State concluded that the Bank needed to make an immediate capital injection of $1.4 million.
   Specifically, it was found on examination by the State examiner that the Bank had adversely classified assets of $3.6 million with adversely classified loans of $3.2 million. The Bank's total capital and reserves was $749,000. Its primary capital was $635,000, and its total Part 325 assets was $19,870,000. The ratio of primary capital to Part 325 total assets was 3.2 percent.
   In the Bank's Report of Condition and Income (Call Report) for the quarter ending September 30, 1988, the Bank reported that its total equity capital was $209,000. Its total reserves for loan and lease losses was $396,000. Thus, its primary capital and reserves was $605,000. At that time the Bank reported that its total assets was $19,814,000, and a primary capital to total assets ratio of 3.05 percent.
   The Respondent contends that four lines of credit were improperly classified as doubtful or loss, and that the amounts deducted to arrive at adjusted primary capital should be reversed. If this were done, the Bank's capital as of May 31, 1988, would be increased by $322,105 (* * *., $51,864; * * *, $145,000, * * *, $87,241; and * * *, $38,000).
   The Respondent argues that by adding these amounts back into capital and subtracting the losses ordered by the State Banking Commission the Bank's adjusted primary capital to Part 325 total assets as of June 17, 1988, was 4.96 percent. And, as of September 30, 1988, based upon these figures, the Bank's primary capital to assets ratio was 4.41 percent.
   The Respondent offered evidence that some of its problems, at least, were attributable to the Christmas freeze of 1983 which substantially affected the citrus industry in the area, and the peso devaluation of 1984 which affected the purchase of retail goods by * * * living just across the border. The Respondent's expert, * * *., testified generally that the local economy has been improving since 1984. From this the Respondent argues that the Bank's condition has improved and will continue to do so, and that its earnings projections over the next 5 years demonstrate that its capital position will be sound, at least by the end of the period.
{{4-1-90 p.A-1452}}
   However, it is noted that for the most recent month for which figures are available in this record, October 1988, the Bank forecast a $54,000 loss, which is consistent with its general negative earnings the past two years.

C. Analysis and Concluding Findings

   It is alleged and the Bank readily concedes that it did not meet all of the conditions in the Order of Correction. Particularly, the Bank concedes that it did not infuse capital of $1.4 million by October 1987. Without more, such would support an Order of Termination. In the Matter of * * * Bank (Insured State Non-Member Bank), 1 P-H FDIC ¶5007 (FDIC-80-33a, 1981). Although the Board's decision in that case was predicated on the Bank's continued failure (in fact refusal) to comply with a paragraph of the Order of Correction, the Board noted that such a finding is not required.

   [.5] Notwithstanding that an Order of Termination can be supported by the mere non-compliance with an Order of Correction, given the seriousness of this remedy, it appears appropriate that the most current information available be analyzed to determine whether or not the Bank continues to operate in an unsafe and unsound condition. This the Board did in the above cited case, and determined to order another corrective period at the end of which, if the Bank did not comply, its insurance would be terminated.
   In the Matter of * * * Bank (Insured State Non-Member Bank), 1 P-H FDIC ¶5024 (FDIC-83-132b, 1984), the Board stated, "Ordinarily the Board considers a 5 percent capital ratio to be adequate protection. But that ratio is appropriate for sound banks, not for ones that have suffered losses and that continue to be exposed to unnecessarily high risks." Where the loans and loss exposure demonstrate more than normal risk, a higher capital-to-assets ratio is required.
   And In the Matter of * * * Bank (Insured State Non-Member Bank), 1 P-H FDIC ¶5092 (FDIC-86-41b, 1987), the Board held that a capital-to-assets ratio of 3.56 percent was inadequate and demonstrated an unsafe and unsound condition. The Board stated that the minimum capital-to-assets ratio for a bank with no significant loan or other problems was 5.5 percent for primary capital or 6 percent for total capital. The Board went on to state that these are minimum requirements set by 12 C.F.R. §325.3(b), and that for a bank with significant problems the capital requirement is greater. In that case, the Board concluded that a capital-to-assets ratio of 3.56 percent was inadequate, and that adversely classified assets of 225.2 percent of adjusted capital and reserves demonstrated an unsafe and unsound condition, as did the fact that 9.3 percent of the loans were overdue.
   As of June 1988, the Bank's capital-to-assets ratio was 3.2 percent and the classified assets was 500 percent of capital, both of which figures are worse than that concluded by the Board to demonstrate an unsafe and unsound condition in the cited case. As the Board stated In the Matter of * * * (Insured State Nonmember Bank) et al., 1 P-H FDIC ¶5049 (FDIC-83-252 b&c et al., 1985), "Perhaps the single most important factor in accessing the adequacy of a bank's capital is `the quality, type, liquidity and diversification of assets, with particular reference to assets adversely classified'", at 6191.
   The Respondent offered evidence to the effect that as of September 30, 1988, adding back as capital the disputed loss items set forth above (* * *, * * *, * * *, and * * *), its adjusted capital was 4.41 percent. And based on these figures and its projections, the Respondent contends that as of December 31, 1989, its capital would be 5.1 percent, which includes the 1.5 percent resulting from the disputed losses being returned to capital.
   The problem with the Respondent's argument is that even resolving the four disputed loans in its favor, it continues to operate with substantially inadequate capital even for a well-managed bank without problems. And the Respondent's evidence does not support a conclusion that the Bank is well managed and without substantial loan problems. Indeed, the Respondent's evidence (in R-19 and R-20) shows that as of October 1988, 26 percent of its loans were classified ($3.5 million classified against total loans of $13.3 million), and that as of October 1988, the percentage of classified loans to total assets was 18.3 percent. Either figure supports the conclusion of an unsafe and unsound condition.
   While it may be that some of the Respondent's difficulty was caused by local economic conditions, the fact remains that from January 1987 through the time of the {{4-1-90 p.A-1453}}hearing, its capital was well under the minimums set by the Board. Further, the most recent comprehensive information available (the State examination report of June 1988), established that in all other areas of analysis the Bank was rated the lowest possible.
   The evidence clearly demonstrates, even accepting the Respondent's arguments and interpretation of the evidence, that the Bank is and has been operating with a primary capital-to-assets ratio of less than 5 percent. It has an excessive percentage of classified loans and inadequate earnings.
   Further, I reject the Respondent's contention that the four loans in dispute were misclassified. There is no argument concerning the underlying facts. The Respondent argues that payment and financial statements show that the examiner misclassified the loans.
   For instance, the Bank challenged the doubtful classification of the $103,000 * * * loan requiring a write-off from capital of approximately $52,000. The Bank argues that financial statements in evidence and the payment history show that the doubtful classification was misplaced. In agreement with the FDIC, however, I note that the first payment was made on February 20, 1987 (R-20), after the October 1986 examination in which the loan was classified. Further, the financial statements were made after the classification (R-10, 11, 12 and 13). Thus, the factual basis upon which the classification was made has not been successfully challenged. Nor, is the evidence submitted by the Respondent, I conclude, sufficient to reclassify the loan. Indeed, it is not appropriate to consider post-examination evidence in determining the accuracy of the examiner's classification. Though a bank may bring forth information showing improvement, it is unlikely to be as forthcoming with information showing deterioration. 1 P-H ¶5049, supra, at 6139.
   As noted above, Sunshine requires substantial deference be given to the examiner's classification of loans. The facts underlying the classification and the rationale for classification may, of course, be tested in an evidentiary proceeding. Here, however, the Respondent presented no persuasive evidence to refute either the facts underlying the examiner's classification of these loans or the rationale upon which the classifications were made. The principal basis of the Respondent's dispute as to the classification of these credits is the financial statements of the borrowers. Financial statements are certainly important, but not definitive. 1 P-H FDIC ¶5049, supra, at 6137. These after-the-fact, self-stated net worths are not sufficient to justify rejecting the examiner's classifications.
   Nevertheless, even accepting that the four credits should have been reclassified thus allowing the Respondent to reverse the deduction from capital, such would not have raised its capital enough to bring it to an acceptable level.

D. Remedy

   Having concluded that the Bank failed to infuse $1.4 million in capital as required by the Order of Correction and did not make other changes, and having concluded that the Bank continues to have a capital-to-assets ratio of less than that deemed appropriate by the Board even for well-managed banks, I conclude that the Respondent continues to operate in an unsafe and unsound condition. I further conclude that an Order of Termination of insurance is appropriate, based not only on its failure to comply with the Order of Correction as of October 1987, but on its continued operation in an unsafe and unsound condition.
   The question then becomes whether any real purpose would be served by ordering an additional period of correction, or whether immediate termination of insurance is appropriate.
   Given the Bank's failure over the past 2 years to make the corrections indicated to any substantial degree, and given the Bank's continued problems, I conclude there is no reason to expect that the Bank's difficulties are solvable within the next several months, or other reasonably proximate period. Accordingly, I conclude that an immediate order of termination is appropriate, and I will so recommend to the FDIC Board upon the following:

FINDINGS OF FACT

   1. At all times pertinent to this proceeding, * * *, * * *, * * *, a bank holding company, owned 100 percent of the outstanding stock in the * * * Bank * * * (herein the Bank). FDIC Ex. 6, p. A-1.
{{4-1-90 p.A-1454}}
   2. The Bank was examined by a team of examiners from the FDIC as of the close of business on January 2, 1987, and a written report of examination was prepared. FDIC Ex. 5.
   3. The Bank was re-examined by a team of examiners from the FDIC as of the close of business on October 25, 1987, and a written report of examination was prepared. FDIC Ex. 6.
   4. The FDIC issued Findings of Unsafe or Unsound Practices and Condition and Order of Correction ("Findings" and "Order") regarding the Bank on June 17, 1987. FDIC Ex. 7.
   5. The Findings and Order were served on the Bank by letter dated June 17, 1987, and were received by the Bank on June 23, 1987. FDIC Exs. 10 and 11.
   6. The time period established by the Order for securing correction of the unsafe or unsound practices and condition was 120 days from the date of receipt by the Bank. FDIC Ex. 10.
   7. An analysis of the results of the January 2 Examination revealed the condition of the Bank to be as follows:
   (a) The Bank's total equity capital and reserves equaled $1,827,000. FDIC Ex. 5, p. 3.
   (b) The Bank's primary capital was $1,203,000. FDIC Ex. 5, p. 3.
   (c) The Bank's adjusted primary capital equaled $892,000. FDIC Ex. 5, p. 3.
   (d) The Bank's total adversely classified assets equaled $5,046,000 or 276.19 percent of total equity capital and reserves. FDIC Ex. 5, p, 2–3, Tr. 35.
   (e) The Bank's adjusted Part 325 total assets equaled $29,370,000. FDIC Ex. 5, p. 3.
   (f) The Bank's total loans equaled $15,894,000. FDIC Ex. 5, p. 2, Tr. 35.
   (g) The Bank had adversely classified assets as of January 2, 1987, as follows:

(1) Substandard $3,801,000
(2) Doubtful 621,000
(3) Loss 624,000
__________
$5,046,000

FDIC Ex. 5, p. 2, Tr. 35–36.
   (h) After deducting 100 percent of the "Loss" assets and 50 percent of the "Doubtful" assets from the Bank's total equity capital and reserves, the Bank's adjusted primary capital equaled 3.04 percent of its adjusted Part 325 total assets. FDIC Ex. 5, p. 1-a.
   (i) The Bank had $3,801,000 in assets classified "Substandard" and an additional $311,000 in assets classified "Doubtful" which were not included in the calculation of adjusted primary capital but which could result in additional losses to the Bank. Tr. 36. FDIC Ex. 5, p. 2.
   (j) Overdue loans and leases in the Bank totaled $2,079,000 or 12.94 percent of the Bank's $16,064,000 in gross loans and leases. Tr. 40–41, FDIC Ex. 5, p. 2-f.
   8. As of January 2, 1987, the Bank had adversely classified loans in the amount of $4,616,000 which equaled 29.04 percent of the Bank's $15,894,000 loan portfolio:

(a) Substandard $3,404,000
(b) Doubtful 621,000
(c) Loss 591,000
__________
$4,616,000

   9. Another $77,000 in loans were "Special Mention" indicating some degree of risk, but not to a sufficient extent to merit adverse classification. FDIC Ex. 5, p. 2; Tr. 35.
   10. As of January 2, 1987:
   (a) The Bank's reserve for loan losses was $669,000. FDIC Ex. 5, P. 4; Tr. 58.
   (b) The Bank had $591,000 in loans classified "Loss." FDIC Ex. 5, p. 2.
   (c) After deducting items classified "Loss" from the reserve, the Bank had $78,000 to cover potential losses arising from $4,025,000 in loans classified "Substandard" to "Doubtful", and those not adversely classified.
   11. For the year ending December 31, 1986, the Bank suffered a ratio of net losses to average total loans and leases of 5.14 percent. FDIC Ex. 5, p. 4; Tr. 58–59.
   12. The results of the October examination revealed the following at FDIC Ex. 6, P. 2:
   (a) As of October 26, 1987, the Bank's total adversely classified assets equaled $4,513,000.
   (b) Adversely classified assets were as follows:

(1) Substandard $3,793,000
(2) Doubtful -0-
(3) Loss 665,000
__________
$4,458,000

{{4-1-90 p.A-1455}}
   (c) Loans and leases subject to adverse classifications were as follows:

(1) Substandard $3,474,000
(2) Doubtful -0-
(3) Loss 579,000
__________
$4,053,000

   (d) Another $200,000 in loans were "Special Mention" in the October examination, indicating some degree of risk, but were not adversely classified.
   13. As of October 26, 1987, the Bank's capital structure was, FDIC Ex. 6, p. 3:
   (a) The Bank's total equity capital and reserves was $1,091,000.
   (b) Primary capital was $426,000.
   (c) Adjusted primary capital was $426,000.
   (d) Total capital was $426,000.
   (e) Part 325 total assets were $25,087,000.
   (f) The ratio of primary capital to total assets was 1.7 percent.
   14. The results of the October examination further revealed the following:
   (a) The Bank increased its primary capital by only $175,000, by recoveries principally via obligator refinancing elsewhere, although it was directed by the Order to increase primary capital by $1,400,000. FDIC Ex. 6, p. 1.
   (b) the Bank's primary capital was $426,000. FDIC Ex. 6, p. 3.
   (c) The Bank's ratio of primary capital to total assets was 1.7 percent. FDIC Ex. 6, p. 3; Tr. 73.
   (d) During the period between January 2, 1987, and October 26, 1987, the Bank's capital position deteriorated, from $1,203,000 to $426,000 which included $175,000 in recoveries. FDIC Ex. 6, p. 6-1; Tr. 73.
   15. All of the capital raised by the Bank during the corrective period was raised from non-recurring sources—the sale of two previously charged-off loans to Director * * *. Respondent Ex. 1, p. 1.
   16. The Bank raised no new capital through the sale of securities, capital injection, capital debt or retained earnings. Respondent Ex. 1, p. 1.
   17. As of October 26, 1987, adversely classified loans and leases in the amount of $4,053,000 equaled 29.28 percent of the Bank's total loans and leases of $13,842,000. Ex. 6, p. 2; Tr. 64, 65.
   18. Overdue loans and leases in the Bank constituted 22.5 percent of the Bank's gross loans and leases of $14,174,000. FDIC Ex. 6, p. 2; Tr. 66.
   19. As of October 26, 1987:
   (a) The Bank's reserve for loan and lease losses was $598,000. FDIC Ex. 6, p. 3.
   (b) The Bank had $579,000 in loans classified "Loss", leaving only $19,000 to cover potential losses arising from $3,474,000 in other classified loans and those not adversely classified. FDIC Ex. 6, p. 2.
   20. The Bank's total adversely classified assets of $4,513,000 equaled 413.66 percent of total equity capital and reserves. FDIC Ex. 6, p. 3, Tr. 73.
   21. Based upon the results of the October examination, the Bank was assigned a composite Uniform Financial Institutions Rating of "5" indicating that the Bank had "an extremely high immediate or near term probability of failure" and that, absent "urgent and decisive corrective measures" the Bank would "likely require liquidation and payoff of depositors, disbursement of insurance funds to insured depositors, or some form of emergency assistance, merger or acquisition." FDIC Ex. 6, p. 1-a-3; Tr. 80.
   22. The State of * * * June examination revealed the following, FDIC Ex. 28, Statement of Financial Position:
   (a) As of June 17, 1988, the Bank's total adversely classified assets equaled $3,611,000.
   (b) Adversely classified assets were as follows:

(1) Substandard $3,497,000
(2) Doubtful -0-
(3) Loss 114,000
__________
$3,611,000

   (c) Adversely classified loans and leases were as follows:

(1) Substandard $3,108,000
(2) Doubtful -0-
(3) Loss 86,000
__________
$3,194,000

{{4-1-90 p.A-1456}}
   23. As of June 17, 1988, the Bank's capital structure was as follows, FDIC Ex. 28, Analysis of Capital:
   (a) Total equity capital and reserves was $749,000.
   (b) Primary capital was $635,000.
   (c) Adjusted primary capital was $635,000.
   (d) Total capital was $635,000.
   (e) Part 325 Total Assets was $19,870,000.
   (f) The ratio of primary capital to total assets was 3.2 percent.
   24. (a) Subsequent to the end of the corrective period, the Bank raised an additional $345,000 in capital.
   (b) All of the capital raised by the Bank was from non-recurring sources, including (1) sale of a lease to Director * * *, (3) recovery of loan origination costs, (3) the sale of land belonging to a subsidiary of the Bank and (4) a recovery on a previously charged-off loan. Respondent Ex. 1, p. 1; Tr. 76.
   25. According to the Bank's Consolidated Reports of Condition and Income ("call report") for the quarter ending September 30, 1988, the following conditions existed in the Bank: FDIC Ex. 20.
   (a) Total equity capital was $209,000. at 10.
   (b) Total reserves for loan and lease losses was $396,000. at 9.
   (c) Primary capital was $605,000. at 9, 10; Tr. 391.
   (d) Total assets was $19,814,000. at 16.
   (e) The ratio of primary capital to total assets was 3.05 percent.
   (f) During the period commencing January 1, 1988, and ending September 30, 1988, the Bank lost $316,000 before taxes. at 4; Tr. 389.

CONCLUSIONS OF LAW

   1. The Bank is a corporation existing and doing business under the laws of the State of * * * and has its principal place of business in * * *. Admission, 1.
   2. The Bank is, and has been at all times pertinent hereto, insured by the FDIC. Admission, 2.
   3. The Bank is, and has been at all times pertinent hereto, a "state nonmember bank" within the meaning of section 3(a) of the Act, 12 U.S.C. §1813(a). Admission, 2.
   4. The Bank is, and has been at all times pertinent hereto, subject to the provisions of the National Bank act, 12 U.S.C. §§1811-1831d and the Rules and Regulations of the FDIC, 12 C.F.R., Chapter III, and the laws of the State of * * *. Admission, 3.
   5. In an action to terminate a bank's insured status under section 8(a) of the Act, 12 U.S.C. §1818(a), for operating in an unsafe or unsound condition or engaging in unsafe or unsound practices, the FDIC has the burden of establishing such condition or manner by a preponderance of the evidence.
   6. As of the January 2, 1987, examination, the Bank was in an unsafe or unsound condition within the meaning of section 8(a) of the Act, 12 U.S.C. §1818(a) and section 325.4(c) of the FDIC Rules and Regulations, 12 C.F.R. §325.4(c).
   7. As of January 2, 1987, the Bank's total capital was below the minimum acceptable level established by FDIC regulations regarding capital maintenance for well-managed banks having no material or significant financial weaknesses.
   8. The Bank had material and significant financial weaknesses including an excessive volume of poor-quality loans in relation to its total loan portfolio.
   9. As of January 2, 1987, the Bank was in an unsafe or unsound condition.
   10. As of January 2, 1987, the Bank possessed an inadequate level of capital protection given the kind and quality of assets held by the Bank.
   11. As of January 2, 1987, the Bank had an excessive volume of adversely classified assets.
   12. As of October 26, 1987 examination, the Bank was deemed to be in an unsafe or unsound condition within the meaning of section 8(a) of the Act, 12 U.S.C. §1818(a), and section 325.4(c) of the FDIC Rules and Regulations, 12 C.F.R. §325.4(c).
   13. The Bank's total capital was below the minimum acceptable level established by FDIC regulations (12 C.F.R. Part 325) regarding capital maintenance for well managed banks having no material or significant financial weaknesses.
   14. As of October 26, 1987, the Bank had material and significant financial weaknesses including an excessive volume of poor-quality loans in its portfolio.
{{4-1-90 p.A-1457}}
   15. To the extent that adversely classified assets exceed 100 percent of a bank's total equity capital and reserves, the risk of loss falls directly upon the Bank's depositors and upon the FDIC as insuror of the Bank's deposits.
   16. As of October 26, 1987, the Bank was in an unsafe or unsound condition.
   17. As of October 26, 1987, the Bank possessed an inadequate level of capital protection given the kind and quality of assets held by the Bank.
   18. As of October 26, 1987, the Bank was operating with an excessive volume of adversely classified assets.
   19. As of the June 17, 1988, state examination, the Bank continued to be in an unsafe or unsound condition within the meaning of section 8(a) of the Act, 12 U.S.C. §1818(a).
   20. As of September 30, 1988, the Bank continued to be in an unsafe or unsound condition within the meaning of section 8(a) of the Act, 12 U.S.C. §1818(a).
   21. The Bank was in an unsafe or unsound condition as of September 30, 1988.
   22. As of September 30, 1988, the Bank had a ratio of primary capital to total capital below the minimum specified by Part 325.3(b) of the FDIC's Rules and Regulations, 12 C.F.R. §325.3(b).
   23. The FDIC has proved all statutory requirements of section 8(a) of the Act, 12 U.S.C. §1818(a), in this action to terminate the Bank's insured status.
   Upon the foregoing findings and conclusions, and the entire record in this matter, I recommend that the FDIC issue the attached Order terminating Federal Deposit Insurance.
   Dated, Washington, D.C. March 14, 1989

In the Matter of * * * BANK
(Insured State Nonmember Bank)
ORDER TERMINATING FEDERAL
DEPOSIT INSURANCE

   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 [12 U.S.C. §1818(a)],
   IT IS HEREBY ORDERED:
   FIRST, That the insured status of * * * Bank, * * * (herein the Bank), be and the same hereby is terminated as of the close of business April 28, 1989.
   SECOND, That the Bank, not later than April 14, 1989, 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 known address as shown on the books of the Bank, and that the Bank furnish the FDIC with a copy of the notice so 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 said notice was mailed to each depositor of the Bank at his last known address as of the date the notice was mailed, and upon the refusal or failure of the Bank to give such notice as specified herein, the FDIC is authorized to so notify depositors. The said notice shall be in the form as follows:

NOTICE
   ____, 1989
   1. The status of * * * Bank, * * *, as an insured bank under the provisions of the Federal Deposit Insurance Act, will terminate as of the close of business on April 28, 1989;
   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 28th day of April, 1989, will continue to be insured, as provided by the Federal Deposit Insurance Act, for two years after the close of business on the 28th day of April, 1989: provided, however, that any withdrawals after the close of business on the 28th day of April, 1989, will reduce the insurance coverage by the amount of such withdrawals.

* * * Bank

   There may be included in such notice, with written approval of the FDIC, any additional information or advice the Bank may deem desirable.
   THIRD, That the Bank, not later than April 14, 1989, so publish in not less than two issues of the local newspaper of general {{4-1-90 p.A-1458}}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 a clipping evidencing such publication.
   FOURTH, That the Executive Secretary of the FDIC be, and hereby is, directed immediately to send a copy of the Findings of Fact, Conclusions of Law, and this Order, by Registered Mail, Return Receipt Requested, to * * * Bank, * * *, to the Honorable * * *, Commissioner of Banks for the State of * * *, and to 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 April 14, 1989, the notice as set forth 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 herein above, with full power and authority to amend, modify, alter, or rescind the order of termination or the insured status of the Bank.
   Dated at Washington, D.C., ____, 198____.
   By direction of the Board.

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