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FDIC Enforcement Decisions and Orders |
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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 InsuranceFailure to Comply with Order of Correction
[.2] CapitalAdequacyCapitalization Should Reflect Risk
[.3] Practice and ProcedurePetitionsIndependent Review by FDIC
[.4] Termination of InsuranceManagement Responsibility
[.5] Termination of InsuranceFailure to Comply with Order of Correction
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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.
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.
[.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,
[.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."
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
NOTICE
____, 1989
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.
In the Matter of
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 13, 1988, both the FDIC and the Respondent appearing by counsel.
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.
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.
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.
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.
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.
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.
FDIC Ex. 5, p. 2, Tr. 3536.
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.
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(d) Another $200,000 in loans were "Special Mention" in the October examination, indicating some degree of risk, but were not adversely classified.
(c) Adversely classified loans and leases were as follows:
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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.
In the Matter of * * * BANK
NOTICE
There may be included in such notice, with written approval of the FDIC, any additional information or advice the Bank may deem desirable. |
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Last Updated 6/6/2003 | legal@fdic.gov |