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FDIC Enforcement Decisions and Orders |
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Bank ordered to cease and desist from unsafe and unsound banking practices. Board declined to use its discretion to delay publication of the cease and desist order, finding no "exceptional circumstances" under which publication would threaten the safety or soundness of the Bank. (This order was terminated by order of the FDIC dated 1-23-92; see ¶
[.1] Cease and Desist OrdersPublicationExceptional Circumstances
[.2] Cease and Desist OrdersPublicationExceptional Circumstances
[.3] ExaminersLoan ClassificationReview by ALJ
In the Matter of
This proceeding is brought by the Federal
{{3-31-92 p.A-1698.14}}Deposit Insurance Corporation ("FDIC") against Mansfield Bank and Trust Company, Mansfield, Louisiana ("Insured Institution"), pursuant to section 8(b)(1) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(b)(1). The FDIC alleged that the Insured Institution had engaged in certain unsafe or unsound banking practices. The FDIC sought a Cease and Desist Order to halt the unsafe or unsound practices and to implement a rehabilitation plan to return the Insured Institution to a safe and sound condition. The Board of Directors ("Board") of the FDIC has reviewed the record, the parties' briefs and exceptions, and the Recommended Decision and Order of the Administrative Law Judge ("ALJ"). The Board agrees with the ALJ's findings and conclusion that the Insured Institution has engaged in unsafe or unsound banking practices. Specifically, the Insured Institution has been operating with inadequate capital, an excessive volume of poor quality assets, and inadequate earnings. The Board agrees with the ALJ's recommendation that a Cease and Desist Order ("Order") should be issued, but disagrees with his recommendation that public disclosure of the Order should be delayed for two years. Accordingly, the Board adopts the ALJ's Recommended Decision with the modifications discussed herein.
On August 18, 1989, the FDIC conducted an examination of the Insured Institution and determined that it was operating: (1) with inadequate equity capital in relation to the kind and quality of its assets; (2) with an excessive volume of poor quality loans and other assets; (3) with improper lending and lax collection practices; and (4) with excessive loan losses, high overhead expenses, and an excessive volume of non-earning assets.
The issues before the ALJ included whether the examiner was correct in the clas-
{{6-30-91 p.A-1699}}classified "Substandard" in the August 18, 1989, FDIC examination.3 For each loan, the ALJ discussed the examiner's basis for the classification and the Insured Institution's concerns. The ALJ concluded that the classifications were based on in-depth analysis and are not arbitrary and capricious. R.D. at 4850.
Based upon review of the record, the Board finds that the ALJ's Findings of Fact and Recommended Decision were correct as to the unsafe or unsound practices of the Insured Institution and its serious financial condition as of the FDIC examination. The Board also agrees that, based on the circumstances existing at that time, a formal Cease and Desist Order is justified. As to the issue of delay in the publication of the Cease and Desist Order, the Board disagrees with the ALJ's Recommended Decision as discussed below.
A. Publication of the Cease and Desist
The Insured Institution requested that publication of a Cease and Desist Order be delayed, claiming that it would be detrimental to the institution and that the progress it has made in improving its condition could be quickly undone by a single press release.5 Insured Institution's Brief at 14. The ALJ agreed that publication should be delayed. FDIC Enforcement Counsel assert in their exceptions that the ALJ's recommended two-year delay is unsupported by statutory authority and is arbitrary and capricious. FDIC's Exceptions at 3.
One of the problems in the financial industry...has been the excessive secrecy of agency supervisory actions. Such secrecy does little to deter misconduct, but
B. Exceptional Circumstances Are Not
Section 1818(u) of the FDI Act, 12 U.S.C. § 1818(u), directs the FDIC to publicly disclose final agency enforcement orders, but provides discretion to delay such publication under "exceptional circumstances" which "would seriously threaten the safety or soundness of an insured depository institution." 12 U.S.C. § 1818(u)(2). The Insured Institution and the ALJ have asserted that the progress the Insured Institution has made could be quickly undone by adverse publicity. R.D. at 62; Insured Institution's Exceptions at 6; Insured Institution's Reply Brief at 14. The Board has considered, and rejects, the arguments presented in the Insured Institution's exceptions as to a delay in public disclosure of the Cease and Desist Order.
[.1] The "exceptional circumstances" which in the judgment of the ALJ merit delaying publication include: (1) the progress the Insured Institution has made since the August 18, 1989, FDIC examination in correcting problems in its loan portfolio and other identified weaknesses;9 (2) the lack of insider abuse at the Insured Institution; (3) the absence of violations of law; (4) evidence that the Insured Institution is located in an "overbanked," economically depressed community;10 and (5) expert testimony by the Louisiana State Deputy Banking Commissioner and the FDIC Examiner that the Insured Institution needs breathing room.11 The Insured Institution argues that publication of the Cease and Desist Order would have "disastrous effects" on the Insured Institution. Insured Institution's Exceptions at 5. Finally, the Insured Institution and the ALJ characterize the Cease and Desist Order as carrying a "penalty" of mandatory publication.12 R.D. at 14.
[.2] The Board disagrees. In this situation, the unsubstantiated assertion that adverse publicity would harm the Insured Institution and its customers does not warrant delay of publication. To hold otherwise
C. Other Matters Raised in Exceptions
The Insured Institution's exceptions also reiterate arguments that: (1) the five disputed loans were improperly classified for limited reasons; (2) the operative date for the State examination was March 16, 1990; and (3) the facts do not merit issuance of the Cease and Desist Order.
1. The Five Disputed Loan Classifications
The Insured Institution asserts that the * * * loan was classified "Substandard" due to the debtor's advanced age, but that the loan is current and, therefore, incorrectly classified. Insured Institution's Exceptions at 8. However, the ALJ notes that this credit may require repayment from either the sale of collateral or from the borrower's estate. R.D. at 49. The Insured Institution's records did not contain enough information to address these contingencies. Accordingly, the ALJ concluded, and the Board agrees, that this loan was properly classified "Substandard."
[.3] Accordingly, the Board finds that the Insured Institution's exceptions concerning these loan classifications fail to address the detailed analyses and conclusions of the examiner and lack merit. The Board agrees with the ALJ that the weight of the evidence demonstrates that the "Substandard" classification of these credits was not arbitrary and capricious or outside the zone of reasonableness.18 R.D. at 48.
The Insured Institution excepts to the ALJ's determination that the State examination is inadmissible as "evidence concerning an act or event after the Notice date." 12 C.F.R. § 308.38(a)(2) and (3). The ALJ had found the operative date for the State examination to be its June 5, 1990 transmittal date. The ALJ ignored the fact that the State examination assessed the condition of the Insured Institution as of March 16, 1990 and that each page of the report bears the date March 16, 1990. The Board agrees with the Insured Institution that the operative date is March 16, 1990, since the report determines the Insured Institution's condition as of that date. The State examination is not evidence of "any act or event occurring after the date of the Notice" under the terms of 12 C.F.R. § 308.38(a)(2). Accordingly, the Board does not adopt the ALJ's analysis or conclusion concerning this procedural issue.19 While the State examination differs from the FDIC examination as to individual loan classifications, overall it corroborates the FDIC's findings that the Insured Institution was in a weakened financial condition, with a composite CAMEL rating of four. Therefore, the Board finds it unnecessary and immaterial to resolve the discrepancies as to individual loan classifications.
The Board has carefully reviewed the entire record in this proceeding, including the ALJ's Recommended Decision, the transcripts, briefs, and exceptions. The Insured Institution remains in a weakened financial condition with a high volume of adversely classified assets, inadequate earnings, and depleted capital. The Board concludes that the Insured Institution has engaged in unsafe or unsound practices and is in a weakened financial condition. Therefore, the issuance of a Cease and Desist Order is supported by substantial evidence and in the best interest of the Insured Institution, its depositors, and the insurance fund.
In the Matter of
The Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC"), having considered the record and the applicable law, finds and concludes that the Mansfield Bank and Trust Company, Mansfield, Louisiana ("Insured Institution"), as set forth in this Decision, has engaged in unsafe or unsound banking practices within the meaning of section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1):
In the Matter of
On March 22, 1990, the FDIC issued a Notice of Charges and of Hearing ("Notice") against Mansfield Bank & Trust Company, Mansfield, LA ("Bank"), an insured state nonmember bank, pursuant to the provisions of section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b) and the FDIC's Rules of Practice and Procedures, 12 C.F.R. Part 308. The Notice charged that the Bank and its board of directors engaged in specified unsafe or unsound practices within the meaning of section 8(b) of the Act in conducting the business of the Bank. The Notice also provided for a hearing to take evidence on the charges alleged in the Notice and to determine whether an appropriate Order to Cease and Desist ("Order") should be issued under section 8(b) of the Act. The Order proposed by the FDIC would require the Bank to cease and desist from asserted unsafe or unsound practices and require the Bank to take affirmative action to correct the conditions resulting from such practices. The Bank filed an Answer to the Notice ("Answer") on April 13, 1990 in which the Bank generally denied the allegations of unsafe or unsound banking practices contained in the Notice.
1. Mansfield Bank & Trust Company founded in 1947 ("Bank") is a corporation chartered by and doing business under the laws of the State of Louisiana. (J.S. 8)
1. The FDIC has jurisdiction over, and authority to issue an Order to Cease and Desist against the Bank under section 8(b) of the Act.
A. The Bank Has Engaged In Unsafe Or
The term "unsafe or unsound practice" is not defined in the Act as such nor are there any indications in the Act concerning which practices are deemed to be "unsafe or unsound practices" within the meaning of section 8 of the Act, 12 U.S.C. § 1818. However, the term "unsafe or unsound practices" has been defined by the Board of Directors of the FDIC as a generic term with an application that must be adapted to constantly changing factual circumstances. An unsafe or unsound practice is any action, or lack of action, that is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk of loss or damage to an institution, its shareholders, or the agencies administering the insurance funds. Hoffman v. FDIC, Case No. 89-70466 (9th Cir. Aug. 31, 1990); FDIC-83-172b, 1 P-H FDIC Enf. Dec. ¶5030 (1984). As this definition indicates, the determination as to whether a particular practice constitutes an unsafe or unsound practice is a factual matter to be determined by the record of the specific administrative hearing.
B. FDIC Examiners Are Entitled To
For purposes of evaluating the safety and soundness of a given bank, FDIC examiners are expert witnesses due to their possession of a unique expertise. The examiner receives extensive classroom and on the job training and must undergo a lengthy and structured apprenticeship prior to any consideration to becoming a commissioned bank examiner. A bank examiner's findings, opinions and determinations are entitled to deference because of the expertise that examiners possess. With such deference, it has been held generally an examiner's opinions or findings cannot be overturned unless shown to be arbitrary and capricious or outside a "zone of reasonableness." Sunshine State Bank v. FDIC, 783 F.2d 1580 (11th Cir. 1986). The court in Sunshine adopted in whole a statement by the FDIC Board of Directors on the deference that must be given to bank examiners. The opinion states:
C. The Bank's Board Of Directors Failed
Bank directors have a duty to direct the affairs of the Bank. Generally, directors of Banks are held to a standard of ordinary care and prudence in the administration of bank affairs. Briggs v. Spaulding, 141 U.S. 132, (1891). A board of directors at financial institutions is entitled to delegate banking business to duly authorized officers, but may be held liable for failure to exercise reasonable supervision over management. Fitzpatrick v. FDIC, 765 F.2d 569 (6th Cir. 1985); Without question a board of directors must exercise ordinary or reasonable care in supervision of the bank's officers. The directors must discharge their duty to select an operating officer, diligently attend director's meetings, meet informally to discuss the bank's business, select competent auditors, review their work and make inquiry as to the condition of the bank.
D. Cessation Of Unsafe Or Unsound
Section 8(b) of the Act provides, in pertinent part, that a cease and desist order may be issued against any bank director or officer who "is engaging or has engaged" in an unsafe or unsound practice [emphasis added]. Section 8(b), in fact, encompasses unsafe or unsound practices which are ongoing at the time of the issuance of the order as well as those unsafe or unsound practices that have already occurred. This indicates that a cease and desist order may be issued even though there may not be an unsafe or unsound practice occurring at the moment of the issuance of the cease and desist order. See FDIC-85-42b, 2 P-H Enf. Dec. ¶5062, p. 6503.
E. Use Of The Examination Report Of The
Federal Regulations at 12 C.F.R. § 308.38 set forth the manner in which evidence may be heard in an administrative hearing before the FDIC. As a general proposition, evidence of any act or event occurring after the date of the Notice may not be admitted. However, such evidence may be admitted for the express purpose of assisting the Administra-
{{6-30-91 p.A-1719}}tive Law Judge in fashioning an order (12 C.F.R. § 308.38(a)(3)).
F. The Effect of Publication Is Relevant In
Section 913 of FIRREA, 12 U.S.C. § 1818(u), requires the FDIC to publish and make available to the public any final order, including modifications or terminations, issued with respect to any administrative enforcement proceeding initiated by the agency. The Congressional mandate and the legislative history of section 913 establishes that Congress wants the agencies to discontinue the virtually uniform policy of maintaining secrecy in enforcement actions. This concern is expressed in Report 101-54, Part 1 of the Committee on Banking, Finance and Urban Affairs:
G. FDIC Has Broad Discretion To
The authority granted to the FDIC by statute for purposes of corrective action is contained in section 8(b) of the Act which provides:
H. Contentions Of The Bank On
The Board of Directors and management of Mansfield Bank readily admit the loan portfolio contains problems; however, they vehemently dispute some of the FDIC classifications, namely:
The examiner in charge of the FDIC August, 1989 examination was FDIC witness Deanna Caldwell. Ms. Caldwell testifies, "An adverse classification is based basically upon the payment history of the credit, the repayment capacity of the borrower and the protection provided by collateral." (I, 25: 1619)
I. Contentions Of Respondent Concerning
As a result of the August 1989 examination, Ms. Caldwell stated, "The primary obstacle to the health of the Bank is the large volume of the inferior quality loans currently in the portfolio. The loans adversely classified herein all consist of debts of long term bank customers or debt that was once considered `good' that is now troubled debt." (FDIC Ex. 2) President Dorroh and Directors Means, Dixon and Dillard stress the
{{6-30-91 p.A-1725}}disastrous economic conditions that have hit Mansfield and DeSoto Parish. The poor economy was acknowledged by FDIC examiner Caldwell and FDIC Review Examiner Stacey. In spite of the "excessive classifications" Examiner Caldwell found at Mansfield Bank, in the Examination Report's confidential portions she noted, "The Bank appears to have stabilized, and the Board is apparently willing to pave the road to recovery with personal funds ...". "Due to apparent stabilization and to concerted efforts on the part of management to improve the condition of the Bank, continuance of the outstanding Memorandum of Understanding is recommended." (FDIC Ex. 2, Confidential-pink sheets)
Upon consideration of all of the foregoing, a cease and desist order essentially as proposed by FDIC enforcement staff is appropriate and should be entered. The order should not be immediately published because there are not now "bad guys" at the Bank who have engaged in "abusive practices or misconduct." (Cf. H.R. Rep. No. 100 1088, 100th Cong. 2nd Sess. 89 (1988)), The bank needs breathing room as per FDIC Examiner Caldwell and OFI Executive Deputy Commissioner Drake. These opinions of those experts must not be ignored. In my opinion, there is no need of any kind for immediate publication of a C&D order. The exception to immediate publication conceived by Congress clearly is applicable.
IT IS HEREBY ORDERED that the Bank, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties of affairs of the Bank, cease and desist from the following unsafe or unsound banking practices: |
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Last Updated 6/6/2003 | legal@fdic.gov |