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FDIC Enforcement Decisions and Orders |
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FDIC issues cease and desist order upon finding that Bank engaged in numerous unsafe or unsound banking practices.
[.1] Cease and Desist OrdersUnsafe or Unsound PracticesLending and Collection Policies
[.2] Cease and Desist OrdersUnsafe or Unsound PracticesFrequency
[.3] Cease and Desist OrdersWhen Appropriate
[.4] LoansClassificationExaminer's Opinion
[.5] Cease and Desist OrdersUnsafe or Unsound PracticesManagement Deficiencies
[.6] Securities LawApplicable to Banks
In the Matter of
This proceeding was brought pursuant to section 8(b)(1) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(b) (1), against The Citizens State Bank of Cortez, Cortez, Colorado ("Insured Institution").
On July 7, 1989, the FDIC completed an examination of the Insured Institution and determined that its overall condition had substantially deteriorated since the prior FDIC examination as of February 29, 1988. Adversely classified assets (loans and other real estate) had increased 60 percent since the prior examination to a total of $6,012,000, of which $2,573,000 consisted of loans classified "Substandard" and $519,000 loans classified "Loss." The Insured Institution also had $2,778,000 in other real estate, largely foreclosed properties, of which $2,596,000 was classified "Substandard" and $182,000 "Loss." Adversely classified assets represented approximately 17 percent of the Insured Institution's total assets and equalled 219.5 percent of total equity capital and reserves, or more than double the Insured Institution's capital. FDIC Ex. No. 1 at 1, 2.2
With only one exception, the ALJ did not disturb any of the asset classifications made by the FDIC in the July 7, 1989, examination. The ALJ concluded that the Insured Institution had engaged in an unsafe or unsound practice by operating with an excessive level of poor quality assets. R.D. at 19.
The Board has reviewed the record of this proceeding and concluded that most of the ALJ's findings of fact and conclusions of law are correct as to the unsafe or unsound practices engaged in by the Insured Institution. The Board also agrees with the ALJ's recommendation that a Cease and Desist Order should be issued. However, the Board disagrees with several of the ALJ's findings and with the ALJ's inclusion or failure to include certain provisions in the proposed cease-and-desist order. Accordingly, the Board adopts the ALJ's Recommended Decision and Order as modified herein.
[.1] The Board finds ample support in the record to sustain FDIC Enforcement Counsel's exceptions, but finds it unnecessary to address each credit transaction. Quite apart from the disputed credit transactions, the record clearly supports the ALJ's findings that the Insured Institution had extended credit without adequate collateral or adequate and current documentation and without collecting interest due. Furthermore, the ALJ recommended appropriate prohibitive relief relating to these practices. R.D. at 22.
[.2] The Insured Institution takes exception to the ALJ's finding that by capitalizing interest, it engaged in an unsafe or unsound practice. According to the Insured Institution, the safety and soundness of a practice depends upon the frequency with which it has occurred. It argues that the number of instances in which it capitalized interest, and the amounts involved, preclude a finding that it engaged in an unsafe or unsound banking practice. This is erroneous.
[.3] The Insured Institution contends that there is a distinction between an unsafe or unsound "condition," the existence of which was allegedly without the fault of management, and an unsafe or unsound "practice," and it suggests that this distinction should preclude prohibitive relief from being granted to the FDIC. The Board finds that the distinction urged by the Insured Institution is meaningless in the context of this case. While there may be certain broad economic conditions affecting an institution which may not be the direct result of its management, this case goes beyond that scenario; the record supports a finding of unsafe or unsound practices by this management for which prohibitive relief is appropriate.
[.4] Here, however, the Board concludes that the ALJ was incorrect in concluding that the * * * loan was improperly classified.8
C. The Responsibility of Management
FDIC Enforcement Counsel excepts to several of the ALJ's findings on the responsibilities of the Insured Institution's management. The ALJ rejected FDIC Enforcement Counsel's proposed findings that the condition of the Insured Institution was the result of management's policies, that management failed to take adequate action to protect the Insured Institution from the local economic decline, and that the board of directors failed to adequately supervise the Insured Institution's other managers. See R.D. at 1113. Furthermore, the ALJ held that management did not engage in unsafe or unsound practices under circumstances where "viable, beneficial alternatives existed." R.D. at 21.
[.5] The Board also concludes that the ALJ was in error in not finding that the Insured Institution engaged in an unsafe or unsound practice by operating with management whose policies and practices were detrimental to the Insured Institution. The ALJ incorrectly recast the issue as whether the condition of the Insured Institution was the "result" of policies adopted or implemented by management. R.D. at 20. There is no requirement that the policies and practices of management predominate over other factors, such as local economic conditions, in adversely impacting the condition of an institution before finding an unsafe or unsound practice. In this case, management's policies and practices evinced a clear failure to take sufficient action in response to local economic conditions.
D. Applicability of the Securities Laws to
[.6] The Board rejects the ALJ's finding that, because the securities of the Insured
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 Citizens State Bank of Cortez, Cortez, Colorado ("Insured Institution"), as set forth in the Decision, has engaged in unsafe and 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
This case may be divided into several categories for purposes of discussion: (1) certain uncontested allegations of unsafe or unsound banking practices, as to which the parties stipulated, (2) contested allegations concerning lending and collection practices, accounting principles applicable to real estate sales and the quality of Respond-
C. Quality of Management
Petitioner contends that Respondent "has engaged in an unsafe or unsound practice [by operating] with management whose policies and practices were detrimental to the Bank and jeopardize its deposits." In support of this contention, Petitioner argues that (1) management's policies have resulted in Respondent's weak financial condition, which is characterized by excessive poor quality assets, inadequate loan loss reserves and inadequate capital, and (2) management "must share in the responsibility" for those lending and collection deficiencies which were shown to be unsafe or unsound banking practices.69 Respondent demurs.
D. Remedy75
While there is no disagreement that the FDIC, like other agencies which exercise their considerable expertise to effect the public interest, may exercise broad discretion when crafting a cease and desist order, Respondent argues that Petitioner's discretion is limited by the principle that "the sanction imposed must...have some relation to the violation found by the agency." City of Oakland v. Donovan, 703 F.2d 1104, 1106 (9th Cir. 1983). In support of its argument, Respondent quotes NLRB v. Express Pub. Co., 312 U.S. 426, 433 (1941), for the proposition that:
1. Prohibitive Relief
Petitioner seeks remedial provisions in this case which will prohibit the unsafe or unsound banking practices found to exist herein.76 Respondent has raised a number of objections to the requested prohibitive relief.
1. Respondent is, and has been at all times pertinent hereto, a corporation existing and doing business under the laws of Colorado, having its principal place of business in Cortez, Colorado.
1. The FDIC has jurisdiction over Respondent and the subject matter of this proceeding.
IT IS ORDERED that The Citizens State Bank of Cortez ("Bank"), Cortez, Colorado, and institution-affiliated parties of the Bank, cease and desist from the following practices: |
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Last Updated 6/6/2003 | legal@fdic.gov |