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   [5170B] In the Matter of The First State Bank, Hawkins, Texas, Docket No. FDIC-89-190a (11-19-91).

   The FDIC Board adopts ALJ's recommendation and grants summary judgment terminating the insurance because there is no factual dispute concering Bank's violation of a cease and desist order requiring it to increase its primary capital. (This order was terminated by order of the FDIC dated 4-20-92; see ¶9010.)

   [.1] Termination of Insurance—Violation of Cease and Desist Order
   Failure to achieve the 7.0 percent capital-to-asset ratio required by cease and desist order is basis for terminating insurance.

   [.2] Summary Judgment—Termination of Insurance
   Summary judgment is proper where Bank's admission that it failed to achieve the required capital ratio leaves no factual dispute concerning violation of cease and desist order.

   [.3] Practice and Procedure—Answer—Motion to Amend
   ALJ did not err in refusing to permit amendment of an answer, in the form of a pro se letter, in which respondent unambiguously admitted violations of the cease and desist order and attempted to explain reasons for the violations.

In the Matter of

THE FIRST STATE BANK
HAWKINS, TEXAS
(Insured State Nonmember Bank)
DECISION AND ORDER
TERMINATING FEDERAL DEPOSIT
INSURANCE

FDIC-89-190a

INTRODUCTION

   This proceeding seeks to terminate the insured status of The First State Bank, Hawk- {{6-30-92 p.A-1830.10}}ins, Texas ("Bank" or "Respondent"), upon findings made by the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC" or "Petitioner") pursuant to section 8(a) of the Federal Deposit Insurance Act ("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. One of the grounds for involuntary termination of insurance under section 8(a)(2) of the FDI Act, 12 U.S.C. §1818(a)(2), is a finding that the institution or its directors have violated a law, regulation, or order, a condition imposed by the FDIC in writing or an agreement entered into with the FDIC. After an examination of the Bank by the FDIC on May 5, 1989, the FDIC determined that the Bank violated certain provisions of a Cease and Desist Order to which it was subject. Most significantly, the Bank failed to increase primary capital to 7.0 percent within the prescribed 120 days. In fact, its adjusted capital ratio was 3.24 percent on the date of examination. Other problems existed as well, including an inadequate reserve for losses and an excessive volume of poor quality assets and loans.
   FDIC Enforcement Counsel moved for summary judgment on the basis of no factual dispute concerning the violation of the Cease and Desist Order. The Administrative Law Judge ("ALJ") recommended granting of the motion. For the reasons set forth below, the Board concludes that the motion should be granted and that termination of insurance is warranted. The ALJ's Recommended Decision is adopted and incorporated herein.

PROCEDURAL HISTORY

   Respondent stipulated to an Order to Cease and Desist ("Order") in September 1988, which became effective on October 28, 1988. Paragraph 1(a) of the Order required Respondent to submit to Petitioner within 60 days a plan to increase primary capital to 7.0 percent of total assets, to achieve that capital ratio within 120 days and to maintain it thereafter. The Bank did timely submit a plan, but failed to achieve the required ratio, either by the prescribed date or any time thereafter. On May 5, 1989, when the Bank was examined by the FDIC, its adjusted capital ratio was 3.24 percent.
   The May 5, 1989 examination revealed that the Bank had violated numerous other provisions of the Order, had engaged in unsafe or unsound practices, and was in an safe or unsound condition. Consequently, the FDIC issued a Notice of Intention to Terminate Insured Status, Findings, and Order Setting Hearing ("Notice") on March 6, 1990. The Bank responded generally to the Notice by letters dated March 21 and August 24, 1990. The FDIC's Office of the Executive Secretary ("OES") requested that Respondent answer the Notice with specificity, pursuant to 12 C.F.R. §308.21, and the Bank did so by letter dated January 10, 1991. Therein, the Bank admitted that it failed to achieve and maintain adjusted primary capital equal to 7.0 percent of adjusted total assets. Additional violations of the Order were admitted as well. It is this letter that OES considers to be the "Answer" under section 308.21 of the FDIC Rules and Regulations.
   At a prehearing conference held before the ALJ on February 4, 1991, Enforcement Counsel orally moved for summary judgment. In light of Respondent's admissions, Enforcement Counsel contended that the Answer did not raise any issues of material fact. Respondent orally opposed the motion and requested leave to file a written motion to amend its Answer. Several briefs and reply briefs were filed by the parties, primarily concerning the amendment of Respondent's Answer.
   On August 5, 1991, the ALJ issued a Recommended Decision ("R.D.") denying Respondent's motions for leave to amend its January 10, 1991 Answer and granting Petitioner's Motion for Summary Judgment. He found no "good cause" shown by Respondent to amend its Answer, pursuant to 12 C.F.R. §308.22(a), and found no material issue of fact regarding Respondent's violation of the Order. Exceptions to the ALJ's Recommended Decision were filed by both parties. All motions, rulings, memoranda, briefs, transcripts and exhibits, as well as the Recommended Decision, are part of the record in this matter.

REQUEST FOR ORAL ARGUMENT

   Respondent submitted a Request for Oral Argument before the Board. No reasons were provided for the Request, and it was not opposed by Enforcement Counsel.
   The grant of a Request for Oral Argument is an extraordinary matter within the discretion of the Board. 12 C.F.R. §308.17. The Board has previously discussed those circumstances in which it would grant such a {{6-30-92 p.A-1830.11}}request. See, In the Matter of Harold Hoffman, 2 P-H FDIC Enf. Dec. ¶5140; FDIC Docket No. FDIC-85-42b, 1 P-H FDIC Enf. Dec. ¶5062. After considering the Respondent's Request, the Board finds none of those circumstances in the instant case. The factual and legal arguments are fully set forth in the parties' submissions. Thus, oral argument will not aid the Board in this matter, and Respondent will not be prejudiced by the lack of oral argument. Accordingly, the Board denies Respondent's Request for Oral Argument.

DISCUSSION

A. Statutory and Regulatory Requirements.

   It is uncontested that the FDIC has the power to terminate a bank's insured status upon a finding that it is in an unsafe or unsound condition. 12 U.S.C. §1818(a). The central issue is, of course, whether the Bank was in such condition. FDIC regulations provide that "[a]ny bank which has less than its minimum capital requirement is deemed to be engaged in an unsafe or unsound practice". 12 C.F.R. §325.4(b). Furthermore, 12 C.F.R. §325.4(c)(2) provides 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 the FDIC is not precluded from bringing an action to terminate insurance under section 8(a) of the FDI Act, 12 U.S.C. §1818(a), with regard to such a bank. Moreover, under section 8(a)(2) of the FDI Act, the Board may terminate insurance of an institution if it or its directors have violated any law, regulation, order, written condition imposed by the FDIC, or agreement entered into with the FDIC.

B. Enforcement Counsel's Assertions

   [.1] The low capital-to-asset ratio, below the 7.0 percent stipulated to in the Order, is the principal basis upon which the FDIC seeks to terminate the Bank's insured status.1The underlying statistics of the case are not contested by the Bank. R.D. at 4. At the May 5, 1989 examination, the Bank's adjusted primary capital ratio was 3.24 percent. See Examination Report for May 5, 1989, Exhibit 3 to Respondent's Exceptions to Recommended Decision and Brief in Support ("Resp. Ex. 3"). In addition, adversely classified assets were found to be 316.4 percent of equity capital and reserves. Id.. In sum, as of the May 5, 1989 examination, Respondent was determined to be in violation of the Order, and in an unsafe or unsound condition to continue operations as an insured institution because: (1) it was operating with inadequate capital and reserves; (2) it was operating with an excessive volume of poor quality assets; (3) it failed to achieve the primary capital ratio required by the Order; and (4) it was operating with management whose policies and practices were detrimental to the institution. Id. and R.D. at 5.

   [.2] Respondent's present management assumed responsibility for the Bank's operation only after the Order was entered into, and attributed many of the problems cited in the examination report to previous management. Resp. Ex. 6, 7, and 9. However, while Respondent claims improvement in a majority of the areas in question, the record is nevertheless replete with admissions of inadequate capital (below 7.0 percent) and other violations of the Order. The ALJ focused on the issue of compliance with the Order's primary capital ratio requirement. He found that paragraph 1(a) of the Order required Respondent to achieve a 7 percent ratio within 120 days, "not merely to submit a plan intended to accomplish that result". R.D. at 4. He further found that Respondent admitted that it violated the Order's primary capital requirements. Id. Because there is no factual dispute concerning the Bank's violation of the Order, the Board affirms the grant of Enforcement Counsel's Motion for Summary Judgment on this basis.2
   However, even without Respondent's admission, independent grounds existed sufficient to justify the termination of the Bank's deposit insurance. The quarterly Reports of Condition ("call reports") prepared and filed by the Bank on June 30, 1991, March 31,


1The FDIC also asserts that the Bank's condition was unsafe or unsound by reason of its poor management and poor quality loans and assets. The ALJ so found, and the Board concurs. R.D. at 5.

2Enforcement Counsel excepted to the ALJ's statement on p.2 of his R.D. that it was undisputed that Respondent complied with all provisions of the Order except those on primary capital. Because non-compliance with the primary capital requirement alone serves as a sufficient basis for termination of insured status, and that was the violation focused upon by the ALJ, the Board need not address the issue of compliance with other provisions of the Order.
{{6-30-92 p.A-1830.12}}1991, and December 31, 19903reveal that its primary capital ratio was 0.84 percent, 1.00 percent and 0.45 percent, respectively, for those dates. These admitted levels of primary capital provide an independent basis for terminating the Bank's deposit insurance since this grossly inadequate level of capital is by definition an unsafe or unsound condition. 12 C.F.R. §325.4(c). Thus, not only did the Bank fail to comply with the Order, it remained in a critically capital deficient condition up to the date of the prehearing conference, more than two years after the date it was required to achieve a primary capital ratio of 7 percent by that Order.

C. The Bank's Contentions

   [.3] Respondent attempted to circumvent its admissions of violation of the Order in its January 10, 1991 Answer ("Resp. Ex. 9") by seeking to amend that Answer. It claimed the Answer was ambiguous, purportedly because it was pro se, and that documents received during discovery warranted amendment to include certain affirmative defenses.
   The ALJ appropriately denied Respondent's motions to amend its Answer. Pursuant to 12 C.F.R. §308.22(a), an answer may be amended "upon good cause shown, by leave of the administrative law judge." The ALJ properly found good cause was not shown by Respondent.4First, he found the plain language of the Answer to unambiguously admit each allegation of the Notice. R.D. at 2. In support of this finding, the ALJ cited "Response of the Federal Deposit Insurance Corporation to Respondent's Motion for Leave to Amend", paragraphs 4–9, which he adopted and incorporated by reference. This analysis clearly illustrates that the Answer's responses constitute admissions to the Notice allegations, rather than simply restating the allegations, as the Bank contends. Examination of the Answer's responses ("Resp. Ex. 9") support this interpretation. Paragraphs 2(a)-(d) and 3(a)-(d) in particular attempt to explain the cause for the admitted violation, practice or condition. Therein, Respondent blames previous management and alleges improvement in many areas of concern to the FDIC.
   Thus, the ALJ was correct in finding that the Answer was not ambiguous. He further properly accorded no significance to the fact that it was submitted pro se, finding that had "no bearing upon the truth, accuracy or clarity of the admissions contained therein". R.D. at 3. For the Bank to claim that its president and chief executive officer was not capable of submitting clear, accurate responses to allegations directly concerning the condition and practices of the Bank is disingenuous.
   The ALJ also acted properly in rejecting Respondent's second contention, finding that the Bank did not demonstrate that any of the documents received during discovery had "any relevance to the truth or clarity of the admissions" in the Answer. R.D. at 3. The ALJ acted within the discretion accorded him by 12 C.F.R. §308.22(a) in making this determination. He was certainly authorized to conclude, as he did, that exclusion of Respondent's affirmative defenses in connection with the Motion for Summary Judgment neither prejudiced Respondent nor justified amendment of its Answer.
   With respect to the summary judgment motion, Respondent attempted to invoke the bar of insurance termination proceedings pursuant to 12 C.F.R. §325.4(c)(1). That "safe harbor" provision precludes initiation of a termination of insured status proceeding while the insured bank is in compliance with a written agreement regarding its capital, and Respondent alleged that it applied to the instant situation because the Bank was in compliance with the Order. The ALJ accepted, arguendo, Respondent's contention that the Order constituted a written agreement under section 325.4(c)(1), but rejected its claim of compliance. As stated above, he found that the plain language of paragraph 1(a) of the Order mandated achievement of 7.0 percent primary capital ratio, and not merely a plan to achieve it. Thus, section 325.4(c)(1) could not act to bar the termination action.
   Finally, the ALJ dismissed as unsupported by the facts, Respondent's attempt to


3Although these call reports are not part of the record in this matter, the reports are required by law to be prepared and submitted to the FDIC by the Bank and are available to the public.

4Since the regulations do not define "good cause", the ALJ must analyze the request for amendment in light of various factors, including delay, futility of amendment, impact of amendment on the final outcome of the action in question and undue prejudice to the opposing party by virtue of the amendment. Here, it appears that the ALJ did consider these factors in his analysis of Respondent's amendment request, and found no demonstration of "good cause" for amendment.
{{6-30-92 p.A-1830.13}}estop the FDIC from terminating insurance on the basis of a September 17, 1990 letter from the FDIC that purportedly accepted Respondent's settlement offer. To the contrary, he characterized the letter as recommending that the termination action proceed.
   Because the correspondence in question does not appear to be part of the Record certified by the ALJ, the Board is unable to determine whether it supports Respondent's claim. However, as a matter of law, estoppel is not ordinarily available against action by an agency of the federal government. See Office of Personnel Management v. Richmond, 110 S.Ct. 2465, 2470 (1990). Moreover, a party claiming estoppel must at least plead the traditional elements of an estoppel, which Respondent has failed to do.5

CONCLUSION

   The Board has fully examined the record and finds no material modification of the ALJ's Recommended Decision required.
   The Bank has been found to be in an unsafe or unsound condition to continue operations as an insured bank and thus presents an undue insurance risk to the FDIC. Accordingly, the Board finds that it is inappropriate to issue an order terminating the insured status of the Bank and requiring the Bank to provide notice of such termination of insured status to its depositors pursuant to section 308.62 of the FDIC Rules and Regulations, 12 C.F.R. §308.62.

ORDER TERMINATING FEDERAL
DEPOSIT INSURANCE

   IT IS HEREBY ORDERED, that the insured status of The First State Bank, Hawkins, Texas, is terminated effective as of the close of business sixty days from the date of this Order.
   IT IS FURTHER ORDERED, that, pursuant to 12 C.F.R. §308.62, 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 308.62 of the FDIC Rules of Practice and Procedure, 12 C.F.R. §308.62, as follows:

NOTICE

____, 1991
1. The status of The First State Bank, Hawkins, Texas, 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 ____, 1992.
   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 ____, 1991, 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 ____, 1991, will reduce the insurance coverage by the amount of such withdrawals.

The First State Bank
Hawkins, Texas

   There may be included in such notice, with the written approval of the FDIC, any additional information or advice the Bank may deem desirable.
   IT IS FURTHER ORDERED, that the Bank, not later than thirty days from the date of this Order, shall publish in no fewer than two issues of a local newspaper of general circulation in Hawkins, Texas, 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.


5The last exception filed by Respondent to the ALJ's Recommended Decision challenged his authority to reject a filing that complied with the FDIC's rules of practice and procedure, but not with his more stringent practice. Specifically, Respondent had filed the original and one copy of a pleading, as required by the FDIC's rules of practice. The ALJ rejected it because he had issued an order in this case requiring two copies of each filing. While rejection of the pleading in question does not materially affect the outcome of this matter, the Board agrees with Respondent that the ALJ's order exceeding the ordinary rules of practice was overreaching in this situation. The Board does not adopt this determination by the ALJ.
{{6-30-92 p.A-1830.14}}
   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 of termination of the insured status 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 19th day of November, 1991.

/s/ Hoyle L. Robinson
Executive Secretary

_____________________________________
RECOMMENDED DECISION

In the Matter of
The First State Bank
Hawkins, Texas
(Insured State Nonmember Bank)

Steven M. Charno, Administrative Law
Judge:

   At the prehearing conference held in this matter on February 2, 1991, the Federal Deposit Insurance Corporation ("FDIC" or "Petitioner") made an oral motion for summary judgment, contending that no hearing was required because Respondent's Answer did not raise an issue of material fact. The First State Bank of Hawkins, Texas ("Respondent") orally opposed the summary judgment motion and requested leave to file a written motion to amend its Answer. At the conclusion of the conference, I took the summary judgment motion under advisement, granted Respondent's request to file a written motion and established a procedural schedule intended to allow the parties a limited opportunity to explore the possibility of settling this case without further litigation. That schedule called for Respondent to submit a settlement proposal by February 19 and for Petitioner to respond to that proposal by March 5.
   By written motion filed March 11, Respondent sought leave to amend its Answer. By response filed March 18, Petitioner opposed the motion to amend. On March 22, I suspended the procedural schedule because Petitioner had failed to respond in a timely manner to Respondent's settlement offer. By letter of June 13, Petitioner informed me that it was rejecting Respondent's offer and asked that I rule on the outstanding motions. By pleading filed June 14, Respondent sought to supplement its February 2 oral opposition to the summary judgment motion.1On June 17, Respondent filed an "Amended Motion for Leave to Amend Answer." By brief filed July 3, Petitioner opposed Respondent's June 14 pleading on procedural grounds and replied to Respondent's arguments concerning the merits of summary judgment. Also on July 3, Petitioner filed a response in opposition to Respondent's June 17 filing. On July 18, Respondent submitted a reply to Petitioner's July 3 pleadings.2Petitioner responded to the July 18 reply in a pleading filed July 24.3

DISCUSSION

A. The Motions to Amend

   Petitioner conducted an examination of Respondent's operations on May 5, 1989 and, based thereon, issued (1) a November 14, 1989 Notice to Primary Regulator of Findings and (2) a March 6, 1990 Notice of Intention to Terminate Insured Status ("Notice") pursuant to 12 U.S.C. §1818(a). By letter dated March 21, 1990, Respondent's President and Chief Executive Officer responded to the Notice. Petitioner took no further action until December 31, 1990, when its Executive Secretary sent a letter asking Respondent to file an answer to the Notice in the form required by Section 308.21 of the FDIC's Rules of Practice and Procedures ("FDIC Rules"), 12 C.F.R. §308.21. Respondent's President and Chief Execu-


1In the absence of any demonstration of prejudice to Petitioner and in order to insure a comprehensive record on appeal, I shall exercise my discretion to allow the filing of this otherwise impermissible pleading.

2Only one copy of this pleading was filed with me. Respondent's submission is therefore rejected because it fails to meet the requirements of numbered paragraph one of my January 11, 1991 Order in this proceeding.

3Given my previous rejection of the pleading which is the subject of Petitioner's response, I also reject the response.
{{6-30-92 p.A-1830.15}}tive Officer complied with the FDIC's request and filed a pro se Answer to the Notice on January 15, 1991. It is this pleading which Respondent seeks to amend.
   Section 308.22(a) of the FDIC Rules, 12 C.F.R. §308.22(a), provides that an answer may be amended "upon good cause shown, by leave of the administrative law judge." Respondent contends that good cause exists for its proposed amendment in that (1) its pro se Answer was so ambiguous as to require amendment in order to clearly express Respondent's meaning and (2) discovery conducted during this proceeding unearthed documents which require modification of the pro se Answer in order to include certain affirmative defenses.4
   I find the first of Respondent's contentions to be without merit. The plain language of the pro se Answer compels a finding that the document unambiguously admits each and every allegation of the Notice.5The fact that the pro se Answer was submitted without advice of counsel has no bearing upon the truth, accuracy or clarity of the admissions contained therein.
   Respondent's second contention is similarly without merit. Respondent did not demonstrate that any of the documents which it received for the first time during discovery have any relevance to the truth or clarity of the admissions contained in the pro se Answer. In any event, I have considered Respondent's affirmative defenses in connection with Petitioner's summary judgment motion and therefore conclude that exclusion of those defenses from Respondent's Answer can neither prejudice Respondent nor justify amendment. For the foregoing reasons, Respondent's motions to amend its Answer will be denied.

B. The Summary Judgment Motion

   As noted above, the unamended Answer admits every material allegation of fact contained in the Notice and provides a factual predicate for granting Petitioner's summary judgment motion. Respondent advances two arguments in opposition to that motion.
   First, it is apparently argued that, because Petitioner caused Respondent to believe that a September, 1990 attempt by Respondent to settle this case had been accepted by the FDIC, Petitioner is estopped from further prosecuting this case. I must reject this argument since I do not believe that a reasonable man could conclude that the FDIC's September 17, 1990 letter to Respondent constituted an acceptance of Respondent's attempt to bring this proceeding to a close. Indeed, that letter explicitly sets forth the intended recommendation of Petitioner's Regional Director that this action be carried forward. Accordingly, I find Respondent's argument to be without factual support.
   Respondent next argues that Section 325.4(c)(1) of the FDIC Rules, 12 C.F.R. §325.4(c)(1), deprives Petitioner of authority to institute an action against Respondent pursuant to 12 U.S.C. §1818(a). That regulation contains the following provision:

    A bank with a ratio of primary capital to total assets of less than three percent which has entered into and is in compliance with a written agreement with the FDIC . . . to increase its primary capital ratio to such level as the FDIC deems appropriate and to take such other action as may be necessary for the insured bank to be operated in a safe and sound manner, will not be subject to a proceeding by the FDIC pursuant to 12 U.S.C. §1818(a) on account of its primary capital ratio.

In support of its argument, Respondent asserts the following uncontested facts: (1) on September 28, 1988, Respondent entered a Stipulation and Consent to the Issuance of an Order to Cease and Desist, (2) that stipulation was accepted by Petitioner's Regional Director in an October 10, 1988 letter to Respondent, (3) pursuant to that stipulation, a cease and desist order was issued to Respondent on October 18, 1988 and (4) that order was effective by its terms on October 28, 1988. It is undisputed that Respondent effected timely compliance with all affirmative provisions of that order, save those dealing with Respondent's primary capital. The parties differ as to whether Respondent com-
4 Respondent also apparently contends that it should be allowed to amend the pro se Answer because it held a belief during September, 1990 that it had complied with all relevant regulatory requirements and that the FDIC intended to rescind the Notice in this proceeding. That contention is immaterial to any question before me, and the record contains no factual support for the belief purportedly held by Respondent.

5 This finding is supported by the cogent and compelling factual analysis found in paragraphs four through nine of "Response of the Federal Deposit Insurance Corporation to Respondent's Motion for Leave to Amend," which analysis is hereby adopted and incorporated by reference.
{{6-30-92 p.A-1830.16}}plied with the primary capital requirements set forth in paragraph 1(a) of the order:
       Within 60 days after the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director of the FDIC's Dallas Regional Office ("Regional Director") and the Banking Commissioner for the State of Texas ("Commissioner") to increase its primary capital. The capital plan shall cause the Bank to achieve, within 120 days after the effective date of this Order, and maintain thereafter, for so long as this Order is in effect, adjusted primary capital equal to or greater than 7.0 percent of the Bank's adjusted total assets.

Respondent argues that this provision constitutes a written agreement to increase primary capital, the existence of which bars this proceeding under 12 C.F.R. §325.4(c)(1).
   Accepting arguendo Respondent's contention that the consent order constitutes a written agreement within the meaning of Section 325.4(c)(1), there remains the issue of whether Respondent was ever "in compliance" with such an agreement. It is uncontested that (1) Respondent submitted the capital plan required by the order in a timely fashion and (2) Respondent did not achieve an adjusted primary capital ratio of at least seven percent within 120 days of the order's effective date. After considering the arguments advanced by the parties, I am of the opinion that paragraph 1(a) of the consent order, although inartfully drafted, required Respondent to achieve a seven percent adjusted primary capital ratio within 120 days, not merely to submit a plan intended to accomplish that result. In any event, the proper construction of paragraph 1(a) of the order is moot given Respondent's admission that it violated the order's primary capital requirements.6For the foregoing reasons, I find that issuance of the Notice in this proceeding was not barred by 12 C.F.R. §325.4(c)(1).7Accordingly, I further find that Petitioner is entitled to summary judgment.

FINDINGS OF FACT8

   1. As of May 5, 1989, Respondent was:
   (a) a Texas corporation with a place of business in Hawkins, Texas;
   (b) an "insured depository institution" within the meaning of 12 U.S.C. §1813(c); and
   (c) subject to the Federal Deposit Insurance Act, 12 U.S.C. §§1811-1831k, the Rules and Regulations of the FDIC, 12 C.F.R. Ch. III, and the laws of Texas.
   2. As of May 5, 1989:
   (a) Respondent's primary capital equaled $783,000;
   (b) Respondent's adjusted primary capital equaled $783,000;
   (c) Respondent's total adversely classified assets equaled $2,838,000 or 316.39 percent of total equity capital and reserves;
   (d) Respondent's adjusted Part 325 total assets equaled $24,204,000; and
   (e) Respondent's total loans equaled $9,499,000.
   3. As of May 5, 1989, Respondent was in an unsafe or unsound condition to continue operations as an insured depository institution in that it had an inadequate level of capital protection for the kind and quality of assets it held.
   4. As of May 5, 1989, Respondent was engaged in hazardous lending and lax collection practices in that it had an excessive volume of poor quality loans in relation to its total loans.
   5. As of May 5, 1989, Respondent was in violation of a cease and desist order, was 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 depository institution, in that:
   (a) Respondent was operating with inadequate capital and reserves;
   (b) Respondent was operating with an excessive volume of poor quality assets;
   (c) By failing to achieve and maintain adjusted primary capital equal to or greater than seven percent of its adjusted total assets, Respondent was in violation of the cease and desist order issued October 18, 1988; and
   (d) Respondent was operating with management whose policies and practices were detrimental to Respondent and jeopardized the safety of its deposits.


6 Respondent's Answer at 3.

7 Petitioner also argued that Section 325.4(c)(1) was not applicable because this proceeding is based on two grounds other than Respondent's "primary capital ratio"—violation of a cease and desist order and operation with management whose policies and practices were detrimental to Respondent. This argument tends to beg the question since the factual basis for both alternative grounds is Respondent's alleged primary capital inadequacy.

8 These finding are based on those set forth in Petitioner's proposed order recommending summary judgment.
{{6-30-92 p.A-1830.18}}removed from the capital forebearance program. The 8 percent mandated by the cease-and-desist order was reinstated.
   Many problems were revealed by the May 5, 1989, examination, particularly with the Bank's capital level and asset quality. It therefore received a copy of FDIC's Notice to Primary Regulator of Findings directing corrective action that included, but was not limited to, increasing primary capital by $2,000,000. That capital infusion did not occur and an examination on September 7, 1990, evidenced the same problems. On that date, the Bank's primary capital ratio had dropped to 1.37 percent. The FDIC thus determined that the Bank remained in an unsafe and unsound condition and issued a Notice of Intention to Terminate Insured Status, Findings, and Order Setting Hearing ("Notice") on October 25, 1990. The Bank filed an Answer to the Notice and requested another examination, which occurred on April 12, 1991. At that time, the Bank's primary capital ratio was 2.10 percent. Again,
   It was noted that earnings were inadequate to augment capital and that a longneeded substantial infusion still had not occurred.
   Following prehearing matters, this case was tried at Oklahoma City, Oklahoma, on May 29–30, 1991. Extensive briefs were subsequently submitted by both parties. On August 20, 1991, the ALJ issued a decision recommending that insurance be terminated. Although he considered the Bank's overall financial condition, he focused primarily on capital, and applied the FDIC regulations controlling capital maintenance (12 U.S.C. Part 325). Under those regulations, Respondent was severely undercapitalized, and had been since prior to the entry of the cease-and-desist order in 1982. The ALJ noted that even the Bank projected that it would be four more years until it could achieve a primary capital ratio of 5.95 percent. He determined that this long-term capital deficiency rendered the Bank's condition unsafe or unsound, posed a threat to the Bank Insurance Fund, and warranted termination of deposit insurance.
   Respondent filed exceptions to the Recommended Decision. All motions, rulings, memoranda, briefs, transcripts and exhibits, as well as the Recommended Decision, are part of the record.

REQUEST FOR ORAL ARGUMENT

   Respondent submitted a Request for Oral Argument before the Board, which was unopposed by FDIC Enforcement Counsel. The Bank alleges that due to the unique facts in this case and the recent favorable earnings performance, oral argument should be granted.
   However, the grant of a Request for Oral Argument is an extraordinary matter within the discretion of the Board. 12 C.F.R. §308.17. The Board has previously discussed those circumstances in which it would grant such a request. See, In the Matter of Harold Hoffman, 2 P-H FDIC Enf. Dec. ¶5140; FDIC Docket No. FDIC-85-42b, 1 P-H FDIC Enf. Dec. ¶5062. After considering the Respondent's request, the Board finds none of those circumstances in the instant case. The factual and legal arguments are fully set forth in the parties' submissions; oral argument will not aid the Board in this matter; and Respondent will not be prejudiced by the lack of oral argument. Accordingly, the Board denies Respondent's Request for Oral Argument.

DISCUSSION

A. Statutory and Regulatory Background

   It is uncontested that the FDIC has the power to terminate a bank's insured status upon a finding that it is in an unsafe or unsound condition. 12 U.S.C. §1818(a). The key question here, of course, is whether the Bank was in such condition. FDIC regulations provide that "[a]ny bank which has less than its minimum capital requirement is deemed to be engaged in an unsafe or unsound practice." 12 C.F.R. §325.4(b). Section 325.3(a) of the FDIC's regulations requires banks to maintain at least the minimum capital set forth in the regulations. Furthermore, section 325.4(c)(2) provides 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.1Moreover, under section 8(a)(2) of the FDI Act, the Board may terminate insurance of an


1 An insured bank operating with less than three percent primary capital is by definition operating in an unsafe or unsound condition. 12 C.F.R. §325.4(c).
{{6-30-92 p.A-1830.19}}institution if it or its directors have violated any law, regulation, order, written condition imposed by the FDIC, or agreement entered into with the FDIC.

B. Enforcement Counsel's Assertions

   Enforcement Counsel alleges that, due to the Bank's inadequate capital, poor asset quality, lax management policies, and failure to comply with the 1982 cease-and-desist order, it is operating in an unsafe or unsound condition and its Federal Deposit Insurance should be terminated. The extremely low primary capital ratio is the chief basis upon which the FDIC seeks to terminate insurance, and the issue was accorded extensive analysis by the ALJ.
   An Order to Cease and Desist ("Order") was issued on December 23, 1982, against the Bank, requiring, inter alia, that it maintain a primary capital-to-asset ratio of at least 8 percent. FDIC Ex. 20.2In an examination conducted by the FDIC on May 5, 1989, the Bank had a primary capital to Part 325 total assets ratio of 1.59 percent. FDIC Ex. 2, p. 3. At the September 7, 1990, examination, the Bank's ratio of primary capital to Part 325 total assets fell to 1.37 percent. FDIC Ex. 3, p. 3. At the April 12, 1991, examination, the Bank's ratio of primary capital to Part 325 total assets stood at 2.10 percent. FDIC Ex. 5, p. 3. At each of these examinations, the Bank was assigned a composite CAMEL rating of 5,3the lowest possible rating, indicating critical deficiencies that threaten the viability of the Bank and require immediate remedial attention. Id., pp. 1-a-8, 1-a-2, and 1-a-3, respectively, According to Oklahoma bank examiner James R. Herring, co-examiner in charge of the April 12, 1991, examination, the Bank has a chance of survival only "in the 50 percent or slightly less than that level. . .." (Trans. at 266).
   The ALJ analyzed the history of Respondent's capital adequacy and noted that, even accepting the Bank's projections, it would not achieve the capital level its own consultant believed necessary for at least four years. R.D. at 7. The ALJ correctly concluded that this long-term low capital level threatens the Bank Insurance Fund. R.D. at 7.
   The Board adopts the finding of the ALJ that the Bank has failed to attain and maintain a primary capital to total assets ratio of 8 percent "at any time since entry of the 1982 Order," R.D. at 9, and his conclusion that the Bank violated the Order. R.D. at 13. The Board further adopts the ALJ's conclusions that, as of the dates of the three examinations, the Bank was operating in an unsafe or unsound condition within the meaning of 12 U.S.C. §1818(a) and 12 C.F.R. §325.4(c) (R.D. at 12), and that the Bank's capital inadequacy "poses an immediate and long-term risk to the Federal Deposit Insurance Fund." R.D. at 13.

C. The Bank's Defenses

   [.1] Although Respondent filed numerous exceptions to the ALJ's Recommended Decision, they may be summarized into several major categories. First, the Bank is concerned that the ALJ (and presumably the FDIC) placed undue emphasis on capital in considering whether to terminate insurance, and failed to consider all material factors. This argument is not only wrong, but even if it were correct, it would not further Respondent's position. On page 4 of the ALJ's Decision, the ALJ stated that this case is "principally," not exclusively, about capital adequacy. He went on to cite "other areas of criticism in the examination reports, . . . which could support an order of termination," and acknowledged that, because termination "is typically reserved only for egregious cases of capital inadequacy," he would focus his analysis on capital. Id.
   The ALJ's analytical approach was sound. The Board has long recognized that the overriding concern in determining whether to terminate insurance is the adequacy of an institution's capital. FDIC Docket No. FDIC-80-33a, 1 P-H Enf. Dec. ¶5007 (1981); FDIC Docket No. FDIC-82-73a, 1 P-H Enf. Dec. ¶5025 (1984); FDIC Docket No. FDIC-87-4a, 2 P-H Enf. Dec. ¶5133 (1989).

   [.2] Next, Respondent objects to the omission of net income data for June, July, and


2 Citations in this decision shall be as follows
Recommended Decision —"R.D. at ____."
Transcript —"Trans. at ____."
Exhibits—"Ex. ____."

3 The term "CAMEL" is an acronym for the five major factors upon which a bank is rated, i.e., capital adequancy, asset quality, management, earnings, and liquidity.
{{6-30-92 p.A-1830.20}}August, 1991, which purportedly evidences its improving financial condition. While acknowledging on page 4 of its Brief in Support of Exceptions to the Recommended Decision, Findings, Conclusions, and Proposed Order of the ALJ ("Exceptions Brief") that this data is not a part of the record of the hearing in this matter, Respondent urges the Board to consider the net income figures in determining whether to terminate insurance. The Bank alleges that, due to the "crucial importance and relevance" of these figures (Id.), they should be considered as evidence of Respondent's viability and its ability to augment capital to achieve minimum regulatory requirements "within a reasonable period of time." Id. at 5.
   The Board agrees with Respondent that this data should be considered. In FDIC-87-120a, 2 P-H Enf. Dec. ¶5136 (1989), on page A-1452, the ALJ recognized that "given the seriousness of [termination], 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." Here, the ALJ could not consider the data in question, as it covers the time period arising only after the hearing. The Board has considered the supplemental income information provided by Respondent in its Exceptions Brief, but finds that it does not evidence sufficient improvement so as to overcome a finding that the Bank is operating in an unsafe or unsound condition. Respondent's own expert witness stated during the hearing that a minimum injection of $750,000 is required to restore the capital to appropriate levels. Trans. at 262. The $87,427.00 earned over the 1991 summer months4falls far short of an amount sufficient to replenish Respondent's grossly deficient capital.
   Even accepting Respondent's claimed primary capital ratio of 2.73 percent as of August 30, 1991,5the Bank is still operating in an unsafe or unsound condition. Section 325.4(c) of the FDIC's regulations, 12 C.F.R. §325.4(c), provides that any bank with a primary capital-to-assets ratio of less than 3 percent is deemed to be in an unsafe or unsound condition. Moreover, the minimum requirement for a healthy, sound bank is a primary capital ratio of 5.5 percent.612 C.F.R. §325.3(b). Although the data submitted by Respondent for June, July, and August 1991 may indicate some apparent improvement in the Bank's capital condition, it is insufficient to elevate it above the 3 percent presumption of unsafe or unsound condition.7
   Additionally, Respondent is relying entirely upon retained earnings to replenish its capital in order to eventually become financially sound. The $87,427.00 in income, while a definite improvement over past performance, does not alter the fact that the Bank has been severely undercapitalized since December 1982, and it has failed to infuse capital, even when it received a copy of the FDIC's Notice to Primary Regulator of Findings issued in December 1989 that the Bank must raise capital by $2 million and take other corrective actions. The Bank has been operating in an unsafe or unsound condition for many years, and the improved net income for the summer of 1991 does not change that fact. That income alone does not increase the Bank's primary capital ratio to the 5.5 percent minimum level required by the regulations.812 C.F.R. §325.3(b).

   [.3] On the basis of the alleged improvement in its financial condition resulting from the improved earnings discussed above, Respondent urges the Board to adopt a proposed alternative remedy, granting a "reasonable probationary period of time so that it may continue on its road to recovery." Respondent's Exceptions Brief, p. 7. In its Post-Hearing Brief, p. 11, Respondent re-


4Respondent's Exceptions Brief, p. 5

5Id.

6The Board notes that the evidence in this record establishes that Respondent is not a "sound" bank. In addition to deficient capital and an excessive quantity of poor quality assets, Respondent was found in the most recent examination to have apparently violated Federal and State laws and to persist in lacking effective, qualified management.

7It must be noted that this data is unverified and represents only one aspect of the Bank's total financial condition. While it is put forth by Respondent as evidence of the Bank's ability to generate profit and increase capital, such "profit" may be illusory because it fails to account for loan losses. In fact, the Report of Condition ("Call Report") prepared and filed by Respondent in June 1991 reveals that the Bank lost $53,000for the first six months of 1991.) Although that Call Report is not part of the record in this mater, it is filed with the Board and is a publicly available document).

8Furthermore, the Bank's other problems, e.g., poor asset quality, lax management policies, and failure to comply with the Order, have not been eliminated.
{{6-30-92 p.A-1830.21}}quests an "additional corrective period of up to twelve months," and cites as precedent for such corrective period FDIC Docket No. FDIC-80-33a, 1 P-H Enf. Dec. ¶5007 (1981) and FDIC Docket No. FDIC-87-120a, 2 P-H Enf. Dec. ¶5136 (1989).
   The Bank's reliance on these cases as precedent, however, is misplaced. In the latter, at A-1446, the Board rejected a similar request by an institution in a financial condition similar to Respondent's, determining that "nothing in the record indicates that a sound corrective period would result in substantial improvement of the Bank's condition." In the former case, the Board directed that insurance be terminated, but provided to set aside that Order in the event that, thirty days prior to the date of termination, the Bank increased its capital, reserves, and subordinated debt by at least $5 million. That condition is distinguishable from Respondent's proposal, which seeks to extend the effective date of the insurance termination for up to one year, while at the same time, Respondent has presented no evidence that would create a realistic prospect for it to raise the required amount of capital in a reasonable period of time. Here, a further corrective period would not be in the best interest of the Bank Insurance Fund or the Bank's depositors. Assuming arguendo that Respondent's proposal were adopted, upon the expiration of the corrective period, ten years would have elapsed since the Bank was first ordered to correct its capital deficiency. In the Board's view, forbearance over such a protracted period under the facts of this case is not practical and creates too great a risk to the Bank Insurance Fund.
   Finally, in further support of its proposal, Respondent asserts that its "continued operation is essential to provide adequate depository services to the community of Healdton." Exceptions Brief, p. 2. The ALJ rejected this contention, and found that Healdton's residents had "reasonable access" to another bank ten miles away. R.D. at 8. The Board concurs with the ALJ's finding.

CONCLUSION

   The Board has fully examined the record and finds no material modification of the ALJ's Recommended Decision required.
   The Bank has been found to be in an unsafe or unsound condition to continue operations as an insured bank and thus presents an undue insurance risk to the FDIC. Accordingly, the Board finds that an order terminating the insured status of the Bank should be issued and should require the Bank to provide notice of such termination of insured status to its depositors pursuant to section 308.62 of the FDIC Rules and Regulations, 12 C.F.R. §308.62.

ORDER TERMINATING FEDERAL
DEPOSIT INSURANCE

   IT IS HEREBY ORDERED, that the insured status of the Bank of Healdton, Healdton, Oklahoma, is terminated effective as of the close of business sixty days from the date of this Order.
   IT IS FURTHER ORDERED, that, pursuant to 12 C.F.R. §308.62, 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 308.62 of the FDIC Rules of Practice and Procedures, 12 C.F.R. §308.62, as follows:

NOTICE

____, 1992
1. The status of the Bank of Healdton, Healdton, Oklahoma, 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 ____, 1992.
   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 ____, 1992, 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 ____, 1992, will re- {{6-30-92 p.A-1830.22}}duce the insurance coverage by the amount of such withdrawals.

Bank of Healdton
Healdton, Oklahoma

There may be included in such notice, with the written approval of the FDIC, any additional information or advice the Bank may deem desirable.
   IT IS FURTHER ORDERED, that the Bank, not later than thirty days from the date of this Order, shall publish in no fewer than two issues of a local newspaper of general circulation in Healdton, Oklahoma, 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 of termination of the insured status 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 10th day of December, 1991.

/s/ Hoyle L. Robinson
Executive Secretary

______________________________
RECOMMENDED DECISION

In the Matter of
Bank of Healdton
Healdton, Oklahoma
(Insured State Nonmember Bank)

JAMES L. ROSE, Administrative Law
Judge:

STATEMENT OF THE CASE

   This matter is before me upon a Notice by the Federal Deposit Insurance Corporation to terminate the Federal Deposit Insurance of the Bank of Healdton (herein the Bank), pursuant to 12 U.S.C. §1818(a).
   It was initiated by the FDIC issuing a Notification To Primary Regulator Of Findings dated December 19, 1989, wherein the Bank was given 30 days to take corrective action found necessary to return it to a safe and sound condition. This included increasing primary capital by $2,000,000. Following the failure of the Bank to increase its capital as required, on October 25, 1990, the FDIC issued its Notice Of Intention To Terminate Insured Status, Findings, And Order Setting Hearing. The Bank filed an answer, and following prehearing matters, the case was tried at Oklahoma City, Oklahoma, on May 29, 1991.
   The FDIC and the Bank appeared by counsel and subsequent to the hearing, both submitted extensive proposed findings of fact, conclusions of law, briefs and reply briefs. Upon the record as a whole, including submissions by counsel, I hereby make the following findings, conclusions and recommended decision:

I. The Facts

   The Respondent is a small commercial bank, and is the only financial institution located in Healdton, a town of about 3,000 in south central Oklahoma. The nearest alternative bank is 10 miles from Healdton. (Tr. 131, 132)
   The Bank has been of regulatory concern for several years, and in 1982 stipulated to an Order to Cease and Desist with the FDIC. (FDIC Ex. 20) Among other things, this order required the Bank to increase its equity capital and maintain it at 8 percent of its total assets. The Bank has never complied with this requirement, though in 1986 the FDIC modified its order to allow the Bank to participate in the capital forbearance program. (FDIC Ex. 21)
   The Bank's capital plan under the forbearance program called for a ratio of total equity capital and reserves to total assets of 5.46 percent by December 31, 1988. It achieved a ratio of 5.33 percent. However, by the examination as of May 5, 1989, its primary capital ratio was 1.59 percent and it was taken off the capital forbearance program. The 8 percent required by the Cease and Desist Order was thus reinstated. (FDIC Ex. 2)
   As a result of this examination, the FDIC {{6-30-92 p.A-1830.23}}examiner concluded that the Bank's earnings were inadequate for capital augmentation and that to achieve a 5.46 percent ratio, an infusion of $1,052,000 would be needed. To achieve 8 percent, the Bank would need $1,813,000. The asset quality was found to have deteriorated which was having a "devastating impact on capital." Other significant problems were found such that the Bank was give a Uniform Financial Institutions Rating of 5.
   This examination triggered the Notification to Primary Regulator of Findings issued by the FDIC on December 19, 1989, which included as corrective action that the Bank increase its primary capital by $2,000,000.
   The Bank was reexamined as of September 7, 1990. Among other things, the Bank's primary capital ratio was found to be 1.37 percent and its adversely classified assets to total equity capital and reserves was 435 percent. The Bank was again assigned a CAMEL rating of 5. (FDIC Ex. 3)
   The last joint examination of the Bank was conducted as of April 12, 1991. (FDIC Ex. 5) At this examination the primary capital ratio was 2.1 percent and adversely classified items to total equity capital and reserves was 289 percent. Again, it was noted that earnings were inadequate to augment capital and that a substantial infusion was needed but had not occurred. The Bank's CAMEL rating was 5.

II. Contentions of the Parties

   The FDIC alleges that given the Bank's inadequate capital, poor asset quality, lax management policies and failure to comply with the 1982 Cease and Desist Order, it should be found to be in an unsafe and unsound condition and its Federal Deposit Insurance should be terminated.
   Counsel for the Respondent contends that the Bank is no longer in an unsafe or unsound condition and argues that it is "operationally viable," that its problems with asset quality have "bottomed out" and by its conservative projections, the primary capital to asset ratio will be 2.89 percent by year-end 1991, improving to 5.95 percent by the end of 1995. Since its condition is improving, and since it is the only Bank in town and for 10 miles, the FDIC Board should exercise its discretion and not order termination of its deposit insurance.
   III. Analysis and Concluding Findings
   This case is principally about capital adequacy and asset quality. There are other areas of criticism in the examination reports, particularly including management, which could support an order of termination given the broad authority of Section 1818(a). However, insurance termination is an extreme sanction and is typically reserved only for egregious cases of capital inadequacy. Therefore, this analysis will focus on capital.
   The FDIC concluded in 1982 that the Bank needed to achieve and maintain an equity capital and reserves ratio of 8 percent. The Bank agreed and signed a consent cease and desist order with this as a provision. Then in 1986 the FDIC agreed to modify the order to allow the Bank maintain a primary capital ratio of 5.46 percent, which it almost achieved by December 1988 with 5.33 percent. But then capital fell off quickly such that by the examination of May 5, 1989, the primary capital ratio was 1.59 percent. As of September 5, 1990, the primary capital ratio was 1.37 percent and as of April 12, 1991 it was 2.10 percent.
   Based on its analysis of its trends, the Respondent maintains that the primary capital ratio will increase: 1991 to 2.89 percent; 1992 to 3.20 percent; 1993 to 4.09 percent; 1994 to 4.99 percent; and, 1995 to 5.95 percent.
   While capital is not the only indicator of a bank's condition, it is certainly one of the most important. Without adequate capital a bank has no cushion for possible loan losses. Further, it is through capital that asset growth is funded. Thus, the FDIC Board has consistently held that banks must have certain minimum capital:

    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 unusually high risks. In the latter cases, a higher level of capital is appropriate. 1 PH FDIC Enf. Dec. ¶5024 at 5553 (1984).

   This follows from the regulations on capital maintenance. 12 C.F.R. Part 325. Thus 12 C.F.R. §325.3(a) requires banks to maintain at least the minimum capital set forth in the regulations. Section 325.4(c) states that any bank with a primary capital to total as- {{6-30-92 p.A-1830.24}}sets ratio of less than 3 percent is deemed to be in an unsafe or unsound condition within the meaning of 12 U.S.C. § 1818(a), while a bank with a ratio equal to or greater than 3 percent may be operating in an unsafe or unsound condition. Indeed, the minimum capital requirement for a bank "whose overall financial condition is fundamentally sound, which (is) well-managed and which (has) no material or significant financial weaknesses" "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." 12 C.F.R. § 325.3(a) and (b).
   In short, the starting point for an analysis of capital adequacy is a primary capital ratio of 5.5 percent. Then depending on other considerations specific to the bank, that may be adjusted up. But in any case, where primary capital falls to a ratio of less than 3 percent, the bank is conclusively presumed to be operating in an unsafe and unsound condition.
   In 1982 the FDIC administratively determined that this Bank needed an equity capital ratio of 8 percent and the Bank signed a consent cease and desist order incorporating such a requirement. The Bank was admitted to, then discharged from, the capital forbearance program which would have allowed it to maintain a primary capital ratio of 5.46 percent. In any event, except for this short period in 1986, since 1982 the FDIC has found this Bank's overall condition to require an equity capital ratio of 8 percent — a level it has not come close to achieving.
   By the Bank's most optimistic projection, it will achieve a primary capital ratio of 5.95 percent by the end of 1995. Even if such would bring the Bank's capital to an adequate level, this is too long a period for the Bank to operate in an unsafe and unsound condition.
   The results of the most recent examination clearly show that the Bank's current condition is unsafe and unsound. Its primary capital to total assets is 2.10 percent (projected by the Bank to be just 2.56 percent by year-end 1991) and its classified items to total equity capital and reserves is 289.07 percent. This means that if just 35 percent of the classified items become unbankable, the Bank would be insolvent. The Bank was given a Uniform Financial Institutions Rating of 5, indicating broad and significant weaknesses and an extremely high near term probability of failure.
   According to Oklahoma bank examiner James R. Herring, co-examiner in charge of the April 12 examination, some newly implemented policies have been beneficial, however, "Management of the bank to me has been unstable. That has been the biggest problem and it's still unstable today." (Tr. 267) He did say that the bank does have a chance of surviving — maybe "in the 50 percent or slightly less than that level. ..." (Tr. 266)
   The conditions reported as of the April 12, 1991, examination do not differ significantly from those reported in the previous examinations. I therefore reject the Bank's contention that its problems are in the past and that it is "operationally viable." Absent a substantial infusion of capital, the Bank poses a significant risk to depositors and the insurance fund.
   The Bank offered the testimony of Charles Stuart, who was hired as a consultant by the Bank in late April 1991 to review operations, loans and management and to help prepare for this hearing. In his opinion, the quality of the loan portfolio is "fair and improving," (Tr. 218) the Bank's loan problems have "bottomed out," (Tr. 224) management controls are effective (Tr. 235), and management is not deficient (Tr. 240). He concluded that the Bank is "operationally viable," meaning that over time it will have sufficient earnings to augment capital. (Tr. 242) However, he agreed with accessing a CAMEL rating of 5 for the Bank (Tr. 260) and stated that it "needs a minimum of $750,000" in additional capital. (Tr. 262) Finally, he offered the opinion that "five and a half percent primary capital with an adequate loan reserve, with an adequate risk profile and with adequate managerial controls is enough to keep the FDIC with a comfort level that their fund is not threatened." (Tr. 264) (An infusion of $750,000 would raise the Bank's primary capital ratio to about 4.9 percent based on the April 12 examination figures.)
   While Stuart may be somewhat more sanguine than the FDIC examiners, he is in basic agreement with them. The Bank needs a substantial capital infusion. But he believes that in time capital will come from earnings. However, even accepting the Bank's projections, it will not reach the capital level Stuart believes necessary for at least {{6-30-92 p.A-1830.25}}four years. At the present, as in the past, the Bank's capital level is too low and it is on this basis the Insurance Fund is threatened.
   I therefore conclude there is nothing in Stuart's testimony which would alter the conclusion drawn from the examination reports that the Bank's insurance ought to be terminated.
   The Bank argues that the FDIC Board has the discretion not to terminate its insurance, even if the Board finds the Bank operating in an unsafe or unsound condition. While this may be, counsel has cited no case where the Board has not terminated the insured status of a bank whose primary capital ratio was less than 3 percent. Nor has independent research disclosed any. To the contrary, where a bank's primary capital is less than the 3 percent, the Board has always ordered termination of insurance, though indicating there may be a case in which the Board would exercise its discretion and refrain from doing so. 2 P-H FDIC Enfd. Dec. ¶5156 (1990). See also, 2 P-H FDIC Enfd. Dec. ¶5133 (1989); 1 P-H Enfd. Dec. ¶5025 (1982).
   The Bank argues in the alternative that the Board should order another corrective period and give it another change to raise the needed capital. Though the Board has sometimes entered such an order, or ordered a stay of insurance termination pending infusion of capital, such is not appropriate here. In those matters the potential capital infusion was in process or was a reasonable enough near term probability to justify delaying the termination of insurance. Here there is simply no indication that the Bank will be able to raise sufficient capital in the near future. Nothing is in the offing. Nor is it reasonable to conclude that the Bank will be able to earn its way to an adequate capital position in any reasonable period.
   Finally, termination of the Bank's insurance, and its resulting closure, would not leave the residents of Healdton without reasonable access to a financial institution. There is a branch of a bank in a town about 10 miles away, which does not seem too distant for a rural area.
   I therefore conclude that the Bank is operating in an unsafe and unsound condition and that its status as a federally insured institution should be terminated. Further, I recommend that the Board not grant an additional corrective period or a stay of its order of termination. Upon the foregoing and the entire record in this proceeding, I hereby issue the following findings of fact, conclusions of law and recommended order:

FINDINGS OF FACT

   1. The Bank is a corporation existing and doing business under the laws of the State of Oklahoma, and maintains its principal place of business in Healdton, Oklahoma. Jt. Stip. 1.
   2. At all material times the Bank has been and is a state non-member bank insured by the FDIC. Jt. Stip. 2.
   3. At all material times the Bank has been subject to the Federal Deposit Insurance Act, 12 U.S.C. § 1811 et. seq., the FDIC Rules and Regulations, 12 C.F.R. Part III, and the laws of the State of Oklahoma. Jt. Stip. 3.
   4. An FDIC Order to Cease and Desist was issued on December 23, 1982, against the Bank, requiring, inter alia, that the Bank maintain an equity capital and reserves to total asset ratio of 8 percent. FDIC Ex. 20.
   5. This Order was modified on December 22, 1986, to allow the Bank to participate in the capital forbearance program. FDIC Ex. 21.
   6. The terms of the 1982 Order were reinstated on a finding that the Bank had failed to implement its plan under the capital forbearance program. FDIC Ex. 2, p-1.
   7. The Bank has failed to attain and maintain an equity capital and reserves to total assets ratio of 8 percent at any time since entry of the 1982 Order.
   8. The Bank's condition as of the May 5, 1989, examination included:
   a. Total equity capital of $1,336,000. Jt. Stip. 7.
   b. Primary capital of $432,000. Jt. Stip. 8.
   c. Adjusted primary capital of $353,000. Jt. Stip. 9.
   d. Adversely classified assets of $5,406, 000 or 334 percent of total equity capital and reserves. Jt. Stip. 10.
   e. Part 325 total assets of $27,171,000. FDIC Ex. 2, p-3.
   f. The ratio of adjusted primary capital to adjusted Part 325 total assets of 1.30 percent. FDIC Ex. 2, p-3.
   g. Adversely classified loans of {{6-30-92 p.A-1830.26}}$3,809,000 represented 19 percent of the Bank's total loans of $14,406,000. Jt. Stip. 12.
   9. The Bank's condition as of the September 7, 1990, examination included:
   a. Total equity capital of $280,000. Jt. Stip. 20.
   b. Primary capital of $381,000. Jt. Stip. 21.
   c. Adjusted primary capital of $346,000. Jt. Stip. 22.
   d. Adversely classified assets of $3,194, 000, or about 435.1 percent of total equity capital and reserves. Jt. Stip. 23.
   e. Part 325 total assets of $27,895,000. FDIC Ex. 3, p-3.
   f. A ratio of primary capital to total assets of 1.37 percent. FDIC Ex. 3, p-3.
   g. Adversely classified loans of $2,370, 000 representing 22.18 percent of the Bank's total loans. FDIC Ex. 3, p-2.
   10. The Bank's condition as the April 12, 1991, examination included:
   a. Primary capital of $556,000. FDIC Ex. 5, p-3.
   b. Total equity capital and reserves of $723,000. FDIC Ex. 5, p-2.
   c. Adjusted primary capital of $551,000. FDIC Ex. 5, p-2.
   d. Part 325 total assets of $26,489,000. FDIC Ex. 5., p-3.
   e. A primary capital to Part 325 total assets of 2.10 percent. FDIC Ex. 5, p-3.
   f. Annualized net income of negative $78,000. FDIC Ex. 5, p-4.
   g. Adversely classified assets of $2,090, 000 amounting to 289.07 percent of total equity capital and reserves. FDIC Ex. 5, p-2.
   h. Overdue loans and leases at 8.99 percent of gross loans and leases. FDIC Ex. 5, p-2.
   i. Adversely classified loans and leases of $1,302,000 amounting to 14.18 percent of total loans and leases. FDIC Ex. 5, p-2.

CONCLUSIONS OF LAW

   1. The FDIC has jurisdiction of this matter pursuant to 12 U.S.C. §§ 1811 and 1833(k).
   2. At all material times, the Bank was a state nonmember bank within the meaning of 12 U.S.C. §§ 1813(e) and 1818(a).
   3. As of the May 5, 1989, examination, the Bank's total capital and primary capital were below the minimum levels required by FDIC regulations.
   4. As of the May 5, 1989, examination the Bank had material and significant financial weaknesses including an excessive volume of poor quality loans in relation to its loan portfolio and an inadequate reserve for loan and lease losses.
   5. As of the May 5, 1989, examination, the Bank had inadequate levels of capital given the kind and quality of its assets.
   6. As of the May 5, 1989 examination, the Bank was operating in an unsafe and unsound condition within the meaning of 12 U.S.C. § 1818(a) and 12 C.F.R. § 325.4(c).
   7. As of the September 7, 1990, examination the Bank's total capital and primary capital were below the minimums required by the FDIC regulations.
   8. As of the September 7, 1990, examination, the Bank had material and significant financial weaknesses, including an excessive volume of poor quality loans in relation to its portfolio and an inadequate reserve for loan losses.
   9. As of the September 7, 1990, examination, the Bank had inadequate levels of capital protection given the kind and quality of assets it held.
   10. As of the September 7, 1990, examination, the Bank's primary capital was such that it is deemed to have been operating in an unsafe and unsound condition pursuant to 12 C.F.R. § 325.4(c).
   11. As of the April 12, 1991, examination, the Bank's total capital and primary capital were belows the levels required by the FDIC regulations.
   12. As of the April 12, 1991, examination, the Bank had material and significant financial weaknesses including an excessive volume of poor quality loans in relation to its loan portfolio and an inadequate reserve for loan and lease losses.
   13. As of the April 12, 1991, the Bank had inadequate levels of capital protection given the kind and quality of its assets.
   14. As of the April 12, 1991, examination, the Bank continued to operate in an unsafe and unsound condition within the meaning of 12 U.S.C. § 1818(a) and 12 C.F.R. § 325.4(c).
   15. The Bank violated the Order to Cease and Desist by failing to achieve and maintain equity capital and reserves of 8 percent {{5-31-93 p.A-1830.27}}of its total assets by December 31, 1983, and each year thereafter.
   16. The Bank violated the Order to Cease and Desist by failing to provide and retain management acceptable to the FDIC and the Bank Commissioner for the State of Oklahoma.
   17. The Bank's capital insufficiency poses an immediate and long-term risk to the Federal Deposit Insurance fund.
   18. The Bank's projections concerning income and capital through year-end 1995 are insufficient to negate the above conclusion.
   19. The Bank's status as an insured institution should be terminated.
   Upon the foregoing findings and conclusions, and the entire record in this matter, I recommend that the FDIC Board of Directors issue the attached Order terminating Federal Deposit Insurance.
   Dated: August 20, 1991.

ORDER TERMINATING FEDERAL
DEPOSIT INSURANCE

   IT IS HEREBY ORDERED, that the insured status of Bank of Healdton, Healdton Oklahoma, ("Bank"), is terminated effective as of the close of business sixty days from the date of this Order Terminating Federal Deposit Insurance ("Order").
   IT IS FURTHER ORDERED, that pursuant to 12 C.F.R. § 308.62, 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 on the books of the Bank. The Bank shall furnish the Federal Deposit Insurance Corporation ("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 on the books of the Bank and the date thereof. Such notice shall meet the requirements of section 308.62 of the FDIC Rules of Practice and Procedure, 12 C.F.R. § 308.62, as follows:

NOTICE

____, 1991
1. The status of the Bank of Healdton, Healdton, Oklahoma, as an insured depository institution, under the provisions of the Federal Deposit Insurance Act, will terminate as of the close of business on the ____ day of ____, 1991;
   2. Any deposits made by you after this 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 of Healdton, on the ____ day of ____, 1991, will continue to be insured, as provided by the Federal Deposit Insurance Act, for 2 years after the close of business on the ____ day of ____, 1991. Provided, however, that any withdrawals after the close of business on the ____ day of ____, 1991, will reduce the insurance coverage by the amount of such withdrawals.

Bank of Healdton
Healdton, Oklahoma 73438

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 suggests that the Bank post the above notice on its doors and at all locations where its depositors 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 Healdton, Oklahoma, 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 such publication.
   IT IS FURTHER ORDERED, that the Executive Secretary of the FDIC is directed to send a copy of the Findings of Fact, Conclusions of Law, and this Order, by certified mail, return receipt requested, to Bank of Healdton, Healdton, Oklahoma, to the Honorable Wayne Osborn, Banking Commissioner for the State of Oklahoma, and to Bruce Heitz, counsel for the Bank.
   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 ter- {{5-31-93 p.A-1830.28}}mination 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 ____ day of ____, 1991.

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