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   [5170C] In the Matter of Bank of Healdton, Healdton, Oklahoma, Docket No. FDIC-89-206a (12-10-91).

   The FDIC Board adopts ALJ's recommendation and terminates the insured status of Bank found to be operating in an unsafe and unsound condition because of its poor capital-to-assets ratio. (This order was terminated by order of the FDIC dated 4-9-92; see ¶9008.)

   [.1] Termination of Insurance—Inadequate Capital
   The overriding concern in determining whether to terminate insurance is the adequacy of an institution's capital.

   [.2] Termination of Insurance—Post-Hearing Evidence
   The board considers post-hearing evidence of Bank's improved net income, but finds improvement is not sufficient to correct institution's severe capital deficiency.

   [.3] Termination of Insurance—Time for Correction
   A probationary corrective period would be contrary to the best interests of Bank's depositors and the insurance fund because Bank has failed to show that it has realistic prospects of restoring its capital within a reasonable time.

In the Matter of

BANK OF HEALDTON
HEALDTON, OKLAHOMA
(Insured State Nonmember Bank)
DECISION AND ORDER
TERMINATING FEDERAL DEPOSIT
INSURANCE

FDIC-89-206a

INTRODUCTION

   This proceeding seeks to terminate the insured status of Bank of Healdton, Healdton, Oklahoma ("Bank" or "Respondent"), upon findings made by the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") 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. After examinations conducted by the FDIC on May 5, 1989, September 7, 1990, and April 12, 1991, the FDIC concluded that, given the Bank's inadequate capital, poor asset quality, lax management policies, and failure to comply with a 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.
   For the reasons set forth below, the Board concludes that termination of insurance is warranted as found by the Administrative Law Judge ("ALJ") in his Recommended Decision, which is adopted and incorporated herein.

PROCEDURAL HISTORY

   In December 1982, the FDIC and Respondent entered into an agreed cease-anddesist order, which, among other things, required the Bank to increase its primary capital and maintain it at 8 percent of its total assets.
   Under the capital forbearance program, 52 Fed. Reg. 26182 (July 13, 1987), this requirement was modified in 1986 to 5.46 percent. The Bank failed to reach either of these levels, but did achieve a ratio of 5.33 percent. However, by May 5, 1989, when the Bank was examined, its primary capital ratio had fallen to 1.59 percent, and it was {{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.1 Moreover, 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-anddesist 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. 20.2 In 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 5,3 the 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. FDIC80-33a, 1 P-H Enf. Dec. ¶5007 (1981); FDIC Docket No. FDIC-82-73a, 1 P-H Enf. Dec. ¶5025 (1984); FDIC Docket No. FDIC87-4a, 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 adequacy, 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-87120a, 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 months4 falls 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, 1991,5 the 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.6 12 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.8 12 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-


4 Respondent's Exceptions Brief, p. 5
5 Id.
6 The 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.
7 It 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 $53,000 for the first six months of 1991.) Although that Call Report is not part of the record in this matter, it is filed with the Board and is a publicly available document).
8 Furthermore, 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 {{6-30-92 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- {{6-30-92 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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