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FDIC Enforcement Decisions and Orders |
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FDIC Board adopts ALJ's recommendation that insurance be terminated because of bank's capital inadequacy, but that the effective date of the termination be delayed so that the bank may be recapitalized or merged into another institution. It also orders delay in publication of the orders, until after the effective date of the termination order, finding that earlier publication could impair the bank's ability to effectuate a merger or achieve an increase in its capital.
[.1] Termination of InsuranceInadequate Capital
[.2] Termination of InsurancePurpose
[.3] Termination of InsurancePost-Examination Evidence
[.4] Termination of InsuranceStay of Effective Date
[.5] Termination of InsuranceDelay in Publication of Order
In the Matter of
This proceeding seeks to terminate the insured status of First State Bank of Marlin, Marlin, Texas ("Bank" or "Respondent"), upon findings made by the Board of Directors ("Board") of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(a),
{{3-31-93 p.A-2000}}that the Bank has engaged or is engaging in unsafe or unsound practices in conducting the business of the Bank and/or is in an unsafe or unsound condition to continue operations as an insured bank. After an examination of the Bank by the FDIC as of May 18, 1990 (the report of which is not in evidence), the FDIC concluded that (1) the Bank is operating with inadequate capital and reserves; (2) the Bank is operating with an excessive volume of poor quality assets; and (3) the Bank is operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits.
Respondent submitted a Request for Oral Argument before the Board, arguing that facts with respect to the improvement in the Bank's financial condition since the February 29, 1992, date used by the ALJ in the Recommended Decision are not fully set forth in the parties' submissions, that oral argument will aid the Board in a case of first impression due to the unique role of the Conservator in operating the Bank, and that without the opportunity to present current financial condition information the Bank will be prejudiced. The request was not opposed by FDIC Enforcement Counsel.
The FDIC initiated this action on October 30, 1990, by issuing to the Banking Commissioner, Texas Department of Banking ("Commissioner") and to the Bank, notice of the FDIC's determinations of the Bank's unsafe or unsound condition and practices in the form of Notification to primary Regulator of Findings of Unsafe or Unsound Practices and/or Condition ("Notification"). The Notification followed an FDIC examination in May 1990 which revealed the following unsafe or unsound conditions, among others: the Bank suffered a net loss of $517,000 for the period January-April 1990; adversely classified loans represented 10.6 percent of total loans; and the ratio of adjusted primary capital to total adjusted Part 325 total assets equaled 2.9 percent. In July 1990, the FDIC terminated further participation by the Bank in the Agricultural Loss Deferral Program, requiring the Bank to recognize an additional $818,000 in loan losses.
The following data is excerpted from various Exhibits and other pleadings, and the Bank's March 31, 1992 Call Report:5
1. Capital Ratios (%)
3. Past Due Loans
4. Recoveries and Chargeoffs
5. Net Income
This proceeding involves two primary issues, namely (1) should the Board issue an Order terminating insurance, and (2) should the Board stay the effective date of that Order to allow the Respondent an additional period of time to comply with capital maintenance requirements? The Board will address these issues separately.
I. SHOULD THE BOARD ISSUE AN
A. Statutory and Regulatory
[.1] 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 ALJ ruled, and the Board agrees, that
B. The Bank's Defense.
Respondent argues that the prior FDIC cases relied upon by the ALJ in concluding that the Bank's level of adversely classified assets is excessive, namely Docket No. FDIC-80-33a, 1980 FDIC Enf. Dec. at 5084, (P-H) ¶5007, and Docket No. FDIC-86-41b, 1987 FDIC Enf. Dec. (P-H) ¶5092 at 7144, should no longer be considered good precedent, at least with respect to financial institutions located in Texas. Respondent contends that after 1985, the State of Texas experienced the worst depression in the State's history with the result that prices and market values have sunk to an all-time low and with adverse effects on the financial condition of all banks in the State. Therefore, Respondent contends, the level of classified assets of a bank considered excessive prior to 1980 and in mid-1985 is not relevant in determining what level of classified assets should be considered excessive for Respondent in 1991 and 1992.
C. Termination of Insurance is Proper.
The Board adopts that portion of the ALJ's Recommended Decision finding that as of February 29, 1992, the Respondent lacked adequate capital and held excessive adversely classified assets, and concluding that Respondent is in an unsafe or unsound condition and that an Order terminating the insured status of the Bank is appropriate in this proceeding.
II. SHOULD THE BOARD STAY THE EFFECTIVE DATE OF THE ORDER TERMINATING INSURANCE
A. The ALJ's Recommended Decision to Stay the Effective Date of the Order
In his Recommended Decision, the ALJ made the following findings, which he concluded supported allowing the Respondent an additional period in which to attain capital adequacy:
B. Exceptions
FDIC Enforcement Counsel and Respondent have asserted numerous Exceptions to the Recommended Decision to delay effectiveness of the Order. The Board has thoroughly considered all Exceptions in reaching its decision. Those considered significant are discussed below.
1. Petitioner's Exceptions
FDIC Enforcement Counsel's arguments against the recommended delay in termination include the following:
[.2] In determining capital adequacy and whether or not a financial institution is in an unsafe or unsound condition for purposes of a proceeding to terminate insurance, it is proper to take into account the most recent reliable financial information which is part of the record or available to the Board. The termination of insurance sanction does not aim to correct past violations but rather to protect the Fund from present and future risks of loss. Moreover, it is an extremely serious action and should be based upon a full consideration of all reasonably available evidence. Hence, the relevant "history" includes recent history and trends. The insured institution's current financial condition is also relevant. It was for this reason that the Board's March 10, 1992, Order provided for the parties to submit updated financial information.
(3) The ALJ failed to give sufficient consideration to the Insured Institution's Call Report as of December 31, 1991, and to the January 6, 1992, Report of Examination by the Texas Department of Banking, which documents have "sufficient probative value."
[.4] The issue is not whether the Bank is in an unsafe or unsound condition, but whether its current condition poses a low enough risk to the Fund, and a high enough probability of future viability, to justify delaying the termination of insurance. An important factor in making that analysis is the quality and effectiveness of Bank management. For the past fifteen months, Mr. Scamardo has been managing this Bank. The record in this case shows that he has impressive credentials, including eight years of experience as an FDIC bank examiner, nine years as president and chief executive officer of a state bank later converted to a national bank, and seven years as a bank consultant, including having been appointed by the Texas Commissioner as Supervisor of some twelve troubled banks. Resp. Ex. 1. The record also shows that Mr. Scamardo has substantially improved the condition and profitability of the Bank during his conservatorship, as evidenced by the financial data set forth above, has instituted good controls over loans and other assets, reduced expenses, and increased liquidity. See Tr. at 150 to 220. In evaluating the quality of management factor, the Board looks to the record of the managers running the bank, not the title of the manager or the statutory condition of the bank at the time of appointment. If the Conservator here had been appointed to act as or were in fact acting as a liquidator, that fact would be significant in determining the present and future viability of the Bank. But the Conservator testified that his responsibility goes beyond mere caretaker, Tr. at 149, and that the Bank is important to the community and continues to serve the needs of the community, Tr. at 150-151. The operation of the Bank under his stewardship, as well as his vigorous support for allowing the Bank to continue to operate while new ownership is solicited, also belie the argument that a conservator appointed under the Texas banking statute is necessarily a liquidator or a caretaker leading to liquidation. The Board finds that Conservator Scamardo is providing the Bank with quality management.
2. Respondent's Exceptions.
Respondent's exceptions primarily concern the terms of the ALJ's Proposed Order delaying the effectiveness of termination of insurance. The Board has considered all of Respondent's exceptions. In light of the Board's conclusions, it is not necessary to discuss them.
C. A Stay of the Order to Terminate is Appropriate in this Case.
Having reviewed the testimony at the hearing, the financial data concerning Respondent's condition since the May 18, 1990, FDIC examination, and the other Exhibits in the record, the Board finds that the significant recent improvements in the Respondent's financial condition allows the Board to conclude that the risk to the Fund has stabilized and is unlikely to be increased by a delay in termination, that Respondent's chances for continued viability have increased since the date of the Notice, and that it is prudent and in the public interest to stay the effective date of the Order to Terminate Insurance for a period of time so that Respondent may attempt to achieve capital adequacy. In making these determinations, the Board considered many factors to be significant. The Board cites some of the most significant, but cautions that this listing is not comprehensive and that any such determination is entirely a matter of Board discretion. First, the Board adopts and incorporates findings (2) through (7) of the ALJ, R.D. at 5-6, with modifications set forth in footnote.10In addition, the Board finds that gross loans have decreased from approximately $25 million in May 1990 to about $14 million as of March 1992, while bond investments have increased from $6,678,000 in May 1990 to $16,626,000 in March 1992, Tr. at 194; March 31, 1992, Call Report; that past due and non-accrual loans have decreased by 16.5 percent from December 31, 1991, to March 31, 1992, based on the Call Reports; that the ratio of adversely classified assets to total assets has decreased by 29.3 percent, from 15.79 percent to 11.16 percent, between December 31, 1991, and March 31, 1992, based on the Call Reports; that the adjusted primary capital ratio to adjusted Part 325 assets increased from 1.9841 percent to 3.7201 percent from the June 1991 to the January 1992 State examinations; and the ratio of adversely classified assets to equity capital and reserves has decreased from 441.19 percent in June 1991 to 253.97 percent in January 1992, according to the respective State reports of examination, a decrease of 42.4 percent. Based on these factors, the Board concludes that while the risk to the Fund is unacceptably high, the impressive improvements in condition and management of assets from June 1991 through January 1992, which trend appears to be continuing based on the more recent information available, justify a delay in termination of insurance to allow the Bank further opportunity to recapitalize.
[.5] The Board also concludes that publication at this time of this Decision and Order Terminating Federal Deposit Insurance and Order to Stay would seriously threaten the safety or soundness of the Bank.12Therefore, the Board hereby enters an order terminating the insured status of the Bank and an order staying the effective date of the termination order for 60 days with a opportunity for an extension of up to 60 additional days.
IT IS HEREBY ORDERED, that the insured status of First State Bank of Marlin, Marlin, Texas, is terminated effective as of the close of business sixty days from the date of this Order.
1. The status of First State Bank of Marlin, Marlin, Texas, 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 October, 1992.
There may be included in such notice, with the written approval of the FDIC, any additional information or advice the Respondent may deem desirable.
/s/ Robert E. Feldman
IT IS HEREBY ORDERED, that the effective date of the Board of Directors ("Board") of the Federal Deposit Insurance Corporation's (FDIC's) Decision and Order, dated August 4, 1992, shall be stayed for 60 days to provide an opportunity for First State Bank of Marlin, Marlin, Texas ("Insured Institution") to achieve an increase in its capital, or effectuate a merger with another financial institution with an increase in the capital of the resulting institution, in such amount as shall be deemed necessary by the Regional Director (Supervision) of the FDIC's Dallas Regional Office ("Regional Director") to return the Insured Institution or the resulting Insured Institution to viability, in accordance with the Board's Decision. For good cause shown, upon the written request of either the Insured Institution or the Division of Supervision, one or more extensions of this stay may be granted.
/s/ Robert E. Feldman
In the Matter of
On March 1, 1991, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Intention to Terminate Insured Status, Findings, and Order Setting Hearing to The First State Bank of Marlin ("Respondent"), alleging that Respondent was in an unsafe or unsound condition and seeking termination of the Bank's insured status pursuant to Section 8(a) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(a). Respondent demurred by Answer filed March 18, 1991.
Upon consideration of the entire record developed in this proceeding, I have reached a decision in favor of the FDIC. In so holding, I rely upon the following findings of fact and conclusions of law.3
IT IS HEREBY ORDERED, that the insured status of First State Bank of Marlin, Marlin, Texas ("Insured Institution") is terminated effective as of the close of business one hundred eighty (180) days from the date of the Final Decision issued by the Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") in enforcement proceeding FDIC-90-207a.
1. The status of the First State Bank of Marlin, Marlin, Texas, 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 ____, 19____; |
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Last Updated 6/6/2003 | legal@fdic.gov |