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[5179A] In the Matter of First State Bank of Marlin, Marlin, Texas, Docket No. FDIC-90-207a (8-4-92).

   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 Insurance—Inadequate Capital
   Regulations in effect at the time proceedings were initiated permit FDIC to terminate insurance of institution with ratio of primary capital greater than 3 percent but less than 5.5 percent. A ratio of 4.34 percent, with an excessive volume of adversely classified assets (281 percent of capital and reserves), is an unsafe or unsound condition sufficient for an order of termination of insurance.

   [.2] Termination of Insurance—Purpose
   The termination of insurance sanction does not aim to correct past violations but to protect the insurance fund from present and future risks of loss, so recent conditions and trends are relevant to the Board's consideration.

   [.3] Termination of Insurance—Post-Examination Evidence
   Reports by state-appointed conservator, while not entitled to the weight accorded FDIC and state reports of examination, are due more weight than documents prepared by bank insiders. All recent reports have probative value in determining bank's current condition.

   [.4] Termination of Insurance—Stay of Effective Date
   An order to stay the effective date of an order of termination is appropriate where the bank's current unsafe or unsound condition poses a low enough risk to the insurance fund, and a high enough probability of future viability, to justify a delay during which the bank attempts recapitalization.

   [.5] Termination of Insurance—Delay in Publication of Order
   It is in the public interest to delay publication of an order of termination of insurance and an order staying its effective date to protect bank's ability to recapitalize during the stay.

In the Matter of

FIRST STATE BANK OF MARLIN
MARLIN,TEXAS
(Insured State Nonmember Bank)
DECISION AND ORDER
FDIC-90-207a,

INTRODUCTION

   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.
   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, and that it is in the public interest to delay the effective date of the Order to Terminate Insurance, as provided in the Order to Stay Effective Date of Order to Terminate Federal Deposit Insurance. The Recommended Decision of the ALJ is adopted and incorporated herein with certain modifications described below.1

REQUEST FOR ORAL ARGUMENT

   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 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. 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.

PROCEDURAL HISTORY AND
FACTUAL SUMMARY

   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.
   As a condition to the continuation of insured status, the Notification required that the Bank accomplish the following actions within thirty days: (1) increase primary capital by $2,700,000, (2) eliminate from the books all assets or portions of assets classified as "Loss" and not less than 50 percent of the assets classified as "Doubtful" in the May 18, 1990 examination, and (3) retain qualified management.
   One February 5, 1991, the Commissioner appointed James E. Scamardo as Conservator of the Bank ("Conservator"). Joint Stipulation No. 56.
   On March 1, 1991, having determined


1 Citations in this Decision shall be as follows:
Recommended Decision—"R.D. at ____."
Transcript—"Tr. at ____."
Exhibits—"FDIC Ex. ____" or "Resp Ex. ____" or "Resp. Late-filed Ex. ____."
{{3-31-93 p.A-2000.1}}that Respondent had failed to comply with the conditions set forth in the Notification, the FDIC issued a Notice of Intention to Terminate Insured Status, Findings, and Order Setting Hearing ("Notice"). The Bank and the Commissioner were served with the Notice on or about March 4, 1991. The Bank filed its Answer on March 18, 1991.
   A hearing was held on October 9, 1991, in Dallas, Texas, before Administrative Law Judge Steven M. Charno. At the commencement of the hearing, the parties submitted a joint statement of stipulated facts and contested issues, based primarily on financial data from the May 18, 1990, FDIC examination through the June 24, 1991 Texas Department of Banking examination. Two witnesses were heard: Mary C. Dwiggins, FDIC review examiner, Fort Worth office;2and James E. Scamardo, Conservator of the Bank.3Exhibits were proffered, some of which were received in evidence. Following the October 9, 1991, hearing, the parties filed briefs and proposed findings of fact and conclusions of law on December 3, 1991.
   A further hearing was held by Judge Charno on December 17, 1991, at which updated financial information was furnished by the parties, and at which the ALJ indicated that he intended to issue a recommended decision terminating the Bank's insured status but staying the effectiveness of the order to allow the Bank a further period of time to achieve capital adequacy. However, on January 10, 1992, Judge Charno issued an Order continuing the proceeding until July 8, 1992.
   On January 23, 1992, FDIC Enforcement Counsel filed a Request for Interlocutory Review and Supporting Memorandum of Authorities of the ALJ's Order, which the Bank opposed. By Order dated March 10, 1992, the Board granted the Request for Interlocutory Review, vacated the January 10, 1992 Order issued by the ALJ, and remanded the case to the ALJ with instructions to submit the case to the Board pursuant to Rule 38 within 35 days. The Board's Order granted the parties fifteen days from the date issued to furnish to the ALJ updated information on the Bank's financial condition. The ALJ permitted the parties to submit supplementary findings of fact and conclusions of law. On March 23, 1992, Respondent filed updated financial information in the form of five Exhibits4and proposed findings of fact and conclusions of law. On March 25, 1992, the FDIC filed its Supplement to the Record, consisting of proposed findings of fact and conclusions based upon data extracted from the Bank's Call Report as of December 31, 1992.
   On April 13, 1992, the ALJ issued a Recommended Decision ("R.D."), finding that as of February 29, 1992, the Bank lacks adequate capital, that the Bank's level of adversely classified assets is excessive, and that this capital inadequacy constitutes an unsafe or unsound condition in light of the Bank's excessive level of adversely classified assets. R.D. at 4, 5. The ALJ also found that:
2Ms. Dwiggins testified that the Bank needed more than the minimum capital requirements set forth in part 325.3 because it had "no management in place," Tr. at 74; that the Bank's overall financial condition was not fundamentally sound because it was not operating with minimum capital and has a "tremendous asset quality problem," Tr. at 74; and that the Bank should have a minimum capital of 7.5 percent, Tr. at 75–76.

3Conservator Scamardo testified that the Bank was the only independently chartered financial institution in Marlin, a town of about 3,500 persons, Tr. at 150; that he is not acting merely as a caretaker, that the Bank is making some loans, Tr. at 149; that the Bank is not trying to keep its large deposits but rather to keep the smaller deposits and service the same kind of loans and the community, Tr. at 151; that his strategy is to reduce problem loans, only make very, very good new loans, and increase bond investments, Tr. at 194, 195; that in 1991, the Bank had written down Other Real Estate ("ORE") by $450,000 based on conservative appraisals ordered by the Conservator, Tr. at 135; that he did not think further write-downs on ORE will be necessary because of the very conservative appraisals, and that all ORE is currently on the market, Tr. at 135–139; and that as of the time of the hearing, the loan portfolio had stabilized, the trends were positive, he was comfortable with the write-downs, and what was reflected as equity was real equity, Tr. at 183–184. The Conservator further testified that he had reduced overhead, Tr. at 196, and planned to raise service charges in October, 1991, Tr. at 207; that the Bank had an appreciation of $234,000 in the investment portfolio, Tr. at 189; and that the Bank was presently equity solvent and profitable, Tr. at 219.

4Excerpts from the State of Texas Department of Banking January 6, 1992, Report of Examination, Resp. Late-filed Ex. 1; 1991 Statement of Condition and Income, Resp. Late-filed Ex. 2; January-February 1992 Statement of Condition and Income, Resp. Late-filed Ex. 3; May 1990-February 1992 Trend Analysis, Resp. Late-filed Ex. 4; March 18, 1992, letter from Planters and Merchants State Bank to Respondent, Resp. Late-filed Ex. 5, all of which were received in evidence by the ALJ.
{{3-31-93 p.A-2000.2}}no evidentiary basis exists for requiring the termination to take place immediately. Indeed, the record is replete with evidence suggesting that Respondent should be allowed an additional period in which to attain capital adequacy. R.D. at 5.
   The ALJ recommended issuance of an order terminating insurance which by its terms would not become effective for 180 days from the date of the Final Decision issued by the Board. Exceptions to the ALJ's Recommended Decision and Order 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.
   FDIC Enforcement Counsel has argued throughout that at the date of the hearing the Bank was in an unsafe or unsound condition based upon its capital inadequacy and overall financial condition; that subsequent financial data does not show significant improvement; and the fact that the Bank is under the control of a state-appointed Conservator is further evidence of the Bank's unsafe or unsound condition. Respondent has not seriously disputed that the Bank is in an unsafe or unsound condition due to its capital inadequacy and excessive level of poor quality assets. Rather, it argues that recent significant improvements in its financial condition establish that the Bank is equity solvent, is profitable, well managed by the Conservator, and hence there is no immediate risk to the Bank Insurance Fund ("Fund") and the Bank should be granted an additional period of time in which to attain capital adequacy.

EVIDENCE CONCERNING
CAPITAL ADEQUACY/UNSAFE
& UNSOUND CONDITION

   The following data is excerpted from various Exhibits and other pleadings, and the Bank's March 31, 1992 Call Report:5

1. Capital Ratios (%)

Primary Cap./Adj. P.C./Tier 1 Cap./
Part 325 TAAdj 325 TATotal Assets
5/18/90
FDIC Exam4.71652.9376
6/24/91
State Exam2.13251.9841
6/30/91
Call Rept1.99721.9972.4877
8/31/91
Bank Stmt2.39612.3961.6569
12/31/91
Call Rept3.91513.91511.7204
1/6/92
State Exam3.92843.72011.6932
3/31/92
Call Rept4.22294.22292.0143


5Both the Notification dated October 30, 1990, and the Notice dated March 1, 1991, are based upon the FDIC Report of Examination dated May 18, 1990. The Joint Statement of Stipulated Facts ("Jt. St.") contains excerpted financial data from the May 18, 1990, FDIC examination, from Call Reports dated March 31, 1990, through June 30, 1991, from monthly Statements of Condition of the Bank dated April 1990 through April 1991, and from the State of Texas Report of Examination dated June 24, 1991. At the administrative hearing, FDIC Enforcement Counsel introduced as FDIC Ex. 7 the Bank's Statement of Condition dated August 31, 1991, and as FDIC Ex. 8 an "ANALYSIS OF CAPITAL" of the Bank, based on the FDIC examination dated April 30, 1990, the State examination dated June 24, 1991, the Call Report dated June 30, 1991, and the Bank's Statements of Condition dated July 31, 1991, and August 31, 1991. Following the Board's Order dated March 10, 1992, the Respondent submitted updated financial information which included excerpts from the State Report of Examination dated January 6, 1992, and the Bank's Statement of Condition dated February 29, 1992. The FDIC submitted a Supplement to the Record which included financial data from the December 31, 1991, Call Report. Respondent's Exceptions to the Recommended Decision incorporate an affidavit of Conservator Scamardo dated May 5, 1992, setting forth certain financial data as of April 30, 1992. The Board takes notice of the March 31, 1992, Call Report recently filed by the Bank, which has not been cited by either party.
{{3-31-93 p.A-2000.3}}
2. Adversely Classified Assets

Adv.Cl.As.Adv.Cl.As./Ad.Cl.As./
($ in thousands)TA (%)Eq.Cap.Res (%)
5/18/90
FDIC Exam4,7769.19158.99
6/24/91
State Exam6,45914.24441.19
6/30/91
Call Rept5,950613.41644.64
8/31/91
Bank Stmt5,950613.65536.04
12/31/91
Call Rept5,950615.79367.28
1/6/92
State Exam4,16011.03253.97
3/31/92
Call Rept4,160711.16255.21

3. Past Due Loans

Past Due Loans ($ in thousands)

on AccrualNon-acc. LoansTotal

Call Rept30-8990+
3/31/903423631,2331,938
6/30/908182063901,414
12/31/901,3541901,2172,761
3/31/915901,0991,4233,112
6/30/914568432,1993,498
12/31/911,3203871,2252,932
3/31/92307--2,1412,448

4. Recoveries and Chargeoffs

TotalTotal
RecoveriesChargeoffs
1/1/90-12/31/90$22,760$948,051
1/1/91-12/31/91545,000305,000
1/1/92-3/31/9237,00096,000

5. Net Income

1/1/90-12/31/90$(948,000)
1/1/91-12/31/914,000
1/1/92-3/31/9265,000

DISCUSSION

   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
ORDER TERMINATING INSURANCE

A. Statutory and Regulatory
Requirements.

   [.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


6Substandard assets and 50 percent of doubtful assets per State Report of Examination dated June 24, 1991.

7Per State Report of Examination dated June 6, 1992.

{{3-31-93 p.A-2000.4}}this proceeding is governed by the capital standards in former Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, because this proceeding was initiated before the April 10, 1991, revisions to Part 325 became effective. Former section 325.4(c) provided that any insured bank with a ratio of primary capital to total assets that is less than three percent is deemed to be operating in an unsafe or unsound condition pursuant to section 8(a) of the FDI Act; and that a bank with a ratio equal to or greater than three percent may be operating in an unsafe or unsound condition. The FDIC is not precluded from bringing an action pursuant to 12 U.S.C. §1818(a) where an insured bank has a ratio of primary capital equal to or greater than three percent, former section 325.4(c)(2), 12 C.F.R. §325.4(c)(2) (1989). The ALJ found that as of February 29, 1992 (based upon Respondent's Late-filed Exhibits), Respondent's leverage capital ratio had grown to 4.34 percent. However, the ALJ ruled that the appropriate minimum ratio of capital to total assets under former section 325.3(b) is 5.5 percent; that the Bank's adversely classified assets as of February 29, 1992, were excessive in light of prior decisions of the Board; and concluded that "Respondent's capital inadequacy, when viewed in the context of the potential risk engendered by its large volume of poor quality assets, constitutes an unsafe or unsound condition" (footnote omitted). R.D. at 5.8The ALJ held that this unsafe or unsound condition is sufficient basis for an order terminating Respondent's status as an insured depository institution. R.D. at 5. FDIC Enforcement Counsel did not take exception to this ruling.

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.
   The Board rejects Respondent's contention. The level of risk to the Fund caused by a particular ratio of adversely classified assets to total assets is no lower in 1992 than in 1980 or 1985. Indeed, the risk to the Fund increases as the number of insured banks experiencing high levels of adversely classified assets increases. Moreover, the level of Respondent's adversely classified assets as a percentage of its capital and reserves as of February 29, 1992 (281 percent), significantly exceeded those in the cases cited (142 percent and 162 percent respectively).

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:
   (1) It was conceded by the FDIC's expert witness that, since February 1991, Conservator Scamardo has adequately minimized risk to the FDIC's insurance fund.
   (2) All major write-offs which might adversely impact net income had been taken by the Respondent by the time the hearing commenced.
   (3) Respondent, under the Conserva-


8The ALJ found that Respondent's ratio of adversely classified assets to total assets, which equalled 13.65 percent on August 31, 1991, had declined to 12.49 percent on February 29, 1992. R.D. at 4.
{{3-31-93 p.A-2000.5}}tor's stewardship, experienced positive operating income from July 1991 through February 1992.
   (4) Respondent's overhead expenses have been significantly reduced by the Conservator.
   (5) As a result of reduced expenditures and increased income, Respondent enjoyed a net profit of $4,031 for calendar year 1991 and a year-to-date net profit of $32,807 as of February 29, 1992.
   (6) The FDIC's insurance fund is protected from immediate risk by appreciation in Respondent's bond portfolio of $332,000.
   (7) Another financial institution recently sought information relevant to purchasing Respondent. R.D. at 5, 6 (footnotes omitted).
   Concluding that the deterioration in Respondent's financial condition appears to have been reversed and the Bank is being ably managed by an objective party appointed by its primary regulator, the ALJ held that immediate termination of deposit insurance is not necessary and recommended that the order terminating insurance not be issued for 180 days after the issuance of a final decision in this matter, citing as precedent Docket No. FDIC-80-33a, supra.

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:
   (1) The recommendation "largely ignores the history of the Insured Institution."

   [.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.
   (2) The ALJ placed undue reliance on Respondent's Late-filed Exhibits, except for the January 6, 1992, State Report of Examination, because the accuracy of these documents was not established.
   [.3] In general, the Board agrees that Call Reports and FDIC and state reports of examination are entitled to more weight than internal bank reports, especially if the latter have not been subjected to the opportunity for cross examination. In this case, however, the fact that the Bank's reports were prepared by the Conservator rather than bank insiders entitles them to more weight than such documents might otherwise be accorded. In any event, in reaching a decision the Board has reviewed all financial information in the record as well as the December 31, 1991, and the March 31, 1992, Call Reports.

   (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."
   The ALJ found the December 31, 1991, Call Report and the January 6, 1992, State Report of Examination to be of less probative value on the question of Respondent's present financial condition than the more recent data provided by the Bank's February, 1992 Statement of Condition. The Board disagrees, and holds that all recent financial data, including the Bank's February 1992 Statement of Condition, Resp. Late-filed Ex. 3, and the January 6, 1992 State Report of Examination and recent Call Reports, have probative value in determining the Bank's current condition and the significance of trends of improvement. The ALJ should not have placed exclusive reliance on the February 1992 Statement of Condition. However, the Board finds that the financial data in that report is consistent with data in the January 6, 1992, State Report of Examina- {{3-31-93 p.A-2000.6}}tion and the December 31, 1991, and March 31, 1992, Call Reports.
   (a) The January 6, 1992, State Report of Examination shows "in part, continued weaknesses in the quality of assets," and no improvement in the ratio of overdue loans and leases to gross loans and leases.
   The Board agrees with this observation. However, FDIC Enforcement Counsel's assertion focuses on only two selected pieces of financial data out of the large body of relevant available data, and for that reason is not determinative. For example, the January 6, 1992, State Report of Examination,9also shows a significant improvement in classified assets, and in the ratio of classified assets to equity capital and reserves, in comparison to the June 24, 1991, State Report of Examination. Classified assets have been reduced from $6,459,000 to $4,160,000, a reduction of 35.5 percent; and the ratio of classified assets to equity capital and reserves has been reduced from 441.19 to 253.97 percent.
   (b) The data in the December 31, 1991, Call Report "should have been regarded as binding admissions" and incorporated into the Recommended Decision.
   As previously stated, the Board has reviewed the December 31, 1991, Call Report and has considered that data in making its decision in this case.
   (c) The operating results in the Bank's Statements of Condition for January and February 1992 are "suspect" and "inconclusive".
   As stated earlier, the Board considers the Statements of Condition prepared by the Conservator to be reliable and to have probative value. In determining the current level of risk to the Fund and whether delaying the effective date of the Order is prudent and in the public interest, the Board has considered and reviewed that financial data as well as the data in the recent Call Reports and the January 6, 1992, State Report of Examination.
   (4) The ALJ's conclusion that no evidentiary basis exists for requiring the termination to occur immediately is erroneous for the following reasons:
   (a) The ALJ's conclusion that the appropriate "base line" or minimum capital ratio by which to measure the Bank is 5.5 percent, per former Part 325.3(b), is wrong in light of the testimony of FDIC Review Examiner Mary C. Dwiggins that the Bank would require a leverage ratio equal to 7.5 percent, Tr. at 74-76, and the Bank's leverage ratio as of December 31, 1991, and February 29, 1992, was substantially below the 7.5 percent baseline.
   The ALJ's reference to the 5.5 percent minimum ratio, R.D. at 4, was made in the context of determining that Respondent is in an unsafe or unsound condition for purposes of ordering termination of insurance. The Board does not read the reference as precluding a higher minimum for purposes of determining whether the Order to Terminate Insurance should be stayed, and the Board agrees that a higher ratio may well be appropriate for that purpose. The Board also notes that Review Examiner Dwiggins assumed that the fact that the Bank was run by a conservator required the conclusion that it "lacked management" in proposing a minimum capital ratio of 7.5 percent. As the Board discusses more fully below, the Board rejects this assumption. More importantly, this argument ignores the determinations made in two recent cases, discussed below, in which the Board concluded that the public interest would be served by delaying termination of insurance because the Board found that the banks in question had reasonable chances of achieving capital adequacy within a reasonable time.
   (b) There is no substantial evidence that the risk of loss to the Fund has been reduced to an acceptable level, based on the fact that the January 6, 1992, State Report of Examination and the February 29, 1992, Statement of Condition show that adversely classified assets equaled 260.2 percent and 281 percent, respectively, of total equity capital and reserves.
   Again, selective data cited by FDIC Enforcement Counsel must be viewed in light of all recent data, including the significant and continuing trends of improvement since June 1991. The issue here is not whether the risk of loss has been reduced to an acceptable level, but whether the risk has been sufficiently minimized so that it is reasonable and prudent to allow the Bank additional time to augment capital.
   (c) The ALJ has ignored the true significance of the fact that the Commissioner, in appointing a conservator for the Bank, was


9Resp. Late-filed Ex. 1.
{{3-31-93 p.A-2000.7}}required to find under the Texas statute that the bank is in an unsafe or unsound condition.

   [.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.
   (d) The ALJ's finding that the FDIC's witness conceded that Conservator Scamardo had adequately minimized risk to the insurance fund has no basis in the record.
   The Board agrees that Review Examiner Dwiggins made no such concession, and the Board does not adopt the ALJ's finding in that regard. Nevertheless, for the reasons stated below, the Board finds that the current level of risk to the Fund justifies a delay in the termination of insurance.
   (e) Respondent's income in 1991 and 1992 is insufficient to restore the Bank to capital adequacy within the reasonably immediate future.
   This objection also misses the mark. Respondent's 1991 and 1992 net income is indicative of a positive trend in the profitability and condition of the Bank. The Conservator argues that projections based solely on operations show that the Bank can achieve capital adequacy over the next two years, Resp. Late-filed Ex. 4. However, the Board bases its conclusion to delay termination primarily on the Bank's projected ability to find a new source of additional capital in the near term, based on its improved condition and profitability.
   (f) The appreciation in value of the Bank's bond portfolio does not adequately protect the Fund from "immediate risk," as found by the ALJ.
   While the Board does not agree with this finding of the ALJ, the appreciation in value of the Bank's bond portfolio is one of the factors on which the Board bases its determination that the current level of risk to the Fund is sufficiently low that a delay in termination of insurance is reasonable. See the discussion of the The First State Bank, Hawkins, Texas, case below.
   (g) The fact that another financial institution has recently sought information relevant to a possible purchase of the Bank is irrelevant and immaterial citing FDIC-87-4a, 2 P-H FDIC Enf. Dec. ¶5133.
   FDIC Enforcement Counsel misreads the cited decision. In that case the bank, whose condition was significantly more adverse than our present case, argued at the time of the hearing that a capital infusion of $2 million under a stock purchase agreement was "imminent," then claimed in its Exceptions that it was working with third parties toward recapitalization within the next several months. The Board did not rule the assertion to be {{3-31-93 p.A-2000.8}}irrelevant but rather not credible in light of previous claims which failed to materialize.

   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.
   These determinations are consistent with the two recent Decisions of the Board cited earlier. In The First State Bank, Hawkins, Texas, Docket No. FDIC-89-190a (Nov. 19, 1991), the bank's adjusted primary capital ratio as of October 1990 was 1.5 percent, and the ALJ recommended termination of insurance on August 5, 1991. The September 30, 1991, Call Report showed $16,894, 000 total assets, $104,000 equity capital and a $347,000 loan reserve. The Tier 1 capital ratio was 0.55%.
   While The First State Bank proceeding was under advisement by the Board, the Respondent proposed a $700,000 offering of preferred stock and submitted a projection which according to the Regional Director (Supervision) of the FDIC's Dallas Regional Office, in a memorandum to the Board dated November 12, 1991:

    suggest[ed] that earnings retention coupled with the equity infusion will gradually restore the bank's capital structure to an acceptable level over the next several years. Problem assets have been reduced in volume by one-half since the 1988 examination, the allowance for loan and lease losses is at an acceptable level, GIC bonds reflect a market value in excess of book value, and significant (additional) writedowns on other real estate are not anticipated.

   The Board issued a Decision and Order Terminating Federal Deposit Insurance dated November 19, 1991. On the same date, having determined that considering "recent
10Finding (2) shall read: "Significant additional writedowns on other real estate which might impact net earnings are not anticipated." Finding (6) shall read: "Appreciation in Respondent's bond portfolio of $332,000 as of February 29, 1992, provides some current protection to the Fund against risk."
{{3-31-93 p.A-2000.9}}progress made by the Insured Institution in obtaining the capital necessary to restore its financial soundness and viability," the Board determined that "the provision of additional time to consummate this recapitalization effort is in the best interest of the Bank Insurance Fund." The Board issued an Order to Stay Effective Date of Order Terminating Federal Deposit Insurance for sixty days, which was later extended to give the bank additional time to raise the required capital. By April 16, 1992, the bank had raised $500,000 in new capital. The Regional Director recommended that the proposed infusion would appear to minimize risk of near-term failure and subsequent cost to the Bank Insurance Fund. On April 20, 1992, the Board issued an Order Setting Aside the Order Terminating Insurance.
   In Chickasha Bank & Trust Company, Chickasha, Oklahoma, Docket No. FDIC-90-22a (July 1, 1991), the bank's primary capital to total capital ratio declined from 3.75 percent as of August 23, 1988, to 3.33 percent and 3.06 percent as of September 15, 1989, and October 12, 1990, respectively. During the same period, the bank's primary capital declined and its classified assets increased to 452 percent. The Board adopted the Recommended Decision of the ALJ and issued a Decision and Order To Terminate Federal Deposit Insurance dated July 1, 1991. On June 28, 1991, the bank indicated to FDIC Enforcement Counsel that it was willing to raise $1,001,000 in new capital, and on July 1, 1991, FDIC Enforcement Counsel moved to stay the effective date of termination of insurance. Consequently, the Board also issued an Order to Stay for sixty days, later extended, and the bank increased its capital by $1,001,000 on October 25, 1991. The Regional Director, in a memorandum dated October 31, 1991, stated that with the capital infusion, Tier 1 capital ratio had increased to 3.57 percent, that adversely classified assets had declined to 159.17 percent, and that with projected earnings Tier 1 capital was expected to increase to 4.54 percent by December 31, 1992, and to 5.31 percent by December 31, 1993.
   Both of these recent cases demonstrate a willingness by the Board to stay the effective date of an Order to Terminate Insurance if the Board finds that there is recent progress toward achieving the level of capital necessary to return the insured institution to viability and that additional time to continue the recapitalization efforts is in the best interest of the Fund.
   In the instant case, unlike The First State Bank and Chickasha Bank & Trust Company cases cited above, the Bank has already made significant recent progress under the management of the Conservator in increasing capital and capital ratios and in decreasing problem assets. While the Bank has not yet proposed a recapitalization plan to the Board's knowledge, the Conservator is seeking a buyer. Resp. Late-filed Ex. 5. The most troublesome area is classified loans, and the ratio of past due loans to total loans.11However, the ratio of adversely classified loans and leases to total loans and leases decreased by 20 percent between the June 1991 and January 1992 State examinations. Resp. Late-filed Ex. 1. In this case, as in The First State Bank case, the allowance for loan and lease losses is at an acceptable level, Tr. at 185–188, GIC bonds reflect a market value in excess of book value, Resp. Late-filed Ex. 4, March 31, 1992, Call Report, and significant (additional) writedowns on other real estate are not anticipated, Tr. at 135. The Board concludes that an Order to Stay the Order to Terminate Insurance is appropriate in this case.
   The Board having concluded that the Board's Order to Terminate should be stayed in the present matter to permit an opportunity for recapitalization, the Executive Secretary received a letter dated July 27, 1992 from counsel to Respondent transmitting a non-binding letter of intent for the merger of the Bank into Citizens State Bank of Woodville, Woodville, Texas ("Woodville")
11However, the Board is mindful of the fact that non-accrual loans as of March 31, 1992, include $979,000 in FDIC-controlled loans and $853,000 in FmHA guaranteed loans. At the administrative hearing, the Conservator described his frustration at being unable to collect on, or improve the classification of, loans and other assets controlled by the FDIC. Tr. at 154–157. Also note the Conservator's affidavit dated May 5, 1992, indicates that two administrative hearings in April before the Farmers Home Administration resulted in recommendations that two FmHA claims be paid which would increase the Bank's capital and reserves by approximately $144,800 and result in the reduction of the Bank's non-accrual loans by approximately $392,000, which would decrease the ratio of past due loans to total loans by about 13 percent. The affidavit also indicates net income for the month of April of $23,873 and year-to-date income of $88,409.
{{3-31-93 p.A-2000.10}}(which owns the stock of the Bank), and a non-binding commitment from Woodville's parent holding company to contribute or arrange for the contribution of additional capital of up to $1,500,000 into the resulting institution, and requesting a stay of 90 days. On July 30, 1992, the Division of Supervision recommended that the Board stay any termination order issued for 60 days with a provision to extend the stay for an additional 60 days. These events further support the Board's conclusion to permit time for a resolution to be implemented by Respondent.

   [.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.

ORDER TERMINATING FEDERAL DEPOSIT INSURANCE

   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.
   IT IS FURTHER ORDERED, that, pursuant to 12 C.F.R. §308.62, the Respondent, 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 Respondent. The Respondent 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 Respondent at the depositor's last address of record as shown on the books of the Respondent and the date thereof. Such notice shall meet the requirements of section 308.123 of the FDIC Rules of Practice and Procedures, 12 C.F.R. §308.123, as follows:

NOTICE

September ____, 1992

   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.
   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 First State Bank of Marlin, Marlin, Texas, on the ____ day of October, 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 October, 1992, will reduce the insurance coverage by the amount of such withdrawals.

First State Bank of Marlin

Marlin, Texas

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


12The State examination report of January 6, 1992, states that, "An earlier announcement by the FDIC's Washington office relating to the imminent termination of deposit insurance was published in the Waco newspaper. Deposit withdrawals exceeded $2,000,000 as public confidence diminished. The Conservator has attempted to counter these ill effects by establishing an Advisory Council of local citizens. Mr. Scamardo indicates a reasonable level of success and continued contribution from this group."
{{3-31-93 p.A-2000.11}}ter, or rescind this Order of termination of the insured status of the Respondent. 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 4th day of August, 1992.

/s/ Robert E. Feldman
Deputy Executive Secretary

ORDER TO STAY EFFECTIVE DATE
OF ORDER TO TERMINATE FEDERAL
DEPOSIT INSURANCE

   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.
   IT IS FURTHER ORDERED, that during the period of this Order to Stay and any extension thereof, the Regional Director shall report to the Board upon the progress being made by the Insured Institution no less often than every thirty (30) days;
   IT IS FURTHER ORDERED, that the Regional Director is hereby delegated authority, in his discretion, to extend this stay by up to 60 days, upon a written request by the Insured Institution made at least 10 days before expiration of the stay; provided, however, that no extension may be so granted unless a satisfactory binding commitment for adequate additional capital or for a merger in which the resulting institution will be adequately capitalized has been submitted to the Regional Director prior to or at the time such extension is granted.
   IT IS FURTHER ORDERED, that at the conclusion of the 60 day stay and any extension thereof, in the event that the Insured Institution has not been merged into another institution or been otherwise recapitalized, the Regional Director shall, within five business days submit a report to the Board as to the current status of any merger/recapitalization effort. Such report shall also contain the most recent financial information available concerning the Insured Institution and a recommendation from the Regional Director concerning disposition of this matter. Such report shall be served upon counsel for the Insured Institution by overnight delivery. Counsel for the Insured Institution shall have five days from the date of delivery of such report to submit additional information to supplement the report.
   IT IS FURTHER ORDERED, that after expiration of the 60 day stay and any extension thereof, the stay shall remain in effect until such time as the Board shall have received, considered, and acted upon the report from the Regional Director and any submission from Insured Institution or its counsel.
   The Board finds that publication at this time of its Decision and Order and this Order to Stay would seriously threaten the safety or soundness of the Insured Institution. Accordingly, pursuant to 12 U.S.C. §1818(u),
   IT IS FURTHER ORDERED, that publication of the August 4, 1992, Decision and Order and this Order to Stay shall be delayed during the period of this Order to Stay and any extensions thereof.
   The Board retains full jurisdiction over this matter and may rescind this Order to Stay at any time upon the recommendation of the Regional Director. At such time, the Board's Decision and Order shall be immediately effective, as though no Order to Stay had been entered.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 4th day of August, 1992.

/s/ Robert E. Feldman
Deputy Executive Secretary

{{3-31-93 p.A-2000.12}}

________________________________________________
RECOMMENDED DECISION

In the Matter of
The First State Bank of Marlin
Marlin, Texas
(Insured State Nonmember Bank)
Steven M. Charno, Administrative Law
Judge:

   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.
   A hearing was held before me on October 9, 1991 in Dallas, Texas. At the commencement of the hearing, the parties submitted an extensive joint statement of stipulated facts and contested issues. On December 3, 1991, the parties filed post-hearing briefs. By Order issued January 10, 1992, I continued this proceeding for 180 days. On March 10, 1992, my Order was summarily reversed by the FDIC's Board of Directors which directed the parties to file updated financial information on or before March 25 and ordered me to issue a decision in this proceeding on or before April 13. In order to allow the parties to preserve their positions for appeal and the Board of Directors to be made aware of any change in those positions, I permitted the parties to submit supplementary findings of fact and conclusions of law. Respondent submitted five exhibits1and proposed additional findings and conclusions under due date of March 25, 1992.2

DISCUSSION

   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
   Based upon its examination of Respondent as of May 18, 1990, the FDIC initiated this proceeding by issuing a Notification to Primary Regulator of Findings ("Notification") to the Banking Commissioner, Texas Department of Banking ("Commissioner"), on October 30, 1990. The Notification alleged that Respondent was in an unsafe or unsound condition with an inadequate level of capital protection for the kind and quality of assets it held. As a condition to the continuation of insured status, the Notification required that Respondent accomplish the following actions within thirty days: (1) increase primary capital by $2,700,000, (2) eliminate from the books, by charge-off or otherwise, all of the assets classified as "loss" and not less than 50 percent of the assets classified as "doubtful" in the May 1990 examination and (3) retain qualified management.
   After the expiration of the thirty-day corrective period provided in the Notification, the FDIC determined that Respondent had failed to increase its primary capital by $2,700,000. The failure to fully comply with such a condition, standing alone, has been held to justify the issuance of an order terminating insured status. Docket No. FDIC-80-33a, 1981 F.D.I.C. Enf. Dec. (P-H) ¶5007 at 5077; Docket No. FDIC-87-120a, 1989 F.D.I.C. Enf. Dec. (P-H) ¶5136 at A-1444. See also In re The First State Bank, No. FDIC-89-190a (F.D.I.C., Nov. 19, 1991).
   The FDIC also contends that Respondent's insured status should be terminated because the Bank was in an unsafe or unsound condition by reason of capital inadequacy.


1These documents are identified as follows: Excerpts from the State of Texas Department of Banking January 6, 1992 Report of Examination shall be Respondent's Late-filed Exhibit no. 1; 1991 Statement of Condition and Income shall be Respondent's Late-filed Exhibit no. 2; January-February 1992 Statement of Condition and Income shall be Respondent's Late-filed Exhibit no. 3; May 1990-February 1992 Trend Analysis shall be Respondent's Late-filed Exhibit no. 4; March 18, 1992 letter from Planters and Merchants State Bank to Respondent shall be Respondent's Late-filed Exhibit no. 5. In the absence of any objection, Respondent's Late-filed Exhibits nos. 1 through 5 are received in evidence.

2Although it filed certain data extracted from Respondent's regulatory filings, the FDIC did not take advantage of the opportunity to supplement its proposed findings or conclusions.

3Proposed findings and conclusions not treated in the ensuing discussion are found to be moot in light of the findings and conclusions which were adopted, to be immaterial to any matter properly before me or to be statements of general principle which lack probative value in the absence of a specific factual context. Findings and conclusions appearing below but not discussed are based on the parties' stipulations or upon admissions contained in post-hearing pleadings.
{{3-31-93 p.A-2000.13}}Most of the factual assertions relied upon by the FDIC in support of this contention were not contested. Respondent argued, however, that its financial condition was improving and that, as of the date of the hearing, the recovery of a loan guaranty claim of approximately $523,000 was imminent.4In order to resolve the question of Respondent's condition, two preliminary rulings are necessary. First, the standard by which I must assess Respondent's condition is not one of "viability," but one of capital adequacy. Second, the applicable capital standard is found in the former Part 325 of the FDIC's Rules and Regulations. A subsequent standard, which became effective April 10, 1991, employs a narrower definition of capital and a lower minimum acceptable capital. Because this proceeding was initiated before the effective date of new Part 325, the level of Respondent's "Tier I" capital is not material to the issue of whether Respondent is in an unsafe or unsound condition.5
   Respondent's Conservator6has submitted monthly operating reports to the FDIC and the Texas Department of Banking. Respondent reduced this data to tabular form, and the resulting documents were received in evidence without objection.7Based on these documents, I make the following findings of fact concerning Respondent's capital adequacy as of February 29, 1992:8
   (1) Respondent's primary capital, which equalled $1,100,000 on August 31, 1991, had grown by 50.4 percent to $1,670,000 on February 29, 1992.
   (2) Respondent's total adversely classified assets, which equalled $5,950,000 or 500 percent of total equity capital and reserves on August 31, 1991, had declined by 15.3 percent to $4,691,000 or 281 percent of capital and reserves on February 29, 1992.9
   (3) Respondent's total assets, which equalled $46,324,000 on August 31, 1991, amounted to $37,563,000 on February 29, 1992.
   (4) Respondent's ratio of primary capital to total assets, which equalled 2.55 percent on August 31, 1991, had grown by 70 percent to 4.34 percent on February 29, 1992.
   (5) Respondent's ratio of adversely classified assets to total assets, which equalled 13.65 percent on August 31, 1991, had declined to 12.49 percent on February 29, 1992.
   The appropriate "base line", i.e., minimum, ratio of capital to total assets under 12 C.F.R. §325.3(b) is 5.5 percent. See Docket No. FDIC-86-41b, 1987 F.D.I.C. Enf. Dec. (P-H) ¶5092 at 7143. Because the Bank's primary capital ratio equalled 4.34 percent on February 29, 1992, I find that Respondent lacked adequate capital. The question of whether this capital inadequacy constitutes an unsafe or unsound condition must be answered in light of Respondent's overall financial condition and must take into account the level and severity of its adversely classified assets. See Docket No. FDIC-87-120a, supra. Respondent had adversely classified assets which equalled 281 percent of its equity capital and reserves on February 29, 1992. In light of prior decisions by the FDIC, I conclude that this level of adversely classified assets is excessive. See, e.g., Docket No. FDIC-80-33a, 1980 F.D.I.C. Enf. Dec. at 5084 [142 percent]; Docket No. FDIC-86-41b, 1987 F.D.I.C. Enf. Dec. (P-H) ¶5092 at 7144, 7147 and 7151 [162 percent]. I therefore conclude that Respondent's capital inadequacy, when viewed in the context of the potential risk engendered
4In post-hearing briefs, the parties advised me that Respondent had, in fact, recovered $520,254.41 on a loan guaranty claim.

5At the hearing and in its post-hearing brief, the FDIC acknowledged that the primary capital standards of former Part 325 governed the disposition of this proceeding. This concession notwithstanding, the FDIC observed that Respondent would have to comply with the new standard if its status as an insured depository institution were not terminated. Given my ruling, this observation will not be addressed.

6On February 5, 1991, the Commissioner appointed James E. Scamardo to be Respondent's conservator.

7Respondent's Late-filed Exhibits nos. 2–4.

8Figures relating to examinations of Respondent as of May 1990 and June 1991, as well as data concerning time periods preceding August 31, 1991, are of limited evidentiary value for two reasons: (1) the issue at the hearing was whether Respondent was then in an unsafe or unsound condition, not whether it has been in such a condition at some point in the past, and (2) Respondent had effected sufficient non-recurring charge-offs, loan restructurings and recoveries to effectively preclude any determination of whether there was a trend in earnings or capital adequacy over the twelve months preceding the hearing. Similarly, I find Respondent's December 31, 1991 Call Report and the report of the Bank's examination as of January 6, 1991 to be of less probative value on the question of Respondent's present financial condition than the more recent data set forth in text.

9Forty-four percent of Respondent's classified assets on February 29, 1992 consisted of loans and Other Real Estate controlled by the FDIC.
{{3-31-93 p.A-2000.14}}by its large volume of poor quality assets,10constitutes an unsafe or unsound condition. I also conclude that this condition provides an independent basis for the issuance of an order terminating Respondent's status as an insured depository institution.
   Although the record provides a factual foundation for terminating Respondent's deposit insurance, I am forced to conclude that no evidentiary basis exists for requiring the termination to take place immediately. Indeed, the record is replete with evidence suggesting that Respondent should be allowed an additional period in which to attain capital adequacy. That evidence is as follows:
   (1) It was conceded by the FDIC's expert witness that, since February 1991, Conservator Scamardo has adequately minimized risk to the FDIC's insurance fund.
   (2) All major write-offs which might adversely impact net income had been taken by the Respondent by the time the hearing commenced.11
   (3) Respondent, under the Conservator's stewardship, experienced positive operating income from July 1991 through February 1992.
   (4) Respondent's overhead expenses have been significantly reduced by the Conservator.12
   (5) As a result of reduced expenditures and increased income, Respondent enjoyed a net profit of $4,031 for calendar year 1991 and a year-to-date net profit of $32,807 as of February 29, 1992.
   (6) The FDIC's insurance fund is protected from immediate risk by appreciation in Respondent's bond portfolio of $332,000.13
   (7) Another financial institution recently sought information relevant to purchasing Respondent.14
   Since the deterioration in Respondent's financial condition appears to have been reversed and because the Bank is being ably managed by an objective party appointed by its primary regulator, I do not believe that immediate termination of deposit insurance is necessary. Accordingly, I recommend that the order terminating insurance not be issued for 180 days after the issuance of a final decision in this matter. There exists precedent for such a deferral. See, e.g., Docket No. FDIC-80-33a, supra.
   Upon the foregoing findings of fact and conclusions of law, and upon the entire record in this proceeding, I hereby recommend issuance of the following:

ORDER TERMINATING FEDERAL
DEPOSIT INSURANCE

   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.
   IT IS FURTHER ORDERED, SECOND, that, pursuant to 12 C.F.R. §308.123, the Insured Institution shall give notice to all of its depositors of the termination of its insured status (the "Depositor Notification"), not later than one hundred fifty (150) days from the date of this Order. The Depositor Notification shall be mailed to each depositor at his/her/its last known address of record, as reflected upon the books of the Insured Institution. The Insured Institution shall furnish the FDIC with a copy of the Depositor Notification mailed and an affidavit executed by the person who mailed such notification, which affidavit evidences compliance with all of the foregoing requirements. The Depositor Notification shall satisfy the requirements of section 308.123 of the FDIC's Rules of Practice and Procedure, 12 C.F.R. §308.123, by making the statements set forth in the attached notice marked "APPENDIX."
   With the prior written approval of the Regional Director of the FDIC's Dallas Regional Office, the Insured Institution may include in the Depositor Notification any additional information which it may deem advisable, provided that such additional infor-


10Conservator Scamardo credibly opined that the threat of loss to the insurance fund from Respondent's problem assets was smaller than the loss which would result from a termination of insured status. I am, however, precluded from considering any costs associated with the termination of Respondent's insured status. See, e.g., In re Boundary Waters State Bank, 1990 F.D.I.C. Enf. Dec. (P-H) ¶5156.

11I credit the Conservator's unrebutted testimony to this effect.

12I credit the Conservator's uncontroverted testimony to this effect.

13This figure is calculated as of February 29, 1992.

14See Respondent's Late-filed Exhibit no. 5.
{{5-31-93 p.A-2000.15}}mation is not inconsistent with the preceding paragraphs and the information required by C.F.R. §308.123 is set forth in a conspicuous manner on the first page of the Depositor Notification. The Board strongly suggests that the Insured Institution post the Depositor Notification on its doors and at all locations where its depositors make deposits and withdrawals.
   THIRD, that no later than one hundred fifty (150) days from the date of this Order, the Insured Institution shall publish the Depositor Notification in at least two issues of a newspaper of general circulation in Marlin, Texas, and shall furnish the FDIC with proof of such publication in the form of a certification form the publisher and a tear sheet or clipping evidencing such publication.
   FOURTH, that the Executive Secretary of the FDIC be, and hereby is, directed to immediately send this Order, by United States Certified Mail, Return Receipt Requested, to the Insured Institution and copies of said Order to the Honorable Kenneth W. Littlefield, Banking Commissioner for the State of Texas, and to Bruce A. Heitz, Esq., counsel of record for the Insured Institution in this proceeding.
   FIFTH, that if the Insured Institution is closed for liquidation within one hundred fifty (150) days from the date of this Order, the notices prescribed in paragraphs SECOND and THIRD shall not be given to depositors.
   SIXTH, that the Board of Directors of the FDIC retains full jurisdiction over these proceedings during the interim between the date of issuance of this Order and the effective termination date, as fixed in paragraph FIRST, with full power and authority to amend, modify, alter or rescind this Order Terminating Insured Status of the subject Insured Institution. 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.
   Done at Arlington, Virginia, this 13th day of April, 1992.

APPENDIX

NOTICE

   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____;
   2. Any deposits made by you after this date, whether the same be new deposits or additions to existing deposits, will not be insured by the Federal Deposit Insurance Corporation;
   3. Insured deposits in First State Bank of Marlin on the ____ day of ____, 1992, will be continue to be insured, as provided by the Federal Deposit Insurance Act, for two (2) years after the close of business on the ____ day of ____, 19____; provided, however, that any withdrawals after the close of business on the ____ day of ____, 19____, will reduce the insurance coverage by the amount of such withdrawals.

FIRST STATE BANK OF MARLIN
101 Live Oak
P.O. Box 720
Marlin, Texas 76661

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Last Updated 6/6/2003 legal@fdic.gov