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   [5185] In the Matter of Investors Bank & Trust Company, Gretna, Louisiana, Docket No. FDIC-91-109a (9-15-92).

   Board adopts ALJ's recommendation to terminate insurance of institution found to be in an unsafe or unsound condition, and in violation of a cease and desist order requiring it to increase capital. (The effective date of this order is modified by ¶9011, dated 9-30-92.)

   [.1] Termination of Insurance—Inadequate Capital
   Bank is operating in an unsafe or unsound condition, and violates the FDI Act, when its ratio of Tier 1 to total assets is less than 2 percent.

   [.2] Termination of Insurance—Violation of Cease and Desist Order
   Failure to increase capital as required by a cease and desist order is a violation of the FDI Act which warrants termination of deposit insurance.

In the Matter of

INVESTORS BANK & TRUST
COMPANY

GRETNA, LOUISIANA
(Insured State Nonmember Bank)
DECISION
FDIC-91-109a

   This proceeding was instituted by a Notice of Intention to Terminate Insured Status, Findings, and Order Setting Hearing ("Notice") issued by the Federal Deposit Insurance Corporation ("FDIC") on September 10, 1991. The Notice alleged that Investors Bank & Trust Company, Gretna, Louisiana ("Bank") had violated a cease-and-desist order and/or had engaged or was engaging in unsafe or unsound practices in the conduct of its business and/or was in an unsafe or unsound condition to continue operating as an insured depository institution within the meaning of section 8(a) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(a). On October 4, 1991, the Bank filed an Answer to the Notice, denying the alleged violations.
   [.1] A hearing was held before Administrative Law Judge Arthur L. Shipe ("ALJ") on February 11, 12, and 13 in New Orleans, Louisiana. On May 26, 1992, the ALJ issued a Recommended Decision concluding that the Bank's insured status should be terminated. The ALJ found that the Bank was in violation of at least two provisions of a cease-and-desist order and that is was under-capitalized, having Part 325 Tier 1 capital of less than two percent of its total assets. Part 325 Tier 1 capital of less than two percent constitutes being in an unsafe or unsound condition under 12 C.F.R. § 325.4.
   The Bank filed Exceptions to the Recommended Decision of the ALJ. The Bank does not except to the facts found by the ALJ, but does take exception to the conclusions he draws from those facts. The Bank's Exceptions contain unverified assertions of facts not of record. This is improper and such material will not be considered by the Board of Directors of the FDIC ("Board"). FDIC Enforcement Counsel filed no Exceptions, but did move to strike unverified assertions of facts not of record from the Bank's Exceptions. The unverified assertions will not be considered, and the Motion is denied as moot. The Board has reviewed the Recommended Decision, the record, and the Exceptions. Based on that review, the Board hereby adopts and incorporates by reference the ALJ's Recommended Decision and concludes that the Bank's insured states should be terminated. The Board had also concluded that the ALJ's recommended Order Terminating Federal Deposit Insurance (attached) is appropriate and will issue that Order as its own.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 15th day of September, 1992.
   /s/ Robert E. Feldman
   Deputy Executive Secretary

In the Matter of
INVESTORS BANK & TRUST
COMPANY
GRETNA, LOUISIANA
(Insured State Nonmember Bank)
ORDER TERMINATING FEDERAL DEPOSIT INSURANCE
FDIC-91-109a

   Under the provisions of 12 U.S.C.
{{12-31-92 p.A-2088}}§ 1818(a), IT IS HEREBY ORDERED, that the insured status of Investors Bank & Trust Company, Gretna, Louisiana ("Bank"), 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. § 308.123, 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 308.123 of the FDIC Rules of Practice and Procedures, 12 C.F.R. § 308.123, as follows:

NOTICE

____, 1992.

   1. The status of Investors Bank & Trust Company, Gretna, Louisiana, 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 ____, 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 reduce the insurance coverage by the amount of such withdrawals.
   Investors Bank & Trust Company
   Gretna, Louisiana
   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 Gretna, Louisiana, 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 is 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 shall not be given to depositors.
   The Board of Directors of the Federal Deposit Insurance Corporation 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 15th day of September, 1992.
   /s/ Robert E. Feldman
   Deputy Executive Secretary

_______________________________________

RECOMMENDED DECISION

Arthur L. Shipe, Administrative Law Judge:
   This proceeding was instituted by Notice of Intention to Terminate Insured Status, Findings, and Order Setting Hearing (Notice) issued by the Federal Deposit Insurance Corporation on September 10, 1991. The Notice alleged that Respondent has violated a cease and desist order and/or has engaged, or is engaged in unsafe and or unsound practices in the conduct of its business, and/or is in an unsafe or unsound condition within the meaning of section 8(a) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(a)). On October 4, 1991, the Respondent filed an Answer to the Notice, denying the alleged violations.
   An Oral Hearing was held in this matter on February 11 and 12, 1992, in New Orleans, Louisiana. Post hearing briefs have been filed.
   Based upon the entire record, including the exhibits and testimony, and my observation of the witnesses' demeanor at the hearing, the following Findings of Fact, Discus-
{{12-31-92 p.A-2089}}sion of Facts and Law, Conclusion of Law, and Order, are entered.

FINDINGS OF FACT

   1. Respondent is an "insured depository institution" as that term is defined in section 3(c)(2) of the Federal Deposit Insurance Act, 12 U.S.C. § 1813(c)(2). (Stip. #1)
   2. Respondent is a corporation chartered and duly authorized to conduct business under and subject to the laws of the state of Louisiana. (Stips. #2 and #7)
   3. Respondent's principal place of business is located in Gretna, Louisiana. (Stip. #3)
   4. Investors Bank and Trust Company commenced doing business on or about November 6, 1984. (Tr. 221)
   5. Respondent has, at all times relevant hereto, been a federally insured state chartered bank, that is not a member of the Federal Reserve System. (Stip. #4)
   6. The Bank was examined by the FDIC as of October 25, 1985. (Tr. 221)
   7. As a result of this examination, the FDIC assigned the respondent a composite CAMEL rating of 1. (Tr. 221)
   8. The Bank was examined by the State of Louisiana as of the close of business January 2, 1987. (Tr. 227)
   9. At the conclusion of this examination, the state examiners assigned the respondent a CAMEL rating of 1. (Tr. 228)
   10. The Bank was examined by the FDIC as of the close of business on July 22, 1988. (Resp. Ex. 15)
   11. That examination found classified loans totalled $6,200,000, representing an increase of $5,695,000 since the 1987 state examination. (Resp. Ex. 15)
   12. The FDIC assigned the Bank a CAMEL rating of 2 in the July 22, 1988 examination. (Resp. Ex. 15)
   13. The confidential portion of the examination report gave management a rating of 1. (Resp. Ex. 15, Page A-11)
   14. The State of Louisiana examined the Bank as of the close of business on December 30, 1988. (Tr. 235)
   15. Classified assets were increased at this examination to just under $10,000,000. (Tr. 237)
   16. On March 31, 1989, Respondent purchased certain assets and deposits of Bankers Trust Company, Kenner, Louisiana, from the FDIC. (Tr. 229-31)
   17. This transaction was approved by the State of Louisiana, the Federal Deposit Insurance Corporation and the Federal Reserve Bank of Atlanta. (Tr. 229-31)
   18. Respondent paid the FDIC a premium of $1,029,000 for certain assets and deposits acquired in this transaction. (Tr. 275-6)
   19. Respondent was examined by the FDIC as of the close of business on January 26, 1990. (Resp. Ex. 13)
   20. The results of this examination assigned respondent a composite CAMEL rating of 5. (Resp. Ex. 13).
   21. Classified assets totalled $23,129,000 or 234.73 percent of equity and reserves. (Resp. Ex. 13)
   22. The confidential portion of the examination gave management a uniform bank rating of 4. (Resp. Ex. 13)
   23. As a result of the January 1990 examination, Respondent stipulated and consented to an Order to Cease and Desist issued by the FDIC ("Order") in June 1990 pursuant to section 8(b) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818 (b). (Stip. #9; FDIC 1)
   24. Pursuant to section 8(b)(2) of the Act, 12 U.S.C. § 1818 (b)(2), the provisions of the Order became effective on June 24, 1990. (Stip. #10; FDIC Ex. 1, p. 15)
   25. Section 1 (a) of the Order required Respondent to have management qualified to restore the Respondent to a safe and sound condition, including an experienced senior lending officer responsible for supervising the Bank's overall lending function. (FDIC Ex. 1, p. 2)
   26. Section 2(a) of the Order required Respondent to increase its primary capital (as that term was defined in 12 C.F.R. Part 325) by $1,600,000 within 180 days of the effective date of the Order. (Stip. #11; FDIC Ex. 1, p. 5)
   27. Section 2(a) of the Order further required Respondent to maintain adjusted primary capital equal to greater than 7.5 percent of the bank's adjusted Part 325 total assets. (Stip. #12; FDIC Ex. 1, p. 5)
   28. Section 8(a) of the Order required Respondent to establish and thereafter maintain an adequate loan loss reserve within 30
{{12-31-92 p.A-2090}}days from the effective date of the Order. (Stip. #13; FDIC Ex. 1, p. 13)
   29. The Order has not been terminated by the FDIC and remains in full force and effect. (Stip. #14)
   30. The FDIC conducted a visitation of Respondent as of the close of business on September 7, 1990. (Resp. Ex. #14)
   31. This examination resulted in total classifications of $17,756,000, with $4,809,000 being classification as a loss. (Resp. Ex. 14)
   32. The Report of Examination included this comment by the Examiner:

       President Haas was the principal organizer of the bank and he influences a substantial amount of business. The board is divided as to what to do about the situation, with indications that his position with the bank is uncertain. It is this examiner's opinion that Mr. Haas still has considerable capabilities, but with his record with loans it would probably be appropriate for him to be removed entirely from making loans. He is still able to analyze loans, particularly when it is another officer's loan.
       The substantial losses taken and to be taken all involve loans made by Mr. Haas and situations in which he apparently became too close to the customer. (Resp. Ex. 14)
   33. The FDIC examined Respondent as of November 30, 1990. (FDIC Ex. 2)
   34. As of November 30, 1990, Respondent's total equity capital and reserves equaled $4,139,000. (Prefiled Testimony (P.T.) Carpenter, p. 5; FDIC Ex. 2, p. 3)
   35. As of November 30, 1990, Respondent's primary capital was negative $220,000. (P.T. Carpenter, p. 5; FDIC Ex. 2, p. 3)
   36. As of November 30, 1990, Respondent's adjusted primary capital was negative $437,000. (P.T. Carpenter, p. 5; FDIC Ex. 2, p. 3)
   37. As of November 30, 1990, Respondent's adversely classified assets and contingent liabilities were 380.74 percent of equity capital and reserves. (P.T. Carpenter, p. 6; FDIC Ex. 2, p. 3)
   38. As of November 30, 1990, Respondent's adjusted Part 325 total assets were $96,787,000. (P.T. Carpenter, p. 6; FDIC Ex. 2, p. 3)
   39. As of November 30, 1990, Respondent's total loans amounted to $53,786,000. (FDIC Ex. 2, p. 2)
   40. As of November 30, 1990, Respondent had an inadequate capital level for the kind and quality of assets it held. (P.T. Bowen pp. 5–6; FDIC Ex. 2, pp. 1-a-2, 2, 3)
   41. As of November 30, 1990, Respondent's adjusted primary capital was negative 0.45 percent of its adjusted Part 325 total assets. (P.T. Carpenter, p. 6; FDIC Ex. 2, p. 3)
   42. As of November 30, 1990, Respondent's ratio of adversely classified loans to total loans was 21.79 percent. (FDIC Ex. 2, p. 2)
   43. As of November 30, 1990, Respondent had $433,000 in assets classified "Doubtful," consisting entirely of Other Real Estate Owned. (P.T. Carpenter, p. 6; FDIC 2, p. 2)
   44. As of November 30, 1990, Respondent had $11,792,000 in assets classified "Substandard." (P.T. Carpenter, p. 6; FDIC 2, p. 2)
   45. As of November 30, 1990, Respondent had $3,210,000 in assets classified "Loss", including $2,223,000 in "Loss" classifications from the Respondent's loan portfolio. (P.T. Carpenter, p. 7; FDIC Ex. 2, p. 2)
   46. Respondent was given a composite CAMEL rating of 5 in the November 1990 examination report. (FDIC Ex. 2)
   47. The examination resulted in total classified assets of $15,759,000, with a loss of $3,210,000. (FDIC Ex. 2, p. 2)
   48. The confidential portion of the examination stated that President Haas was responsible for the vast majority of debt classified loss in the recent examinations. (FDIC Ex. 2, p. A-1)
   49. The Respondent did not contest any of the adverse loan classifications contained in the FDIC Report of Examination as of the close of business on November 30, 1990. (Stip. #26; FDIC Ex. 2)
   50. As of November 30, 1990, Respondent was insolvent. (P.T. Carpenter, p. 8; P.T. Bowen, pp. 5–6; FDIC 2, pp. 1-a-2, 3)
   51. As of November 30, 1990, Respondent's assets evidenced deterioration from the prior examination conducted in January 1990. (P.T. Carpenter, pp. 9–10; P.T. Bowen, p. 6; FDIC Ex. 2, pp. 2-a through 2-f)
   52. As of November 30, 1990, Respond-
{{12-31-92 p.A-2091}}ent had sustained a loss of $4,394,000 for the year, was in its second consecutive year of net losses, and could not rely upon earnings to protect its capital base. (P.T. Carpenter, p. 12; P.T. Bowen, p. 5; FDIC Ex. 2, pp. 4, 4-a)
   53. On January 13, 1990, an attempt had been made by some of the other Directors to remove President Haas from the Bank; only Mr. Haas' vote prevented his removal. (FDIC Ex. 2, p. A-1)
   54. President Haas resigned as President of Respondent on March 19, 1991. (FDIC Ex. 3, p. A-1)
   55. Mr. Gene Harris was appointed acting President; Mr. Leslie P. Boudreaux was named Chairman of the Board. (FDIC Ex. 3, p. A-1)
   56. Respondent's amended Call Report as of December 31, 1990, indicates its primary capital ratio was below 3 percent. (Stip. #16)
   57. Respondent's Call Report as of March 31, 1991, indicates its primary capital ratio was below 3 percent. (Stip. #18)
   58. Respondent's Call Report as of March 31, 1991, indicates its Tier 1 capital ratio was below 2 percent. (Stip. #19)
   59. A "limited scope" safety and soundness examination of the Bank was conducted, as of June 19, 1991, by the FDIC. (P.T. Carpenter, p. 14; FDIC Ex. 3; Tr. 14)
   60. On March 5, 1991, Directors Seale, Boudreaux and Autin purchased $1,500,000 of previously charged-off loans to prevent closure of Respondent by the regulators; the proceeds went into capital. (Resp. Ex. 11)
   61. Directors Seale, Boudreaux and Autin purchased stock held by other directors who did not wish to contribute to the purchase of charged-off loans, and with FDIC assistance, processed a change of control application with the Federal Reserve Board. (Tr. 404–405)
   62. In June 1991, the Bank showed improvement in the areas of loan review and administrative from the November, 1990 examination. (FDIC Ex. 3, p. A-1)
   63. The limited scope examination found the Bank's reserve for loan losses to be adequate. (FDIC Ex. 3)
   64. No new loans were classified. (FDIC Ex. 3)
   65. The General Marine Catering loan was removed from its previous substandard classification. (Tr. 56)
   66. Respondent's Call Report as of June 30, 1991, indicated its primary capital ratio to be below 3 percent. (Stip. #21)
   67. Respondent's Call Report as of June 30, 1991, indicated its Tier 1 capital ratio to be below 2 percent. (Stip. #22)
   68. Respondent's Call Report as of September 30, 1991, indicated its primary capital ratio to be below 3 percent. (Stip. #24)
   69. Respondent's Call Report as of September 30, 1991, indicated its Tier 1 capital ratio to be below 2 percent. (Stip. #25)
   70. The FDIC conducted a full scope examination of Respondent as of the close of business November 15, 1991. (FDIC Ex. 4)
   71. The Bank was given a composite CAMEL rating of 5. (FDIC Ex. 4)
   72. The General Marine Catering loan was reclassified at this examination. (FDIC Ex. 4)
   73. The loan was reclassified primarily because the accounts receivable of the borrower were not being collected under a "lockbox" program. (Tr. 173, 175)
   74. Additional collateral had been obtained on the General Marine Catering loan subsequent to the June 19, 1991 limited scope examination. (Tr. 168, 324-25)
   75. As the time of the hearing a "lockbox" program for General Marine Catering was scheduled to become effective February 15, 1992. (Tr. 325)
   76. As of November 15, 1991, Respondent's total equity capital and reserves was $2,062,000. (P.T. Slaughter, p. 5; FDIC Ex. 4, p. 3-b)
   77. As of November 15, 1991, Respondent's Tier 1 capital was negative $599,000. (P.T. Slaughter, p. 6; FDIC Ex. 4, p. 3)
   78. As of November 15, 1991, Respondent's adjusted Tier 1 capital was negative $746,000. (P.T. Slaughter, p. 6; FDIC Ex. 4, p. 3)
   79. As of November 15, 1991, Respondent's total adversely classified assets and contingent liabilities equaled $10,330,000. (P.T. Slaughter, p. 6; FDIC Ex. 4, p. 2)
   80. As of November 15, 1991, Respondent's ratio of adversely classified items to total equity capital and reserves was 500.97 percent. (P.T. Slaughter, p. 6; FDIC Ex. 4, p. 3-b)
{{12-31-92 p.A-2092}}
   81. As of November 15, 1991, Respondent's Part 325 total assets were $68,285,000. (P.T. Slaughter, p. 6; FDIC Ex. 4, p. 3)
   82. As of November 15, 1991, Respondent's adjusted Part 325 assets were $68,138,000. (P.T. Slaughter, p. 6; FDIC Ex. 4, p. 3)
   83. As of November 15, 1991, Respondent's Tier 1 capital was negative 1.09 percent of its Part 325 total assets. (P.T. Slaughter, p. 7; FDIC Ex. 4, p. 3-a; Tr. p. 145)
   84. As of November 15, 1991, Respondent held $6,223,000 in adversely classified loans in its loan portfolio. (P.T. Slaughter, p. 7; FDIC Ex. 4, p. 2)
   85. As of November 15, 1991, 17.50 percent of Respondent's loan portfolio was adversely classified. (P.T. Slaughter, p. 7; FDIC Ex. 4, p. 2)
   86. As of November 15, 1991, Respondent's ratio of adversely classified assets to total assets was 15.59 percent. (P.T. Slaughter, p. 9; FDIC Ex. 4, p. 2)
   87. As of November 15, 1991, Respondent was insolvent by almost $600,000 under Tier 1 capital requirements. (P.T. Slaughter, p. 8; FDIC Ex. 4, p. 3)
   88. As of November 15, 1991, Respondent's overdue loans and leases equaled 9.09 percent of its total loans and leases. (FDIC Ex. 4, p. 2)
   89. As of November 15, 1991, Respondent's earnings were impaired due to the poor quality of its assets, and its earnings are not adequate to provide it with the capital necessary to make it a viable institution. (P.T. Slaughter, p. 10; P.T. Birdsell, p. 9; FDIC Ex. 4, pp. 3-a, 4)
   90. As of November 15, 1991, Respondent's reported positive earnings were partially due to the sale of securities which was a non-recurring source of income. (Tr. 248-50)
   91. As of November 15, 1991, Respondent was in violation of Section 2(a) of the Cease and Desist Order; since it had not achieved and maintained the required 7.5 percent capital ratio, but was instead operating at an adjusted Tier 1 leverage capital ratio of negative 1.09 percent and primary capital to Part 325 total assets ratio of 1.28 percent. (P.T. Slaughter, p. 11; P.T. Birdsell, p. 9; FDIC Ex. 1, p. 2; FDIC Ex. 4, pp. 3-a - 3-b; Tr. 423)
   92. As of the November, 1991 examination, the Bank's loss classification was $123,000, with $67,000 attributable to the loan portfolio. (FDIC Ex. 4, p. 2)
   93. The Bank's reserve for loan losses was $1,492,000. (FDIC Ex. 4, p. 2)
   94. The examiners required an addition to the loan loss reserve of $214,000. (Tr. 176)
   95. As of December 31, 1991, Respondent had a Tier 1 capital ratio of negative 1.03 percent. (Tr. 269)
   96. Since March, 1991, no loss charge to the reserve had exceeded the amount provided by the Bank. (Tr. 322)
   97. On June 11, 1991, the directors settled outstanding litigation against NCNB for $2,200,000, with six (6) directors contributing to the settlement. (Tr. 407-08, Resp. Ex.)
   98. The Bank is attempting to raise capital from the sale of stock pursuant to a recent prospectus. (Resp. Ex. 1)
   99. Respondent's 1992 capital plan acknowledged the need for a capital injection in early 1992 for the Bank to survive. (Tr. 429)
   100. IBT Bankshares, Inc., Respondent's holding company, issued a stock offering in an attempt to recapitalize Respondent. (Tr. 401-2)
   101. The stock offering intended to recapitalize Respondent was open from November 15, 1991 through February 1, 1992. (Tr. p. 411)
   102. Respondent failed to receive any subscriptions for the stock and failed to obtain any money in escrow pursuant to the stock offering. (Tr. p. 441-2)
   103. The Directors of IBT Bankshares were personally liable for the debt of IBT Bankshares held by NCNB, Texas. (Tr. pp. 469–470) The settlement of the IBT Bankshares debt with NCNB, Texas, did not increase or augment Respondent's capital. (Tr. p. 471)

DISCUSSION OF FACTS AND LAW

   [.2] The FDIC seeks here to terminate the deposit insurance of Respondent on the alleged grounds that Respondent is in an unsafe and unsound condition, and is operating in violation of a cease and desist order imposed in June of 1990. That order, among other things, required the infusion within 180 days of $1.6 million in capital, and the maintenance of a ratio of adjusted primary
{{12-31-92 p.A-2093}}capital to adjusted Part 325 total assets of 7.5 percent.
   The determinative facts in this proceeding are virtually undisputed. At the last full scale examination of Respondent conducted in November 1991, its equity and reserves were $2,062,000. It had adversely classified assets of over $10 million, including $6,223,000 in classified loans. Its adjusted Tier 1 capital was negative $746,000. Its Part 325 total assets were $68,285,000.
   Respondent contends, nevertheless, that it is not in an unsafe and unsound condition, and that its deposit insurance should not be terminated. It offers several arguments in support of its position.
   Initially, it claims that most of its difficulties are attributable to a former president, who is no longer with the bank. FDIC Enforcement attempts to refute this by noting that those officials now in control of the bank have been there since its inception. However, different examiners of the bank did lay heavy responsibility for the bank's dire straits upon the former president, who effectively controlled the bank during his tenure, and originated most of its dubious loans. One examiner testified at the hearing that he had formed the opinion in 1990, that this individual was "ruining" the bank. Tr. 153–154. He resigned in March 1991. The examiners were generally complementary of the operational efficiency of present management. The board chairman, a retired successful contractor, now works full time at the bank, without compensation, and has been effective in pursuing collections, and other matters. The chief criticism of present management is its inability or unwillingness to raise capital to an adequate level. The change in management has not effected substantial improvement in that crucial area.
   A Cease and Desist Order, imposed in June 1990, required Respondent to raise $1,600,000 in additional capital within 180 days, and to maintain an adjusted capital ratio of 7.5 percent. Neither of these terms of the Order has been complied with. (The Order also required Respondent to hire a lending officer, which has not been done, assertedly because no one qualified would accept the position under the bank's present status.)
   Respondent contends that the requirement for an infusion of $1,600,000 was substantially complied with by the receipt of a $1,000,000 tax refund in 1990. It is doubtful though that this refund was the capital infusion contemplated by the Order. Respondent contends that the required capital ratio of 7.5 percent has been impossible to achieve because of required charge-offs, which in 1990 amounted to $11,789,000. In March 1990, three directors did infuse capital of $1,500,000 into the bank through the purchase of charged-off assets of the bank. In addition, these directors settled, for $2,240,000, claims on a loan to the bank's holding company for which the bank's stock was collateral. This did not directly raise the bank's capital, but it did clear the cloud on the stock's ownership, and thereby removed an obstacle to the sale of more stock. Efforts to issue more stock have remained unsuccessful, however.
   Two directors have expressed a willingness to invest $500,000 each in the bank, with possibly $250,000 being invested by a third director. Their willingness to make these capital contributions seems, however, contingent upon assurances of further forbearance by the regulating officials, which has not been forthcoming.
   Respondent disputes the classification of one corporate business loan in the approximate amount of $1,420,000. This loan seems borderline. It was classified, then passed, and subsequently reclassified. The loan is assertedly partially collateralized by first mortgages on real estate, and assets of the individuals owning the borrowing corporation, as well as receivables. The examiner was skeptical of the claim of first mortgages because supporting documents were not in the file.
   An important factor in evaluating the security provided by the borrower's receivables is the use of a "lock-box" arrangement under which payments are made through the bank. Such an arrangement was not in effect at the November 1991 examination, but was said to be established at the time of the hearing. The loan has not defaulted and its principal has been reduced by $32,000.
   When this loan was reclassified Respondent was required to increase its loan loss reserves by $214,000. Though a substantial amount, (Enforcement seems to dispute whether it is directly related to the loan in question) even if this amount were deemed improperly removed from the Respondent's
{{12-31-92 p.A-2094}}capital, and it is not so found, the bank would remain drastically under capitalized.
   Respondent contends that its worst experience is past and it is now on the road of recovery to financial health. It claims an income for 1991, before the $214,000 required addition to reserves, of $434,146. However, as Enforcement points out, $183,254.50 of this was attributable to profit on the sale of securities, a nonrecurring source of earnings.
   Respondent argues that because its reserves are allegedly adequate, and have covered losses recently taken, its lack of capital poses no threat to the insurance fund. Since its classified assets are approximately five times its equity and reserves, this claim is not accepted.
   In summary, it is concluded that despite improved management and operations, Respondent remains unacceptably undercapitalized, with no prospects of meeting its capital requirements through earnings. Solicitations and proffers of capital have not borne fruit, and Respondent remains in an unsafe and unsound condition, and in violation of the Cease and Desist Order.

CONCLUSIONS OF LAW

   1. Respondent is an unsafe and unsound consideration within the meaning of section 8(a)(2)(ii) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(a)(2)(ii) because its ratio of Tier 1 capital to total assets is less than 2 percent, in violation of 12 C.F.R. § 325.4(c).
   2. Respondent's violation of the capital regulations at 12 C.F.R. § 325 constitute an appropriate basis for the termination of its deposit insurance pursuant to section 8(a)(2)(iii) of the Federal Deposit Insurance Act (12 U.S.C. § 1818 (a)(2)(iii)).
   3. Respondent is engaged in unsafe and unsound practices in violation of 8(a)(2)(i) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(a)(2)(i) by operating as an insured depository institution with a deficient capital, a high level of classified assets, and insufficient earnings to augment its capital.
   4. Respondent's operations in an unsafe and unsound condition constitutes a basis for the termination of its deposit insurance pursuant to section 8(a)(2)(i) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(2)(2)(i)).
   5. Respondent is operating in violation of an outstanding Cease and Desist Order in that it failed to increase its primary capital by $1,600,000 within 180 days from the effective date of that Order; it failed to achieve and maintain adjusted primary capital equal to or greater than 7.5 percent of its adjusted Part 325 total assets, and it failed to hire and retain an experienced lending officer, all required by the Order.
   6. The cited violations of the Order constitute a basis for termination of Respondent's deposit insurance under Section 8(a)(2)(iii) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(a)(2)(iii).
   Accordingly, it is recommended that the attached Order be entered.
   Dated this 26th day of May, 1992.

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