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FDIC Enforcement Decisions and Orders |
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FDIC terminated the insured status of a state nonmember bank, and ordered the bank to give notice of such termination to its depositors for operating in an unsafe and unsound condition by having a high amount (17%) of adversely classified loans, and operating with a dangerously low level of equity capital and reserves.
[.1] Unsafe or Unsound Banking PracticeCease by Case Determination
[.2] Unsafe or Unsound Banking PracticeDeference to FDIC
[.3] Net Worth Certificate Assistance ProgramImplementation of Program
[.4] Practice and ProcedureRulemaking Procedings
[.5] Net Worth CertificatesEligibility
[.6] AssetsLossesManagement
[.7] AssetUnsafe or Unsound Practices
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In the Matter of * * * (INSURED
On August 16, 1982, the Federal Deposit Insurance Corporation ("FDIC") found that * * * Bank, * * * ( * * * "Bank"), had been operating in an unsafe or unsound condition as of June 30, 1982, and ordered * * * to correct this condition within 120 days. On January 8, 1983, the FDIC again examined * * * and on May 31, 1983, issued a Notice of Intention to Terminate Insured Status and Notice of Time and Place of Hearing ("Notice of Intent"). After discovery was completed, a hearing commenced on August 22, 1983, in * * * The Administrative Law Judge ("ALJ") submitted his Recommended Decision on February 27, 1984, upholding the FDIC's contentions, along with a Proposed Order terminating * * * deposit insurance. On May 14, 1984, the FDIC's Board of Directors ("Board") denied a request by counsel for * * * to present oral arguments to the Board in connection with its review of the Recommended Decision in this matter.
[.1,.2] A determination of an unsafe or unsound condition can be made only after a consideration of the surrounding circumstances of the operation of each particular bank. It is well settled that the term unsafe or unsound condition generally encompasses conduct that is contrary to accepted standards of prudent banking. See First National Bank of Eden v. Department of the Treasury, 568 F.2d 610 (8th Cir. 1978); Groos National Bank v. Comptroller of the Currency, 573 F.2d 889 (5th Cir. 1978). However, the term unsafe or unsound condition, like other generic terms, may be applied differently depending on the circumstances. Since the FDIC is the only Federal agency responsible for the interpretation and application of section 8(a), the FDIC's interpretation of what constitutes an unsafe or unsound condition under this section is entitled to great deference. See, e.g., City Federal Savings & Loan Ass'n v. Federal Home Loan Bank Board, 600 F.2d 681, 688 (7th Cir. 1979); FTC v. UniversalRundle Corp., 387 U.S. 244, 25152 (1967). Deference to any agency's determination is particularly appropriate when, as is true in the instant proceeding, the agency has fully informed the respondent of the reasons supporting its actions.
[.5] * * * also argued that FDIC exceeded the authority granted by Congress by adding as a condition of eligibility for assistance that losses may not have been incurred as a result of mismanagement. The Garn-St Germain Act provides that a qualified bank must, inter alia, have incurred losses during the two previous quarters. 12 U.S.C. § 1823(i)(2)(B). Further, it states that such losses must not result from speculative transactions in "futures or forward contracts," management actions designed solely to meet assistance qualifications, or excessive operating expenses. 12 U.S.C. § 1823(i)(2)(C). However, with respect to the amount of assistance that FDIC can provide, the Act expressly states that the FDIC may only purchase net worth certificates from a qualified institution "in an amount equal to [a percentage] of its operating losses (not occasioned by mismanagement...)". 12 U.S.C. § 1823(i)(5) (emphasis added). Moreover, if an institution's total losses result from mismanagement, as in the present case, FDIC can grant no net worth assistance even though they may be technically qualified. In its policy statement, therefore, FDIC incorporated this limitation (relating to all types of mismanagement losses) in the definition of "qualified institution" to avoid the anomaly of concluding that a "qualified" institution under the statutory definition is in fact actually disqualified by the amount limitation quoted above. In view of this and the fact that, under the Act, assistance is to be given at FDIC's "sole discretion" and "on such terms and conditions as [FDIC] may prescribe," * * * contention is without merit.
[.6] In another argument, * * * appears to claim that FDIC discriminated against * * * as a commercial bank, in that FDIC
{{4-1-90 p.A-252}}found * * * acquisition of long-term assets with short-term deposits to be mismanagement while not applying similar standards to mutual savings banks. This contention is also fallacious. FDIC reviewed * * * application for assistance under the same statutory criteria as apply to mutual savings banks. The distinction is that, as a commercial bank, * * * had opportunities for investing in business, consumer, and other variable rate assets and/or short-term loans not generally available to mutual savings banks. By choosing instead to invest heavily in long-term, fixed rate assets, * * * exposed itself to operating losses that it could have avoided had it more prudently matched its assets to its liabilities. Nevertheless, its management chose the strategy of investing heavily in high risk real estate development loans and long-term, low yield bonds. * * * management's speculative lending and investing resulted in massive loan charge-offs and heavy market depreciation in its bond portfolio. The FDIC denied * * * net worth assistance because its losses were caused by this mismanagement.
NOTICE
1. The status of the * * * Bank, * * * , as an insured bank under the provisions of the Federal Deposit Insurance Act, will terminate as of the close of business on the thirty-first day of July, 1984;
ADDENDUM
Following are the FDIC Board conclusions with respect to * * * detailed, specific exceptions to the "Findings," "Conclusions" and "Merits of the Case" portions of the ALJ's Recommended Decision for this case.
"FINDINGS"
(addressed as numbered in the ALJ's Recommended Decision)
"CONCLUSIONS"
93. The ALJ concluded that * * * has failed to comply with the Order of Correction issued by the FDIC on August 16, 1982. * * * excepts to this conclusion alleging that the provisions of the Order were unreasonable and impossible to meet.
"MERITS OF THE CASE"
("Page" refers to page in ALJ
FDIC-82-73a
RECOMMENDED DECISION
James P. Timony,
Preliminary Statement
In this action, the Federal Deposit Insurance Corporation ("FDIC") is attempting to terminate the insured status of * * * Bank ("* * *") based on its allegedly unsafe or unsound condition. The FDIC has proceeded pursuant to Section 8(a) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(a).
Abbreviations
FINDINGS
1. * * * is an * * * corporation and has its principal place of business at * * * ( * * * Answer)
February 27, 1982 examination
6. * * * was examined as of the close of business February 27, 1982 by FDIC examiner * * * ( * * * Tr. 38) The total dollar amount of * * * assets subject to adverse classification was $16,658,400. (* * * Tr. 47; FDIC Ex. 2 at 2)
June 30, 1982 report of condition.
43. * * * submitted a report of condition as of June 30, 1982. On that date * * * total equity capital was $4,180,000 and its reserves were $189,000. (FDIC ex 3 at 3-2)
January 8, 1983 examination
49. Following the FDIC's Order of Correction of August 16, 1982 and after the expiration of the 120-day corrective period, * * * was examined as of the close of business on January 8, 1983. ( * * * Tr. 282) On that date the total dollar amount of * * * assets subject to adverse classifications was $13,097,000. The dollar amounts of * * * assets subject to adverse classification were $12,158,000 Substandard, $325,000 Doubtful and $614,000 Loss. ( * * * Tr. 287; FDIC Ex. 6 at 2)
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79. In a 1980 examination the FDIC reported capitalization of interest (writing new notes including past due interest) by * * * (* * * Tr. 744, 746) The Board of Directors told * * * , President of * * * , to stop the practice. ( * * * Tr. 779)
June 30, 1983 report of condition
89. * * * had losses of $343,000, equity capital and reserves of $3,106,000, and a loan valuation reserve of $16,000 on June 30, 1983. (FDIC Ex. 7A; * * * Tr. 979-80)
CONCLUSIONS
92. The FDIC has jurisdiction over the bank and the subject matter of the proceeding. (Stipulated)
DISCUSSION
Merits of the Case
The FDIC found on August 16, 1982 that * * * was operating in an unsafe or unsound condition, with adequate equity capital and reserves, and ordered correction. At the end of the correction period * * * failed to comply with the order to obtain additional capital. (fs. 78, 88)
[.7] * * * has had two main problems: low asset quality (fs. 614, 19, 2125, 3034, 4952, 54, 6068) and a position of high risk to interest rates changes. (fs. 3541, 6973) These resulted from mismanagement by officials of * * * , and when the economy ran into trouble and interest rates rose the bank began to have serious earnings problems. ( * * * Ex. 11)
Legal Arguments
* * * presents two legal arguments.4 First, that the FDIC has failed to articulate standards defining what is an unsafe or unsound condition. And, second, that the FDIC wrongfully denied * * * net worth assistance under the Garn-St. Germain Act. These arguments lack merit for the following reasons.
[.8] * * * argues that the determination that it was in an unsafe or unsound condition is invalid because the FDIC failed to articulate standards defining that term. The term unsafe or unsound condition is undefined in the statute, legislative history, or, as yet, in the reported cases. Congress has delegated the duty of defining the term to the FDIC, with judicial review. Cf. Federal Trade Commission v. R.F. Keppel & Bro, Inc., 291 U.S. 304, 310-12 (1934) Here, the FDIC has informed * * * of the details of its condition, found to be unsafe or unsound, in two investigation reports as well as in the Findings and Order of Correction dated August 16, 1982. Furthermore, three expert witnesses creditably testified that according to standards of prudent banking operation articulated in those documents, the bank is in an unsafe or unsound condition.5
DECISION
I therefore conclude that the preponderance of the evidence shows that respondent * * * was, on June 30, 1983, as well as earlier dates, in an unsafe or unsound condition. A Proposed Order is attached.
PROPOSED ORDER
NOW, THEREFORE, in conformity with the above Findings of Fact and Conclusions of Law, and pursuant to section 8(a) of the Federal Deposit Insurance Act:
NOTICE (Date)
1. The status of the * * * , as an insured bank under the provisions of the Federal Deposit Insurance Act, will terminate as of the closed of business on the Blank day of ________, 19________; |
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Last Updated 6/6/2003 | legal@fdic.gov |