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FDIC Enforcement Decisions and Orders |
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Bank ordered to cease and desist from unsafe or unsound banking practices and from violations of law. FDIC stated that the bank's poor condition was not the result of economic factors in the agricultural economy since other banks similarly situated were in better financial conditions than this bank. FDIC also ordered the addition of two outside directors to the bank's board of directors.
[.1] Practice and ProcedurePetitions to FDICOral Argument
Oral argument before the Board was unnecessary because the factual and legal arguments were fully set forth in the parties' pleadings, the Recommended Decision, and the Exceptions.
[.2] Agricultural BanksManagement
Although economic conditions in rural areas have increased the possibility of loan losses for agricultural banks, this fact by itself does not excuse unsafe or poor management. Local agricultural decline should have led bank management to make adjustments in banking practices to restore the bank to a sound financial condition.
[.3] Unsafe or Unsound Banking PracticeGenerally Defined
Imprudent practices include: the repeated failure to identify adequate collateral margins on loans; the propensity to permit borrowers to capitalize unpaid interest; the repeated practice of extending credit to multiple borrowers where the source of repayment is a single course; permitting the loan portfolio to contain an excessive volume of adversely classified assets (25.9% of the bank's total loans); permitting the amount of debt to borrowers to increase as collateral value declined; paying dividends without regard to earnings or losses; operating a bank
[.4] DirectorsIndependent Directors Added to Board
FDIC may order the addition of outside directors to a bank's board of directors to exercise independent business judgment and oversight over the affairs of the bank when a bank's current board of directors and management fail to adequately respond to deteriorating conditions.
[.5] DirectorsDuties and ResponsibilitiesAdequacy of Employees
A bank's board of directors should exercise judgment independent of management. The board is obliged to select and maintain capable management and see that the bank operates in compliance with law and regulations.
[.6] Cease and Desist OrdersFDIC Authority to Issue
If a bank has engaged in unsafe and unsound practices and has committed numerous violations of law and regulations, the FDIC has broad discretion to exercise its expertise in fashioning an appropriate remedy to stop the practices and violations, to prevent abuses, and to correct the effects of the practices or violations.
[.7] DepositsBrokeredReports to FDIC
A bank in a weakened financial condition, whose loan to deposit ratio is too high, may turn to highly volatile brokered deposits to overcome liquidity difficulties. A reporting provision in an order would require the bank to give notice to the FDIC whenever it obtained brokered deposits and will merely alert the Regional Director to the fact that the bank is turning to brokered deposits as a funding source.
[.8] Call ReportsAmendment Required
Call reports that do not provide an accurate picture of a bank's condition because they do not provide for an adequate loan valuation reserve for possible loan losses may require refiling.
[.9] Examination of Banks
The purpose of a bank examination is to maintain confidence in the banking system, provide a report of the bank's condition to the bank's management and to the FDIC, protect the FDIC's insurance fund, and insure compliance with various laws and regulations.
[.10] DefinitionsLiquidity
Liquidity refers to the ability of a bank to provide, in a cash effective manner, for decreases in its deposits and increases in its assets.
[.11] LiquidityAdequacyDetermination
The adequacy of a bank's liquidity is based on several factors, including the following: the loan to deposit ratio, the history of borrowings, and the volume of adversely classified assets.
[.12] Loan Loss ReservePurpose
The purpose of a loan valuation reserve is to absorb potential loan losses in those loans classified Substandard and all other unrecognized losses in the loan portfolio.
[.13] Unsafe or Unsound PracticesStatutory Standard
An unsafe or unsound banking practice encompasses what is viewed as conduct deemed contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder.
Improvements made by a bank, changes in practices, and correction of deficiencies are not defenses to a cease and desist order.
In the Matter of * * * BANK (Insured State Nonmember Bank)
[.1] By letter dated December 3, 1985, pursuant to section 308.17 of the Rules and Regulations, 12 C.F.R. § 308.17, the Bank requested permission to present oral argument to the Board. The Board has considered the request, but finds oral argument to be unnecessary because the factual and legal arguments are fully set forth in the parties' pleadings, the Recommended Decision and the Exceptions. The Board finds oral argument would not aid its deliberations.
[.2] The ALJ concluded that the Bank has been operated in an unsafe or unsound manner. (RD at 15.) The Bank argued that the general decline in farm prices and land values in * * * County are the primary causes of its liquidity problems and its abnormally high classification ratio. The ALJ rejected that argument observing:
[.3] There is no need to repeat the ALJ's detailed review of the particular unsafe and unsound practices. Imprudent practices include: (1) the repeated failure to identify adequate collateral margins on loans; (2) the propensity to permit borrowers to capitalize unpaid interest, that is to extend additional credit for the amount of interest owed when loans are renewed; (3) the repeated practice of extending credit to multiple borrowers where the source of repayment is a single source; (4) permitting the loan portfolio to contain an excessive volume of adversely classified assets, $3,645,000 or 25.9 percent of the Bank's total loans as of May 23, 1984; (5) permitting the amount of debt to borrowers to increase as collateral value declined; (6) paying dividends without regard to earnings or losses; (7) operating the Bank with a loan to deposit ratio of 75.8 percent as of May 23, 1984, which does not provide for adequate liquidity; (8) operating with an inadequate loan valuation reserve; and (9) operating the Bank with an adjusted primary capital ratio of 5.76 percent as of May 23, 1984.
[.4] The failure of the Bank's board of directors and the current management adequately to respond to deteriorating conditions convince the Board that two additional outside directors should be added to the Bank's board of directors to exercise independent business judgment and oversight over the affairs of the Bank.
[.5] The Bank's board of directors should exercise judgment independent of management. The board is legally responsible for the sound direction of the Bank. The board is obliged to select and maintain capable management and see that the Bank operates
{{4-1-90 p.A-792}}in compliance with law and regulations. The board must formulate specific Bank goals and policies covering investments; loans; asset, liability and funds management; profit planning and budgeting; capital planning; internal routine and controls; and personnel policies. The board is also obliged to avoid self-serving practices and authorize payment of dividends only as may properly be paid.1
[.6] The Board rejects the ALJ's conclusion that a requirement that the Bank obtain management acceptable to the Regional Director cannot be included in a cease and desist order. Where the Board finds that a bank had engaged in unsafe or unsound practices and has committed numerous violations of law and regulations, it has, under established court precedent, broad discretion to exercise its expertise in fashioning an appropriate remedy to stop the practices and violations, to prevent abuses and to correct the effects of the practices or violations. First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 680 (5th Cir. 1983); del Junco v. Conover, 682 F.2d 1338, 1340 (9th Cir. 1982), cert. denied, 459 U.S. 1146 (1983); Gross National Bank v. Comptroller of the Currency, 573 F.2d 889, 897 (5th Cir. 1978).
[.7] The Board has found this Bank to be in a weakened financial condition resulting from unsafe and unsound practices as well as a deteriorating local agricultural economy. The Bank's loan to deposit ratio has been found to be too high. Should the Bank's condition continue to deteriorate, there is the potential danger that it would turn to highly volatile brokered deposits to overcome liquidity difficulties.2 Thus, past history and present intentions are not particularly useful guides.
[.8] The ALJ declined to include a requirement that the Bank's Reports of Condition and Income (commonly referred to as "call reports") be republished to reflect proper provision for loan losses. Call reports filed after May 23, 1984, do not provide an accurate picture of the Bank's condition because they did not provide for an adequate loan valuation reserve for possible loan losses. So that the call reports accurately describe the condition of the Bank as of the dates the reports were filed, the Board orders that the call reports be refiled.
ORDER TO CEASE AND DESIST
IT IS HEREBY ORDERED, that * * * Bank, * * * ("Bank"), its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from the following unsafe or unsound banking practices:
ORDER DENYING REQUEST FOR ORAL ARGUMENT
FDIC 85-42b
On February 13, 1985, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Charges and of Hearing ("Notice") against the * * * Bank, * * * ("Bank") pursuant to the provisions of Section 8(b)(1) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. Section 1818(b)(1)) and Part 308 of the FDIC Rules of Practice and Procedures (12 C.F.R. Part 308). The Notice charged that the Bank has engaged in specified unsafe or unsound practices within the meaning of Section 8(b)(1) of the Act in conducting the business of the Bank and has violated laws, rules and regulations. The Notice also called for a hearing to take evidence on the charges alleged in the Notice and to determine whether an appropriate Order to Cease and Desist ("Order") should be issued under Section 8(b)(1) of the Act. The Order would require the Bank to cease and desist from the specified unsafe or unsound practices and violations and require the Bank to take affirmative action to correct the conditions resulting from such practices and violations. Counsel for the Bank filed an Answer to the Notice ("Answer") on March 5, 1985, admitting certain allegations contained in the Notice and denying others. Counsel for the Bank and the FDIC entered into stipulations regarding certain facts and use of documents designated as FDIC Exh 1.
[.9] 3. The purpose of a bank examination is to maintain confidence in the banking system, provide a report of the bank's condition to the bank's management and to the FDIC, protect the FDIC's insurance fund and insure compliance with various laws and regulations. (TR at 12)
[.10] 57. Liquidity refers to the ability of a bank to provide, in a cash effective man-
{{4-1-90 p.A-801}}ner, for decreases in its deposits and increases in its assets.
[.11] 58. As of May 23, 1984, the Bank's liquidity was inadequate based on the Bank's very high loan to deposit ratio, history of borrowings, and high volume of adversely classified assets. (TR at 91, 93, 356 and 407)
[.12] 67. The purpose of a loan valuation reserve is to absorb potential loan losses in those loans classified Substandard and all other unrecognized losses in the loan portfolio. (TR at 75)
CONCLUSIONS OF LAW
ISSUES AND RATIONALE
[.13] Also as noted by the FDIC, the courts have accepted the Comptroller of the Treasury's definition of the phrase "unsafe and unsound." First National Bank of Eden v. Department of the Treasury, 568 F.2d 610 (8th Cir. 1978) and First National Bank of La Marque v. Smith, 610 F.2d 1258 (5th Cir. 1980). As pointed out by the Eighth Circuit in considering the First National Bank of Eden case, which also involved an action under Section 8(b) of the Act, "the Comptroller suggests that these terms [unsafe and unsound] encompass what may be generally viewed as conduct deemed contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder." Supra at 611. Moreover, the courts have not attempted to substitute their judgment in cases involving alleged "unsafe and unsound" practices; rather, the agencies' findings are reviewed to determine if they are reasonable or rationally connected with the evidence as a whole. See Abilene Sheet Metal, Inc. v. National Labor Relations Board, 619 F.2d 332, 337 (5th Cir. 1980) and J.H. Rose Truck Line, Inc. v. Interstate Commerce Commission, 683 F.2d 943, 948 (5th Cir. 1982).
[.14] The final preliminary matter to be considered is whether improvements made by the Bank and changes in practices should be considered in the issuance of a Cease and Desist Order. The Bank has objected to a number of the specific provisions requested by the FDIC in its proposed Cease and Desist Order because it feels that the conditions which warranted those provisions have been corrected. However, the case law in this area uniformly states that correction of deficiencies is not a defense to a Cease and Desist Order. The issue was most recently considered by the U.S. Court of Appeals for the 5th Circuit in an unpublished decision dated March 12, 1985, a copy of which was furnished to the respondent and the undersigned in the brief of the FDIC. In Bank of Dixie v. Federal Deposit Insurance Corporation, No. 84-4737 (5th Cir. 1985), the Bank of Dixie appealed the issuance of a final Order to Cease and Desist issued by the FDIC on the grounds, inter alia, that the FDIC failed to consider evidence of improvements made by that bank in its operating procedures. The Court rejected that condition and ruled that a Cease and Desist Order is necessary to assure the FDIC that the bank will not resume the unsound or unsafe banking practices which have been established. Other courts have also mentioned the unreliability of the continuance of corrective actions and/or the potential for resumption of the discontinued practices or violations where corrective action has been taken only after a regulatory agency has instituted enforcement action. The Cease and Desist Order is meant to insure the bank's continued compliance with safe and sound banking practices as much as to correct the specific liquidity and classification problems discovered. In addi
{{4-1-90 p.A-808}}tion, it must be pointed out that if the bank has already complied with many of the provisions of the Cease and Desist Order, they can hardly be considered onerous. The inclusion of the provisions the bank feels have been complied with will merely insure that the correction of deficiencies and the maintenance of an adequate capital to asset ratio and loan loss reserve and not solely dependent on voluntary measures taken by the Bank.
RECOMMENDED ORDER TO CEASE AND DESIST
CERTIFICATE OF SERVICE |
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Last Updated 6/6/2003 | legal@fdic.gov |