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FDIC Enforcement Decisions and Orders |
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Bank's insurance terminated. Bank found to be operating in an unsafe or unsound condition because of inadequate capital, excessive volume of poor quality assets, and inadequate management. (This order was terminated by order of the FDIC dated 1-7-91; see ¶15,213.)
In a proceeding to terminate insurance, FDIC is not required to consider the costs of termination or the risk to the insurance fund posed by Bank's continued operation.
INTRODUCTION
This proceeding seeks to terminate the insured status of Boundary Waters State Bank, Ely, Minnesota (the "Bank" or "Respondent"), upon findings made by the Board of Directors (the "Board") of the Federal Deposit Insurance Corporation (the "FDIC") pursuant to section 8(a) of the Federal Deposit Insurance Act (the "FDI Act"), 12 U.S.C. § 1818(a), that the Bank is in an unsafe or unsound condition to continue operations as an insured bank. After an examination of the Bank by the State of Minnesota (the "State") as of September 1989 (the report of which is not in evidence), an examination by the FDIC as of March 3, 1989, and a visitation by the State as of January 29, 1990, 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.
PROCEDURAL HISTORY
The FDIC initiated this action on December 23, 1988, by issuing to the Commissioner of Commerce for the State of Minnesota ("Commissioner") and to the Bank, notice of the FDIC's determinations of the Bank's unsafe or unsound condition and practice in the form of the Findings of Violations of Cease-and-Desist Order and of Unsafe or Unsound Practices and Condition and Order of Correction.
{{3-31-91 p.A-1568}}or Unsound Practices and/or Condition, and Order Setting Hearing ("Notice"). The Bank and the Commissioner were served with the Notice on or about November 17, 1989. The Bank filed its Answer on December 6, 1989.
DISCUSSION
A. Statutory and Regulatory Requirements
[.1] Although the Respondent devotes a considerable portion of its submissions to the assertion that the FDIC need not terminate the insurance of a bank with less than three percent primary capital and that the above cited regulation creates only a rebuttable, rather than conclusive, presumption, this argument is essentially irrelevant in the circumstances of this case. While there may be a case in which the FDIC might exercise its discretion to refrain from terminating the insurance of a bank with less than three percent primary capital, this is not such a case. The record herein so strongly supports the conclusion that this Bank was and is operating in an unsafe and unsound condition, that the distinction between a rebuttable and a conclusory presumption is meaningless. Assuming the presumption were rebuttable, no evidence presented by the Respondent even approaches the threshold necessary to rebut the presumption. The ALJ found, and the Board concurs with the finding, that "there is nothing in this record which would suggest that the Bank's capital to asset ratio of less than 3 percent does not imply an unsafe and unsound condition...Not only does the March 3, 1989 examination demonstrate that the Bank was in an unsafe and unsound condition, its own Call Reports confirm this. And the state visitation of January 1990 shows that the condition has not changed." R.D. at 7.
[.2] The ALJ permitted the Respondent to amend its Answer prior to the hearing to assert as an affirmative defense that this Board's failure to approve an application for a change in control of the Bank, which allegedly would have infused capital sufficient to satisfy the FDIC's requirements, was arbitrary and capricious, and, accordingly, that the FDIC is estopped by its conduct from terminating the Bank's insured status based upon capital insufficiency.
[.3] Respondent asserts that the Bank "is not in such an unsafe or unsound condition" that deposit insurance must be terminated (emphasis added). Of course, this is an attempt by the Bank to create a new standard, not found in either the FDI Act or the FDIC regulations. The FDIC need not prove by a preponderance of the evidence that the Bank is "so" unsafe or unsound as to require termination of insurance; it must prove only that the Bank is unsafe or unsound. This it has done.
[.4] The Respondent argues that its condition was the result of actions by previous management, and that current management has improved conditions such that the Bank is and will be profitable according to its budget statement. The record does not support this assertion. While in 1989 there had been some improvement in the amount of losses over the losses experienced in 1988 and 1987, Respondent's own Reports of Condition and Income for 1989 show that the Bank had a net operating loss of $259,000 for the year. Moreover, the Bank's income statement for the first two months of 1990 reports an accumulated loss of $15,126.89. As noted by the ALJ, "while this may be a better figure than that in the budget, it is nevertheless negative." R.D. at 3.
To show improvement both in management of the Bank and in its condition, much is made by the Bank of its restructuring of credit lines. However, State Bank Examiner Curtis Thoreson testified that the quality of the Bank's loan portfolio was still unsatisfactory, both as of September 8, 1989, and as of January 29, 1990. Tr. at 168169. Examiner Thoreson noted that while some loans were "restructured," the fundamental problem of the borrowers' inability to repay the debt had not been improved in the least. Tr. at 169, 172. The evidence shows that the restructuring that was done consisted primarily of extending the payment terms for loans so that they would not be overdue. The Bank's records do not contain updated financial statements or other documentation indicating any likelihood that borrowers could make payments when the extended terms expire. Tr. at 169-70.
[.5] Finally, Respondent contends that the FDIC's costs in terminating the Bank's insured status would be far greater than the alleged risk the Bank poses to the insurance fund, and that for policy reasons the Board should not terminate the Bank's insurance. Section 8(a)(2) of the FDI Act provides for involuntary termination of insurance if the Board determines that one of three conditions is present.7 Nothing in the statutory language or legislative history suggests that consideration of the potential cost of liquidation compared with the financial risk posed by continued operation was intended by Congress to be an aspect of the administrative determination required under section 8(a)(2). In this case, the Board need only find that the Bank is operating in an unsafe or unsound condition. Such finding does not include any consideration of the cost of liquidation. See FDIC-89-24a.
CONCLUSION
The Board fully examined the record and finds that nothing contained therein requires modification to the ALJ's Recommended Decision.
ORDER TERMINATING FEDERAL DEPOSIT INSURANCE
IT IS HEREBY ORDERED, that the insured status of Boundary Waters State Bank, Ely, Minnesota, is terminated effective as of the close of business sixty days from the date of this ORDER.
NOTICE
____, 1990
In the Matter of
The Bank is a small commercial bank in northern Minnesota which has been the subject of regulatory concern of the FDIC and the State of Minnesota for some years. Among other things, the Bank currently is subject to a consent cease-and-desist order of the FDIC, violation of which was alleged to be a cause for termination of the Bank's insurance. This allegation was withdrawn at the outset of the hearing.
{{2-28-91 p.A-1573}}than that in the budget, it is nevertheless negative.
A. The Bank's Unsafe and Unsound Practices and Conditions
{{2-28-91 p.A-1574}}condition. Whether a bank's condition would be considered unsafe and unsound with a greater than 3 percent capital to asset ratio would depend on other factors, including quality of the loan portfolio, management and liquidity. Clearly, section 325.4(c) sets the minimum below which a bank's capital cannot drop without it being found in an unsafe and unsound condition regardless of other considerations. (There are circumstances set forth in the regulations, not applicable here, in which a bank operating with less than 3 percent capital to asset ratio may nevertheless not be subjected to having its insurance terminated.)
B. Respondent's Defenses
The Respondent's principal defense concerns the rejected application for change in control, contending that the proponents would have infused sufficient funds to bring the capital-to-assets ratio to an acceptable level. Since, according to the Respondent, the FDIC rejected the application capriciously, it is estopped from terminating the Bank's insured status based upon capital insufficiency.
{{2-28-91 p.A-1576}}levels of classified loads would be in the best interest of the insurance fund, the depositors or the public. Accordingly, I reject the Respondent's contention in this regard and conclude that this Bank's status as an insured institution ought to be terminated.
FINDINGS OF FACT
1. The Bank is a corporation existing and doing business under the laws of the State of Minnesota, with its principal place of business at Ely, Minnesota.
19. As of December 31, 1989, the Bank's ratio of primary capital to Part 325 total assets, without deducting any assets adversely classified "Loss", was 1.99 percent.
{{2-28-93 p.A-1578}}in deposits or other liabilities, or to fund asset growth. (TR. 8890.)
CONCLUSIONS OF LAW
1. The FDIC has jurisdiction over the Bank and the subject matter of this proceeding. |
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Last Updated 6/6/2003 | legal@fdic.gov |