Federal Deposit
Insurance Corporation

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   [¶5166B] In the Matter of Chickasha Bank & Trust Company, Chickasha, Oklahoma, Docket No. FDIC-90-22a(7-1-91).

   The FDIC Board adopts ALJ's recommendation and terminates the insured status of Bank found to be operating in an unsafe and unsound condition without realistic prospects for significant, immediate improvement in its capital condition.

   [.1] Termination of Insurance—Violation of Cease and Desist Order
   Bank's failure to correct its unsafe and unsound condition by increasing primary capital, as required by a cease and desist order, is basis for FDIC to terminate deposit insurance.

   [.2] Termination of Insurance—Post-Examination Evidence
   The Board accepts post-examination evidence of an institution's current financial condition, but where that evidence is in the form of affidavits by Bank officials (rather than current call reports or reports of examination) it is accorded little weight.

   [.3] Termination of Insurance—Time for Correction
   Section 8(a) of the FDI Act no longer provides for a period of correction after Board determination that a basis for termination of insurance exists, so after 30 days notice the matter is set for hearing.

In the Matter of

CHICKASHA BANK & TRUST
COMPANY
CHICKASHA, OKLAHOMA
(Insured State Nonmember Bank)
DECISION AND ORDER TO
TERMINATE FEDERAL DEPOSIT
INSURANCE

   This is a proceeding to terminate the insured status of Chickasha Bank & Trust Company, Chickasha, Oklahoma (the "Insured Institution" or "Respondent"), pursuant to section 8(a) of the Federal Deposit Insurance Act (the "FDI Act"), 12 U.S.C. § 1818(a). The Insured Institution consented to a Cease-and-Desist Order ("Order") after an examination as of September 23, 1988 ("Examination I"), revealed continued inadequate capital and an excessive level of poor quality assets. The Federal Deposit Insurance Corporation ("FDIC") and the Oklahoma State Banking Department ("State") conducted a joint examination as of September 15, 1989 ("Examination II"), to determine compliance with the Order.
   Examination II revealed further deterioration of the Insured Institution's financial condition. FDIC examiners found that Respondent had violated the Order, had engaged and/or continued to engage in unsafe or unsound practices, and was in an unsafe or unsound condition to continue operations as an insured institution. On May 21, 1990, the Board of Directors ("Board") of the FDIC issued its Notice of Intention to Terminate Insured Status, Findings, and Order Setting Hearing ("Notice"). Thereafter, the FDIC and the State conducted an examination as of October 12, 1990 ("Examination III"), that revealed that Respondent's primary capital, Part 325 assets, and ratio of primary capital to Part 325 total assets had decreased further.
   Administrative Law Judge James L. Rose ("ALJ") held a hearing on November 28–29, 1990. The ALJ determined that the Respondent had violated the Order and is in an unsafe and unsound condition. The ALJ's Decision recommends that Respondent's in-
{{6-30-92 p.A-1766.14}}sured status be terminated. The parties submitted exceptions to the ALJ's Recommended Decision. This matter is now before the Board for final decision.
   For the reasons set forth below, the Board concludes that termination of insurance is warranted and adopts and incorporates by reference herein the ALJ's Recommended Decision.¹

   Respondent submitted a Request for Oral Argument before the Board with its Exceptions to the Recommended Decision. Pursuant to 12 C.F.R. § 308.43, the grant of a request for post-hearing oral argument is an extraordinary matter within the sole discretion of the Board.
   As set forth in prior decisions of the Board (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), the factors considered in determining whether to exercise the Board's discretion to permit oral argument include whether (1) the factual and legal arguments are fully set forth in the parties' submissions, (2) oral argument will aid the Board in this matter, and (3) the Respondent will be prejudiced by the lack of oral argument. The request here fails to articulate any basis for oral argument before the Board. Accordingly, the Board declines to grant Respondent's request for oral argument.

   The ALJ recommends that the Board "issue the attached Order terminating the Bank's insurance...." R.D. at 15. The ALJ found that, "[e]ven accepting [Bank President] Pettigrew's statements as true, the Respondent continues to have substantially inadequate capital, even for a well-managed bank without serious financial problems...the Bank is in an unsafe and unsound condition and ... its Federal Deposit Insurance ought to be terminated." R.D. at 4. The ALJ considered two post-hearing affidavits submitted by Respondent, admitting² the first affidavit into evidence. He found that "the decision to terminate a bank's insurance is of the utmost seriousness and should be based upon a full consideration of all reasonably available evidence." R.D. at 3 and 4.
   The Board finds that the record before it supports the ALJ's determination that termination of insurance is appropriate. The Respondent is operating in an unsafe and unsound condition without realistic prospects for significant, immediate improvement in its capital condition in light of its high level of classified assets.

   The Respondent is an insured State nonmember bank located in Chickasha, Oklahoma, with approximately $44 million in assets. Tr. at 3; FDIC Ex. No. 17, p.3; R.D. at 18. Following Examination I³ in Septem-

   The FDIC has the authority under section 8(a) of the FDI Act, 12 U.S.C. § 1818(a), to terminate a financial institution's insured status upon a finding that it is in an unsafe or unsound condition or that it has violated a written agreement with the FDIC. In this proceeding, it is the Insured Institution's capital inadequacy, high volume of adversely classified assets, inability to comply with the Order, and lack of prospects for an immediate infusion of new capital that require termination of federal deposit insurance.

   [.1] A. The ALJ Properly Found that FDIC Enforcement Counsel have Established that Respondent is in an Unsafe and Unsound Condition and that it has Violated Terms of the Cease-and-Desist Order.
   As the ALJ found, FDIC Enforcement Counsel have established "that the Bank is now and has been operating in an unsafe and unsound condition in that it has too little capital given the poor quality of its assets." R.D. at 13–14. Moreover, the Respondent admitted that the Order, issued against the Insured Institution on May 25, 1989, required it to "[i]ncrease its primary capital by no less than $1,800,000 within 90 days after the effective date of the Order" and that the

B. Exceptions

   [.2] FDIC Enforcement Counsel's Exception challenged the acceptance of the Respondent's First Monthly Affidavit into evidence, asserting that if additional financial information is necessary, the document submitted should be either a Call Report or a Report of Examination. In previous termination of insurance actions the Board has accepted post-FDIC examination evidence as to an institution's current financial condition. However, that evidence has been in the form of current Call Reports and state reports of examination. This type of evidence is significantly different in nature, both as to reliability and objectivity, than the affidavits at issue in this proceeding. While the Board concurs with the ALJ's decision to accept the first affidavit in evidence (and to reject the second for the reasons stated), the inherently self-serving and one-sided nature of the affidavits raises questions as to the weight to be accorded such evidence. However, as the ALJ concluded, even if the two affidavits are taken at face value, they simply do not establish that the Insured Institution is no longer in an unsafe or unsound condition and no longer a threat to depositors and the insurance fund.
   The Respondent has set forth several Exceptions to the Recommended Decision that have been thoroughly considered by the Board. Respondent states in its first Exception that "the Bank takes exception to the ALJ's recommendation that the FDIC Board of Directors issue an order terminating the Bank's federal deposit insurance." Resp. Exc. at 1. The Insured Institution continues to press positions taken at the hearing and rejected by the ALJ as Exceptions¹⁸ to the ALJ's findings that are adverse to the Insured Institution, including the findings of fact and conclusions of law.
   Respondent asserts eleven separate Exceptions to the Recommended Decision, seven Exceptions to the ALJ's Findings of Fact, and five Exceptions to the ALJ's Conclusions of Law. The Exceptions span the ALJ's recommendation not to grant it a period of correction to the ALJ's failure to adopt the Respondent's proposed Conclusions of Law. However, considering the record before it, the Board finds that none of the Respondent's Exceptions are meritorious.

   [.3] C. Time for Correction is not Available under FIRREA
   Before the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L. 101-73, 103 Stat. 83 (August 9, 1989), section 8(a) of the FDI Act specifically provided for a period of correction of not less than 120 days (or a shorter period not less than 20 days) before the issuance of the Notice. 12 U.S.C. § 1818(a) (1989). However, section 8(a) of the FDI Act no longer provides for a period of correction. After determining that a basis for termination of insurance exist, the FDIC is required to give 30 days' notice to the insured institution's primary regulator "for the purpose of securing the correction of such practice, condition, or violation." 12 U.S.C. § 1818(a)(2)(A). After giving such notice, the FDIC, if it determines that "any unsafe or unsound practice or condi-

D. Respondent's Request for Stay

   Respondent has requested that the Board stay the "effectiveness of any such order terminating insured status...to permit the Bank the opportunity to appeal." Resp. Exc. at 5. However, Respondent has not provided any reasonable justification for such a stay. The record before the Board reveals a financial institution in a lengthy and continual decline. Despite its attempts, it has been unable to attract the additional capital necessary for it to survive as a viable institution. Delay in the termination of the insured status can only prolong the harm and increase the risk to depositors and to the insurance fund.

   The evidence in this record obviates the Respondent's assertion that the Insured Institution is improving. The evidence supports the ALJ's findings that the Respondent's capital-to-asset ratio is too low; that the Respondent has an excessive volume of adversely classified assets; that the Respondent's current condition is at best the same as in September 1989 when it was assigned a CAMEL rating of 5 and it stipulated to the Cease-and-Desist Order, with which it has not complied; and that even accepting the Respondent's assertions in their post-hearing affidavits, "the Bank has an insufficient capital cushion given the poor quality of its assets" resulting in the determination that the "Bank is now and has been operating in an unsafe and unsound condition." R.D. at 13. The Board, therefore, adopts the ALJ's findings and concurs with the ALJ's conclusion that the Insured Institution is in an unsafe or unsound condition within the meaning of 12 C.F.R. § 325.3. R.D. at 7–9 and 13–14. Absent an infusion of capital that has not been forthcoming, the deposit insurance of the Insured Institution should be terminated. Inasmuch as the Insured Institution has been in a steadily declining financial condition and has been unable to attract the necessary capital for the past several years, there is nothing in this record to indicate that this trend will end and that the Insured Institution will find a source of new capital in the immediate future. Therefore, the Board hereby enters an order terminating the insured status of the Insured Institution.

   IT IS HEREBY ORDERED, that the insured status of Chickasha Bank & Trust Company, Chickasha, Oklahoma, 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 308.62 of the FDIC Rules of Practice and Procedures, 12 C.F.R. § 308.62, as follows:

   July ____, 1991
1. The status of Chickasha Bank & Trust Company, Chickasha, Oklahoma, as an insured bank under the provisions of the Federal Deposit Insurance Act, will terminate as of the close of business on the ____ day of September, 1991.
   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.
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   3. Insured deposits in the Respondent on the ____ day of September, 1991, 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 September, 1991, will reduce the insurance coverage by the amount of such withdrawals.

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 Chickasha, Oklahoma, 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, alter, 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 1st day of July, 1991.
   /s/ Hoyle L. Robinson

In the Matter of
Chickasha Bank & Trust Company
Chickasha, Oklahoma
(Insured State Nonmember Bank)
James L. Rose, Administrative Law Judge:

Statement of the Case
   This matter is before me upon an action by the Federal Deposit Insurance Corporation under 12 U.S.C. § 1818(a), to terminate the Federal Deposit Insurance of the Chickasha Bank & Trust Company, Chickasha, Oklahoma (herein the Respondent or the Bank).
   This proceeding was initiated by the FDIC issuing a Notification to the Primary Regulator of Findings on March 13, 1990. The Notification required the Bank to increase its primary capital by $1,800,000 within 30 days and to eliminate from its books all assets classified as loss and not less than 50 percent of its assets classified as doubtful in the examination as of September 15, 1989. After the 30-day period provided in the Notification, the FDIC concluded that the Bank had not complied with the requirement to increase its primary capital by $1.8 million and that the Bank continued to be in an unsafe and unsound condition.
   Therefore, on May 21, 1990, the FDIC issued a Notice of Intention to Terminate Insured Status, Findings, and Order Setting Hearing. The Notice charged that the Bank had violated the previously consented to cease and desist order, that the Bank was in an unsafe and unsound condition, and that a significant risk to the insurance fund existed. The Bank filed its answer on July 9, 1990. On November 28 and 29, 1990, this matter was heard before me at Oklahoma City, Oklahoma. Both the FDIC and the Bank were represented by counsel.
   Following the close of the hearing, counsel submitted extensive briefs and reply briefs. In addition, by letter dated December 5, 1990, counsel for the Respondent advised that the Oklahoma Supreme Court had granted the Bank's motion for a writ of prohibition against contesting the validity of certain bonds issued by Grady County (the classification of which will be discussed below). Further, by transmittal letter dated February 1, 1991, counsel for the Respondent submitted an affidavit signed by Landel Pettigrew, the Bank's president, setting forth certain alleged changes in its primary capital and average assets as of December 31, 1990, and January 31, 1991.
   Counsel for the FDIC objected to receipt
{{6-30-92 p.A-1766.20}}of Pettigrew's affidavit into the record essentially on grounds that it was submitted following the close of the hearing and after the time for submission of briefs.
   I conclude that the affidavit ought to be received into evidence. First, the affidavit does not set forth evidence which was available at the time of the hearing. Rather, it purports to update the Bank's condition since the hearing and to be the most recent evidence available concerning the Bank's capital position. One of the difficulties with an action to terminate a bank's insurance is that the remedy does not aim to set right past violations, like a cease and desist, prohibition or civil money penalty. The remedy is prospective, but is necessarily based on evidence reflecting a past condition. Therefore deeming irrelevant all evidence after some set point in the past (the Notice, for instance) risks deciding the issue of insurance termination upon conditions which no longer exist. Further, the decision to terminate a bank's insurance is of the utmost seriousness and should be based upon a full consideration of all reasonably available evidence. Indeed the FDIC Corporation Board, sua sponte, reviewed an ALJ decision recommending termination of insurance to which no exceptions had been taken "given the serious nature of a Section 8(a) sanction. ..." In the Matter of *** Bank (Insured State Non-Member Bank), 2 P-H FDIC Enf. Dec. ¶5136 (1989) at A-1444. See also 2 P-H Enf. Dec.¶5133 (1989) where a state examination and call reports issued within two months of the hearing were considered because they constituted the most recent and reliable information of the bank's condition. In that case the FDIC Board noted that no capital injection had been made through the date of the Bank's exceptions to the ALJ decision and found that it continued to operate at a dangerously low capital level.
   Thus the FDIC Board recognizes decisions regarding the termination of a bank's insurance should consider recent competent evidence. Nevertheless, some accommodation must be made between insuring that the Board's final decision be based on current evidence and having finality to the process of taking evidence. At some point the record has to be deemed complete, yet all relevant and material evidence presented by the parties should be considered, given the seriousness of insurance termination.
   In this case that accommodation can be achieved by receiving Pettigrew's affidavit.¹ The fact assertions in the affidavit are of course hearsay, and have not been subject to cross-examination by counsel for the FDIC or subject to contest by rebuttal evidence. Were these facts material, then I would be inclined to reopen the record to allow the FDIC to respond. However, upon reviewing the affidavit I conclude that the assertions concerning the Bank's capital demonstrate no significant or material change from that set forth in the record. Even accepting Pettigrew's statements as true, the Bank continues to have substantially inadequate capital, even for a well-managed bank without serious financial problems. Therefore, although I received Pettigrew's affidavit into the record, it does not alter my conclusion that the Bank is in an unsafe and unsound condition and that, its Federal Deposit Insurance ought to be terminated.
   Upon the record as a whole,² including my observation of the witnesses, briefs and arguments of counsel, I hereby make the following Findings of Fact, Conclusions of Law, and recommended Order.

   The Respondent is a small commercial bank which has been in existence since 1973. It is one of three banks located in Chickasha, Oklahoma, a town of about 16,000, 45 miles from Oklahoma City.
   Although this action is predicated on the FDIC examination as of September 15, 1989, the Bank's deteriorating condition predates that examination. Thus, as of December 1985, the Bank's primary capital to Part 325 assets was 7.62 percent (whereas peer banks had a ratio of 9.25 percent). As of Decem-

   This case is about capital adequacy and asset quality. In brief, the record evidence overwhelmingly points to the conclusion that the Bank's capital is and has been inadequate, particularly for the high level of classified assets it holds. Further, the evidence shows that these conditions have existed with a generally downward trend for the last 5 years; and, there is no compelling evidence (including the Respondent's posthearing affidavits) that the Bank's condition will improve significantly in the foreseeable future.
   These general trends can be seen from the call reports and examination reports in evidence:
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   Unsafe or unsound condition. 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 Federal Deposit Insurance Act (12 U.S.C. § 1818(a)).

   An insured bank with a ratio of primary capital to total assets that is 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 to total assets that is equal to or greater than three percent.

   Calculation of minimum capital requirement. The minimum capital requirement for a bank (or an insured bank making an application to the FDIC) shall consist of a ratio of total capital to total assets of not less than 6 percent and a ratio of primary capital to total assets of not less than 5.5 percent.

   In 1986, Grady County (where the Bank is located) issued general obligation bonds, $3,500,000 of which the Bank purchased. On December 29, 1989, a lawsuit was filed, the essence of which contested the legality of the bond issue and the Bank was made a party defendant. In the examination of October 12, 1990, this $3.5 million asset was classified substandard essentially on grounds that if plaintiffs are successful the bonds could be cancelled or rescinded and in such a case it would be difficult to predict their value.
   As indicated above, shortly following the close of the hearing the Supreme Court of Oklahoma ruled in the Bank's favor on its
{{6-30-92 p.A-1766.23}}original jurisdiction petition seeking to prohibit contesting the legality of the bond issue. The Bank had argued that Oklahoma has a limitation period for contesting a bond issue which had run before the plaintiffs brought their suit.
   Though the lawsuit remains active, the Bank contends that inasmuch as the plaintiffs cannot successfully challenge the legality of the bond issue, the examiner's classification should be rescinded.
   The Bank further contends that the Grady County bonds lawsuit has inhibited its ability to raise capital and with success in this litigation it will be able to pursue capital injection. Therefore, either the FDIC's action to terminate its insurance ought to be dismissed or, at a minimum, another corrective period during which the Bank would be allowed to raise capital should be ordered.
   Under the Board's Sunshine decision, 1 P-H FDIC Enf. Dec. ¶5049 (1985), affirmed Sunshine State Bank v. Federal Deposit Insurance Corporation, 783 F.2d 1580 (11th Cir. 1986), as a general matter, an FDIC examiner's classification of a loan is entitled to substantial deference. The underlying facts upon which the classification judgment is made can be tested for accuracy, and the examiner's judgment can be evaluated to determine whether it is outside "the zone of reasonableness." But absent adverse findings on these issues, the examiner's predictive judgment concerning the inherent weakness in a credit must be accepted. Further, facts occurring subsequent to the classification are not relevant to determine whether or not the classification was appropriate in the first instance. Sunshine at 6125. However, post-examination facts certainly can be used, if otherwise relevant, to determine the current status of a bank's assets for purposes of whether, for instance, a bank's insurance ought to be terminated. 2 P-H FDIC Enf. Dec. ¶5136, supra.
   Here, the Respondent contends that $3.5 million substandard classification should be removed from the Bank's total classified assets, based upon the Supreme Court's action. I agree with the Respondent. I conclude that the substandard classification was reasonable in the first instance, due to the pendency of the lawsuit. However with the Supreme Court's determination that the bond issue cannot be contested, and given the fact that the bonds are backed by the Grady County taxing authority and its full faith and credit, I conclude that this is not an asset which should be classified. Further, the FDIC has never classified such an asset in the Region which includes Oklahoma. (Joint Ex. 2)
   Nevertheless, even subtracting the Grady County bonds from the assets classified at the October 1990 examination, leaves $6,195,000 in classified assets or 14.05 percent of the Bank's total assets. Further, this level of classified assets amounts to 452 percent of the Bank's total equity capital and reserves. Both percentages are inordinately high and demonstrate substantial weakness in asset quality. Accordingly, I conclude that even accepting the Respondent's position with regard to the Grady County bonds, it had too high a level of classified assets.
   The second point the Respondent makes with regard to the Grady County bonds is that pendency of the lawsuit inhibited it from raising capital; and absent this impediment, it is now in a position to pursue capital successfully. I reject the Respondent's argument in this respect primarily because Pettigrew stated in his letter to Walker (R. Ex. 4-1) that the Bank had been attempting to raise capital since June 1988, but without success. The lawsuit, however, was not filed until December 1989, approximately a year and a half later. Therefore, the pendency of the lawsuit could not have been the critical element of the Bank's inability to raise capital. The lawsuit may have been a factor after December 1989; but given the Bank's lack of success prior to its filing, I conclude that the Supreme Court's decision will not foreseeably aid the Bank in raising capital.

   At the 1989 examination, the FDIC required the Bank to charge off a loan to Dr. Don Hess in the amount of $50,038.74. Subsequently, the Bank appealed this ruling to the Oklahoma State Banking Commissioner who permitted rebooking of $42,538.74 of this credit, which represented the chargedoff amount minus six payments which had been received (R. Ex. 94). In the 1990 report, the FDIC again required the Bank to charge off this loan in the amount of $35,000, and again the Respondent appealed to the
{{6-30-92 p.A-1766.24}}Oklahoma State Banking Commissioner who permitted rebooking of $33,379 (R. Ex. 108).
   At the 1990 examination, the FDIC also required the Bank to charge off from other real estate owned, $43,000 of the Harbor real estate credit. The Bank appealed this charge-off to the Oklahoma Banking Commissioner who allowed it to rebook the asset in the amount of $38,000 (R. Ex. 102). The dispute concerning whether and to what extent this is a bookable asset involved appraisal on the real estate and the methodology used.
   The sum and substance of the testimony with regard to these two credits is that whether they are bankable assets is a matter about which there could be reasonable disagreement. The Respondent brought forth no evidence to the effect that the underlying facts upon which the FDIC examiner made his decision were erroneous nor, in view of the testimony of the State Banking Commissioner, can I say that the examiner's conclusion concerning these credits was outside the zone of reasonableness.
   Although the decision of the State Banking Commissioner may be considered here as relevant evidence concerning these credits, such is not binding on the FDIC. 2 P-H FDIC Enf. Dec. ¶5136 at A-1445 n. 4. Accordingly, deference must be given the examiner's determination and I conclude that the Hess and Harbor assets were appropriately required to be charged off from the Bank's books.
   Nevertheless, even if these are bookable assets and the Bank's capital should be increased by approximately $80,000, such would not substantively affect its capital position.
   Assuming the rebooking of these two credits and rescinding the substandard classification of the Grady bonds from the October 1990 examination would yield the following: The Bank's primary capital to assets would go from 3.06 percent to 3.28 percent; adversely classified assets to total assets would go from 21.97 percent to 14 percent; and total equity capital and reserves to classified assets would go from 596 percent to 362 percent.
   Even accepting the Respondent's position with regard to these credits, the picture of its capital adequacy and asset quality is essentially identical to that at the September 1989 examination, which was before the Grady lawsuit was filed. At best, the Bank's current situation is not worse than in September 1989, when it was assigned a 5 rating and an order of correction was entered.
   Similarly, accepting the affidavit submitted by the Respondent's president in February 1991, the Bank's primary capital to assets ratio would be 3.75 percent and its total equity capital and reserves to adversely classified assets 394 percent, which means that if just one-fourth of the classified assets become uncollectable the Bank would be insolvent. Therefore, even accepting the Respondent's best case numbers, the Bank has an insufficient capital cushion given the poor quality of its assets. (Pettigrew's second post-hearing affidavit, asserting a primary capital to asset raito of 3.78 percent shows no significant change.)
   I therefore conclude that the Bank is now and has been operating in an unsafe and unsound condition in that it has too little capital given the poor quality of its assets.

   The Respondent argues that if its capital should be found inadequate, rather than terminate its insurance, which would surely result in its going out of business, another period of correction ought to be ordered. The Respondent maintains that it has at least adequate management which should be able to raise additional capital. It also notes that the trends are moving in a positive direction.
   I do not agree with the Respondent's argument that with successful resolution of the Grady County bonds lawsuit it will necessarily be able to raise capital. It was unable to raise capital well before the action was filed.
   Further, from the record it appears that in part, at least, the Respondent's difficulties over the last several years are as a result of management improvidently declaring a dividend and paying its directors "exorbitant" fees. While the Bank was ultimately admitted to the capital forbearance program, it had initially been denied admittance based upon the State Banking Commissioner's evaluation of management. Since management remains the same, I cannot conclude from these facts that management is more than marginally adequate.
   The Respondent further contends that the Bank's problems are a direct result of the well known economic conditions existing in Oklahoma the last few years. While eco-
{{6-30-92 p.A-1766.25}}nomic conditions in the State no doubt have had an impact on the Bank, it is noted that the Bank's peers, who presumably operate in the same economic climate, had a primary capital to asset ratio of 10.25 percent as of June 30, 1990 (FDIC Ex. 17).
   Accordingly, on the record before me I cannot conclude there would be any purpose to be served by ordering another period of correction. 2 P-H Enf. Dec. ¶5136, supra. I will recommend that the FDIC Corporation Board issue the attached Order terminating the Bank's insurance and adopt the following findings of fact and conclusions of law:

   1. The Bank is a State nonmember bank existing and doing business under the laws of the State of Oklahoma and has its principal place of business in Chickasha, Oklahoma (Joint Ex. 1, No. 1).
   2. The Bank is, and has been at all times pertinent hereto, an insured State nonmember bank subject to the Act, 12 U.S.C. §§ 1811-1831k, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of Oklahoma (Joint Ex. 1, No. 3).
   3. Following an examination as of September 23, 1988, an Order to Cease and Desist ("Order") was issued against the Bank on May 25, 1989, effective June 4, 1989 (Tr. 157, 158 and 159; Joint Ex. 1, No. 23; FDIC Ex. 3, p. 13).
   4. Inter alia, the Order required the Bank to increase its primary capital by no less than $1,800,000 within 90 days (Joint Ex. 1, No. 23(a)).
   5. The Bank did not increase its primary capital by $1,800,000 within 90 days after the effective date of the Order (Tr. 34, 159; Joint Ex. 1, No. 24; FDIC Ex. 1, p. 1; FDIC Ex. 17, p. 1-b).
   6. Examiners from the FDIC examined the Bank as of September 15, 1989, and prepared a Report of Examination (Joint Ex. 1, No. 11; FDIC Ex. 1).
   7. As a result of the September 15, 1989, examination the FDIC determined that the Bank was engaging or had engaged in unsafe or unsound practices, was in an unsafe or unsound condition, and had violated the Order (FDIC Ex. 1).
   8. The FDIC issued a Notification to Primary Regulator of Findings ("Notification") regarding the Bank on March 15, 1990 (Joint Ex. 1, No. 4).
   9. Following the expiration of the 30-day corrective period set forth in the Notification, the FDIC determined that the Bank had not been restored to a safe and sound condition (Joint Ex. 1, Nos. 8, 24).
   10. On May 21, 1990, the FDIC issued a Notice of Intention to Terminate Insured Status, Findings and Order Setting Hearing ("Notice") (Joint Ex. 1, No. 9).
   11. Examiners from the FDIC examined the Bank as of October 12, 1990, and prepared a Report of Examination (Tr. 37; FDIC Ex. 17).
   12. An analysis of the results of the September 15, 1989, examination revealed the condition of the Bank to be as follows:
   (a) Primary capital was $1,530,000 (Joint Ex. 1, No. 22(a); FDIC Ex. 1, p. 3).
   (b) The Bank's ratio of primary capital to Part 325 total assets was 3.33 percent (Tr. 33; Joint Ex. 1, No. 22(e); FDIC Ex. 1, p. 3).
   (c) The Bank failed to increase its primary capital by $1,800,000 as required by the Order (Tr. 34, 159; Joint Ex. 1, No. 22(g); FDIC Ex. 1, p. 1).
   (d) The Bank's equity capital equaled $143,000 before losses of $34,000 in Other Real Estate (Tr. 30; Joint Ex. 1, No. 22(h); FDIC Ex. 1, p. 3).
   (e) The Bank's year-to-date net income was a negative $468,000 (Joint Ex. 1, No. 22(i); FDIC Ex. 1, p. 4).
   (f) The Bank's total assets equaled $43,984,000 (Joint Ex. 1, No. 22(j); FDIC Ex. 1, p. 2).
   (g) The Bank's total assets adversely classified equaled $7,111,000 or 384.59 percent of total equity capital and reserves (Tr. 33; Joint Ex 1, No. 22(k)).
   (h) The Bank's total loans equaled $25,295,000 (Joint Ex. 1, No. 22(l)).
   (i) The Bank's overdue loans and leases equaled 14.85 percent of gross loans and leases (Joint Ex. 1, No. 22(m)).
   13. The Bank had an excessive volume of poor quality loans in its portfolio. As of September 15, 1989, adversely classified loans and leases in the amount of $5,922,000 equaled 23.41 percent of the Bank's total loans and leases of $25,295,000 (Tr. 31; FDIC Ex. 1, p. 2).
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   14. During the September 15, 1989, examination the FDIC made the following analysis of the Bank's assets:
   (a) Adversely classified loans and leases were:

   1. The FDIC has jurisdiction over the Bank and this action, pursuant to the Act, 12 U.S.C. §§ 1811-1831(k), and the FDIC Rules and Regulations, 12 C.F.R. Chapter III.
   2. In an action to terminate a bank's insured status under section 8(a) of the Act, 12 U.S.C. § 1818(a), the FDIC has the burden of establishing such condition or practice by a preponderance of the credible evidence.
   3. At all times pertinent to this proceeding, the Bank was an insured State nonmember bank subject to the Act, 12 U.S.C. §§ 1811-1831(k), the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of Oklahoma.
   4. As of September 15, 1989, the Bank's total capital was below the minimum acceptable level established by FDIC regulations regarding capital maintenance for fundamentally sound, well-managed banks having no material or significant financial weaknesses within in the meaning of 12 C.F.R. § 325.3.
   5. As of September 15, 1989, the Bank was operating with an excessive volume of adversely classified assets.
   6. As of September 15, 1989, the Bank
{{6-30-92 p.A-1766.27}}was in an unsafe or unsound condition within the meaning of section 8(a) of the Act, 12 U.S.C. § 1818(a).
   7. As of October 12, 1990, the Bank's total capital was below the minimum acceptable level established by FDIC regulations regarding capital maintenance for fundamentally sound, well-managed banks having no material or significant financial weaknesses within the meaning of 12 C.F.R. § 325.3.
   8. The Bank had an excessive volume of poor quality loans in its portfolio.
   9. As of October 12, 1990, the Bank was operating with an excessive volume of adversely classified assets.
   10. As of October 12, 1990, the Bank was in an unsafe or unsound condition within the meaning of 12 U.S.C. § 1818(a).
   11. As of November 28, 1990, the Bank continued to be in an unsafe or unsound condition within the meaning of section 8(a) of the Act, 12 U.S.C. § 1818(a).
   12. For purposes of this action the Harbor and Hess credits, which the Oklahoma Banking Commissioner allowed to be rebooked, are not bankable assets.
   13. As of December 3, 1990, the Grady County Bonds issue should not be classified as substandard.
   14. As of December 31, 1990, the Bank continued to have inadequate capital and excessive classified assets.
   15. The FDIC has satisfied all statutory requirements of section 8(a) of the Act, 12 U.S.C. § 1818(a), in this action to terminate the Bank's status as an insured depository institution.
   16. By failing to increase its primary capital as required by the Order, the Bank engaged in a violation of the Order.
   17. Violation of the Order is a sufficient cause to terminate the Bank's status as an insured depository institution.
   Dated, Washington, D.C. March 12, 1991
   /s/ James L. Rose

In the Matter of
Chickasha Bank & Trust Company
Chickasha, Oklahoma
(Insured State Nonmember Bank)

   IT IS HEREBY ORDERED, that the insured status of Chickasha Bank & Trust Company, Chickasha, Oklahoma ("Bank"), is terminated effective as of the close of business sixty days from the date of this Order Terminating Federal Deposit Insurance ("Order").
   IT IS FURTHER ORDERED, that pursuant to 12 C.F.R. § 308.62, 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 and the depositor's last address of record as shown on the books of the Bank. The Bank shall furnish the Federal Deposit Insurance Corporation ("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 on the books of the Bank and the date thereof. Such notice shall meet the requirements of section 308.62 of the FDIC Rules of Practice and Procedure, 12 C.F.R. § 308.62, as follows:

   1. The status of the Chickasha Bank & Trust Company, Chickasha, Oklahoma, 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 ____, 1991;
   2. Any deposits made by you after this date, either new deposits or additions to existing deposits, will not be insured by the Federal Deposit Insurance Corporation;
   3. Insured deposits in Chickasha Bank & Trust Company on the ____day of ____, 1991, will continue to be insured, as provided by the Federal Deposit Insurance Act, for 2 years after the close of business on the ____day of ____, 1991. Provided, however, that any withdrawals after the close of business on the ____ day of ____, 1991, will reduce the insurance coverage by the amount of such withdrawals.