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FDIC Enforcement Decisions and Orders |
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Board adopts recommendation of ALJ and orders termination of bank's deposit insurance, despite some improvement in bank's condition after the date of the ALJ's recommended decision, finding that it remains in an unsafe and unsound condition by reason of its inadequate capital, high level of adversely classified assets, and failure of management to supervise and improve operations.
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[.2] Termination of InsuranceManagement Deficiencies
In the Matter of
This is a proceeding initiated by the Federal Deposit Insurance Corporation ("FDIC") on June 12, 1991, to terminate the insured status of Tarrant Bank, Fort Worth, Texas ("Respondent," "Bank," or "Insured Institution"), pursuant to section 8(a) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §1818(a). A hearing was held in this matter before Administrative Law Judge Steven M. Charno ("ALJ") on April 22, June 1011, and September 15, 1992. The ALJ issued his Recommended Decision on October 23, 1992, urging that the Respondent's insured status be terminated.1
[.1,.2] After a thorough review of the record in this proceeding as supplemented with more recent financial information, including the most recent State Report of Examination of the Bank, the Board concludes that termination of insurance is warranted, as found by the ALJ, and adopts and incorporates herein by reference the ALJ's Recommended Decision, with the modifications set froth in note 6, infra. The record considered by the ALJ fully supports his recommendation to terminate the Bank's deposit insurance.4 Despite the Bank's claims, the more recent financial information submitted pursuant to the Executive Secretary's
Pursuant to 12 U.S.C. §1818(a), IT IS HEREBY ORDERED, that the insured status of Tarrant Bank, Fort Worth, Texas, is terminated effective as of the close of business forty-five days from the date of this Order.
____, 1993
In the Matter of
On June 12, 1991, the Federal Deposit Insurance Corporation ("Petitioner" or "FDIC") issued a Notice of Intention to Terminate Insured Status, Findings, and Order Setting hearing to Tarrant Bank ("Respondent" or "Bank"), alleging that Respondent was in an unsafe or unsound condition and seeking termination of the Bank's insured status pursuant to Section 8(a) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(a). Respondent demurred by Answer filed June 24, 1991.
I. Background
Based upon its examination of Respondent as of September 7, 1990, the FDIC initiated this proceeding by issuing a Notification to Primary Regulator of Findings ("Notification") to the Commissioner of the Texas Department of Banking on February 28, 1991. The Notification alleged that Respondent was in an unsafe or unsound condition by virtue of being operated with (1) inadequate capital and reserves, (2) an excessive volume of poor quality assets and (3) management whose policies and practices were detrimental to the Bank and jeopardized the safety of deposits. As a condition to the continuation of insured status, the Notification required that Respondent accomplish the following actions within thirty days: (1) increase primary capital by $5,200,000, (2) eliminate from its books, by charge-off or otherwise, all of the assets classified as "loss" and not less than 50 percent of the assets classified as "doubtful" in a
II. Capital Adequacy
A. Uncontested Facts
Petitioner conducted an examination of the Bank as of January 17, 1992. Because Respondent challenges certain results of the examination, the parties were unable to reach stipulations concerning Respondent's condition at that time. For the reasons set forth below, I make the following findings of fact concerning Respondent's condition as of January 17, 1992: (1) Respondent's primary capital ratio was 4.33 percent, (2) Respondent's ratio of adversely classified loans to total loans was 17.16 percent and (3) Respondent's ratio of adversely classified assets to total equity capital and reserves was 420.25 percent.4
1. ORE Classifications
Respondent disputes the correctness of five adverse classifications of the Bank's Other Real Estate ("ORE") during the 1992 examination. The burden of establishing the validity of these classifications is on Petitioner. In response to questions from the bench, Petitioner's expert witness failed to fully explain the objective factual basis for his classification of a piece of ORE acquired from Mr. Maguire. This failure was not remedied by the expert's testimony that he could not recall his bases for criticizing Respondent's appraisal of the Maguire property or that he had relied upon the opinion of another expert who was not made available for cross-examination. The opinion of an expert who is unwilling or unable to explain his methodology or assumptions is not entitled to deference. See Sunshine State Bank v. FDIC, 783 F.2d 1580, 1583 (11th Cir. 1986). Accordingly, I find that Petitioner has not demonstrated the accuracy of its classification of the Maguire ORE as "doubtful" in the amount of $392,000. I therefore find that Respondent's equity capital as of January 17, 1992 should be increased by $196,000.
2. Indirect Dealer Loans
During the 1992 examination, Petitioner adversely classified some $2,225,000 in indirect automobile dealer installment loans. Respondent challenges these classifications and asks that $54,000 in "loss" classifications be set aside and that $54,000 be added to Respondent's equity capital as of January 17, 1992.
3. Loan Loss Reserves
A determination of the adequacy of Respondent's loan loss reserves turns on the opinions of three comparably qualified experts. After employing a number of methodologies, Petitioner's expert reached the conclusion that Respondent's reserves as of December 31, 1991 should have been $2,000,000. When the premises underlying this conclusion are projected to March 31, 1992, the amount of reserves which Petitioner believes necessary is $1,906,000. Respondent's expert calculated the proper amount of reserves to be $1,400,000 on December 31 and $1,258,000 on March 31. The State Supervisor, who was the only independent expert to give evidence in the proceeding, calculated the necessary reserve level to be slightly in excess of $1,400,000 on March 31.
4. Bias
Respondent argues that Petitioner's conduct of the 1992 examination evidence bias
C. Respondent's Condition on August 31, 1992
Respondent submitted a large volume of financial data concerning the Bank's operations and condition during the first eight months of 1992. This data included two of Respondent's quarterly Reports of Condition and Income, balance sheets and income statements for July and August of 1992 and copious underlying documentation relating to the Bank's recoveries, classifications and loan portfolio performance. This data was offered in evidence at the September 15 hearing and was not seriously challenged by Petitioner through cross-examination or through the introduction of rebuttal evidence. Accordingly, I find Respondent's evidentiary presentation to be the most probative evidence in the record concerning the Bank's condition during 1992 and make the following findings of fact concerning Respondent's condition on August 31, 1992: (1) Respondent's primary capital ratio had increased to 4.84 percent, (2) Respondent's ratio of adversely classified loans to total loans had been reduced to 13.87 percent and (3) Respondent's ratio of adversely classified assets to total equity capital and reserves had dropped to 369.81 percent.
D. Discussion
The appropriate "base line," i.e., minimum, ratio of capital to total assets under 12 C.F.R. § 325.3(b) is 5.5 percent. See Docket No. FDIC-86-41b, 1987 F.D.I.C. Enf. Dec. (P-H) ¶5092 at 7143. Because the Bank's primary capital ratio equalled no more than 4.84 percent on August 31, 1992, I find that Respondent lacked adequate capital on that date. The question of whether this capital inadequacy constitutes an unsafe or unsound condition must be answered in light of Respondent's overall financial condition and must take into account the level of its adversely classified assets. See Docket No. FDIC-87-120a, supra. On August 31, 1992, Respondent had adversely classified assets which equalled 369 percent of its equity capital and reserves. In light of prior decisions by the FDIC, I conclude that this level of adversely classified assets is excessive. See, e.g., Docket No. FDIC-80-33a, 1980 F.D.I.C. Enf. Dec. at 5084 [142 percent]; Docket No. FDIC-86-41b, 1987 F.D.I.C. Enf. Dec. (P-H) ¶5092 at 7144, 7147 and 7151 [162 percent]; In re First State Bank of Marlin, Docket No. FDIC-90-207a (F.D.I.C., issued August 4, 1992) [255 percent]. I therefore conclude that Respondent's capital inadequacy, when viewed in the context of the potential risk engendered by its large volume of poor quality assets, constitutes an unsafe or unsound condition. I also conclude that this condition provides an independent basis for the issuance of an order terminating Respondent's status as an insured depository institution.
III. Respondent's Management
Petitioner argues that the 1992 examination revealed serious deficiencies in Respondent's management. Specifically, Petitioner asserts that the examination report criticized Respondent's management in connection with the Bank's indirect dealer loans for (1) originating 20 percent of all newly classified loans, (2) failing to adhere to underwriting policies and (3) purchasing high-risk paper. The record supports these criticisms, and Respondent has proffered no probative evidence in contravention. Accordingly, I find that Respondent's management has failed to
IV. Requested Stay of the Order Terminating Insurance
In response to Petitioner's showing that the Bank is in an unsafe and unsound condition and, therefore, should have its deposit insurance terminated, Respondent contends that its financial condition has improved during 1992, in major part because of the Bank's strong earnings performance. Based on this performance, Respondent asks that the effective date of any order terminating deposit insurance be stayed for a sixmonth period.
IT IS HEREBY ORDERED, that the insured status of Respondent, Tarrant Bank, Fort Worth, Texas, is terminated effective as of the close of business sixty days from the date of this Order.
1. The status of Tarrant Bank, Fort Worth, Texas, as an insured depository institution under the provisions of the Federal Insurance Act, will terminate as of the close of business on the ____ day of December, 1992.
There may be included in such notice, with the written approval of the FDIC, any additional information or advice the Respondent may deem desirable.
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