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Appeals of Material Supervisory Determinations: Guidelines & Decisions

SARC-96-02 (February 29, 1996)

Your appeal of material supervisory determinations has been decided. Rulings not in your favor were made by the Supervision Appeals Review Committee (“Committee”) of the Federal Deposit Insurance Corporation (“FDIC”) on February 21, 1996 and are conveyed in this letter. The other appeal issues and comments on other matters related to the examination process were resolved by Nicholas J. Ketcha Jr., Director, Division of Supervision. Mr. Ketcha's findings are conveyed in a separate letter.

The Committee’s finding on each item decided against [Bank] (“Bank”) is presented below along with an explanation of the reason for the decision.

1. Substandard Classification of the … Properties
The Substandard classification on the Properties with book value as Other Real Estate at $8,413,000 is deemed appropriate. Factors leading to this determination included the following. The Bank’s stated 7.9 percent return on book value is not sufficient for these high risk asset properties. Among the high risk items is that income to the Bank is volatile as it is based on the merchandizing activities of the lessee, not fixed payments. If the lessee chooses not to renew its lease, it is uncertain whether or not a new lessee could be found, or, if found, whether the same amount of income could be generated. Value of the real estate is questionable as deficiencies are noted in the appraisal and the property has very limited marketability. Even if the $8.7 million appraised value is a fair representation of current market value, the margin of protection is insufficient for these properties' high degree of risk and the relatively low rate of return. The Bank has been unable to dispose of the properties for over eight years and there is still apparently no buyer interest. The property is leased on a year-to-year basis and the lessee is not interested in entering into a long term lease arrangement or in purchasing the properties. Substantial loss exposure is present.

2. Termination of the Cease-and-Desist Order
It is determined that the subject Cease-and–Desist Order remains an appropriate corrective program for your Bank; it will therefore not be terminated at this time. While the Bank’s condition has improved since the 1991 examination on which the cease and desist order was based, the volume of adversely classified assets remains excessive, loan administration problems including hazardous lending practices still exist, management deficiencies including the board’s structure continue, compliance with the order is incomplete, and confidence is low that Bank management is willing to take necessary corrective action based on an informal corrective program. The FDIC’s approach to determining the appropriate corrective program is driven by a bank’s condition as identified at examinations, compliance with and continued relevance of any existing corrective program, and by our judgment about the willingness of the institution to take necessary corrective action to eliminate the problems.

These determinations constitute the final decision of the FDIC.

By direction of the Supervision Appeals Review Committee of the FDIC.