FDIC Issues Enforcement Actions to Three Problem Banks

falling apartThe FDIC took enforcement actions against 39 banks in May, up from 31 during the previous month.  The 39 orders issued by the FDIC in May 2014 included two consent orders, one prompt corrective action directive, seven section 19 orders, three civil money penalties, and sixteen orders terminating consent orders and cease and desist orders.

Of the enforcement actions that the FDIC can take, the most serious orders issued are consent orders and prompt corrective action directives.

A Prompt Corrective Action Directive (PCAD) is the most serious action that can be taken against a bank and requires immediate corrective action to be taken by the bank.  Typically, a PCAD issued to a bank is a strong indicator of imminent failure.

FDIC guidelines on issuing a PCAD state that “Prompt corrective action is a framework of supervisory actions for insured depository institutions which are not adequately capitalized. These actions become increasing severe as an institution falls within lower capital categories.”

The sole PCAD issued in May was to The Freedom State Bank, Freedom, Oklahoma, issued on May 2, 2014.  This Bank was not previously on the unofficial Problem Bank List based on financial statements issued by The Freedom State Bank to banking regulators.  As a result of an FDIC audit report dated March 17, 2014, regulators determined that the Bank was a “critically undercapitalized institution” with a Tier 1 risk-based capital ratio of -10.42%.

The bank was so close to collapsing that the FDIC gave The Freedom State Bank only until April 23, 2014 to submit an acceptable capital restoration plan.  The capital restoration plan hastily put together by The Freedom State Bank was immediately determined to be unacceptable and the bank was closed on June 27, 2014, becoming the 12th banking failure of the year.

Consent orders are issued to banks considered to be operating in an unsafe and unsound manner and is one of the most serious regulatory actions that can be taken against a bank under Section 8 of the Federal Deposit Insurance (FDI) Act.

The two consent orders issued by the FDIC in May were against the following banks:

  • Community 1st Bank Las Vegas, Las Vegas, New Mexico
  • Farmers Deposit Bank, Cynthiana, Kentucky

Section 19 orders issued under the provisions of Section 19 of the FDI Act are issued by the FDIC to prohibit any person convicted of “any criminal offense involving dishonesty or breach of trust” from participating in the control or management of an FDIC insured institution.

Civil money penalties are assessed against banks or individuals found to be in violation of various rules and regulations.

Removal and prohibition orders are usually taken by regulators against individuals who have committed “violations of law or regulations, unsafe or unsound banking practices, and/or breach of fiduciary duty.”  An individual issued a removal and prohibition order is banned from any further participation in the affairs of any financial institution insured by the FDIC.

Despite the improvement in the overall health of the banking industry, there are still 411 banks listed on the FDIC’s confidential Problem Bank List at March 31, 2014, representing 6.1% of all FDIC insured institutions.  Problem banks typically have outstanding regulatory enforcement actions issued against them.

PBL MARCH 2014The entire list of FDIC enforcements actions for May can be viewed at FDIC Enforcement Decisions and Orders.

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