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FDIC Enforcement Decisions and Orders |
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Bank ordered to cease and desist from engaging in unsafe or unsound banking practices, including the payment of an excessive management fee, operating with an inadequate level of capital protection for the quality and volume of assets held, recapitalizing the bank largely by using the funds of its own depositors, maintaining an inadequate loan loss reserve, operating with an excessive volume of poor quality loans and assets, and failing to provide supervision over the active officers of the bank adequate to prevent the unsafe or unsound banking practices.
[.1] Unsafe or Unsound Banking PracticeCase by Case Determination
[.2] Management ServicesPayment
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[.4] LoansPurchase of Common Stock of Bank
[.5] Lending and Collection Policies and ProceduresInadequate Security
[.6] DirectorsDuties and ResponsibilitiesSupervision of Bank's Affairs
[.7] Cease and Desist OrderDefensesCessation of Violation
In the Matter of, * * *
RECOMMENDED DECISION OF
PRELIMINARY STATEMENT
This is a proceeding brought by the Federal Deposit Insurance Corporation ("FDIC") pursuant to § 8(b)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(b)(1)1 for an order requiring * * *
THE ISSUES
The jurisdictional allegations of the Notice were admitted by respondents' answer, which otherwise was essentially a general denial. The issues to be determined are:
The "unsafe or unsound banking practices" alleged by paragraphs 5 through 10 of the Notice are:
Whether the Notice alleges "practices" or "conditions".
The Bank contends that the Notice, rather than alleging unsafe or unsound banking practices, lists, primarily, conditions. The thrust of this argument is that § 8(b)(1) of the Act provides for the issuance of a cease-and-desist order against practices but not conditions, although it permits the order to require affirmative action to correct the conditions resulting from such practices. A literal reading of the last sentence of § 8(b)(1) lends some credence to this contention. However, the same section requires the Notice to "contain a statement of the facts constituting the alleged . . . unsafe or unsound practice or practices," and this in effect is what the FDIC has done. Paragraph 5 through 10 of the Notice allege repeatedly that the respondents have engaged (and in most instances are continuing to engage) in unsafe or unsound banking practices "in that" they did or failed to do certain things. It is true these acts or failure to act resulted in certain conditions, but that does not make the Notice fatally defec-
{{4-1-90 p.A-29}}tive under the Act so that a cease-and-desist order will not lie.
The existence of an enforceable order.
The FDIC of course could have elected to enforce the negotiated order of December 16, 1977. However, it was based on the examination of May 9, 1977, and this was to some extent obsolete. Also, it did not cover all of the practices now alleged to be unsafe or unsoundparticularly the payment of allegedly excessive management fees.
[.1] It is apparent that what constitutes an unsafe or unsound practice must depend on the facts of each case. The matter was well stated by John F. Horne, Chairman of the Federal Home Loan Bank Board:
The management fee and loan loss provision.
Paragraph 5 of the Notice alleges that the Bank's net operating losses of $156,900 from January 1, 1975, through December 22, 1978, were covered primarily by (a) an excessive management fee of $276,300 paid to * * * and (b) the providing of loan loss provisions which lacked $22,300 of being sufficient to cover the Bank's actual net loan losses.
[.2] However, few banks pay management fees, so comparable expenses would normally be reflected under salaries. If this Bank's management fees were considered as salary, the "salary and employee benefits" item would be 2.77% of total assets for 1978, as compared to a median of 1.52% for the peer group and 1.53% for all banks in the state. This would also raise this Bank's average "salary and benefits" per employee to $19,727, as compared to $13,714 for the peer group and $13,969 for all banks in the state. (Tr.75). Thus it is clear that this Bank is paying considerably more for management services than most banks in the state in spite of its poor financial condition.
The need for additional capital.
Paragraph 6 of the Notice alleges that "the Bank has been and is operated with an inadequate level of capital protection for the volume and quality of assets held." The Notice then gives figures the accuracy of which was stipulated.
[.3] If the FDIC cannot require additional equity capital to protect depositors, it is powerless indeed. However ill-suited a cease-and-desist order may be for this purpose, affirmative action also may be required under the specific provisions of the Act.
The use of Bank funds to purchase its common stock.
Paragraph 7 of the Notice, as amended by stipulation, alleges that the Bank "loaned $93,150 of its fund for the purpose of purchasing common stock of the Bank, thereby in effect recapitalizing the Bank largely by using the funds of its own depositors."
[.4] The charge is that the making of the loans was an unsafe or unsound banking practice, not because the loans were unsound, but because the proceeds were used "for the purpose of purchasing common stock of the bank, thereby in effect recapitalizing the Bank largely by using the funds of its own depositors." Examiner * * * testified,
The quality of loans and assets.
Paragraph 8 of the Notice charges that there was "an excessive volume of poor quality loans and poor quality assets which originated as loans." It goes on to state that loans in the amount of $396,100 (6.6% of total loans) and assets totalling $182,900 were adversely classified as of December 22, 1978. The loans so classified were $326,600 Substandard, $35,400 Doubtful, and $34,100 Loss. The adversely classified assets included $155,000 in "other real estate" classified Substandard and $27,900 in "other assets" classified Loss.
[.5] I find that the making of inadequately secured loans as reflected by the adversely classified loans and assets was an unsafe and unsound banking practice, as alleged.
The valuation reserve for loan losses.
Paragraph 9 of the Notice alleges that an adequate valuation reserve for loan losses has not been maintained, and, specifically that as of December 22, 1978, this reserve was only $9,300 whereas loans classified Loss totalled $62,000.
The "inadequate supervision" charge.
Paragraph 10 of the Notice alleges that all of the foregoing unsafe and unsound banking practices were the result of the failure of the Bank's board of directors to provide
{{4-1-90 p.A-33}}adequate supervision over its active officers.
[.6] There is nothing intrinsically wrong with the Bank's being controlled by its majority stockholders, through their undoubted power to elect directors of their own choosing. However, a board of directors has a duty to supervise the business of the corporation, and * * * sets a higher, stricter fiduciary standard for directors and officers of a corporation than some other jurisdictions. Delano v. Kitch, 542 F. 2d 550 (10th Cir. 1976).
The Bank's discontinuance of the practices charged.
The Bank's principal "defense" is that most of the practices and conditions complained of have been eliminated since the December 22, 1978, FDIC examination. There was considerable testimony to this effect at the hearing, and since the hearing the Bank has moved alternatively to introduce a recent state bank examination report, which it claims substantiates its evidence, or to reopen the hearing. For the reasons which follow, this motion is denied. The evidence adduced by the Bank at the hearing regarding changes in its practices and conditions since December 22, 1978, was admitted over the FDIC's objections on the ground that it was entitled to have the matter heard strictly on the basis of the examination of that date. However, a final ruling on the relevance of such charges was reserved until the writing of this decision.
[.7] These improvements do not mean that the FDIC is not entitled to a cease-and-desist order. Literally dozens of cases might be cited to the effect that discontinuance of the practices complained of in such an administrative proceeding does not render the controversy moot or require discontinuance of the agency proceeding. Pike and Fischer, Administrative Law, 2nd Series, Consolidated Digest Vol. 2, § 8b.8. This is especially true where the cessation of the practice was not voluntary but was brought about by the administrative proceeding, Galter v. FTC, 186 F. 2d 810 (7th Cir. 1951), or even where the discontinuance took place some time prior to the filing of the complaint, since the agency is not obliged to assume that such practices will not be resumed, Arkansas Wholesale Grocers v. FTC, 18 F. 2d 866 (8th Cir. 1927), cert. den, 275 U.S. 533 (1927).
RECOMMENDED FINDINGS OF FACT
In view of the foregoing and all facts of record, it is recommended that the FDIC find that:
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1. The FDIC has jurisdiction over respondents and the subject matter of this proceeding.
/s/ Dee C. Blythe
ORDER
IT IS ORDERED, that * * *, its directors, officers, employees, and agents, CEASE AND DESIST from the unsafe and unsound practices set forth in the findings of fact and conclusions of law, and further take affirmative action as follows:
/s/ HOYLE L. ROBINSON |
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Last Updated 6/6/2003 | legal@fdic.gov |