Federal Deposit
Insurance Corporation

{{4-1-90 p.A-179}}
   [¶5021]FDIC Docket No. FDIC-83-21k-B (1-9-84).

   Civil money penalties assessed against directors and principal shareholders of insured state nonmember bank for violations of laws and regulations, exceeding the lending limits, and failure to take physical possession of collateral used to secure loans. FDIC assessed higher penalties for some directors than for others on the basis that these directors' positions as bank chairman and vice president, membership on the loan committee, and combined ownership of more than 50% of the bank's stock, conferred on them an additional measure of responsibility for monitoring the loan's compliance with the requirements of federal statutes and regulations.

   [.1]Directors—Duties and Responsibilities to Officers—Delegation
   Directors are expected to exercise reasonable diligence in carrying out their fiduciary duties, and may not delegate their full responsibility to officers of the bank.

   [.2]Civil Money Penalties—Factors Determining Liability
   Assessment of civil money penalties against bank directors is appropriate when directors admit knowledge of the facts on which the violations of laws or regulations are based.

   [.3]Civil Money Penalties—Differing Penalties Assessed
   Higher civil money penalties are supported for some directors when these directors are conferred with an additional measure of responsibility. Directors' positions as bank chairman and vice president, substantial stock ownership, membership on the loan committee, and connection with two separate affiliates whose loans were cited as being in violation of the same statute, support the imposition of higher penalties on these directors.

   [.4]Loans—Collateral
   The provision requiring that a loan be secured is for the purpose of protecting the bank against the possibility of a loss. In the case of a loan, the security is to insure the fulfillment of the obligation. In order to secure a loan, the collateral must be under the control of the bank, either actual or constructive, and give it priority over third parties.

   [.5]Civil Money Penalties—Amount—Statutory Standard
   Certain factors must be considered in determining an appropriate penalty, including the size of the financial resources, good faith of the insured bank or person charged, the gravity of the violation and the history of previous violations.

   [.6]Directors—Duties and Responsibilites—Standard of Care
   Directors of a bank are required to exercise ordinary care and prudence in the administration of the bank's affairs. They have a duty to manage the bank, and it is negligent to leave the management of its affairs entirely up to others.

In the Matter of * * *, individually and
as a director and principal shareholder of
* * *, * * *, an insured State
nonmember bank; and * * *, individually
and as a director and principal shareholder
of * * * * * *, an insured State
nonmember bank; and * * *, and * * *,
individually and as directors of * * *,
* * *, an insured State nonmember bank.




DECISION AND ORDER
FDIC-83-21k-B
   Pursuant to its authority under section 18(j)(3) of the Federal Deposit Insurance Act (12 U.S.C. §1828 (j)(3), the Federal Deposit Insurance Corporation on February 7, 1983, issued a notice of assessment of civil money penalties against the above named parties alleging violations of sections 22(h) and 23A of the Federal Reserve Act, as amended (12 U.S.C. §§375b and 371c), and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215) by virtue of exceeding the lending limits approved by the Board of Directors and failing to comply with the collateral requirements of section 23a. On May 12, 1983, a hearing in the matter was

{{4-1-90 p.A-180}}held in * * *. Thereafter, the parties filed proposed findings of fact, proposed conclusions of law, proposed orders, briefs and reply briefs. The Administrative Law Judge filed his Recommended Decision and Order on September 22, 1983, upholding the FDIC's charges. The Administrative Law Judge ("ALJ") recommended reducing to $1,000 the $5,000 penalties assessed against * * * and * * *, but upheld the $1,000 penalties assessed against each of the other Respondents.
   On September 18, 1981, Respondents, as directors of * * * Bank, * * * * * * ("* * *" or "the Bank"), approved¹a $400,000 loan to * * * Company ("* * *"). Two of the respondent directors (* * * and * * *) are controlling shareholders in both * * * and * * * ; thus, * * * is an affiliate of * * *. At the May 24, 1982 examination of * * *, FDIC examiners cited this loan as violating section 23A of the Federal Reserve Act, 12 U.S.C. §371(c), in that it was not adequately secured by collateral of the type required by section 23A. At a June 8, 1982 meeting of * * * Board of Directors, FDIC examiners explained that the loan violated section 23A because the collateral purportedly securing the loan was not in * * * physical possession. During an October 14–15, 1982 visitation of * * * FDIC examiners discovered that the collateral was still not in * * * possession. The visitation further revealed that on several separate occasions the credit extended to * * * exceeded the $400,000 authorized by the * * * board, thus violating section 22(h) of the Federal Reserve Act (12 U.S.C. §375(b)) and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215). Despite FDIC warnings of a legal violation, Respondents failed to obtain physical possession of the collateral until December 16, 1982, after the FDIC had warned Respondents that civil money penalties were being considered.

   [.1] Respondents do not deny that they had knowledge that stock purportedly securing the * * * line was being held by * * * to secure its own $375,000 loan to * * *. Neither do Respondents deny knowledge that * * *, also held a superior security interest of $500,000 in such stock. Several Respondents²merely allege that they relied upon the representations of Respondent * * * the President of * * *, who said he believed that the arrangements made to secure the * * * loan were legally sufficient. Respondents' alleged reliance upon the "legal advice" given by * * * was unjustified, in light of their awareness that the FDIC considered the * * * loan to violate section 23A. Directors are expected to exercise reasonable diligence in carrying out their fiduciary duties, and may not delegate their full responsibility to officers of the bank. Heit v. Bixby, 276 F. Supp 217 (E.D. Mo. 1967); Gibbons v. Anderson, 80 F. 345 (W.D. Mich. 1897).
   Respondents' explanation for the several different occasions upon which the * * * line exceeded $400,000 is similarly unpersuasive. Permitting a "related interest" of "directors" and "principal shareholders"³to draw credit in excess of the amount authorized by the board, because it is believed that the debtor will subsequently obtain sufficient funds to eliminate such excess, does not excuse violations of the prior approval requirements of section 22(h) and Regulation O.

   [.2] In light of previous violations in connection with loans to insiders, the Respondents admitted knowledge of the facts upon which the instant violations were based, and the duration of the instant violations after notice thereof by bank examiners, the FDIC concludes that the assessment of civil money penalties against Respondents is appropriate.
   None of the Respondents have questioned the appropriateness of the penalties assessed with respect to their resources. The ALJ's Recommended Decision found that the $1,000 penalties assessed against Respondents * * * were appropriate under the circumstances. However, the ALJ recommended that the $5,000 penalties assessed against * * * and * * * be reduced to $1,000. The Recommended Decision stated that "The evidence does not indicate any extenuating circumstances or compelling reason as to why * * * and * * *

[.3] The FDIC Board of Directors disagrees with and departs from the ALJ's Recommended Decision insofar as the latter states that there is no reason for assessing higher penalties against * * * and * * * than against the other Respondents. As demonstrated by the discussion below and the supplemental findings of fact made by the FDIC Board of Directors,⁴the record contains substantial evidence supporting higher penalties for these two respondents.
* * * and * * * positions as the Bank's Chairman and Vice President, respectively, as well as their membership on the * * * loan committee, conferred upon them an additional measure of responsibility for monitoring the loan's compliance with the requirements of federal statutes and regulations. Furthermore, the * * * family's substantial stock ownership in * * * provided * * * and * * * with an opportunity to control bank policy which was not shared by the other Respondents.
   In addition, * * * and * * * together owned more than 50% of the stock of * * * Company, the recipient of the loan in question. It further appears that, at the time the credit was first extended, both * * * and * * * were officers and directors of * * *. These business and financial interests in * * * provided them with a significant incentive for ensuring that the * * * credit was initially extended, and later renewed.
   And finally, it appears that another interest of * * * and * * * was involved in a section 23A violation as recently as one year prior to the extension of the * * * credit. The August 31, 1981 FDIC Report of Examination cited * * * for permitting * * * , a * * * affiliate, to co-sign a note without adequate collateral, in violation of section 23A. Both * * * and * * * were directors of * * *. The fact that * * * and * * * were connected with two separate affiliates whose loans were cited as being in violation of the very same statute within a relatively short period of time further supports the imposition of higher penalties upon these two Respondents.
   Thus, the FDIC concludes that the $1,000 penalties assessed against Respondents * * * should be upheld, for reasons cited in the ALJ's opinion. The FDIC further concludes that the $5,000 penalties assessed against * * * and * * * should also be upheld, for reasons cited in this decision.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

   Accordingly, the Board of Directors adopts all the findings of fact of the ALJ numbered 1-32, and the bases therefor, as set forth in his Recommended Decision, which are hereby incorporated by reference as part of this decision. The Board of Directors further makes the following supplemental findings of fact:
   33. * * * was Vice President of * * * Bank, and * * * was Chairman of the Board of Directors of * * *, at all times relevant to this action. (Ex. 5, p.B).
   34. Both * * * and * * * were members of the * * * Loan Committee at all times relevant to this action. (Ex. 5, pp. B and B-2).
   35. * * * and * * * each owned 1,030 shares of * * * stock at all times relevant to this proceeding. (Ex. 5, p. B). The * * * family owns 55% of * * * ' stock. (Ex. 15, p. 1-c).
   36. As of August 31, 1981, * * * was a vice-president and director of * * * Company (Ex. 5, p. 17). At all times relevant to this action, * * * was both a director and officer of * * * Company. (Ex. 5, p. 17; Ex. 9, pp. 23 and 24). As of May 24, 1982, five of * * * eight directors were members of the * * * family who also owned * * * stock. (Ex. 15, p. 1-c). * * * and * * * owned over 50% of * * * stock at all times relevant to this proceeding (Tr. at 14).
   37. The August 31, 1981 FDIC Report of Examination * * * cited the bank for violating the requirement in section 23A of the Federal Reserve Act, 12 U.S.C. §371c, that loans to affiliates be secured by adequate collateral. (Ex. 5, p. 1-c). The affiliate involved, * * * Company, had co-signed a note for an unsecured loan to a non-affiliate borrower. (Ex. 5, pp. 1-c, 16 and 17). The record shows that both * * * and * * * were directors of * * * Company at that time (Ex. 5, p. 17).

   4. The violations were of such gravity that civil money penalties of $1,000 each are warranted, pursuant to section 18(j)(3) of the Federal Deposit Insurance Act, 12 U.S.C. §1828(j)(3), against respondents * * * and * * * Civil money penalties of $5,000 each are warranted against Respondents * * * and * * *, in light of their control over * * * Bank, their interest in * * * Company and their connection with another * * * affiliate involved in a section 23A violation in the year preceding the instant violations.

   After taking into account the appropriateness of the penalty with respect to the size of financial resources available to * * * , * * * , the gravity of the violations, the history of previous violations and such other matters as justice may require, it is:
   ORDERED, that by reason of the violations found herein, a penalty of $5,000 each be and hereby is assessed against * * * and * * * individually, pursuant to the provisions of section 18(j)(3) of the Act, 12 U.S.C. 1828(j)(3).
   FURTHER ORDERED, that by reason of the transactions and violations found herein, a penalty of $1,000 each be and hereby is assessed against * * * , and * * * , individually, pursuant to the provisions of section 18(j)(3) of the Act, 12 U.S.C. §1828(j)(3).
   FURTHER ORDERED, that the civil money penalties set forth in this Order shall not be paid directly or indirectly by * * * Bank, but shall be paid directly by the individual against whom the penalty is assessed.
   By order of the Board of Directors.
   Dated at Washington, D.C., this 9th day of January, 1984.

/s/ Hoyle L. Robinson
Executive Secretary

FDIC-83-21k-B)

RECOMMENDED DECISION

   Burroughs, Judge: The Federal Deposit Insurance Corporation ("FDIC") seeks civil monetary penalties against directors of the * * * ("* * *"), * * *, pursuant to the provisions of section 18(j)(3)(A) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1828(j)(3)(A). The action results from a Report of Examination of * * * at the close of business on May 24, 1982, and a subsequent visitation on October 14–15, 1982, wherein it was determined that an extension of credit to * * * Company ("* * *") in the amount of $400,000 was in violation of sections 22(h) and 23A of the Federal Reserve Act, as amended 12 U.S.C. §§375b and 371c, respectively), and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215), promulgated pursuant to section 22(h) of the Federal Reserve Act. * * * is an affiliate of * * *. Shareholders who own or control a majority of the shares of * * * also directly or indirectly control * * *.
   On February 7, 1983, the Board of Directors of the FDIC issued a Notice of Assessment of Civil Money Penalties assessing a $5,000 penalty against * * * and * * * and a penalty of $1,000 against * * * , individually. On February 24, 1983, a letter was received by the Executive Secretary of the FDIC from counsel for the directors advising that they desired a hearing pursuant to section 308.69(b) of the FDIC's Rules of Practice and Procedures. A hearing was held in * * *, on May 12, 1983.
   * * * is an insured State nonmember bank. On July 31, 1981, the board of directors of * * * unanimously approved a $750,000 line of credit to * * *. Director * * * was absent and did not vote. Directors * * * and * * * abstained since they owned the majority of * * * stock. * * * served as director and chairman of the board of * * * . The meeting to approve the line of credit was called as a result of an oral request made by * * * . No loan application was filed by * * * prior to the approval on July 31, 1981 (Tr. 12–13).
   A demand note for the amount of $400,000 was executed by * * * on behalf of * * * on August 4, 1981. The note makes no reference to security for the loan. Collat- {{4-1-90 p.A-183}}eral or the loan was to consist of an assignment of one-third interest in 270,100 shares of the * * *. The stock was owned by * * *, and * * *. A pledging agreement dated July 30, 1981, signed by * * * individually and as vice president of * * *, was given in connection with the loan.¹The pledging agreement made no reference to * * * but stated that the stock was pledged "to secure the payment of all indebtedness, direct or contingent, now or hereafter owing the bank by the undersigned, or any of them." Possession of the stock was not physically delivered to * * *.
   The stock referred to in the pledging agreement was in the possession of the * * * ("* * *") to secure a $375,000 loan made by * * *. The same stock was pledged to the * * *, ("* * *") to secure a loan of $500,000 made to * * *. There are also indications that the same stock was pledged to the * * * (Ex.K). The directors of * * * were aware that the stock was in possession of * * * to secure a previous debt. They were also aware of the pledge to the * * * Bank. The marked value of the stock is unknown. Its book value was listed at $7.71 per share in the Report of Examination of * * * as of the close of business on May 24, 1982.
   The 270,100 shares of stock of * * * consisted of certificate number 135 for 166,800 shares, certificate number 136 for 52,900 shares, and certificate number 137 for 50,400 shares. Certificate numbers 135 and 136 were owned by * * *. Certificate number 137 was owned by * * *. The stock was in the possession of * * *. By letter dated July 30, 1981, * * * , individually and as vice president of * * * , advised * * * to deliver the stock to * * * Bank when the debt at * * * was liquidated. The letter indicated that * * * Bank would receive it for * * *. The letter was duly noted by a representative of * * * and * * * , president of * * * , that they agreed to the terms of the letter. The letter makes no reference to the fact that the stock was also pledged to * * * Bank.
   On September 18, 1981, the board of directors of * * * amended the line of credit approved for * * * on July 31, 1981, to reduce the amount to $400,000. Action was taken by the directors to lower the line of credit to $400,000 at the suggestion of one of the bank examiners during a September, 1981, examination, wherein it was determined the loan could not exceed $400,000. Directors attending and voting approval included * * *.
   Director * * * was not present at the July 31, 1981, approval of the line of credit but voted in favor of the $400,000 extension of credit at the September 18, 1981, meeting.
   On January 5, 1982, a new loan in the amount of $400,000 was made to * * * to pay out the line of credit that had been extended to it on August 4, 1981 (date of demand note). The extension of credit was made pursuant to the authorization of the board of directors meeting held on September 18, 1981. The loan was to be secured by the same stock in the * * *. As of January 5, 1982, the stock was still in the possession of * * * as security for the $375,000 loan from * * *. The stock was also pledged to secure a $500,000 debt to * * * Bank.
   The * * *, by letter dated June 7, 1982, advised * * * that it held 270,100 shares of * * * as collateral on a debt of * * *. There is no reference to any of the stock being held for the benefit of * * * , or * * *. On June 8, 1982, the examiners discussed all matters in their report of examination as of the close of business on May 24, 1982, with the board of directors of * * *. All directors were present. The discussion included the loan to * * * and the fact that * * * did not have physical possession of the pledged stock. The examiners advised the directors that there was a violation of section 23A of the Federal Reserve Act (Tr. 33–34).
   On June 9, 1982, a new loan was made to * * * to liquidate the January 5, 1982, loan. A demand note in the amount of $400,000 was given to * * *. The note states that its purpose was to "pay off previous note dated 1/5/82 in principal amount

SECTION 23A

   Section 23A of the Federal Reserve Act (12 U.S.C. §371c) requires that loans to affiliates be secured.²The FDIC submits that * * * did not have a perfected security interest in the assumed collateral for the following reasons:
   (1) The note did not purport to be secured;
   (2) The pledging agreement did not purport to pledge the security as collateral for the debt of * * * ;
   (3) * * * which had possession of the stock certificates, had not agreed to act as agent for * * * and
   (4) The first lienor (* * *) was not notified of the existence or amount of any security interest of * * *. The respondents argue that * * * held a valid, enforceable security interest in the stock pledged as collateral for the loan under Article 9 of the Uniform Commercial Code as enacted in * * * Rev. Stat. 355.9-101, et seq. They argue that the parties intended for a security interest to be created and thought they had complied with section 23A of the Federal Reserve Act.

[.4] Section 23A, while providing that the loan be secured by collateral, does not define when a loan is secured. The provision requiring that a loan be secured is for the obvious purpose of protecting the bank against the possibility of a loss. Something that is secure is generally regarded as free from loss. In the case of a loan, the security is to insure the fulfillment of the obligation.

REGULATION O

   On June 9, 1982, August 10, 1982, and August 24–29, 1982,⁶the records show that the extensions of credit to * * * exceeded the $400,000 limit authorized by the board of directors. These extensions of credit violated section 22(h)(2) of the Federal Reserve Act, 12 U.S.C. §375b(2) (Supp. V, 1981)⁷and section 215.4(b) of Regulation O, 12 C.F.R. §215.4(b),⁸since the loans exceeded the maximum amount of credit authorized by the board of directors of * * *.
   President * * * acknowledged that the records show excessive loans on the dates indicated but testified that the problem on

PENALTY DETERMINATION

   [.5] Section 18(j)(3)(A) of the Federal Deposit Insurance Act (12 U.S.C. §1828(j)(3)(A)) empowers the FDIC to impose civil penalties against any person participating in the conduct of the affairs of an insured nonmember bank who violates any provision of sections 23A of 22(h) of the Federal Reserve Act or any lawful regulation, such as Regulation O, promulgated pursuant to such authority.⁹Certain factors must be considered in determining an appropriate penalty. These factors specifically include the size of the financial resources, good faith of the insured bank or person charged, the gravity of the violation and the history of previous violations.¹⁰
   Respondents contend they were unaware that they were in violation of section 23A of the Federal Reserve Act. All insist that the extensions of credit to * * * were made in good faith. Several of the directors submitted statements in December, 1982, to the FDIC indicating that they were advised by president * * * that the loan was secured and that everything was legal. For these reasons, it is argued that the penalties are inappropriate.

   [.6] Directors of a bank are required to exercise ordinary care and prudence in the administration of the bank's affairs. Briggs v. Spaulding, 141 U.S. 132, 165–166. Lane v. Chouning, 610 F.2d 1385 (8th Cir. 1979). They have a duty to manage the bank and it is negligence to leave the management of its affairs entirely up to others. See Heit v. Bixby, 276 F. Supp. 217 (E.D. Mo. 1967). In Atherton v. Anderson, 99 F.2d 883, 888 (6th Cir. 1938), the court, in disposing of the argument by directors that they were uninformed of what was taking place, stated:

   Under the facts as stated and presently to be stated we do not think that appellants are justified in saying that they were uninformed of what was taking place. Directors of a national bank are not required to maintain a system of espionage over the acts and conduct of its officers. Briggs v. Spaulding, supra, 141 U.S. 132, at page 162, I1 S.Ct. 924, 35 L.Ed. 662. The business of a bank may be entrusted to them upon the assumption that they are honest and faithful but they are not to be regarded as infallible. Warner v. Penoyer, 2 Cir., 91 F. 597, 590, 592, 44 L.R.A. 761. As pointed in Gibbons v. Anderson, C.C., 80 F. 345, 349, it is not unusual for banks to meet disaster through the malfeasance of trusted officials. This is one of the dangers to be

apprehended and guarded against. For this reason the law requires and depositors have a right to expect that directors should retain and maintain a reasonable control and supervision over the affairs of the Bank, especially its larger and more important ones, to the end that they may keep themselves informed of its condition. Briggs v. Spaulding, supra; Bowerman v. Hamner, supra; Gibbons v. Anderson, supra; Warner v. Penoyer, supra; Wheeler v. Aiken County Loan & Savings Bank, C.C., 75 F. 781. In the discharge of this duty the directors are required not only in the observance of their official oath but by common law (Martin v. Webb, 110 U.S. 7, 15, 3 S.Ct. 428, 28 L.Ed. 49) to use ordinary diligence; and by ordinary diligence is meant, that degree of care demanded by the circumstances. They have their own responsibilities which they may not put aside.

FINDINGS OF FACT

   .1 * * * ("* * * , "), is a corporation existing and doing business under the laws of * * *. Its principal place of business is located in * * * . At all times relevant to this proceeding, it was an insured State nonmember bank (Admitted, Notice and Answer).
   2. * * * and * * * were principal shareholders and directors of * * * , at all times relevant to this proceeding, within the definition of the terms "director" and "principal shareholder" set forth at sections 215.2(c) and (j) of Regulation O, respectively, 12 C.F.R. §§215.2(c) and (j) (Ex. 3, 5, 7; Tr. 10).
   3. During all times relevant to this proceeding, * * * , * * * , and * * * were directors of * * * within the definition of the term "director" set forth at section 215.2(c) of Regulation O, 12, C.F.R. §215.2(c). (Admitted, Notice and Answer).
   4. * * * ("* * *"), is a "related interest" of * * * and * * * as that term is defined in section 215.2(k) of Regulation O, 12 C.F.R. §215.2(k). * * * and * * * own a majority of the stock of * * * . * * * is an "affiliate" of * * * as defined by section 2(b) of the Banking Act of 1933, 12 U.S.C. §221a(b)(1976)(Tr. 10, 13–14).
   5. Commencing with the examination of * * * by the FDIC as of the close of business February 11, 1979, FDIC examiners have cited * * * or individuals associated with it for violation of the following statutes and regulations governing transactions with insiders and affiliates:

   (a) As a result of an examination as of February 11, 1979, FDIC examiners cited * * * ; for violation of 12 C.F.R. §337.3(b)(1979) requiring prior approval of the bank's board of directors for certain transactions. The violation involved respondent * * * ; (Ex. 1, at 1-a; Ex. 2; Tr. 5–6).
   (b) As a result of an examination as of March 24, 1980, FDIC examiners cited * * *, for violation of Regulation O involving respondent * * *; (Ex 3, at 1-6-2; Ex. 4; Tr. 7–8).
   (c) As a result of an examination as of August 31, 1981, FDIC examiners cited * * * for violation of Regulation O (involving respondent * * * ), and of section 23A of the Federal Reserve Act (Ex. 5, at 1-c; Ex. 6; Tr. 8–9).

   The undersigned hereby pledge/s to * * * , * * * all the property described below to secure the payment of all indebtedness, direct or contingent, now or hereafter owing the Bank by the undersigned, or any of them:
One-third Share of the following stock of * * * and Trust: Certificate #135 for 166,800 shares, Certificate #136 for 52,700 shares, and Certificate #137 for 50,400 shares:

   There has been pledged to you and you have possession of the following stock of the * * * , * * * , Certificate #135 for 166,800 shares, Certificate #136 for 52,900 shares, and Certificate #137 for 50,400 shares.
   This is to direct that you deliver said stock to * * * , 41101, when the debts now due to you have been paid. Said * * * will receive it for The * * * , 41164, and the undersigned, their successors and assigns, as their interests may appear.

   Per the phone request of Mr. * * * this serves as your notification that we hold 270,100 shares of * * * in certificates 135, 136, and 137 as collateral on Mr. * * * debt.

   28. Following the October 14-15, 1982, visit of examiner * * * to the bank, the FDIC advised the directors of the bank that it was considering the imposition of civil penalties against the directors (Tr. 43).
   29. On November 17, 1982, * * * , vice president of the * * * , wrote the following letter to * * * president of * * * (Ex. K; Tr. 71–72):

   Please be advised our Bank is in receipt of a letter from * * * , whereby they agree to send stock pledged to them by * * * direct to our Bank after * * * (sic) debts have been paid to their Bank.
   This letter will serve as our agreement to hold the stock to secure our debt and the balance of the stock will be held for benefit of your Bank and The Bank * * * as their interest may appear.

   We furnish the following information at your request:
   The present balance of * * * Loan's debt to our bank is Five Hundred Thousand ($500,000) dollars.

   The letter states that the book value of the stock on November 15, 1982, was $6.93 per share (Ex. 13).
   32. On December 16, 1982, 68,600 shares of the capital stock of * * * Deposit was assigned and delivered to * * * to collateralize the line of credit extended to * * * (Ex. 22).

CONCLUSIONS OF LAW

   1. Extensions of credit made on June 9, 1982, August 10, 24, 25, 26, 27, and 28, 1982, were made in violation of section 215.4(b) of Regulation O, 12 C.F.R. §215.4(b) in that they exceeded the maximum amount of credit authorized by the board of directors of * * * Bank.
   2. The extensions of credit to * * * Company were made in violation of section 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. §371c (1976), in that they were not secured by the kind and amount of collateral required to be provided.
   3. The violations occurred from the failure of the named directors to exercise ordinary care and prudence in the administration of the bank's affairs.
   4. The violations were of such a gravity that the following civil monetary penalties are warranted pursuant to section 18(j)(3)(A) of the FDIC Act. 12 U.S.C. §1828(j)(3)(A):

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PROPOSED ORDER

   Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the following ORDER be entered by the Board:
   ORDERED: 1. That, by reason of the violations determined against * * * and * * * , individually, a penalty of $1,000 is assessed against each of them pursuant to the provisions of section 18(j)(3)(A) of the Act, 12 U.S.C. §1828(j)(3)(A); and
   2. That the civil monetary penalties assessed against each of the named individuals shall not be paid directly or indirectly by the * * * Bank but shall be paid directly by the individual against whom the penalty is assessed.
   Dated this 22nd day of September, 1983.

/s/ James D. Burroughs
Judge
1365 Peachtree Street, N.E.
Room 240
Atlanta, Georgia 30309
FTS: 257-4197
(404) 881-4197