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   [5041] FDIC Docket No. FDIC-83-218e (1-14-85).

   FDIC issued an order removing bank directors from their offices for violating an order to cease and desist from unsafe or unsound banking practices, for violating laws and regulations, and for breaching their fiduciary duties. The president/chief executive officer of the bank, as the highest-ranking officer of the bank, bears the responsibility for the unsafe or unsound practices, and for the violation of a cease and desist order, resulting in substantial financial loss to the bank.

   [.1] Unsafe or Unsound Banking Practice—Defined Generally
   Unsafe or unsound banking practices include having the following: poor quality loans; inadequate capital and loan loss reserves; excessive concentrations of credit; and poor quality of management.

   [.2] Cease and Desist Orders—When Appropriate
   Bank director caused a bank to violate a cease and desist order by failing to provide the bank with management acceptable to the FDIC, by failing to take steps to increase sufficiently the bank's total equity capital and reserves, by failing to adopt and implement policies to improve the quality of the bank's loan portfolio, and by failing to establish an adequate loan loss reserve within the periods specified in a cease and desist order.

   [.3] Directors—Duties and Responsibilities—Compliance with Cease and Desist Order
   A president and chief executive officer of a bank, as the highest-ranking officer of the bank, bears responsibility for the unsafe and unsound practices of the bank, and for violation of a cease and desist order.

   [.4] Prohibition, Removal, or Suspension—Correction of Violations
   The repayment of funds after an ALJ's finding that a bank insider had violated the law, is not a defense to an action for violation of law.

   [.5] Bank Examinations—Purpose
   The purposes of a bank examination are: to determine the financial condition of a bank; to evaluate a bank's management; and to determine a bank's compliance with applicable laws and regulations.

   [.6] Lending and Collection Policy and Procedures—Overdue Loans
   A volume of overdue loans amounting to 13.13% of the total amount of a bank's loans is excessive.

   [.7] Lending and Collection Policy and Procedures—Unsafe or Unsound Practices
   A volume of adversely classified loans equal to 17.44% of a bank's total loans is excessive or very high.

   [.8] Assets—Unsafe or Unsound Practices
   An amount of adversely classified assets equal to 264.53% of the total equity capital and reserves of a bank is excessive.

   [.9] Capital—Adequacy—Unsafe or Unsound Practices
   Adjusted equity capital and reserves in an amount equal to 2.17% of adjusted total assets is indicative of an inadequate capital account.

   [.10] CAMEL Rating—Management—"5"
   Management of a bank should be rated 5 in those instance where incompetence has been demonstrated and where problems resulting from management are of such severity that management must be strengthened or replaced before sound condition can be brought about.

   [.11] CAMEL Rating—"5" Defined
   A bank given a composite rating of 5 is one where the volume and character of weaknesses are such as to require urgent aid from the shareholders or other {{4-1-90 p.A-366}}sources. Such banks require immediate corrective action and constant supervisory attention, and the probability of failure is high.

   [.12] Removal, Prohibition, or Suspension—Personal Benefit from Bank Funds Directors
   A bank director who abstracts bank funds for his personal benefit is in breach of his fiduciary duty to the bank.

In the Matter of * * * An Officer and
Director of * * * BANK OF * * *
(INSURED STATE NONMEMBER BANK)


DECISION AND ORDER OF
REMOVAL FROM OFFICE AND
PROHIBITION FROM FURTHER
PARTICIPATION

FDIC-83-218e

STATEMENT OF THE CASE

   These proceedings arise under Section 8(e)(1) of the Federal Deposit Insurance Act (the "Act") (12 U.S.C. §1818(e)(1)). On October 3, 1983, the Board of Directors of the Federal Deposit Insurance Corporation (the "Board" and the "FDIC", respectively) issued a Notice of Intention to Remove from Office and to Prohibit from Further Participation (the "Notice") against * * * (the "Respondent") and * * *, pursuant to Section 8(e)(1) of the Act and Part 308 of the FDIC Rules of Practice and Procedures (12 C.F.R. Part 308). The Notice charged the Respondent and * * * in their capacities as officers and directors of the * * * Bank of * * * (the "Bank"), with having violated an Order to Cease and Desist issued by the FDIC against the Bank on November 8, 1982, which had become final; and with having engaged or participated in unsafe or unsound banking practices, violations of law, or breaches of their fiduciary duties evidencing a willful or continuing disregard for the safety and soundness of the Bank. The Notice further alleged that the Bank had sustained or probably would sustain substantial financial loss or other damage as a result of the conduct of the Respondent and * * *, and/or that the two officers and directors had received financial gain by reason of such violations, practices, or breaches of fiduciary duties. The Respondent and * * * filed an Answer on November 21, 1983, which admitted certain allegations in the Notice, and denied others.
   Following the issuance of the Notice, and prior to the administrative hearing, * * * entered into an agreement with the FDIC, entitled "Agreement to Resign from Office and to Refrain from Participation," dated January 17, 1984. The FDIC then moved to delete reference to * * * from the Notice. That motion was granted on May 1, 1984. The removal action against the Respondent, * * *, has continued.
   A formal hearing was conducted from May 1 to May 4, 1984, in * * *, before Administrative Law Judge E. Kendall Clarke (the "ALJ"). The FDIC's Proposed Findings of Fact, Conclusions of Law, Order, and Brief were submitted on August 24, 1984. The Respondent's Proposed Findings of Fact, Conclusions of Law, and Order were submitted on September 6, 1984. The ALJ issued his Recommended Decision on October 16, 1984. Neither party filed exceptions to the Recommended Decision.

BACKGROUND

      [.1—.2] The FDIC alleged that the Respondent, in his capacity as president and a director of the Bank, had caused the Bank to commit unsafe and unsound banking practices: namely, poor quality loans, inadequate capital and loan loss reserves, excessive concentrations, and poor quality of management. The FDIC further claimed that the Respondent had caused the Bank to violate the Order to Cease and Desist by failing to provide the Bank with management acceptable to the FDIC; by failing to take steps to increase sufficiently the Bank's total equity capital and reserves; by failing to adopt and implement policies to improve the quality of the Bank's loan portfolio; and by failing to establish an adequate reserve for loan losses, within the periods specified in the Order to Cease and Desist.
   The FDIC alleged that the Respondent had breached his fiduciary duties by availing himself of overdraft privileges at the Bank in violation of the conditions on loans and other extensions of credit to executive officers and directors under Section 22(h) of the Federal Reserve Act, as amended (12 U.S.C. § 375b), and Section 215.4(d) of Regulation O (12 C.F.R. § 215.4(d)), as made applicable to state nonmember banks by Section 18(j) of the Act (12 U.S.C. {{4-1-90 p.A-367}}§ 1828(j)). The FDIC also claimed that the Respondent had received income generated from the sale of credit life insurance, after having been informed by the State Superintendent that the receipt of credit life insurance commissions by a director was improper. Finally, the FDIC alleged that the Respondent had failed to service properly loans under his supervision, thus incurring risks of loss that imminently threatened the Bank's solvency.
   The Respondent did not challenge the facts upon which the FDIC based its charges. Instead, he claimed that he was not personally responsible for deterioration in the condition of the Bank, and that he had not caused the Bank to violate the Order to Cease and Desist. The Respondent claimed that the Bank had suffered no substantial loss by reason of the overdrafts, and that the supervisory fees he withdrew from the sale of credit life insurance had been repaid to the Bank. The Respondent denied having received financial gain from the overdrafts and the credit life insurance commissions. The Respondent contended that the losses estimated by the FDIC on loans he supervised were speculative. The Respondent further denied that any of the acts or omissions complained of had involved personal dishonesty or willful or continuing disregard for the safety and soundness of the Bank, and also denied that the Bank had suffered or would suffer substantial financial loss, or that the interests of the Bank's depositors had been seriously prejudiced by reason of these acts or omissions. The Respondent contended that he is being held responsible for a general deterioration in the condition of the Bank, and that this is an improper basis for a Section 8(e) action.

DECISION

   [.3—.4] After reviewing the entire record, the Board finds that the Recommended Decision is supported by the evidence and is in accordance with applicable law. The Respondent was President and Chief Executive Officer, the senior loan officer, a member of the loan committee and a member of the board of directors of the Bank during the entire period from 1977 to January 1984. As the highest-ranking officer of the Bank, he must of necessity bear the responsibility for the unsafe and unsound practices described in the Recommended Decision and violation of the Order to Cease and Desist, resulting in substantial financial loss to the Bank. The ALJ having found that Respondent violated the law, Respondent's subsequent repayment of funds obtained through impermissible insider transactions is not a defense. The acts of the Respondent demonstrate a willful, or continuing disregard for the safety and soundness of the Bank within the meaning of Section 8(e) of the Act (12 U.S.C. 1818(e)), as recently reaffirmed by the Court of Appeals in Brickner v. FDIC, 53 U.S.L.W. 1081, 2266 (8th Cir. November 5, 1984).
   The Board therefore agrees with Administrative Law Judge Clarke that a permanent order must be issued removing the Respondent from his positions as president and director of the Bank and prohibiting his further participation in the affairs of the Bank.

FINDINGS OF FACT

   The Board adopts Judge Clarke's Recommended Findings of Fact, and incorporates them herein by reference.

CONCLUSIONS OF LAW

   The Board adopts Judge Clarke's Recommended Conclusions of Law, and incorporates them herein by reference.

ORDER OF REMOVAL AND PROHIBITION FROM PARTICIPATION

   Having found and concluded that * * * (the "Respondent"), in his capacity as an officer and director of the * * * Bank of * * * (the "Bank"), has violated a cease-and-desist order which has become final, has engaged or participated in unsafe or unsound banking practices, violations of law, and breaches of his fiduciary duty, evidencing a willful or continuing disregard for the safety and soundness of the Bank; and
   Having found and concluded that by reason of the Respondent's conduct, the Bank has suffered or will probably suffer substantial financial loss or other damage, and that the Respondent has received financial gain by reason of such violations or practices, it is:
   ORDERED, that the Respondent be, and hereby is, removed as an officer and director of the Bank, and prohibited from participation {{4-1-90 p.A-368}}in any manner, in the conduct of the affairs of the Bank.
   This ORDER shall become effective thirty (30) days after service of the Respondent and the Bank, and shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall be modified, terminated, suspended, or set aside by the Board.
   Dated at Washington, D.C. this 14th day of January, 1985.
   By direction of the Board of Directors.
/s/ Hoyle L. Robinson
Executive Secretary

Docket No. FDIC 83-218e

   Recommended Decision, Findings of Fact,
Conclusions of Law

SUMMARY OF PROCEEDINGS

   On October 3, 1983, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Intention to Remove From Office and to Prohibit From Further Participation ("Notice") to * * * ("Respondent") and * * * pursuant to the provisions of section 8(e)(1) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. § 1818(e)(1) and Part 308 of the FDIC Rules of Practice and Procedures (12 CFR Part 308). The Notice charged the Respondent and * * * , in their capacities as officers and directors of the * * * Bank of * * * ("Bank"), with violating an FDIC Cease and Desist Order issued on November 8, 1982 against the Bank, which had become final, with engaging in unsafe or unsound banking practices, with committing violations of law, and/or with breaching their fiduciary duties evidencing a continuing disregard for the safety and soundness of the Bank. The Notice further alleged that, as a result of the Respondent and * * * actions and conduct, the Bank had suffered or would probably suffer substantial financial loss or other damage, or that the interests of the Bank's depositors could be seriously prejudiced by reason of such violations, practices, or breaches of fiduciary duties, and/or that the Respondent and * * * had received financial gain by reason of such violations, practices, or breaches of their fiduciary duties.
   The Notice advised that a hearing would be held to take evidence on the charges contained therein to determine whether a permanent order should be issued to remove the Respondent and * * * from their respective positions as officers and directors of the Bank, and to prohibit their further participation in the conduct of the affairs of the Bank.
   An Answer to the Notice ("Answer") was filed on November 21, 1983. The Answer contains certain admissions and certain denials on behalf of Respondent and * * *.
   Subsequent to the issuance of the Notice, and prior to the hearing, * * * entered into an agreement with the FDIC, entitled "Agreement to Resign From Office and to Refrain From Participation", dated January 17, 1984. As a result, the Notice was modified by motion of the FDIC to eliminate reference to * * *. That motion was granted by this Court on May 1, 1984 (Hearing Transcript (hereafter "Tr.") 5).
   A hearing on the charges against the Respondent was convened in * * * before the undersigned administrative law judge, beginning on May 1, 1984 and concluding on May 4, 1984. The hearing record consists of a transcript of 490 pages, 33 exhibits introduced by the FDIC numbered 1 through 33 (hereafter "FDIC Ex."), and four exhibits introduced by the Respondent and lettered A through D (hereafter "Resp. Ex.").

FINDINGS OF FACT

   A. General Findings

   1. The Bank is a corporation existing and doing business under the laws of the state of * * * and has its principal place of business at * * * (Notice, para. 1; Answer, para. 1).
   2. The Bank is and has been, at all times pertinent to this proceeding, an insured State-chartered bank which is not a member of the Federal Reserve System, subject to the provisions of the Federal Deposit Insurance Act and the Rules and Regulations of the FDIC (Notice, para. 1; Answer, para. 1).
   3. The respondent is and has been, from 1977 to 1984, and at all times pertinent to this proceeding, a principal shareholder of the Bank, president, and a director of the Bank, and the primary decision-maker in the Bank (Notice, para. 2; Answer, para. 2; Tr. 150, 438, 439).

   [.5] 4. The FDIC conducts periodic examinations of banks under its supervision. The purposes of an examination are: (1) to determine the financial condition of the bank, (2) to evaluate its management and (3) to determine its compliance with applicable laws and regulations. Evaluation of the financial condition of a bank involves an analysis of capital adequacy, analysis of {{4-1-90 p.A-369}}quality of assets, analysis of the bank's earnings and analysis of the bank's liquidity position (Tr. 46).
   5. Various corrective action programs based on the examinations of the Bank have been instituted against the Bank in the past, including a Cease and Desist Order issued June 13, 1977 and terminated following substantial compliance on October 15, 1979, two Memoranda of Understanding dated June 20, 1980 and November 12, 1981 and a Cease and Desist Order dated November 8, 1982 (Notice, para. 8; Answer, para. 8).
   6. The Bank was examined as of the close of business April 30, 1982. Based on the results of this examination, an Order to Cease and Desist, to which the board of directors of the Bank consented, was issued on November 8, 1982, by the FDIC, pursuant to Section 8(b) of the Federal Deposit Insurance Act. (12 U.S.C. 1818(b)). This Order became effective on November 18, 1982, and the time frames provided therein for compliance begin as of that date (Hereafter, this Order will be referred to as "November 1982 Order") (FDIC Ex. 3).

   B. Findings Concerning the November 8, 1982 Order to Cease and Desist

   7. The Bank was under the Respondent's leadership and control during the time period allowed for correction in the November 1982 Order (Notice, para. 4; Answer, paras. 4 and 6; Tr. 438, 439).
   8. a. The November 1982 Order required that, within 60 days, the bank retain management acceptable to the Regional Director of the * * * Regional Office of the FDIC ("Regional Director") and the Superintendent of Banks for the State of * * * ("State Superintendent"), and required that such management be given stated written authority, including the responsibility for implementing and maintaining lending policies and other bank policies in accordance with sound banking practices (FDIC Ex. 3, pp. 4 and 5).
   b. The Bank hired * * * in September 1982, to serve on a probational basis as a loan officer. Mr. * * * was appointed senior loan officer in April 1983, but resigned later in that same month, as a result of respondent's unwillingness to delegate to him the responsibility and authority to function effectively (FDIC Ex. 2, pp. 1, A-1).
   9. a. The Order required the Bank, within 180 days, to increase its total capital and reserves by not less than $700,000, and enumerated several methods by which such increase could be accomplished (FDIC Ex. 3, p. 5).
   b. As of May 6, 1983, the total capital and reserves of the Bank had been increased by approximately $208,000. This increase was accomplished by a net, one-time conversion adjustment of the Bank's internal records to an accrual accounting basis. No other steps were taken during the 180-day period to further increase the capital by the remaining $492,000 ordered (FDIC Ex. 2, p. 1-a; Tr. 424, 446).
   10. a. The November 1982 Order required the Bank to charge off or collect all assets or portions of assets classified Loss and 50% of assets classified Doubtful, within 10 days of the effective date of the November 1982 Order (FDIC Ex. 3, p. 7).
   b. As of May 6, 1983, "Other Assets" classified loss were charged off or collected. The remaining loans or portions of loans classified Loss and 50% of those classified Doubtful were not charged off or collected (FDIC Ex. 2, pp. 1-a and 1-a-1).
   11. a. The November 1982 Order required the Bank to reduce loans classified Substandard and the remaining loans classified Doubtful to not more than $800,000 within 180 days (FDIC Ex. 3, pp. 7, 8).
   b. As of May 6, 1983, the loans in these categories as referred to in the November 1982 Order had been reduced to $1,107,548, which amount was $307,548 in excess of the amount to which these classified assets should have been reduced (FDIC Ex. 2, pp. 1-a, 1-a-1).
   12. a. The November 1982 Order required the Bank to correct all violations of law within 30 days of its effective date, with the exception of violations involving concentrations of credit. Violations with respect to concentration of credit were to be corrected by reduction to not more than 25% of the Bank's total equity capital within 120 days from the date of the November 1982 Order (FDIC Ex. 3, pp. 8, 10).
   b. As of May 6, 1983, a number of violations of law continued to be noted. Further, concentrations of credit were reduced in {{4-1-90 p.A-370}}amount, but increased in terms of percentage of the Bank's total equity as of May 6, 1983 (FDIC Ex. 2, pp. 1-a-1 through 1-a-3, and 6-b through 6-b-5).
   13. a. The November 1982 Order required the Bank, within 60 days of its effective date, to establish and maintain an adequate reserve for loan losses, such reserve being established by charges to current operating income. At the end of each calendar quarter, the board of directors of the Bank was ordered to review the adequacy of the Bank's reserve, and to commit the results of such review to writing, including any increase in the reserve recommended, and the basis for determination of the amount of the reserve provided (FDIC Ex. 3, pp. 8, 9).
   b. As of May 6, 1983, the reserve for loan losses was $139,000. This amount was inadequate to cover loans classified Loss and 50% of loans classified Doubtful. The only recordation of any discussion of the board of directors of the Bank concerning the loan loss reserve took place on December 29, 1982 (FDIC Ex. 2, p. 1-a-1).
   14. a. The Order provided that within 60 days, the Bank was to review its current loan policies and practices for the handling and collection of overdue loans, its handling of maturing loans, its policies and practices regarding concentrations of credit, and the maintenance of reasonable credit standards. The policies, plans, and procedures were to be submitted to the Regional Director and the State Superintendent for review and acceptance (FDIC Ex. 3, p. 9).
   b. On October 5, 1982, the Bank reviewed its loan policy and approved amendments addressing the level of total loans outstanding, board approval of credits that deviate from general credit standards, maturity guidelines on short-term, single-payment loans, and credit worthiness guidelines on unsecured loans. Policies with respect to concentrations of credit were not addressed. The amended Bank policy was not submitted to the Regional Director or the State Superintendent. The Bank did not review its loan policy subsequent to issuance of the November 1982 Order (FDIC Ex. 2, p. 1-a-2).
   15. a. Under the terms of the Order, the Bank was to initiate a program to obtain accurate and adequate documentation to perfect the Bank's security interest in collateral securing loans in the Bank's loan portfolio, and to obtain current and complete financial information on borrowers (FDIC Ex. 3, p. 10).
   b. As of May 6, 1983, no formal program had been established to ensure that the Bank obtain current and complete information on borrowers (FDIC Ex. 2, p. 1-a-2).
   16. a. Within 120 days from the effective date of the Order, the Bank was required to take all necessary steps to reduce the credit to * * * , and * * * so that neither of these credits would exceed 25% of the Bank's total equity capital (FDIC Ex. 3, p. 10).
   b. Credit to * * * , as of April 30, 1982, was $806,612, or 72.9% of the Bank's total equity capital. This total was reduced to $652,006, of which $46,506 was paid as a result of liquidation of collateral and $108,100 was reduced by loss charge-off. The remaining total, however, was equal to 74.7% of the Bank's total equity capital as of May 6, 1983, because the Bank's total equity capital had decreased since April 30, 1982. As of April 30, 1982, the * * * credit line was $489,975 or 44.3% of the Bank's total equity capital. This amount was reduced $90,000 through loss charge-off, leaving a balance of $399,975. However, this amount represented 45.8% of the Bank's total equity capital as of May 6, 1983 (FDIC Ex. 2, pp. 1-a-2 and 1-a-3).
   17. Of the 10 requirements for corrective action contained in the November 1982 Order, the Bank has complied with only those contained in paragraphs 6 and 10, and was in violation of the remaining eight provisions of that Order (FDIC Ex. 2, pp. 1 through 1-a-3; Tr. 71).

   C. Findings Concerning the Unsafe or Unsound Practices in Which Respondent was Engaged and/or Which He Participated.

   18. The Bank was examined by the FDIC as of the close of business May 6, 1983, by a group of FDIC examiners under the direction of Examiner-in-Charge, * * * (FDIC Ex. 2; Tr. 48).
   19. As of May 6, 1983:
   a. The Bank's total equity capital and reserves equaled $1,012,000.
   b. The Bank's adjusted equity capital and reserves equaled $385,000.
   c. The Bank's total assets equaled $18,099,000.

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   d. The Bank's adjusted total assets equaled $17,704,000.
   e. The Bank's total deposits equaled $16,755,000.
   f. The Bank's total loans equaled $12,913,000. (FDIC Ex. 2, pp. 2-3).
   20. As of May 6, 1983:
   a. The Bank has extended credit to various borrowers with inadequate sources of repayment and without adequate analysis (FDIC Ex. 2, pp. 1-a-5, 2-a-1 through 2-a-27).
   b. The number of overdue loans was 125, totaling $1,696,000 which amount was 13.13% of the total amount of the Bank's loans (FDIC Ex. 2, p. 2-f; Tr. 109).

   [.6] c. A volume of overdue loans amounting to 13.13% of the total amount of the Bank's loans is excessive (Tr. 110).
   d. The amount of adversely classified loans was $2,252,000, of which $1,786,000 was classified Substandard, $110,000 was classified Doubtful, and $356,000 was classified Loss. The total amount of classified loans was 17.44% of the amount of total loans in the Bank (FDIC Ex. 2, p. 2; Tr. 92; FDIC Ex. 7).

   [.7] e. A volume of classified loans equal to 17.44% of a bank's total loans is excessive or very high. Such percentage in banks comparable to * * * Bank of * * * is normally two to five percent (Tr. 107).
   f. Other than loans, the amount of assets of the bank which was adversely classified was $405,000, of which $210,000 was classified Substandard, $161,000 was classified Doubtful, and $34,000 was classified Loss (FDIC Ex. 2, p. 2).
   g. The total amount of assets subject to adverse classification was $2,677,000. This amount equaled 264.53% of total equity capital and reserves of the Bank (FDIC Ex. 2, p. 3; Tr. 105).

   [.8] h. An amount of classified assets equal to 264.53% of the total equity capital and reserves of the Bank is excessive. Such percentage in other banks in the state of * * * is usually less than 50% (Tr. 108).
   i. The adjusted equity capital and reserves of the Bank equaled $385,000; this amount was 2.17% of adjusted total assets of $17,704,000 (FDIC Ex. 2, p. 3).

   [.9] j. Adjusted equity capital and reserves in an amount equal to 2.17% of adjusted total assets is indicative of an inadequate capital account. That percentage in comparable banks in the state of * * * is between 6.5% and 7.5% (Tr. 113, 114).
   k. The adversely classified assets not considered in the computation of the adjusted equity capital and reserves totalled $2,143,000. These adversely classified assets equaled 556.62% of the adjusted equity capital and reserves of the Bank (FDIC Ex. 2, pp. 2 and 3; Tr. 116, 117).
   l. The significance of a large amount of classified assets which have not been deducted from capital for purposes of computing the adjusted equity capital and reserves in that a large portion of these assets, probably 15% to 25%, will deteriorate and become losses (Tr. 118).
   m. The loan valuation reserve of the Bank was inadequate in relation to the quality of loans in the Bank. The loan valuation reserve was $139,000. After deducting loans classified Loss, totaling $356,000, and 50% of the loans classified Doubtful, totaling $55,000, the balance was a negative $272,000. In addition to the loan valuation reserve being inadequate for loans classified Loss and Doubtful, the reserve amount is obviously inadequate to provide for probable future losses from the remaining loans classified Doubtful, from the loans classified Substandard, and from unclassified loans (FDIC Ex. 2, pp. 2 and 3; Tr. 118, 119).
   n. The Bank was being operated with high overhead expenses and a declining net interest margin, resulting in its unprofitable operation. In 1982, the Bank experienced a net loss of $491,000 due to heavy loan losses, high overhead, and loss of income from nonearning assets (FDIC Ex. 2, p. 1-a-7; Tr. 122).
   o. The Bank violated section 708.305 of the * * * Revised Statutes (* * * § 708.305) in that the Bank granted extensions of credit to * * *, or for its benefit, in excess of 15% of the Bank's capital stock, unimpaired surplus, and capital debentures maturing in more than five years. In this instance, proceeds from loans to * * * and * * * are deemed extensions of credit to * * * because the proceeds from these loans were deposited directly to the account of * * * (FDIC Ex. 2, p. 6-B).
{{4-1-90 p.A-372}}
   p. The Bank violated Section 22(h) of the Federal Reserve Act, as amended (12 U.S.C. § 875b), as implemented by Section 215.4(d) of Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. § 215.4(d)), made applicable to State nonmember banks by Section 22(j) of the Federal Deposit Insurance Act (12 U.S.C. 1828(j)), in that the Bank allowed an overdraft of the account of Respondent for a period of 34 consecutive days, during which there was no written, preauthorized agreement for extension of credit or transfer of funds from another account; and no charge of any kind was made by the Bank to Respondent, although there is a customary $5.00 charge per not sufficient funds (N.S.F.) check levied on other customers of the Bank (FDIC Ex. 2, p. 6-b-1).
   q. The Bank violated Section 708.445 of * * * Revised Statutes in that it continued to hold repossessed assets longer than the six months maximum period allowed by law (FDIC Ex. 2, p. 6-b-2).
   r. The Bank violated Section 708.088 of * * * Revised Statutes, in that the Bank failed to charge of certain assets from the Bank's books after being instructed to do so by the State Superintendent of Banks (FDIC Ex. 2, p. 6-b-2).
   s. The Bank violated Section 708.058 of the * * * Revised Statutes, in that certain loans made by the Bank are not supported by the appraisal, as required by law (FDIC Ex. 2, 6-b-3).
   t. As of May 6, 1983, the Bank's financial components and managerial adequacy were rated, based on the Uniform Financial Institutions Rating System. The instructions promulgated by the federal bank regulatory agencies were followed by Examiner * * * in making these ratings. The specific items evaluated included capital adequacy, asset quality, management, earnings, and liquidity. These items were accorded a numerical rating of 1 to 5, 1 being the best and 5 being the worst. On the basis of the individual ratings, a composite rating of 1 to 5 was assigned to the Bank. For making these rating, guidelines have been provided and the ratings of * * * Bank of * * * were assigned in accordance with those guidelines. The ratings were: capital adequacy, 5; asset quality, 5; management, 5; earnings, 5; liquidity, 2; composite, 5 (FDIC Ex. 2, p. 1-a-8; FDIC Ex. 33; Tr. 128, 137–142).

   [.10] u. The instructions of the three federal bank regulatory agencies provide that the Management of a bank should be rated 5 in those instances where incompetence has been demonstrated and where problems resulting from management are of such severity that management must be strengthened or replaced before sound condition can be brought about (FDIC Ex. 33).

   [.11] v. The instructions of the federal bank regulatory agencies provide that a bank given a composite rating of 5 is one where the volume and character of weaknesses are such as to require urgent aid from the shareholders or other sources. Such banks require immediate corrective action and constant supervisory attention, and the probability of failure is high for banks in this category (FDIC Ex. 33).
   w. The Bank was examined by FDIC examiners as of March 16, 1984. The Bank's financial components and managerial adequacy were rated, using the Uniform Financial Institution Rating System, at that examination. The ratings were: capital adequacy, 5; asset quality, 5; management, 5; earnings, 5; liquidity, 3; composite rating, 5 (Tr. 483, 484).
   x. The condition of the Bank had not improved between May 6, 1983 and March 16, 1984 (Tr. 484).
   21. The condition of the Bank has deteriorated over the period covered by the last three examinations conducted by the FDIC, as follows:
   a. The volume of classified assets was $1,315,000 as of July 17, 1981; $2,015,000 as of April 30, 1982 and $2,677,000 as of May 6, 1983 (FDIC Ex. 2, p. 2; FDIC Ex. 5; Tr. 82, 87).
   b. The volume of classified loans was $1,234,000 as of July 17, 1981; $1,930,000 as of April 30, 1982 and $2,252,000 as of May 6, 1983 (FDIC Ex. 2, p. 2; FDIC Ex. 6; Tr. 92-94).
   c. The ratio of classified loans to total loans was 9.11% as of July 17, 1981; 14.94% as of April 30, 1982 and 17.44% as of May 6, 1983 (FDIC Ex. 2, p. 2; FDIC Ex. 8; Tr. 102).
   d. The percentage of classified assets to total equity capital and reserves was 101.39% as of July 17, 1981; 176.44% as of April 30, 1982 and 264.53% as of May 6, 1983 (FDIC Ex. 2, p. 3; FDIC Ex. 9; Tr. 105).
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   e. The ratio of the Bank's adjusted equity capital and reserves to adjusted total assets was 6.55 as of July 17, 1981; 3.40 as of April 30, 1982 and 2.17 as of May 6, 1983 (FDIC Ex. 2, p. 3; FDIC Ex. 10; Tr. 113-115).
   f. The net income of the Bank for the calendar year 1980 was $82,000; for the calendar year 1981 it was $49,000; and for the calendar year 1982 the Bank had a net loss of $491,000. The Bank had an interim net loss from January 1, 1983 to May 6, 1983 of $55,000 (FDIC Ex. 2, p. 4; Tr. 120, 121).
   g. The after-tax operating income of the Bank, as percentage of total assets, was 0.61% in 1980; 0.31% in 1981 and a negative 2.84% in 1982. The Bank's peer group percentages for these periods were 1.05% for 1980; 1.15% for 1981 and 0.94% for 1982 (FDIC Ex. 2, p. 4; FDIC Ex. 11; Tr. 123-125).

   D. Findings Concerning Acts from Which Respondent Derived Personal Benefit

   22. Beginning February 9, 1983, the Respondent's * * * account was overdrawn for 34 consecutive days. The overdraft balance of the account during the first six days exceeded $1,000. The Respondent paid no customary fees to the Bank as a result of the overdrafts. Respondent did not have a written, preauthorized agreement for credit or for transfer of funds from other accounts. These overdrafts, under these conditions, were in violation of section 22(h) of the Federal Reserve Act, as amended (12 U.S.C. §375b), as implemented by section 215.4(d) of Regulations O of the Board of Governors of the Federal Reserve System (12 C.F.R. § 215.4(d)), as made applicable to State nonmember banks by section 22(j) of the Federal Deposit Insurance Act (12 U.S.C. § 1828(j)) (FDIC Ex. 2, p. 6-b-1; FDIC Ex. 21; Tr. 190-194).
   23. From August, 1980 through March, 1983, at least $5,627 was abstracted by Respondent from the Bank's income from the sale of credit life insurance, for the personal use of the Respondent. This was done despite a letter from the State Superintendent, entered into the minutes of the Bank's board of director's meeting of October 11, 1977, stating that income generated from the sale of credit life insurance should not go to Bank directors, officers, principal shareholders, or their interests. The minutes of that meeting were signed by Respondent (Notice, para. 7(d); FDIC Ex. 15; FDIC Ex. 16; FDIC Ex. 17; FDIC Ex. 18; Tr. 171–187).
   24. In December 1983 or January 1984, after the issuance of the Notice in this proceeding, Respondent caused a review to be made of the bank control account from which these credit life insurance income funds had been taken. As a result of that review, Respondent repaid the Bank the sum of $11,501 for funds abstracted from that account. No interest was paid to the Bank for the Respondent's use of these funds (Tr. 293, 298, 300).

   E. Findings Concerning the Loans to * * * and * * *

   25. The Respondent, at all times pertinent to this proceeding, was the president and chief loan officer of the Bank. Also, he was the officer of account on loans by the Bank to * * * (Tr. 439).
   26. At all times pertinent to this proceeding, the Respondent's servicing of the loan account of * * * was not done in a prudent fashion and was deplorably bad (Tr. 153, 177).
   27. The servicing of the loan account of * * * has been repeatedly characterized as "negligent" by the Farmers Home Administration, guarantor of 90% of the * * * loans (FDIC Ex. 13, pp. 2, 6, 22, 23, 30).
   28. As a result of the Respondent's negligent servicing of the * * * account, the 90% guarantee of Farmers Home Administration ("FmHA") of the loans by the Bank to * * * had been jeopardized, resulting in Potential Loss and Contingent Liabilities of $1,417,000 and Estimated Loss in Contingent Liabilities of $77,000 (FDIC Ex. 2, pp. 2-a-4 through 2-1-12, p. 3-a; FDIC Ex. 3).
   29. Respondent's negligent servicing of the * * * loan account was such as to jeopardize the solvency of the Bank and to prejudice the interests of the Bank's depositors (Tr. 159, 177).
   30. Proceeds from the liquidation of collateral used to secure a portion of the loans to * * * have been diverted from repayment of the FmHA guaranteed loans and applied instead to the personal indebtedness of the individual guarantors (FDIC Ex. 2, p. 2-a-7; FDIC Ex. 13, p. 6).
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   31. The Respondent violated several provisions of a guarantee Agreement with the U.S. Small Business Administration ("SBA"), governing the SBA 90% guarantee of a $200,000 loan to * * *. Additional credit of $141,000 has been extended to that borrower, thereby jeopardizing the SBA guarantee. Despite numerous and detailed requests as to the servicing of the * * * loan, the Respondent failed to respond in a timely and/or complete fashion, thereby jeopardizing the validity of the guarantee (FDIC Ex. 14, pp. 2, 7, 10, 14, 17; FDIC Ex. 2, pp. 2-a-26, 2-a-27).

   F. Findings Concerning Financial Losses or Probable Financial Losses by the Bank

   32. The Bank has suffered substantial financial loss from the actions or omissions of Respondent in that: (1) the Bank received no income, either in interest or fees, from the overdraft of Respondent's account, (2) the Bank was deprived of the income and the possible earnings thereon, of the $11,510 abstracted from the Bank's income account between 1980 and 1983, (3) the Bank has been required to charge off large amounts of the * * * credit as a result of improper servicing and handling of that credit, (4) the Bank has been required to charge off large amounts of other credits extended by the Bank, totaling hundreds of thousands of dollars, during the period Respondent has served as president and chief loan officer of the Bank (FDIC Ex. 2; FDIC Ex. 13).
   33. The Bank will probably suffer substantial financial loss or other damage as a result of the actions or omissions of Respondent in that: (1) there is a probability that the Farmers Home Administration will withdraw its guarantee of the * * * credit, (2) there is a probability that the Small Business administration will withdraw its guarantee of the * * * Credit, (3) there is a probability that the Bank will be penalized up to $1,000 per day for each day's violation of Section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) (FDIC Exs. 13 and 14; Tr. 193, 291).

CONCLUSIONS OF LAW

   1. The FDIC has jurisdiction over the Bank, the Respondents, and the subject matter of this proceeding.
   2. The FDIC has the authority to issue a Removal Order against the Respondent pursuant to Section 8(e)(1) of the Federal Deposit Insurance Act ("Act").
   3. The Bank, under the direction and control of Respondent, violated the November 8, 1982 Order to Cease and Desist, which was "an order which has become final", at the time of its issuance.
   4. In addition to the violations of the November 8, 1982 Order to Cease and Desist, the following conclusions of law are made as a result of the FDIC examination of May 6, 1983:
   a. The Bank has engaged in hazardous lending and lax collection practices.
   b. The Bank has an excessive volume of poor quality loans and other assets in relation to its total assets.
   c. The Bank has an excessive volume of poor quality loans and other assets in relation to the amount of its equity capital and reserves.
   d. The loan valuation account of the Bank is inadequate in light of the poor quality of its loans.
   e. The Bank has been operated in such a manner as to produce substantial operating losses in 1982 and 1983.
   f. The Bank was being operated with insufficient equity capital and reserves in relation to the kind and quality of the assets held by the Bank.
   g. The Bank has been operated with a management whose policies and practices were detrimental to the Bank and jeopardized the safety of its deposits.
   h. The condition of the Bank deteriorated with each consecutive examination of the Bank beginning in 1981.
   5. Each of the practices described in paragraphs 4(a) through 4(g) constitutes an unsafe or unsound banking practice.
   6. The Respondent violated Section 22(h) of the Federal Reserve Act, as amended (12 U.S.C. § 375(b)), as implemented by Section 215.4(d) of Regulation O of the Board of Governors of the Federal Reserve System (12 CFR § 215.4(d)), as made applicable to State nonmember banks by Section 18(j)(s) of the Act (12 U.S.C. § 1828(j)(s)).
   7. The Respondent engaged and participated in the unsafe or unsound practices described in paragraphs 4(a) through 4(g). Such engagement and participation were violations of Respondent's fiduciary duty as an officer and director of the Bank within the meaning of Section 8(e) of the Act.
{{4-1-90 p.A-375}}
   8. By his participation in the violation of law described in paragraph 6 above, the Respondent violated the law within the meaning of Section 8(e) of the Act.

   [.12] 9. Respondent abstracted Bank funds totaling at least $11,501 for his personal benefit from the bank control account in which premiums from the sale of credit life insurance were deposited. Such action by Respondent constituted a breach of his fiduciary duty as an officer and director of the Bank, resulted in financial gain to Respondent and demonstrated personal dishonesty on the part of Respondent.
   10. The Respondent's failure to take appropriate action to effectively curb or otherwise curtail the violations of law and unsafe or unsound practices described above constituted a breach of his fiduciary duty as a director and officer of the Bank.
   11. The Respondent's breach of fiduciary duty as a director and officer of the Bank, and his participation in the violations of law and the unsafe and unsound banking practices described above demonstrate a continuing disregard for the safety and soundness of the Bank.
   12. The Bank has suffered substantial financial loss as a result of the Respondent's breach of his fiduciary duty and participation in the violations of law and the unsafe or unsound banking practices described above.
   13. The Bank will probably suffer additional substantial financial loss or other damage as a result of the Respondent's conduct.
   Based on the foregoing Findings of Fact and Conclusions of Law and taking into consideration all of the evidence presented at the hearing I find that a permanent order should be issued removing * * * from his position as president and director of * * * Bank of * * * and to prohibit his further participation in the affairs of the Bank.
/s/ E. Kendall Clarke
Administrative Law Judge

ORDER OF REMOVAL AND
PROHIBITION FROM
PARTICIPATION
FDIC-83-218e

   Having found and concluded that * * * ("Respondent"), in his capacity as an officer and director of the * * * Bank of * * * ("Bank"), has violated a cease-and-desist order which has become final, has engaged or participated in unsafe or unsound banking practices, violations of law, and breaches of his fiduciary duty, evidencing a willful or continuing disregard for the safety and soundness of the Bank; and
   Having found and concluded that by reason of Respondent's conduct, the Bank has suffered or will probably suffer substantial financial loss or other damage, and that Respondent has received financial gain by reason of such violations of practices, it is:
ORDERED, that the Respondent be, and hereby is, removed as an officer and director of the Bank, and prohibited from participation in any manner, in the conduct of the affairs of the Bank.
   This ORDER shall become effective thirty (30) days after service of the Respondent and the Bank, and shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall be modified, terminated, suspended, or set aside by the FDIC.
   Dated at Washington, D.C. this * * * day of * * *, 1984.
   By direction of the Board of Directors.
Hoyle L. Robinson

Executive Secretary

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