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FDIC Enforcement Decisions and Orders

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   [5042] FDIC Docket No. FDIC-84-58e (1-25-85).

   FDIC removed a bank director from his office and prohibited him from further participation in the affairs of the bank for engaging in unsafe or unsound banking practices, violations of law, and for breaching his fiduciary duty. The director's conduct resulted in financial loss to the bank and personal financial gain. The improper conduct included unauthorized extensions of credit to bank insiders, extending credit that resulted in over 90% of the bank's adversely classified loans, deviating from normal and acceptable lending practices, and failing to provide for an adequate loan loss reserve.

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   [.1] Bank Holding Company—Payment of Debt
   The payment by a bank of holding company indebtedness is contrary to acceptable banking practices.

   [.2] Bank Examinations—Purpose
   The purpose of a bank examination is to determine the financial condition of the bank and to maintain public confidence in the integrity of the banking system.

   [.3] Loan Loss Reserves—Purpose
   The purpose of a loan valuation reserve is to provide for loan losses a bank may encounter in the future.

   [.4] Cashier's Checks—Reflection on Books
   Failure to reflect the issuance of a cashier's check as a bank liability at the time the check is issued is an improper and imprudent banking transaction.

   [.5] Regulation O—Lending Limitations—Approval by Board of Directors
   It is the normal and customary practice of the board of directors to be apprised of, and to approve, loans to bank insiders before the disbursement of loan proceeds. Failure to do so is an improper banking practice.

   [.6] Prohibition, Removal, or Suspension—Statutory Standard
   A bank director or officer may be removed for any one of three acts: a violation of law, rule, regulation, or cease and desist order which has become final; the engaging or participation in any unsafe or unsound banking practice; or the commission or engaging in any act, practice, or admission which constitutes a breach of a fiduciary duty.

   [.7] Prohibition, Removal, or Suspension—Financial Loss
   If a bank director engages in conduct which may result in removal, one of the following three consequences must occur: the bank has suffered or will probably suffer substantial financial loss or other damage; the interest of depositors could be seriously jeopardized; or the officer or director has received financial gain.

   [.8] Prohibition, Removal, or Suspension—Disregard for Safety and Soundness
   In order to justify the removal of a director from office, the director must have: been involved in personal dishonesty; demonstrated a willful disregard for the safety and soundness of the bank; or demonstrated a continuing disregard for the safety and soundness of the bank.

   [.9] Unsafe or Unsound Banking Practice—Statutory Standard
   An unsafe or unsound banking practice encompasses practices contrary to accepted standards of prudent operation that might result in abnormal risk of loss to a bank.

   [.10] Directors—Personal Benefit from Bank Funds
   A bank director's use of bank funds for his personal benefit is a breach of the director's fiduciary duty of loyalty to a bank, its depositors, and shareholders.

In the matter of * * * BANK OF * * *
COUNTY, * * *


DECISION AND ORDER TO REMOVE
FROM OFFICE AND TO PROHIBIT
FROM FURTHER PARTICIPATION

FDIC-84-58e

STATEMENT OF THE CASE

   On March 19, 1984, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Intention to Remove from Office and to Prohibit from Further Participation ("Notice") to * * * ("Respondent") pursuant to the provisions of Sections 8(e)(1) and 8(e)(5) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. 1818(e)(1), (e)(5)) and Part 308 of the FDIC Rules and Regulations (12 C.F.R. Part 308). The Notice charged the Respondent, in his capacity as officer and director of * * * Bank of * * * County, * * * ("Bank"), with engaging or participating in unsafe or unsound banking practices, violations of law and regulations and/or breaches of his fiduciary duty which evidenced personal dishonesty and/or a willful or continuing disregard for the safety {{4-1-90 p.A-377}}and soundness of the Bank. The Notice further alleged that, as a result of Respondent's actions and conduct, the Bank had sustained or would probably sustain substantial financial loss or other damage and/or that the interests of the depositors could be seriously jeopardized, and/or Respondent has received financial gain.
   On April 20, 1984, Respondent filed an answer to the Notice admitting certain allegations and denying others. Both Counsel for the Respondent and the FDIC subsequently filed motions to produce evidence. The FDIC also filed a motion for a more definite statement of certain statements made in Respondent's answer to the Notice. On June 19, 1984, Administrative Law Judge Earl S. Dowell issued an Order requiring the exchange of certain information prior to the hearing.
   A hearing of the action was convened in * * *, before Administrative Law Judge Dowell beginning on July 10, 1984, and concluding on July 16, 1984. The hearing record consists of a transcript ("Tr. ____") of 1277 pages, 43 exhibits introduced by the FDIC numbered 1 through 43 ("FDIC Exh. ____") and 5 exhibits introduced by the Respondent and numbered 44 through 48 ("Rs. Exh. ____"). The FDIC called seven witnesses and the Respondent called two, including himself. Pursuant to a motion filed by the FDIC on August 22, 1984, FDIC Exhibit 49 relating to the closing of the Bank on grounds of insolvency was added to record.
   The case was decided on October 19, 1984. Judge Dowell recommended removing the Respondent from the Bank, however, he found that the Respondent was not personally dishonest and recommended that the Respondent not be barred from participation in any other FDIC insured bank. The FDIC filed exceptions. None were filed by the Respondent.
   The Board of Directors of the FDIC ("Board"), after review of the transcript, exhibits and other relevant material, has decided not to adopt the Findings of Fact proposed by Judge Dowell for the reasons set forth below, infra, pp. 32-33. The Board does hereby adopt the following Findings of Fact:

FINDINGS OF FACT

   A. GENERAL FINDINGS OF FACT

   1. The Bank was a corporation duly chartered to conduct the business of banking under the laws of the State of * * * and had its principal place of business at * * *, at all times pertinent to this proceeding. (Notice at 1, Answer at 1).
   2. The Bank was at all times pertinent to this proceeding an insured State chartered bank which is not a member of the Federal Reserve System, and was subject to the provisions of the Federal Deposit Insurance Act and the rules and regulations of the FDIC. (Notice at 1, Answer at 1)
   3. By virtue of Section 18(j)(1) of the Act (12 U.S.C. § 1828(j)(1)), the Bank was subject to Section 23A of the Federal Reserve Act (12 U.S.C. § 371c). (Notice at 2, Answer at 1)
   4. By virtue of Section 18(j)(2) of the Act (12 U.S.C. § 1828(j)(2)) and Section 337.3(a) of FDIC Rules and Regulations (12 C.F.R. § 337.3(a)), the Bank was subject to Section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215). (Notice at 3, Answer at 1)
   5. Respondent, * * *, was at all times pertinent to this proceeding an officer, director and/or person participating in the affairs of the Bank. (Notice at 1, Answer at 1)
   6. At all times pertinent to this proceeding the Respondent was personally indebted to the Bank in an amount in excess of $80,000. (Notice at 3, Answer at 1)
   7. Respondent served as a member of the Bank's board of directors and as the Bank's president and chief executive officer since May 1980. (Notice at 3, Answer at 1)
   8. * * * , Inc. ("* * *"), a one bank holding company, acquired 89.75 percent of the outstanding stock of the Bank on February 10, 1983. (Notice at 4, Tr. 450, 707, 820, 865, 869, 1096-1097, 1105)
   9. At all times pertinent to this proceeding Respondent was sole owner of * * *. (Notice at 8b, Answer at 2, Tr. 451, 484, 820, 1105-1106)
   10. At all times pertinent to this proceeding * * * was indebted in the amount of $782,000 to * * * Bank * * * and Respondent {{4-1-90 p.A-378}} pledged his stock in * * * as collateral. (Notice at 8(c), Tr. 464, 481–482, 707, 827, 1098, 1105, 1246–1247)
   11. Interest on the * * * debt to * * * was due quarterly at the end of April, July, and October, 1983, and at the end of January, 1984. (Tr. 464, 827, 1098, 1106, 1122)
   12. Respondent was personally obligated on * * * indebtedness to * * * (Tr. 481–482, 708, 1250)

   [.1] 13. * * *'s obligations are separate and distinct from those of the Bank; the Bank is not responsible for their payment, and payment by the Bank of holding company indebtedness is contrary to acceptable banking practices. (Tr. 464-465)
   14. * * * is one of the Bank's correspondent banks. (Tr. 463)
   15. Respondent exercised a controlling and dominant role in the management and policies of the Bank. (Tr. 39, 46, 104, 209, 303, 919, 1076, 1198)
   16. As the Bank's chief executive officer and principal owner, Respondent had authority to make entries in the Bank's general ledger (Tr. 303), and had instructed others to make entries on the Bank's general ledger which would reflect changes in various accounts. (Tr. 585)
   17. Respondent is an experienced banker and is familiar with all aspects of a bank's operations. (Tr. 976–979, 1164–1165)
   18. The Bank was examined by the FDIC as of the close of business on December 13, 1980, November 14, 1981, December 11, 1982, and August 27, 1983. (Tr. 23, FDIC Exhs. 1 and 2)

   [.2] 19. The purpose of an examination of a financial institution by the FDIC is to determine the financial condition of the institution and to maintain public confidence in the integrity of the banking system and its individual banks. An examination analyzes a bank's assets, earnings, capital, and management, and determines if there are any violations of law or regulation. (Tr. 18, 21)
   20. The FDIC examinations were conducted in accordance with published examination instructions, guidelines, standards and criteria. (Tr. 22–23)
   21. The FDIC's examiners classify bank assets according to the degree of risk of nonpayment present in the assets. (Tr. 48)

   B. FINDINGS REGARDING THE FINANCIAL CONDITION OF THE BANK

   (1) Findings Regarding the Lending and Collection Practices of Respondent.
   22. Respondent is the loan officer of record for the following major adversely classified loans; a. * * * related loans; b. * * * related loans; c. * * * related loans; d. * * * related loans; e. * * * related loans; f. * * * loan; g. * * *, * * *, and * * * loans; h. * * * related loans; and i. * * * group loans. (FDIC Exh. 1 at 28-35, Tr. 88-89)
   23. Respondent is responsible for nine of the eleven of the major adversely classified loans discussed in the August 27, 1983 FDIC report of examination. (Tr. 9, 87-88, 396, FDIC Exh. 1 at 28-36)
   24. The major adversely classified loans for which Respondent is responsible total approximately two and one-half million dollars and represent over 90 percent of the total dollar volume of the adversely classified credits and represent a significant risk of loss to the Bank. (Tr. 90, FDIC Exh. 1 at 28-36)
   25. As of August 27, 1983, a total of $2,914,000 of Bank loans were adversely classified either Substandard, Doubtful or Loss. Of this amount $2,019,000 was classified Substandard, $397,000 was classified Doubtful and $498,000 was classified Loss. (FDIC Exh. 1 at 7)
   26. As of August 27, 1983, a total of $230,000 of the Bank's "other real estate" was adversely classified. Of this amount $222,000 was classified Substandard and $8,000 was classified Loss. (Tr. 54, FDIC Exh. 1 at 7)
   27. As of August 27, 1983, $87,000 of the Bank's income earned but not collected was classified Loss. (FDIC Exh. 1 at 7)
   28. As of August 27, 1983, 26.24 percent of the Bank's total loans were adversely classified. (Tr. 78, FDIC Exh. 1 at 7)
   29. As of August 27, 1983, the Bank's total loans amounted to $11,106,000. (Tr. 76–77 FDIC Exh. 1 at 47)
   30. A 26.24 percent adversely classified loan ratio is extremely high and represents a significant increase over the percentages shown at the December 11, 1982 FDIC examination and November 14, 1981 FDIC examination. (Tr. 78)
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   31. As of August 27, 1983, the Bank's gross loans were $11,507,000. (Tr. 76, FDIC Exh. 1 at 47)
   32. An overdue loan is one that has not been paid within 30 days of maturity. (Tr. 80)
   33. A nonaccrual loan is one on which the bank no longer earns income and per FDIC standards is past due 90 days or more. (Tr. 59, 276)
   34. The Bank's overdue loans and its nonaccrual loans represented 18.81 percent of the Bank's gross loans as of August 27, 1983. (Tr. 81, FDIC Exh. 1 at 7)
   35. The overdue and nonaccrual loan percentage of 18.81 percent is extremely high and represents an increase of this ratio from 13.30 percent at the December 11, 1982 FDIC examination and 5.40 percent at the November 14, 1981 FDIC examination. (Tr. 81, FDIC Exh. 1 at 7)
   36. * * * group loans consist of loans to * * * and * * *. (FDIC Exh. 1 at 33-34, Tr. 252-253)
   37. The proceeds of all loans included in the * * * loans went to or for the benefit of the * * * operations. (Tr. 254, 279, 316, 392)
   38. As of August 27, 1983, the * * * group loans totaled approximately $1.06 million (Tr. 254) and were classified $711,000 Substandard and $352,000 Loss. (FDIC Exh. 1 at 33-34)
   39. Capitalization of interest is contrary to normal and acceptable lending practices because it distorts the abilities of the borrower to repay the indebtedness, understates the delinquency status of the loan portfolio, and defers appropriate collection action on the loan. (Tr. 85, 96, 267-268)
   40. The Respondent capitalized interest on loans. (Tr. 86, 96, 264, 427, 1063)
   41. Loaning money to borrowers on projects out of a bank's normal trade area is a hazardous lending practice in this case because the Bank was unable to supervise the loans and monitor the operations. (Tr. 92, 263)
   42. The Respondent loaned money to borrowers or operations outside the Bank's normal trade area. (Tr. 92, 263, 387)
   43. Respondent deviated from normal and acceptable lending practices by paying an overdraft of * * * in the amount of $195,000 on June 4, 1983. (Tr. 262, FDIC Exh. 1 at 34)
   44. Respondent deviated from normal and acceptable lending practices by accounting for the overdraft to * * * in the amount of $195,000 as a loan purchased by * * *, when that bank had, in fact, not purchased the loan. (Tr. 262)
   45. The manner in which Respondent handled this transaction was a false statement on the Bank's books. (Tr 266)
   46. Respondent deviated from normal and acceptable lending practices by allowing the filing of a security interest in * * *, when the personal property securing the loan was located in * * *. (Tr. 271, 275)
   47. Respondent made loans that deviated from normal and acceptable lending practices through his lack of proper credit analysis. (Tr. 270-271)
   48. It is a deviation from normal and acceptable lending practices to make loans in excess of a bank's legal lending limit. (Tr. 93)
   49. Respondent deviated from normal and acceptable lending practices by making a loan in which the true entity responsible for making the loan was not shown on the Bank's books. (Tr. 300, FDIC Exh. 21)
   50. The Respondent deviated from normal and acceptable lending practices by failing to establish a repayment program in connection with extensions of credit. (Tr. 93, 1063)
   51. The Respondent deviated from normal and acceptable lending practices by making extensions of credit without taking adequate collateral as security. (Tr. 94, 96)
   52. The Respondent deviated from normal and acceptable lending practices by making loans to borrowers who do not have the ability to service the debt. (Tr. 931)
   53. The Respondent deviated from normal and acceptable lending practices by processing loans in which a customer of the Bank had signed in his presence the name of another individual. (Tr. 399-401)
   54. The Respondent deviated from normal and acceptable lending and collection practices by failing to demand interest due upon maturity of a loan or furnish an accounting of the loan to a borrower. (Tr. 396-397, 1063)
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   55. The Respondent deviated from normal and acceptable lending practices by making loans that represent a concentration of credit. (Tr. 292, FDIC Exh. 1 at 40)
   56. Respondent deviated from normal and acceptable lending practices by failing to charge-off from the Bank's books interest on loans on which interest was no longer being accrued. (Tr. 115)
   57. The Respondent deviated from normal and prudent lending practices in that he continued to accrue interest on the Bank's books on loans for which such practice was not warranted or justified because no interest had been paid for over 90 days and thus they were in non-accrual status. (Tr. 59-61, 116-117, 276)
   58. The Bank's earnings and capital positions were both misstated as a result of Respondent's policies concerning the accrual of interest on loans that were in a nonaccrual status. (FDIC Exh. 1 at 9, Tr. 115-117, 294-295)
   59. Respondent's deviation from normal and acceptable lending practices increased the risk of loss to the Bank. (FDIC Exh. 1 at 28–36, Tr. 286)

   (2) Findings Regarding the Bank's Equity Capital.
   60. As of August 27, 1983, the total dollar amount of the Bank's assets subject to adverse classification was $3,235,000 which represents 220.97 percent of the Bank's total equity capital and reserves. The dollar amounts of the Bank's assets subject to adverse classification was $2,241,000 Substandard, $397,000 Doubtful and $597,000 Loss. (FDIC Exh. 1 at 7 and 8, Tr. 50, 110)
   61. A 220.97 percent classified assets ratio is extremely high relative to comparable banks. (Tr. 110-111)
   62. The total amount of adversely classified assets was $1,671,000 at the December 11, 1982 FDIC examination and $308,000 at the November 14, 1981 FDIC examination. (FDIC Exh. 1 at 7, Tr. 52)
   63. As of August 27, 1983, the Bank's total assets were $16,238,000. (FDIC Exh. 1 at 7)
   64. As of August 27, 1983, the Bank's adjusted gross assets were $15,541,000. (FDIC Exh. 1 at 8, Tr. 100)
   65. As of August 27, 1983, the Bank's total unadjusted capital and reserves were $1,464,000. (FDIC Exh. 1 at 8, Tr. 104)
   66. As of August 27, 1983, the Bank's adjusted capital and reserves were $668,000. (FDIC Exh. 1 at 8, Tr. 104)
   67. As of August 27, 1983, the Bank's adjusted capital and reserves as a percentage of its adjusted gross assets was 4.30 percent. (FDIC Exh. 1 at 8, Tr. 105)
   68. A ratio of adjusted capital and reserves to adjusted gross assets of 4.30 percent is extremely low relative to comparable banks and represents a decline from the previous FDIC examination and places the Bank in a risk position. (Tr. 106)
   69. The Bank's adversely classified assets of $3,235,000 represented 220.97 percent of the Bank's total equity capital and reserves. (FDIC Exh. 1 at 8, Tr. 110)
   70. Adversely classified assets not deducted from capital in calculating the Bank's adjusted capital and reserves total $2,440,000. (Tr. 107) A certain percentage of this figure can be expected to deteriorate and represents an additional risk to the Bank's capital account. (Tr. 108-109)
   71. The deterioration in the Bank's capital position occured while the Bank was under the direction and control of the Respondent. (Tr. 109)
   (3) Findings Regarding the Bank's Loan Valuation Reserve.

   [.3] 72. The purpose of a loan valuation reserve is to provide for loan losses a bank may encounter in the future based on the risk in the bank's loan portfolio. (Tr. 101).
   73. As of August 27, 1983, the Bank was operating with a reserve for loan losses totaling $99,000; as of the same date the Bank had loans totaling $498,000 that were adversely classified Loss and loans totaling $397,000 that were classified Doubtful by the FDIC. (Tr. 101-102)
   74. The Bank's loan valuation reserve was inadequate; after the elimination of all loans of the Bank adversely classified Loss and one-half of those classified Doubtful as of August 27, 1983 by a charge to the loan loss reserve of the Bank, the remaining balance in the loan loss reserve of the Bank was a deficit amount. (Tr. 102)
   75. The failure of Respondent to provide for an adequate loan loss reserve resulted in a misstatement of the actual earnings and income of the Bank, misled shareholders and the general public, understated its capital, and inaccurately disclosed the true nature {{4-1-90 p.A-381}}and quality of its loan portfolio. (Tr. 103)
   76. Respondent was responsible for the Bank's inadequate loan valuation reserve. (Tr. 103-104)
   (4) Findings Regarding the Bank's Liquidity as of August 27, 1983.
   77. A bank's liquidity (its ability to convert assets into cash quickly with little or no loss) is measured through its liquidity ratio, volatile liability dependency ratio and loan to deposit ratio. (Tr. 118-120)
   78. As of August 27, 1983, the Bank's liquidity was marginal based on a liquidity ratio of 28.3 percent; a volatile liability dependency ratio of 9.21 percent and a loan to deposit ratio of 75 percent. (Tr. 120-121, 123, FDIC Exh. 1 at 53)
   79. Respondent was responsible for the Bank's liquidity position. (Tr. 39, 46, 303)
   (5) Findings Regarding Violations of State Law.
   80. Respondent caused loans to be made in excess of * * * legal lending limit of 15 percent of the Bank's "sound capital" (* * * Code § 28-1-13-1) in the case of * * * loan for $279,000. (FDIC Exh. 1 at 12–13)
   81. Respondent caused loans to be made in excess of * * * legal lending limit of 15 percent of the Bank's "sound capital" (* * * Code § 28-1-13-1) in instances where loan proceeds went to a common enterprise, as follows: * * * related loans; * * * related loans; * * * related loans; and * * * related loans. (Tr. 177, 215, FDIC Exh. 1 at 12–13)

   C. FINDINGS REGARDING RESPONDENT'S TRANSACTIONS TO, OR FOR THE BENEFIT OF * * *

   (1) Findings with Respect to the May 2, 1983 Transaction.

   82. A cashier's check is an official bank check purchased by the remitter upon the bank's receipt of consideration from the remitter in the form of cash or its equivalent, and is reflected on the bank's books when the check is issued. (Tr. 461–462)
   83. On May 2, 1983, the Bank issued a cashier's check signed by Respondent with * * * as the designated remitter, and made payable to * * * in the amount of $19,321.92; the check was paid by the Bank on May 4, 1983. (Tr. 456–458, 461, 463, 826, 1107–1108, FDIC Exhs. 4, 5 and 6(a))
   84. No evidence of consideration from * * * as remitter was reflected upon the Bank's books for the issuance of said cashier's check, and the Bank received nothing in exchange from * * * for those funds. (Tr. 462–463, 465, 473, 484, 588, 828)
   85. On May 20, 1983 the Bank recorded the cashier's check on its books as a credit to cashier's check account. (Tr. 473, 588-589, 829, FDIC Exhs. 7 and 8)
   86. The normal and prudent banking procedure upon the issuance of a cashier's check is a credit to the cashier's check account and a debit on the asset side of the books for the payments received in cash, check or by means of other consideration from the remitter. (Tr. 467, 588, 828)
   87. * * *, Vice President of the Bank, initialed and entered the debit ticket dated May 20, 1983, on the Bank's books as a debit to Bank expenses upon the direction of the Respondent. The debit actually represented the payment of * * * interest indebtedness due * * * on April 30, 1983. (Tr. 473-474, 586)

   [.4] 88. Failure to reflect the issuance of a cashier's check as a Bank liability at the time said check was issued was an improper and imprudent banking transaction which misrepresented the Bank's books and its financial condition by understating the Bank's cashier's check account and overstating capital or net worth of the Bank and caused a shortage in the Bank's books. (Tr. 465, 467-468, 711-712, 828-829, 846)
   89. Respondent was responsible for the misrepresentation and delay from May 2, 1983 through May 20, 1983, in accurately reflecting this transaction on the Bank's books as a liability. (Tr. 468, 476)
   90. With less than $5,500.00 in its Bank checking account, * * * was without the financial resources to meet its April 30, 1983 interest obligation. (Tr. 462, 473, 487-488, FDIC Exh. 9)
   91. The payment of the indebtedness of * * * by the Bank constitutes an unsecured extension of credit by the Bank to its affiliate, * * *, without a note signed by * * * to the Bank, with no interest rate nor any repayment terms established, and exposed the Bank to potential financial loss. (Tr. 465, 483-485, 487, 828)
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   92. Said loan or extension of credit from the Bank to * * * was made without the prior approval of the board of directors of the Bank or disclosure to the Board as is normally the policy of the Bank. (Tr. 477, 485–486, 827)
   93. Respondent was involved in a conflict of interest when he issued a cashier's check on May 2, 1983 for the benefit of his own company. (Tr. 476-477, 485, 487, 827-828, 847)
   94. The May 2, 1983 transaction brought financial gain to Respondent in that a default by * * * on its loan to * * * was averted, and Respondent's interest in the holding company and its stock in the bank were protected from foreclosure. (Tr. 475-476, 487)
   (2) Findings Regarding the May 31, 1983 Transaction.
   95. Respondent is the Bank loan officer of record for extensions of credit to * * *, Respondent's father. (Tr. 491-492, 590, 1252)
   96. Pursuant to a $50,000.00 line of credit established in favor of * * * at the Bank, an unsecured loan in the amount of $19,321.92 was made to * * * on May 31, 1983. (Tr. 488, 490, 492, 495, 589-590)
   97. Bank dividends were disclosed on the Bank's records as the intended source of repayment for this loan. (Tr. 493)
   98. At the time the loan was made, * * * owned no Bank stock. (Tr. 493, 1253)
   99. Neither an application for the loan nor a letter of direction concerning the disbursement of loan proceeds was completed by * * *; nor was the purpose of the loan disclosed on the Bank's loan record. (Tr. 499)

   [.5] 100. Prior board of director approval for this extension of credit to * * * was not given although it is the normal and customary practice of the board of directors of the Bank to be apprised of loans to "insiders", to approve such loans prior to the disbursement of loan proceeds and to approve loans which exceed the lending authority of the loan officer of record. (Tr. 299-300, 485-486, 492, 591, 830, 1118, 1140)
   101. Proceeds from the loan to * * * in the amount of $19,321.92 were not disbursed to * * *, but were used to reverse the Bank expense debit of May 20, 1983 in the amount of $19,321.92 for the * * * interest payment. (Tr. 489, 494-495, 498-499, 589-590, FDIC Exhs. 11 and 12)
   102. The May 20, 1983 debit to Bank expenses was reversed by * * * on May 31, 1983 pursuant to an opinion of the Department of Financial Institutions of the State of * * * that the debit to Bank expenses did not reflect interest on the holding company loan and was an improper entry. (Tr. 480, 495, 590, 600)
   103. The disbursement of loan proceeds to a party other than the borrower, * * *, without a letter of direction signed by said borrower deviates from normal and prudent banking practices. (Tr. 499, 503)
   104. The May 31, 1983 entries of a credit to the Bank expense account and a debit to the commercial loan account of * * * represent the means by which Respondent attempted to negate the May 2, 1983 payment of * * * indebtedness by the Bank. (Tr. 494)
   105. The use of the proceeds from the loan to * * * which reversed the debit to Bank expenses incurred when the Bank paid the April 30, 1983 interest payment of * * *, provided a tangible economic benefit to * * *, and therefore the loan to * * * actually represents an extension of credit to * * *. (Tr. 300, 494, 496-497, 830)
   106. As an unapproved and unsecured extension of credit to * * *, the loan to * * * for which Respondent was the loan officer created a conflict of interest for Respondent in that the proceeds of his father's loan, which exceeded his lending authority, were used for the benefit of * * * and to diminish his own personal liability. (Tr. 299, 302, 481-482, 504-505, 846-847)
   107. Said transaction exposed the Bank to an increased risk of loss by failing to disclose on the Bank's books the entity truly responsible for paying the loan. (Tr. 300)
   108. Respondent received financial gain as a result of the loan made to * * * in that the payment of the April 30, 1983 interest of the * * * indebtedness averted a default on the * * * loan to * * * and thus Respondent's interest in the holding company and its stock in the bank were protected from foreclosure. (Tr. 301, 505, 846)

   (3) Findings Regarding the August 10, 1983 Transaction.

   109. A second interest payment was owed by * * * to * * * on July 30, 1983 in the {{4-1-90 p.A-383}}amount of $21,743.94. (Tr. 507, FDIC Exh. 14)
   110. On August 10, 1983 * * * debited or charged the Bank's correspondent checking account in the amount of $21,743.94 as a means of meeting * * * July 30, 1983 obligation at the request of the Respondent by means of telephone instructions from the Bank to * * * , a secretary at * * *. (Tr. 505, 507, 521, 831, 1122–1124, FDIC Exhs. 3 and 14)
   111. No simultaneous consideration from * * * was paid to the Bank as compensation for the use of Bank funds in the payment of the July 30, 1983 * * * interest payment. (Tr. 510)
   112. The debiting of a bank's correspondent account for the purpose of repaying an obligation of the holding company without a simultaneous provision of consideration by the holding company to the bank is a deviation from normal and customary banking practice and constitutes a misapplication of bank funds. (Tr. 510, 512)
   113. * * * , the Bank's correspondent bank, never debited the checking account of the Bank without an understanding and approval by the correspondent bank through verbal, telephone or letter instructions as reflected on the debit memorandum forwarded to the bank. (Tr. 709–710)
   114. Only senior officers of the Bank have the authority to authorize * * * to debit the Bank's correspondent account. (Tr. 644)
   115. Respondent was responsible for the August transactions which paid the July * * * interest obligation to * * *. (Tr. 522)
   116. The August 10, 1983 debit to the Bank's correspondent checking account was neither entered nor reflected on the books of the Bank until August 12, 1983. (Tr. 508-309, 522, 831)
   117. The failure to enter the August 10, 1983 debit to the Bank's correspondent account at * * * on the Bank's books on the date said debit was made is an irregular practice contrary to normal and prudent banking standards, and a misrepresentation of the Bank's books. (Tr. 509, 512, 517, 846)
   118. This transaction was not disclosed to the board of directors of the Bank by Respondent at any board meeting. (Tr. 517-518)
   119. The debit entry to the Bank's correspondent account without a corresponding and simultaneous payment of funds from * * * to the Bank constituted an unsecured extension of credit to * * *, the affiliate of the Bank, with no rate of interest established, and a shortage in the correspondent account. (Tr. 510–511, 513–514, 517, 831)
   120. The misstatement of the Bank's books in this transaction prejudiced the interests of the depositors, and had an adverse impact upon the financial condition of the Bank. (Tr. 518-519)
   121. This unsecured extension of credit to * * * created a conflict of interest for the Respondent in that he was on both sides of the transaction. (Tr. 513, 846-847)
   122. Respondent received financial gain as a result of the August transactions in the Bank's account at * * * in that a default on the * * * indebtedness to * * * was averted, and thus Respondent's interest in the holding company and its stock in the Bank were protected from foreclosure. (Tr. 524–525, 846)
   123. The debiting of the Bank's correspondent checking account exposed the Bank to potential loss because of the absence of financial resources of * * * to repay the Bank, and the absence of a legally enforceable obligation in the form of a note to the Bank. (Tr. 514)

   (4) Findings Regarding the August 12, 1983 Transaction.

   124. On August 12, 1983 a second unsecured advance on the $50,000 line of credit in favor of * * * was made in the amount of $21,743.94. (Tr. 519–520, 523, 645, 832–833, 1122–1125)
   125. The board of directors of the Bank did not grant prior approval for this loan and it was not revealed to the board until disclosed by regulatory authorities in the FDIC August 27, 1983 Report of Examination. (Tr. 523, 526, 833)
   126. Proceeds of this loan were not disbursed to the borrower * * * , but were used to reverse the August 10, 1983 debit to the Bank's correspondent account at * * *. (Tr. 520, 423, 832–833, FDIC Exhs. 16 and 17)
   127. A general ledger ticket which debited commercial loans in the amount of $21,743.94 for * * * was initialed by * * * , Secretary for Respondent, on {{4-1-90 p.A-384}}August 12, 1983 at which time a credit ticket in that same amount was initialed by Ms. * * * to cover the debit to the Bank's correspondent account for the payment of the * * * interest. (Tr. 520, 523, 643-644; FDIC Exhs. 16 and 17)
   128. Said tickets were given to Ms. * * * by Respondent with the understanding that said entries were to be made. (Tr. 522, 645)
   129. It is a deviation from normal and prudent banking practices to delay in making a corresponding and offsetting entry. (Tr. 517, 846)
   130. This second advance to * * * as part of his line of credit with the Bank was for the tangible economic benefit of * * * and thus the personal benefit of Respondent in that the proceeds thereof were used to repay the Bank which had paid * * * the July 30, 1983 interest payment on August 10, 1983 thereby averting a default on the * * * loan to * * *. Thus Respondent's interest in the holding company and its stock in the Bank were protected from foreclosure. (Tr. 524–525, 832–833)
   131. The debiting of the Bank's correspondent account to cover a * * * obligation and Respondent's attempt to negate said debit through the use of an unsecured and unapproved loan to his father created a conflict of interest in light of Respondent's capacities as chief executive officer of the Bank and sole owner of * * *. (Tr. 525, 845–847)

   (5) Findings Regarding the November 2, 1983 Transaction.

   132. On November 2, 1983, pursuant to standing instructions, * * * debited, at the direction of Respondent, the Bank's correspondent account in the amount of $23,134.17 for interest due * * * on the * * * indebtedness on October 31, 1983. (Tr. 527-529, 592, 834, FDIC Exhs. 18, 19 and 20)
   133. Prior approval of this debiting of the Bank's correspondent account for the purpose of repayment of the * * * indebtedness was not given by the Bank's board of directors; and the board was not made aware of this transaction until informed by regulatory authorities on February 17, 1984. (Tr. 530–531, 535)
   134. This debit to the Bank's correspondent account at * * * was not reflected on the Bank's books until January 20, 1984, during which time the books of the Bank misrepresented the financial condition of the Bank and overstated the assets of the Bank. (Tr. 530, 834–835)
   135. The debiting of the Bank's correspondent account at * * * on November 2, 1983 for the payment of * * * October 31, 1983 interest payment to * * * was in the nature of an unsecured extension of credit to * * * for which no note was executed, in that * * * provided the Bank with no consideration at the time the debit was made. (Tr. 531, 533–535)
   136. This extension of credit on November 2, 1983 called for no payment of interest and no terms of repayment were established. (Tr. 534)
   137. This extension of credit on November 2, 1983 exposed the Bank to potential risk of loss in that * * * lacked the financial resources to repay the Bank. (Tr. 532, 536)
   138. This extension of credit on November 2, 1983 to * * * for which Respondent has admitted responsibility created a conflict of interest for Respondent in that Bank funds were used to extinguish Respondent's holding company debt. (Tr. 529, 532, 845–847)
   139. This payment of the * * * debt on November 2, 1983 resulted in a financial gain for the Respondent by maintaining the current status of the * * * loan and protecting his interest in the holding company and its stock in the Bank from foreclosure. (Tr. 532, 845–846)

   (6) Findings Regarding the January 23, 1984 Transaction.

   140. A debit ticket dated January 19, 1984, initiated by Respondent and initialed by * * * , was processed by the Bank on January 23, 1984 in the amount of $67,000; said ticket was an increase in the Bank's account with * * * and was characterized as a Bank loan to Respondent that was sold to * * * even though * * * had not purchased the loan. (Tr. 538-539, 648, FDIC Exh. 23)
   141. A checking account deposit ticket dated January 19, 1984, for the account of * * * in the amount of $67,000 representing loan proceeds from a loan to Respondent was completed and processed on January 23, 1984, by Respondent though said entry was inaccurate because the "deposit" constituted only Bank funds. (Tr. 541, FDIC Exh. 21)
{{4-1-90 p.A-385}}
   142. On January 20, 1984, Respondent wrote a check dated January 19, 1984, on the account of * * * in the amount of $67,261.25 and made payable to the Bank; said check was received by Ms. * * *. (Tr. 538, 649; FDIC Exhs. 22 and 24)
   143. On January 23, 1984, Respondent initiated a loan credit to the account of * * * in the amount of $44,127.08, of which $41,065.86 represented a principal payment on * * * indebtedness to the Bank and of which $3,061.22 represented an interest payment on said indebtedness; said entries were processed by Ms. * * *. (Tr. 539, 649, FDIC Exh. 25)
   144. The aforementioned principal and interest payments of * * * represent repayment of his delinquent indebtedness which was incurred to cover the Bank's payment of * * * obligation in the May 2, 1983 cashier's check transaction and the August 10, 1983 correspondent account transaction. (Tr. 536, 539, 541, 1134, 1136)
   145. On January 23, 1984, Respondent initiated a Bank credit ticket dated January 19, 1984, which reflected a credit in the amount of $23,134.17 in the Bank's correspondent account at * * *. (Tr. 539-540, 543)
   146. Said credit ticket dated January 19, 1984 and initialed by * * * represents "payment of interest on * * *" and was initiated by Respondent in an attempt to offset the November 2, 1983 debit to the Bank's correspondent account by * * *. (Tr. 541, 543, 659, 1134, 1136, FDIC Exh. 26)
   147. The aforementioned debit ticket, deposit ticket, check, loan credit and credit ticket were not reflected on the books of the Bank until January 23, 1984. (Tr. 538, 540, 546, 836-837)
   148. On January 19, 1984, Respondent personally delivered a loan request in the form of a cover letter, the Bank's promissory note and an offer to sell his interest in * * * to * * * , Vice President and Senior Account Officer in the correspondent bank division of * * *. (Tr. 543, 713, 736, 1133-1134)
   149. Said loan request in the amount of $67,000 anticipated a direct loan from the Bank which would be purchased as a participation by * * * as reflected by the signed endorsement on the back of the note to * * *. (Tr. 543, 713, 1125, 1134)
   150. On January 19, 1984, Respondent was informed by * * * that * * * would not purchase a participation in a loan from the Bank to Respondent, and that any loan from * * * must be on a direct basis, using * * * own note form. (Tr. 736-737)
   151. Respondent represented to Mr. * * * that the purpose of said loan was to facilitate the sale of his interest in * * *. Respondent never indicated to Mr. * * * that the purpose of the loan was to repay the indebtedness of * * * or Respondent's father. (Tr. 714, 735, 737, 739, 1125–1126, FDIC Exh. 27)
   152. An oral commitment to make such loan on a direct basis was given to Respondent on January 27, 1984 at which time Respondent was informed that said loan would be approved on a ninety day basis with the expectation that the sales transaction would be consummated within this time period. (Tr. 547-548, 736-738, FDIC Exh. 27)
   153. The Bank's note delivered by Respondent on January 19, 1984 to * * * was never purchased by * * * , but a * * * note dated February 16, 1984 in the amount of $67,000 and signed by Respondent is the document upon which the loan to Respondent was made on February 17, 1984 by * * * through the crediting of the Bank's correspondent account at * * *. (Tr. 545, 548-549, 739, 1137; FDIC Exhs. 27, 28 and 29)
   154. The $67,000 credit on the Bank's books, and the actual debit to the Bank's correspondent account with * * * for the "* * * participation" on the Bank's books, without a corresponding credit on the books of * * * and an actual increase in the balance therein, constitutes a loan from the Bank to Respondent which exceeded Respondent's lending authority, for which no application was made, no prior board of director approval given, and which resulted in a shortage to the Bank. (Tr. 543-544, 837)
   155. The Bank was exposed to a risk of loss from January 23, 1984, at which time Respondent procured for his use $67,000 of Bank funds, until February 17, 1984, at which time Respondent's loan from * * * was funded and credited to the Bank's correspondent {{4-1-90 p.A-386}} account at * * * and the transaction reconciled; * * * account balance at this time was only $8,798.19. (Tr. 538, 548-549, 551-552, 847)
   156. Respondent did not utilize loan proceeds from his loan with * * * in the manner or for the purpose which he represented to * * * at the time the initial loan request was made on January 19, 1984, but applied them to the indebtedness of his father and the Bank's correspondent account. (Tr. 539-540, 548, 649, 714, 737, 739, FDIC Exhs. 24, 25 and 26)
   157. The disbursement of funds in the absence of a loan commitment and based solely upon a verbal commitment is an imprudent and improper banking practice. (Tr. 552)
   158. Respondent received financial gain from the January 23rd entries in that Respondent was able to repay the obligation of his father, * * * , and the obligation of * * * to the Bank on January 23, 1984. (Tr. 550, 845–846)
   159. Respondent's use of $67,000 of Bank funds to repay the aforementioned obligations of his father and * * * was a self-serving practice and created a conflict of interest on his part, and covered up the prior instances of use of Bank funds for servicing of the * * * debt to * * *. (Tr. 551, 846–847)
   160. The $67,000 loan made by * * * to Respondent has been charged off by * * * in its entirety, and is considered a loss. (Tr. 742)
   (7) Findings Regarding the February 17, 1984 Transactions.
   161. On February 17, 1984 the Bank's correspondent checking account was debited by * * * in the amount of $22,982.11 for the interest payment due on the * * * loan to * * * on January 31, 1984; Respondent was responsible for said debit. (Tr. 554–556, 593, 838; FDIC Exhs. 30 and 31)
   162. * * * did not reimburse the Bank for the February 17, 1984 debit to its correspondent account; this transaction constituted an unsecured extension of credit to * * * , and no interest rate or repayment terms were established and no prior board of director approval was sought. (Tr. 558–559, 838)
   163. * * * normally and customarily received verbal telephone or letter authorization for the debiting of the Bank's correspondent account from the Bank. (Tr. 709-710)
   164. The unsecured loan to * * * exposed the Bank to financial loss in that * * * lacked the financial resources with which to repay the Bank, and * * * had not entered into any written agreement to repay the Bank. (Tr. 560)
   165. Said loan from the Bank's correspondent account was not reflected on the books of the Bank at the time of said debit, and the failure to enter this transaction misrepresented the Bank's financial condition by overstating the assets of the Bank and was contrary to normal and prudent banking practice. (Tr. 556–557, 838, 846)
   166. The unsecured and unapproved loan to * * * by the Bank created a conflict of interest for Respondent in that it posed a threat of loss to the Bank and represented a means of keeping * * * indebtedness to * * * current and protecting Respondent's interest in the holding company and its stock in the Bank from foreclosure. (Tr. 560, 845–847)
   167. The avoidance of a default on said indebtedness, and the reduced prospective liability of Respondent on his personal guarantee thereof represented financial gain to Respondent. (Tr. 845–846)
   (8) Findings Regarding the February 22, 1984 Transaction.
   168. On February 20, 1984 the Bank processed two checks drawn by Respondent made payable to the Bank and dated February 18, 1984, one in the amount of $7,282.11 drawn on the account of * * * and the other check in the amount of $15,700 drawn on the account of * * * or * * *. (Tr. 561–563, 569, 593–594, FDIC Exhs. 32 and 33)
   169. Said checks were applied to the Bank's correspondent account by * * * at the direction of the Respondent through a credit ticket initialed by * * * dated February 22, 1984 and used as reimbursement for the February 17, 1984 debit by * * *. (Tr. 563–564, FDIC Exh. 34)
   170. The account of * * * or * * * at the Bank lacked sufficient funds with which to clear the $15,700 check dated February 18, 1984. (Tr. 565, FDIC Exh. 36)
   171. On February 21, 1984 the board of directors of the Bank approved a $15,000 unsecured loan to Respondent for his "personal use" with disbursement into his {{4-1-90 p.A-387}}checking account. (Tr. 566-568, 594, FDIC Exh. 39)
   172. On February 22, 1984, proceeds from said loan were credited to the account of * * * or * * * and therein were used for the clearance of the $15,700 check dated February 18, 1984 drawn by Respondent and made payable to the Bank. (Tr. 568, FDIC Exh. 35 and 38b)
   173. * * * was the economic beneficiary of the $15,000 loan to Respondent in that the proceeds of said loan were utilized for the payment of a check to the Bank initiated by Respondent to reimburse the Bank for the use of Bank funds on February 17, 1984 to make the fourth quarterly interest payment on the * * * loan to * * *. (Tr. 568-569, 839, 845, 1262)

   D. FINDINGS REGARDING RESPONDENT'S REIMBURSEMENT TO THE BANK FOR * * * QUARTERLY INTEREST PAYMENT TRANSACTIONS AND TO * * * FOR THE * * * INDEBTEDNESS

   174. In addition to the principal sum borrowed upon each of the Bank's payments of * * * four quarterly interest payments, the Bank was deprived of interest for the following days: May 2 through May 30, 1983, August 10 through August 12, 1983, November 2, 1983 through January 22, 1984, January 23, 1984 through February 16, 1984, and February 17, 1984 through February 21, 1984. (Tr. 632, 685, FDIC Exh. 3)
   175. Respondent reimbursed the Bank for such interest only after the FDIC's investigation of said transactions, and its notification to the board of directors of Respondent's use of Bank funds to service * * * indebtedness to * * *. (Tr. 571, 573, 632–633, FDIC Exh. 3)
   176. The $782,000 loan to * * * by * * * , which was personally guaranteed by the Respondent is in default, and $457,000.00 has been charged off to loan loss reserve by * * *. (Tr. 742–743)

FINDINGS OF FACT OF THE ADMINISTRATIVE LAW JUDGE

   The Board has determined not to adopt the Findings of Fact recommended by Judge Dowell. The Board believes that the findings as noted below are not in an appropriate format. Additionally, some are erroneous and not supported by the evidence presented at the hearing. The balance of the findings are not material to the case.
   Judge Dowell, in his written opinion, has interspersed findings of fact with explanations, contentions and allegations of the FDIC and the Respondent. The Board believes the facts should be separated, stated and supported by references to the record.
   Judge Dowell appears to have adopted as a finding of fact the Respondent's characterization of the collateral value, secured position and collection prospects for certain of the classified loans. Among them are loans to * * *. (Rec. Decs. at 15-16). These findings were based upon the unsupported testimony of the Respondent and are in direct contravention of the findings in the FDIC Report of Examination and of the testimony of an expert witness for the FDIC (Tr. 58–60, 70–71, 86–99, 115, 123, FDIC Exh. 1 at 28-33). Additionally Judge Dowell appears to accept the proposition that "...the Bank made efforts for the * * * Bank to fund the [* * *] loan." (Rec. Decs. at 16). The Respondent was unable to corroborate this information with either testimony from an official of * * * Bank * * * , or from any type of documentary evidence. Therefore, this finding is rejected. Likewise, Respondent's estimate of the value of certain real estate leases on the * * * line of credit and his belief that upon sale of the subject property the Bank would be made whole is not adopted in light of the absence of an appraisal (FDIC Exh. 1) and the failure to qualify the Respondent, Mr. * * * , or any other person as an expert in the area of appraisal of real estate or equipment. Finally, we do not accept the apparent finding that a sale of the * * * property was obstructed only by a delay by the State of * * * in the issuance of certain requisite permits. Again, there was no evidence offered by the Respondent to corroborate the allegation.
   Various other findings of fact appear to have been made, interspersed with Judge Dowell's discussion of the testimony and contentions of the parties. The Board considers these findings made by Judge Dowell and not heretofore discussed to be irrelevant to the determination of the case and therefore, although not necessarily erroneous, not necessary for our determination.

{{4-1-90 p.A-388}}
OPINION

   [.6] This action was brought pursuant to Section 8(e)(1) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e)(1). That section authorizes the removal of a bank director or officer for any one of three acts:
   1. A violation of law, rule, regulation or cease and desist order which has become final; or

   2. The engagement or participation in any unsafe or unsound practice in connection with the bank; or

   3. The commission or engagement in any act, practice or admission which constitutes a breach of said officer's or director's fiduciary duty.

   [.7] If any of the above three acts occur, the FDIC must look to the effects of the act. One of the following three things must occur as a consequence of the act:
   1. The bank has suffered or will probably suffer substantial financial loss or other damage; or

   2. The interest of depositors could be seriously jeopardized by reason of one of the aforementioned acts; or

   3. The officer or director has received financial gain by reason of one of the aforementioned acts.
   The substantial financial loss to which the statute refers can be either actual financial loss which has occurred or the probable financial loss that the bank will suffer as a result of the bank official's conduct.

   [.8] In addition to the occurrence of an act which causes a specific consequence, the statute requires that the bank official must, at the time when he/she committed the acts, have either:
   1. Been involved in personal dishonesty; or
   2. Demonstrated a willful disregard for the safety and soundness of the bank; or

   3. Demonstrated a continuing disregard for the safety and soundness of the bank. See generally, Brickner v. FDIC, 53 U.S.L.W. 1081 (8th Cir., November 5, 1984).
   The willful or continuing disregard criteria were adopted as being gauges of conduct which would encompass those practices which though not fraudulent were deliberate and effectuated in the face of an inauspicious outcome or were knowingly repeated over a period of time and threatened the safety and soundness of the bank. H.R. REP. NO. 1383, 95th Cong., 2d Sess. 18, reprinted in 1978 U.S. CODE CONG. and AD. NEWS 9273, 9290.
   The conclusions of law as set out below clearly show Respondent caused the Bank to violate numerous Federal and State laws and regulations; specifically Section 23A of the Federal Reserve Act, Section 22(h) of the Federal Reserve Act as implemented by Section 215.4(a) of Regulation O of the Board of Governors of the Federal Reserve System, Section 337.3(b) of the FDIC's rules and regulations and the legal lending limit of the State of * * *.

   [.9] Additionally, the conclusions of law, supported by the findings of fact, show that the Respondent engaged or participated in certain unsafe or unsound banking practices related to the management of the Bank that contributed to its resulting condition. An unsafe or unsound banking practice would include "any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk of loss or damage to an institution, its shareholders, or the agencies administering the insurance funds" Financial Institutions Supervisory and Insurance Act of 1966: Hearings on S. 3158 before the House Comm. on Banking and Currency, 89th Cong., 2d Sess. 50 (1966). Judicial recognition has been given to the concept of unsafe or unsound banking practices. The courts have construed this phrase to encompass practices contrary to accepted standards of prudent operation that might result in abnormal risk or loss to a bank. First National Bank of Eden v. Department of the Treasury, 568 F. 2d 610, 611 (8th Cir. 1968). This includes the improper perfection of a security interest in personal property under the laws of the State of * * *.

   [.10] Respondent also breached his fiduciary duty as a director and officer of the Bank through his use of Bank funds for his personal benefit. The evidence shows that he appropriated Bank funds for the benefit of * * * and thus himself in violation of federal banking laws and regulations. Misappropriation of Bank funds for one's own use constitutes a breach of the fiduciary duty of loyalty to a bank, its depositors and shareholders.
{{4-1-90 p.A-389}}
   The Respondent's practices have resulted in actual and probable future substantial loss to the Bank. His unsafe or unsound lending practices have caused approximately $2,500,000 of adversely classified credits to be put on the books of the Bank. This represents over 90% of the total dollar volume of adversely classified credits and almost $1,000,000 more than the Bank's total unadjusted capital and reserves of $1,464,000. Additionally, the total amount of adversely classified assets has grown from $308,000 on November 14, 1981 to the current amount. All of this occurred under the administration of the Respondent. By virtue of the extremely poor financial condition of the Bank, which was caused in substantial part by Respondent's unsafe and unsound lending practices and violations of law, the interests of depositors have been jeopardized.
   The findings of fact pertaining to the Respondent's handling of the four payments on the * * * loan to * * * clearly show violations of law and imprudent banking practices resulting in financial gain to the Respondent. These actions were in violation of Section 23A of the Federal Reserve Act, Regulation O of the Board of Governors of the Federal Reserve System, and Section 337 of the FDIC Rules and Regulations. Additionally, Respondent breached his fiduciary duty to the Bank by using the Bank's resources for his own enrichment.
   In view of these facts, the Board concludes that Respondent has demonstrated a willful and a continuing disregard for the safety and soundness of the Bank by engaging in imprudent banking practices and violations of law and regulation.
   In his conclusions, Judge Dowell also found that the Respondent violated Section 23A of the Federal Reserve Act, Regulation O of the Board of Governors of the Federal Reserve System, and Section 337.3(b) of the FDIC rules and regulations. He found that the Bank had a composite uniform bank rating of 5 and, therefore, was in an unsafe and unsound condition and that Respondent and the Bank had been placed on notice more than once regarding the poor operation of the Bank, and had failed to make suggested improvements. This failure resulted in the continued deterioration of the condition of the Bank. Although the Board does not quarrel with these conclusions, it feels that they should be more specifically detailed and set out.
   Judge Dowell also concluded that the record would not sustain a charge that Respondent committed acts that involved personal dishonesty. The Board believes that the evidence fully supports a conclusion that the Respondent acted with personal dishonesty within the meaning of Section 8(e)(1). Dishonesty is a "disposition to lie, cheat or defraud; untrustworthiness; lack of integrity." Black's Law Dictionary, § 21 (rev. 5th ed., 1979). The activity need not rise to the level of an indictable offense and includes self-dealing practices. Financial Institutions Supervisory and Insurance Act of 1966: Hearings on S. 3158 and S. 3695 before House Comm. on Banking and Currency, 89th Cong. 2d Sess. 52 (1966).
   The record is replete with instances where Respondent acted in a self-dealing manner by using Bank funds for the benefit of his personal interest in * * * , and engaged in other illegal acts which benefited his personal interests. These acts include the cashier's check transactions of May 2, 1983 and the charging of the Bank's correspondent account by * * * on August 10, 1983, November 2, 1983 and February 17, 1984. The $67,000 transaction of January 23, 1984 which repaid Respondent's father's loans is an instance of self-dealing with Bank funds. Lastly, Respondent processed loans in which a customer had signed, in his presence, the name of another individual to the loan documents.
   Judge Dowell also found that "contentions of the parties as to...law not specifically discussed have been given due consideration and are found to be either not materially significant or not justified." The Board, since it is making its own conclusions of law based on more detailed findings of fact, has determined that additional conclusions of law are indeed relevant and justified in reaching its decision.
   Finally, Judge Dowell found that, although the FDIC has the "statutory authority to issue the recommended order of removal and prohibition and to prohibit Respondent's participation in the affairs of any other insured bank", the FDIC has not made a persuasive argument that Respondent should be prohibited from participating in other insured banks. Section 8(e)(5) {{4-1-90 p.A-390}} gives the Board the discretion to issue an order "as it may deem appropriate." This broad authority is necessary to fashion a remedy which takes cognizance of the uniqueness of each removal action. Additionally, removal from the Bank without a concurrent ability to prohibit the Respondent from participating in the affairs of other insured banks would leave those banks vulnerable to victimization by the Respondent. The seriousness of the violations of law, unsafe and unsound banking practices, breaches of fiduciary duty and the personal dishonesty of the Respondent warrant imposing the prohibition against participating in other insured banks. Judge Dowell's conclusion is also contrary to the express language of Section 8(j) of the Federal Deposit Insurance Act. Section 8(j) provides criminal penalties for persons who are removed from any office pursuant to Section 8(e) and who thereafter serve in any capacity in any bank without prior written approval of the FDIC. The FDIC, therefore, rejects that portion of Judge Dowell's proposed order which by implication would permit the Respondent to do that which was rendered criminal by Section 8(j). Brickner, Supra.
   The Board takes notice of the fact that the * * * Bank of * * * was closed by the * * * Department of Financial Institutions on August 10, 1984, due to insolvency. This fact was not taken into account in the consideration of this case.

CONCLUSIONS OF LAW

   In view of the foregoing discussion the Board makes the following conclusions of law.
   1. The FDIC has jurisdiction over the Respondent, the Bank, and the subject matter of this proceeding.
   2. The FDIC has the authority to issue an ORDER OF REMOVAL FROM OFFICE AND PROHIBITION FROM PARTICIPATION pursuant to Sections 8(e)(1) and (5) of the Federal Deposit Insurance Act ("Act")(12 U.S.C. § 1818(e)(1) and (5)).
   3. Respondent engaged in unsafe or unsound banking practices within the meaning of Section 8(e) of the Act by operating the Bank with inadequate capital and loan valuation reserves, engaging in hazardous lending and lax collection practices, operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits, operating the Bank without adequate provisions for liquidity, improperly perfecting a security interest in personal property under the laws of the State of * * * (* * * Rev. Stat. § 355.9-401(1)(c)) and operating the Bank in violation of the legal lending limit of the State of * * * (* * * Code § 28-1-13-1)
   4. Respondent's unsafe or unsound banking practices described in paragraph 3 above resulted in substantial financial loss and probable future substantial financial loss or other damage to the Bank within the meaning of Section 8(e) of the Act.
   5. Respondent's unsafe or unsound banking practices described in paragraph 3 above seriously jeopardized the interests of the Bank's depositors within the meaning of Section 8(e) of the Act.
   6. Respondent's unsafe or unsound banking practices described in paragraph 3 above involved a continuing disregard for the safety and soundness of the Bank within the meaning of Section 8(e) of the Act.
   7. * * * is a related interest of the Respondent for purposes of Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215).
   8. * * * is an affiliate of the Bank for purposes of Section 23A of the Federal Reserve System (12 U.S.C. § 371c).
   9. The Respondent violated Section 23A of the Federal Reserve Act (12 U.S.C. 371c), as made applicable to State nonmember banks by Section 18(j)(1) of the Act (12 U.S.C. § 18(j)(1)) through the following:

       A. The issuance on May 2, 1983 and payment on May 4, 1983 of a $19,321.92 Cashier's Check to * * *.
       B. The $19,321.92 loan to * * *, Respondent's father on May 31, 1983.
       C. The $21,743.94 August 10, 1983 debit by * * * to the Bank's correspondent account.
       D. The $21,743,94 August 12, 1983 loan to * * * , Respondent's father.
       E. The $23,134.17 November 2, 1983 debit by * * * to the Bank's correspondent account.
       F. The $22,982.11 February 17, 1984 debit by * * * to the Bank's account for the January 30, 1984 interest payment.
       G. The $15,000 February 21, 1984 loan to Respondent by the Bank.
    {{4-1-90 p.A-391}}
       10. 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(a) of Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. § 215.4(a)) as made applicable to State nonmember banks by Section 18(j)(2) of the Act (12 U.S.C. § 1828(j)(2)), through the following:
         A. The failure to establish an interest rate and the greater than normal risk of repayment on the May 2, 1983 cashier's check transaction.
         B. The failure to establish an interest rate and the greater than normal risk of repayment on the August 10, 1983 extension of credit to * * *.
         C. The failure to establish an interest rate and the greater than normal risk of repayment on the $23,134.17 November 2, 1983 extension of credit to * * *.
         D. The failure to establish an interest rate and the greater than normal risk of repayment on the $22,982.11 February 17, 1984 extension of credit to * * *.
       11. The Respondent violated Section 337.3(b) of FDIC's Rules and Regulations (12 C.F.R. § 337.3(b)) by failing to obtain the prior approval of the majority of the Bank's board of directors with regard to the extensions of credit made on May 2, 1983, May 31, 1983, August 10, 1983, August 12, 1983, November 2, 1983 and February 17, 1983.
       12. The Respondent violated law, rule or regulation within the meaning of Section 8(e) of the Act.
       13. The Respondent engaged in unsafe or unsound banking practices within the meaning of Section 8(e) of the Act through his participation in transactions resulting in the payment of Bank funds to or for the benefit of * * * on May 2, 1983, May 31, 1983, August 10, 1983, August 12, 1983, November 2, 1983, January 23, 1984, February 17, 1984, and February 22, 1984.
       14. A director's fiduciary duty to a bank requires the operation of the bank in the absence of self-dealing.
       15. The Respondent, by engaging in insider transactions and using the Bank's assets for his personal benefit, breached his fiduciary duty as director of the Bank within the meaning of Section 8(e) of the Act through his participation in transactions resulting in the payment of Bank funds to or for the benefit of * * * on May 2, 1983, May 18, 1983, May 31, 1983, August 10, 1983, August 12, 1983, November 2, 1983, January 23, 1984, February 17, 1984, and February 22, 1984.
       16. The Respondent's violations of law, rule, or regulation, unsafe or unsound banking practices, and breach of fiduciary duty resulting from the payment of Bank funds to or for the benefit of * * * resulted in substantial financial loss or other damages to the Bank prior to notification by the FDIC within the meaning of Section 8(e) of the Act.
       17. The Respondent's violations of law, rule, or regulation, unsafe or unsound banking practices, and breach of fiduciary duty resulting from the payment of Bank funds to or for the benefit of * * * arising from insider transactions resulted in financial gain to the Respondent within the meaning of Section 8(e) of the Act.
       18. Respondent's violations of law, rule, or regulation, unsafe or unsound banking practices, and breach of fiduciary duty arising from insider transactions resulting from the payment of Bank funds to or for the benefit of * * * involved a willful and continuing disregard for the safety or soundness of the Bank within the meaning of Section 8(e) of the Act.
       19. Respondent's violations of law, rule or regulation, unsafe or unsound banking practices, and breach of fiduciary duty resulting from the payment of Bank funds to or for the benefit of * * * and the $67,000.00 transaction of January 23, 1984 which repaid Respondent's father's loans are acts that involved personal dishonesty within the meaning of Section 8(e) of the Act.
       20. Respondent's practices with regard to his management of the Bank's loan portfolio are grounds for removal and prohibition from further participation in the conduct of the Bank and from all other FDIC insured banks within the meaning of Section 8(e)(1) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(e)(1)).
       21. Respondent's violations of law, rule, or regulation, unsafe or unsound banking practices, and breach of fiduciary duty arising from insider transactions resulting from the payment of Bank funds to or for the {{4-1-90 p.A-392}}benefit of * * * are grounds for his removal and prohibition from further participation in the conduct of the Bank and from all other FDIC insured banks within the meaning of Section 8(e) of the Act.

ORDER

   Having found and concluded that Respondent * * * , in his capacity as an officer and director of the * * * Bank of * * * ("Bank") has engaged or participated in unsafe or unsound banking practices, violations of law and regulation, and breaches of his fiduciary duty which evidences both a willful and a 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 and will probably suffer substantial financial loss and other damage, and that the interests of the depositors could be seriously prejudiced and that the Respondent has received financial gain, it is:
   ORDERED, that Respondent * * * be, and hereby is, removed as a director and officer of the Bank and prohibited from further participation in any manner in the conduct of the affairs of any other bank insured by the Federal Deposit Insurance Corporation.
   This ORDER shall become effective thirty (30) days after service on Respondent 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.
   By direction of the Board of Directors.
   Dated at Washington, D.C. January 25, 1985.
/s/ Hoyle L. Robinson
Executive Secretary

RECOMMENDED DECISION

Decided: October 19, 1984

   Bank Official violated banking statutes;
however, personal dishonesty not shown as
to respondent's actions; removal as president
and director ordered. * * * , assistant
General Counsel, * * * and * * * for Federal
Deposit Insurance Corporation. * * *
for respondent. * * * and * * * for certain
witnesses.

   By Earl S. Dowell, Administrative Law
Judge:

   On March 19, 1984, the Board of Directors of the Federal Deposit Insurance Corporation submitted a notice of intention to remove from office and to prohibit from further participation * * * , respondent, in his capacity as an officer, director and/or person participating in the conduct of the affairs of * * * Bank of * * *. The head of the Bank is in * * * but most of the banking directors meet in * * *.
   The respondent admits that the Bank, a corporation existing and doing business under the laws of the State of * * * , and having its principal place of business at * * * , is and has been, at all times relevant hereto, an insured State nonmember bank. The Bank is subject to the Act (12 U.S.C. sections 1811-1831d) and the FDIC's Rules and Regulations (12 C.F.R. Chapter III). At all times pertinent to the charges respondent has been an officer, director and/or person participating in the affairs of the Bank. The FDIC has jurisdiction over the Bank, * * * and the subject matter of this proceeding.
   The proceeding was assigned for hearing at * * * , and was heard by the Judge on July 10, 11, 12, 13, 14, and 16, 1984. FDIC and the Bank were represented by counsel. Briefs were filed by both parties.
   In its trial memorandum FDIC stresses that the respondent (1) violated State and Federal laws and regulation; (2) engaged or participated in certain unsafe or unsound banking practices relating to his management of the Bank that contributed to its resulting condition; (3) breached his fiduciary duty as a director or officer of the Bank through his use of Bank funds for his personal benefit; (4) caused the Bank to suffer or to probably suffer substantial loss or other damage; (5) caused the interests of the depositors to be jeopardized by such actions; (6) received financial gain by reasons {{4-1-90 p.A-393}} of the violations of law or breach of his fiduciary duty; (7) evidenced personal dishonesty through the use of Bank funds for his personal benefit and the circumvention of the State legal lending limit; and (8) demonstrated a willful or continuing disregard for the safety or soundness of the Bank through imprudent management practices and violations of law and regulation.
   FDIC takes the position that section 8(e)(1) of the Act does not require it to prove all of the above allegations to sustain a removal action (12 U.S.C. section 1818(e)(1). The FDIC notes that it meets its burden of proof under the statute if it establishes that respondent engaged in either 1, 2, or 3 above and that any of those three factors has resulted in either 4, 5, or 6 above and in either 7 or 8 above.
   In its Notice of Intention to Remove from Office and to Prohibit from Further Participation, FDIC lists seven transactions either initiated or authorized by respondent which are alleged to be violations of Federal banking laws and regulations. FDIC contends that respondent violated or participated in the violation of section 23A of the Federal Reserve Act (12 U.S.C. section 371c), Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215), and Part 337 of FDIC Rules and Regulations (12 C.F.R. Part 337).
   FDIC spells out that regulation O is promulgated pursuant to section 22H of the Federal Reserve Act (12 U.S.C. section 375b). Section 23A of the Federal Reserve Act is made applicable to State chartered banks that are not members of the Federal Reserve System by section 18(j)(1) of the Federal Deposit Insurance Act [12 U.S.C. section 1828(j)(1)].
   Regulation O and section 22H of the Federal Reserve Act are made applicable to such banks by section 18(j)(2) of the Federal Deposit Insurance Act [12 U.S.C. section 1828(j)(2)]. * * * Bank of * * * is a State chartered bank that is not a member of the Federal Reserve System and is subject to the regulations of the FDIC.
   The trial memorandum notes that section 23A prohibits unsecured extensions of credit and similar transactions by an insured bank with its affiliates. Section 23A also restricts the amount of any such loan that can be made between a bank and its affiliate but that provision is not an issue in this case. Affiliate is defined in section 23A(b)(1)(A) as "any company that controls the member bank and any other company that is controlled by the company that controls the member bank." As stated above, the term member bank may be read as FDIC insured nonmember bank.
   Control is defined in section 23A(b)(3)(A)(i) as existing where "such company or shareholder, directly or indirectly, or acting through one or more other persons owns, controls, or has power to vote 25 percent or more of any voting securities of the other company." In this proceeding respondent admits that * * * is a bank holding company with regard to Bank in that it controls about 90 percent of its outstanding stock. Thus, * * * is an affiliate of Bank because it controls more than 25 percent of its voting securities.
   Loans or other extensions of credit between Bank and its affiliate * * * are covered by section 23A. Pursuant to section 23A(c)(1) each loan or extension of credit to "an affiliate by a member bank or its subsidiary shall be secured at the time of the transaction by collateral having a market value equal to [various market values are ascribed to the security given]. Inasmuch as no security was offered on any of the loans alleged to be violations of section 23A, the market value descriptions are not applicable. Each loan transaction, insists the FDIC, is a violation of section 23A because they were extensions of credit from the Bank to * * * and they were all made without any collateral.
   Section 23A violations as alleged follow:
   1. Paragraph 8(d) of the Notice alleges that on May 2, 1983, respondent issued a Bank cashier's check in the amount of $219,321.92. The cashier's check was made payable to * * * , the Bank's correspondent bank. * * * owed interest on its indebtedness to * * * at that time in the amount of $19,321.92. The payment by the Bank of * * * obligation to * * * on May 4, 1983 was equivalent to an extension of credit by the Bank to * * * since no consideration was offered for the payment of that check. Bank funds were used to repay an obligation of a Bank affiliate. This loan in the amount of $19,321.92 was unsecured and therefore was in violation of section 23A.

{{4-1-90 p.A-394}}
   2. Paragraph 8(f) of the Notice alleges that respondent caused the Bank to extend credit to his father, * * * , in the amount of $19,321.92 on May 31, 1983, as a means of repaying the loan to * * * created by the May 4, 1983 payment of a cashier's check by the Bank in an identical amount. Because the proceeds of the loan to * * * were used in effect to replace the loan created by the cashier's check, * * * received the economic benefit of the loan made to * * *. Section 23A(a)(2) states that "For the purpose of this section, any transactions by a member bank with any person shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, that affiliate." FDIC takes the position that since the May 31st transaction eliminated the * * * loan created by the payment of the cashier's check on May 4, 1982, the loan to respondent's father is considered to be covered by section 23A as a loan to an affiliate. The loan to * * * was unsecured and was in violation of section 23A.
   3. Paragraph 8(h) alleges that on August 10, 1982, respondent caused * * * to deduct $21,743.94 from an account maintained by the Bank at * * *. The purpose of the deduction (debit) was to pay interest on indebtedness owed by * * * to * * *. The Bank's payment of the obligation of another entity with Bank funds is deemed to be a loan to that other entity; namely, * * * , an affiliate of the Bank. Since this loan was unsecured it is deemed to be in violation of section 23A.
   4. Paragraph 8(j) alleges that respondent caused the Bank to make a loan of $21,743.94 to his father on August 12, 1983. The amount is identical to that deducted by * * * from the Bank's account at * * * on August 10, 1983. The purpose of the loan was to replace the debt created between Bank and * * * at the time of the August 10, 1983, transaction. Thus, FDIC reasons that the loan on August 12th is deemed to be for the benefit of * * * and is covered by section 23A pursuant to section 23A(a)(2), cited above. This loan also was unsecured and is deemed to be in violation of section 23A.
   5. Paragraph 8(1) of the Notice alleges that respondent again caused * * * to deduct funds from the Bank's account maintained at * * * for the benefit of an interest payment due * * * by * * * on its indebtedness. * * * deducted $23,134.17 on November 2, 1983. This again is deemed to be an unsecured loan in violation of section 23A for the same reasons as the August 10, 1982, transaction described above.
   6. Paragraph 8(o) alleges that on February 17, 1984, * * * again deducted an interest payment of a * * * indebtedness from the Bank's account in the amount of $22,982.11. This transaction was equivalent to an unsecured loan to * * * by the Bank and was in violation of section 23A for the same reasons as the November 2, 1983 and August 10, 1983, transactions.
   7. Paragraph 8(r) of the Notice alleges that the Bank's board of directors approved a loan to respondent in the amount of $15,000. FDIC considers this loan to respondent as an economic benefit of * * * for essentially the same reasons as the loans to respondent's father, * * *, on May 31, 1983 and August 12, 1983. In the case of the loan to respondent on or about February 22, 1984, the purpose of this loan was deemed to be for the benefit of * * * in that it reversed or eliminated in part the February 17, 1984, charge to the Bank's account made by * * * , as alleged in Paragraph 8(o) of the Notice.
   FDIC insists that several of these transactions also violate Federal Reserve Regulation O. The pertinent part is based on section 215.4(a) of that regulation, paraphrased as stating that all loans by a bank to a bank insider such as respondent and to that insider's "related interest" may not be on preferential terms. Admittedly * * * has a related interest. Regulation O defines a related interest as a company that is controlled by a person [Part 215.2(k)]. Control of the company also is defined as the ownership control or power to vote 25 percent or more of any class of voting securities of the company or bank [Part 215.2(b)(1)(i)]. As noted above, respondent admits that he owns approximately 90 percent of * * * , and also admits to being an executive officer and director of the Bank, "Regulation O covers loans to * * * , as his related interest for purposes of section 215.4(a) of the Regulation.
   The "trial memorandum" contends that the following transactions are violations of Regulation O for the reasons stated:
   1. Paragraph 8(d) of the notice (as noted above) concerns the payment of the cashier's check and is considered a loan to * * * {{4-1-90 p.A-395}} falling within the restrictions of section 215.4(a) of Regulation O since no interest was charged on the indebtedness and because the financial condition of * * * was such that repayment of the loan by * * * involved more than the normal degree of risk.
   2. Paragraph 8(h) also alleged as a Regulation O violation for the reasons previously stated that the deduction of $21,743.94 from the Bank's account by * * * was a loan to * * *. No interest was charged on this loan and it was considered to involve more than the normal risk of repayment, in violation of section 215.4(a) of Regulation O.
   3. Paragraph 8(l) alleges another deduction by * * * from the Bank's correspondent account for the repayment of an indebtedness of * * *. This transaction was considered to be a loan to * * * for reasons previously stated. No interest was charged and the economic condition of * * * was such as to create more than the normal risk of repayment, as prohibited by section 215.4(a) of Regulation O.
   4. Paragraph 8(q) alleges a similar transaction involving the deduction of $22,982.11 by * * * from the Bank's account on February 17, 1984 to repay a * * * indebtedness. This loan to * * * was preferential under section 215.4(a) of Regulation O because no interest was charged and it involved more than the normal risk of repayment by * * * due to its financial condition.
   The memorandum also details that certain of these transactions are violations of Part 337 of FDIC rules and regulations, specifically, section 337.3(b). Subparagraph (b) requires prior approval by the majority of the Bank's entire board of directors for certain loan transactions between the Bank and its insiders and their related interests. Herein the threshold for the prior approval requirement was met since the total amount of Bank indebtedness to respondent and to * * * (his related interest) exceeded the greater of $25,000.00 or 5 percent of the Bank's capital and unimpaired surplus. Respondent admits he was personally indebted to the Bank in an amount in excess of $80,000. FDIC concludes that six of the seven loan transactions discussed above did not receive prior approval of the Bank's board of directors and are in violation of section 337.3(b) of FDIC regulations. The $15,000 loan [see paragraph 8(r)] to respondent was approved by the board of directors.
   The "report of examination", dated August 27, 1983, spells out that the general financial condition of the Bank has significantly deteriorated since the previous Federal Deposit Insurance Corporation examination on December 11, 1982. Adverse asset classifications at that examination were high, over five times greater than those adversely classified at the November 14, 1981, examination. Asset condition has now deteriorated to the point that losses are eroding capital to a critically low level and non-earning assets have attained a level apparently outside the managerial capabilities of active management.
   The Board of Directors has formulated policies and procedures for granting and servicing loans, which include, among other requirements, that all loans have a plan of liquidation at the time they are granted. This liquidating plan should be dated, in writing, and included on the credit memo of the borrower's credit file. FDIC considers it imperative that any loans submitted for board approval be in compliance with all requirements of these policies.
   FDIC recognizes that duties and responsibilities of daily operations can be delegated to active officers, however the ultimate accountability for the condition of the bank rests firmly with the Board of Directors. It stresses that disregard of director duty and responsibility is apparent in this Bank. The Bank currently is operating under a written Memorandum of Understanding between the Board of Directors of the Bank and the * * * Regional Office of the Federal Deposit Insurance Corporation and the Department of Financial Institutions, State of * * *.
   This memorandum was preceded by a letter agreement dated and signed by the Bank president, * * *, at a Board meeting held at the conclusion of the December 11, 1982, examination. This letter states in part:

       At the meeting with your examiners and the Board of Directors on January 10, 1983, the following agreements were made: 1) the bank would remove the concentration of credit known as * * * from the books of the bank within 30 {{4-1-90 p.A-396}} days. This can be through participation with non-recourse to a correspondent bank or payout by sale. * * * line of credit is excluded under this point; (2) The bank will not report any earnings on this concentration of credit with the exception of * * * line of credit unless it would be (*)cash' basis.
   FDIC notes that the Bank did not comply with the aforementioned points of the letter, however, the entire Board of Directors signed the "memorandum of understanding" dated April 28, 1983. This agreement states that:
       1) The Bank shall exert every possible effort to completely eliminate (loan reductions via cash payments) as soon as possible, but in any event by June 30, 1983, the * * * concentration of credit, and minimally effect $100,000 in principal reductions monthly beginning April 30, 1983.
   As of the date of examination, August 27, 1983, and the date of the Board meeting, October 18, 1983, no payments or reductions of any type had been made.
       2) The Bank shall not accrue interest on any loans which are included in the * * * concentration of credit in the Report (except * * *), unless prior written approval is received from the FDIC and Director (of Financial Institutions).
   The Bank continued to accrue interest on these loans up to May 19, 1983, contradictory to both the memorandum of understanding and the letter of January 10, 1983.
       3) The Bank shall not advance any additional funds to any of the individuals or their interests involved in the * * * concentration of credit either directly or indirectly, or in any manner for their benefit.
   The Bank advanced an additional $18,000 to * * *, mother of * * * , contrary to this point.
       4) The Bank shall immediately adopt policies which provide for the transferring of loans to nonaccrual status at least in accordance with the FDIC Report of Call and Income Instructions. Such policies will also provide for reversal of previously accrued interest.
       5) The Bank shall, within 30 days, develop and implement policies which preclude imprudent or unwarranted concentrations of credit, including defined limits for advances to or for the benefit of one entity, related interests or endeavors.
   While the respondent asserts that the Bank has verbally established policies regarding these two points, there has been nothing in this regard reduced to writing, there is no evidence in the Board minutes of what the policies are, and no adoption and approval of any policies.
   In summation, FDIC notes that the Board and management have failed to comply with any of the five points of the memorandum of understanding, for which primary responsibility rests squarely with respondent, "as he is chief executive officer and the controlling shareholder." It considers the fact that neither the January 10, 1983 letter nor the memorandum were complied with seriously damages the integrity and credibility of respondent, and the continued deterioration in the condition of the Bank, "raises serious questions as to his capability and effectiveness in overseeing the operations of the bank."
   FDIC considers the amount of assets subject to adverse classification as excessive and unacceptable. Total adversely classified assets now represent nearly 20 percent of the Bank's total assets and 221 percent of the Bank's total equity capital and reserves. These compare with 13 and 131 percent, respectively, at the December 11, 1982, examination, which was at that time also considered excessive and unacceptable. In addition, the severity of adverse classifications has increased dramatically, with assets classified Loss increasing from $23,000 to $597,000 and assets classified Doubtful, none at the previous examination, now totaling $397,000. Substandard classifications have increased from $1,648,000 to $2,241,000. The bulk of the classifications are in the loan category, with classified loans representing $2,914,000 of the $3,235,000 in total classifications. FDIC contends that for the most part, reasons for these excessive classifications can be attributed to the liberal lending and lax collection practices for commercial loans. Amounts extended to the * * * concentration which are adversely classified represent approximately one-third of the total classifications.
   FDIC explains that reasons for classification vary from one borrower to another, but generally include one or more of the following: inadequate performance as evidenced {{4-1-90 p.A-397}} by the lack of significant reduction or delinquency; an unwillingness on the borrower's part to pay as agreed; weak financial position of borrowers as evidence in several of the loans detailed where borrowers have highly leveraged financial conditions and have shown operating losses; and lack of or inadequate collateral protection.
   While the overdue loan ratio at 7.75 percent shows improvement from the 13.30 percent calculated at the December 11, 1982, examination, FDIC points out that a 30-day grace period is now used on all single payment notes, which was not used previously. Also, the 7.75 percent does not include nonaccrual loans, which would raise the ratio to 18.81 percent if so included. It is insisted that management has made liberal use of renewals and extensions without the collection of interest, "further distorting the actual quality of the loans regarding their performance."
   As often is the case in periods of rapid growth, the quality of and proper documentation for loans lessened. Total footings at the November 24, 1979 examination were $8,941,000. Respondent obtained control and elected himself president in May of 1980. Footings at this examination have reached $16,238,000, which represents an 81.6 percent increase. Footings increased over 22 percent from the December 11, 1982 examination to this one, an annualized rate of growth of approximately 33 percent. The annualized total loan growth rate over this same period is nearly 18 percent; however, commercial loans have grown at an annualized rate of 50 percent (33.4 percent since December 11, 1982), indicative of respondent's emphasis on profitability. The commercial loan generally is the highest yielding asset found in a bank, and as such, the quickest way to increase profits. "However, there is an inherently greater risk of loss involved with a commercial loan if not properly made."
   FDIC points out that while the Bank's lending policy states that the trade area of the Bank is * * * County and "adjoining areas contiguous thereto", it further states that generally the primary trade area will be the area surrounding the cities of * * * and * * *. As this market area is somewhat limited as to growth potential, with industry, commerce and farming being stagnant, and having several other financial institutions serving the * * * area, a general expansion outside this area has been necessary to sustain the desired growth. For example, the $1,063,000 in classified * * * funds, representing 9.6 percent of total loans, were advanced for a coal washing operation in * * * over 400 miles from the Bank.
   FDIC stresses its concern that the Bank continues to grant extensions of credit which exceed the Bank's legal loan limit in view of the fact that violations of this nature have been cited at each of the three most recent FDIC examinations during respondent's tenure: December 13, 1980, November 14, 1981 and December 11, 1982. In fact, the number of excess lines has increased to eleven. The * * * line originated at $195,000 on June 4, 1981 to cover an overdraft. It has been cited as a violation of the Bank's legal lending limit at both the November 14, 1981 and December 11, 1982 examinations, with respondent giving assurances of correction on each occasion. It is stressed that the fact that excess lines continue to be cited lends credence to the supposition that respondent has little concern "for compliance with this law. Clearly, ignorance of the law is an unacceptable defense, especially in view of the previous citations. The continued noncompliance with this law can only be regarded as a blatant and willful disregard for operating within the regulated environment in which the bank exists."
   Although the Bank's liquidity ratio has slightly improved since the December 11, 1982 examination, it remains somewhat low at 28 percent. The Bank's loan growth and reliance on large certificates of deposit has been extremely high in relation to peer. Time deposits over $100,000 have increased 90 percent since the December 11, 1982 examination and now represent over 28 percent of total deposits. At this examination (August 27, 1983) total loans represent 75 percent of total deposits, a level believed excessive and outside the range of management's capabilities in view of the high volume of adversely classified loans. FDIC suggests that the board reconsider the aggressive lending posture assumed over recent years and exercise greater selectivity in approval of loans. Also, the board is forewarned that decreasing the size of the Bank by allowing Federal Funds Sold and large {{4-1-90 p.A-398}} certificates of deposit to runoff may adversely affect the liquidity position of the bank and will not be a viable solution to the Bank's capital problem.
   On October 18, 1983, a meeting was held with the Bank's board in the office of the Department of Financial Institutions with all but one of the directors present. The findings of the August 27th report were reviewed and the board was informed that immediate corrective action was necessary including the sale of capital, improving asset condition, elimination of the * * * concentration and providing the Bank with acceptable management. Also the board was informed that formal action under section 8(b) of the Federal Deposit Insurance Act was likely.
   The Bank has been given a composite uniform bank rating of 5. The "report" spells out that this category is reserved for institutions with an extremely high immediate or near term probability of failure. The volume and severity of weaknesses or unsafe and unsound conditions are so critical as to require urgent aid from stockholders or other public or private sources of financial assistance. FDIC explains that in the absence of urgent and decisive corrective measures, these situations will likely require liquidation and the payoff of depositors, disbursement of insurance funds to insured depositors, or some form of emergency assistance, merger or acquisition.
   A financial institution is assigned a uniform composite rating that is predicated upon an evaluation of pertinent financial and operational standards, criteria and principles. The rating is based upon a scale of one through five in ascending order of supervisory concern. Thus, "1" represents the highest rating and, consequently, the lowest level of supervisory concern; while "5" represents the lowest, most critically deficient level of performance and, therefore, the highest degree of supervisory concern.
   Composite 1 includes institutions that are basically sound; composite 2 are fundamentally sound; composite 3 includes institutions that include a combination of financial, operational or compliance weaknesses ranging from moderately severe to unsatisfactory; composite 4 includes institutions that have an immoderate volume of serious financial weaknesses or a combination of other conditions that are unsatisfactory, a higher potential for failure is present but is not yet imminant or pronounced; while 5, as spelled out above, represents the most serious of bank conditions.
   In the comment section of the August 27, 1983 FDIC "report"—it emphasizes that the apparent wholesale disregard of the January 10, 1983 letter and the subsequent report, coupled with the continued detrimental philosophies and practices, justify lowering the Bank's management rating to 5. The respondent was given notice at the October 18, 1983 board meeting that a forthcoming corrective program should include increasing capital by $600,000 by December 20, 1983, and that serious consideration would be given to taking formal action for "his removal". FDIC believes that the composite 5 rating is most descriptive of the Bank's condition, with the ultimate resolution of the * * * loans being a determining factor in the continued viability of the Bank.
   FDIC notes that the Bank's adjusted equity capital and reserves represented 9.02 percent of adjusted total assets at the December 11, 1982 examination. This ratio was calculated at 4.30 percent as of August 27, 1983, a critically low level and inadequate to support the current asset structure and quality thereof. "Analysis of Equity Capital and Reserves provides insight as to the reasons for this marked deterioration." The Bank's capital has been lowered by $597,000 in assets classified Loss, and $199,000 representing 50 percent of the assets classified Doubtful. Deduction of these two categories from total equity capital and reserves totally depletes the loan less reserve and undivided profits and impairs surplus in the amount of $97,000. This leaves only $668,000 in remaining capital to absorb possible losses. These factors, coupled with the tremendous growth the Bank has experienced, have resulted in an insufficient level of capital.
   In addition to the above, $96,000 in potential loss exists in two lawsuits that have resulted in judgments against the Bank, which are now being appealed. One is in favor of * * * Corporation in the amount of $60,000, the other in favor of * * * in the amount of $36,000. Considering the fact that an additional $198,000 represents the balance of assets classified Doubtful and an additional $2,241,000 in assets are classified Substandard, FDIC insists it is apparent that the capital level of the bank is {{4-1-90 p.A-399}} grossly inadequate. FDIC considers it imperative that the board take immediate action to recapitalize the Bank in an amount determined to be acceptable by the FDIC and the Department of Financial Institutions.
   Since his arrival in 1980, respondent has placed a great deal of emphasis on increasing the size and profitability of the Bank. The Bank's net income for 1980 was $2,000, due largely to prior mismanagement. In 1981, net income increased to $153,000 and in 1982 to $182,000, resulting in adjusted net operating income ratios well over peer. Over this same period of time, interest and fees on loans increased from $765,000 to $1,036,000 to $1,534,000. As previously noted, President * * * has shifted the asset structure of the Bank with the emphasis on increasing loans, particularly commercial loans. An analysis of the component ratios and trends provides greater insight into respondent's method of increasing earnings. The Bank's yield on total loans for 1982 was 16.89 percent, 206 basis point above the bank's peer group average of 14.83 percent. Total interest income (led by loans) to average earning assets was 15.81 percent, while the peer group's was 13.86 percent.
   FDIC concludes that it is clear that the Bank has been able to price its lendable funds well above its competitors, which raises the question of why are borrowers willing to pay higher rates to borrow at subject bank. Generally speaking, the greater the risk of repayment, the higher the interest rate charged. At the same time, should a borrower prove to be more creditworthy, the more inclined he would be to apply for a more favorable rate at competing institutions. "A borrower's willingness to accept the higher rates is usually indicative of his inability to procure credit elsewhere. At the same time, the cost of funding this loan growth has been greater, requiring the influx of out of area money, as the local deposit base is insufficient to provide the required funds."
   The Bank's interest expense to average earning assets for 1982 was 10.42 percent, 201 basis points higher than the peer group's 8.41 percent. The Bank's resultant net interest income of 5.39 percent closely approximates the 5.47 percent of the peer group. However, consideration must be given to the fallacy of equating income (earnings, profits) on the accrual basis to actual cash basis profitability. That is, the Bank has booked or recognized interest income on a significant dollar volume of loans without ever collecting it from the borrowers, raising serious questions as to its ultimate collectability.
   As indicated, the Bank has made liberal use of extensions on loans, coupled with the renewal of notes without collecting the interest due by capitalizing it into the principal balance of the new note. The most significant case in point for 1982 was the interest accrued on the * * * principals. The Bank also continued to accrue interest on these lines until May 19, 1983. The interim 1983 earnings schedule has been adjusted by $47,000 by reversing accrued interest on these lines. The Bank has never received any payment of either principal or interest on these loans since their inception in early June 1981.
   FDIC also notes that the 1983 income includes $61,000 in extra-ordinary items, which accounts for approximately one-half of the year-to-date net income. Finally, there are the aforementioned asset losses, with loan losses alone amounting to about four times the year-to-date net income, and likely hampering future earnings for some time to come. In summation, the drain on earnings and the subsequent effect on capital is largely attributable to the nonperformance of the * * * loans, but is aided by a significant volume of other nonperforming loans, many of which were advanced "under the aggressive growth/profitability philosophy" of respondent.
   The Bank now has eight concentrations of credit, including six concentrations with correspondent banks. The * * * concentration was listed at the December 11, 1982 examination. Joining that concentration at the August 27, 1983 examination is the * * *, a local radio station operating under the receivership of subject bank. Both of these concentrations are adversely classified, and the * * * line is listed as a violation of the Bank's legal lending limit.
   The Judge is reminded that these two concentrations represent 99.8 percent of the Bank's total equity capital and reserves. As noted above, point 5 of the memorandum of understanding stated "that the bank shall, within 30 days, develop and implement {{4-1-90 p.A-400}} policies which preclude imprudent or unwarranted concentrations of credit including defined limits for advances to or for the benefits of one entity, related interests or endeavors." The respondent stated that there was a verbal policy regarding concentrations. "Whatever this policy is, it apparently does not preclude the bank from having concentrations, or require eliminating undesirable ones once identified."
   The record notes that respondent is a man of integrity. The Bank's board of directors has given him a vote of confidence, found that, in fact, he in their opinion is an honest man and has not done anything dishonest. These directors are long-standing members of the community and businessmen in that area, and could well judge the quality of the man.
   Oral testimony also stated (as previously noted herein) that as of the August 27, 1983 examination—the total loan of credit for the * * * account amounted to $1,063,000. At that time FDIC classified the loan as $711,000, substandard, and $352,000, loss. The respondent was the loan officer. An account for * * * was opening dating back to at least 1980. In June of 1981 a large draft on the account was paid. The "overdraft" was an insufficient check that was paid and was in the amount of $195,000 and there was less than $10,000 in the * * * account at the time. The * * * loan (sometimes referred to as * * *) at that time had not repaid the overdraft. The record is quite clear that there was no documentation at the time the overdraft was paid, no note signed, no promise to pay, no terms for repayment and no collateral assigned. It was merely an unsecured overdraft.
   FDIC again orally stated through a witness that * * * had not repaid the overdraft. It was merely an internal accounting entry on the Bank's records stating that there had been an increase to the Bank's account that it maintained at * * * Bank. * * * Bank, in fact, had not bought that overdraft. The witness emphasized that this "entry" was completely and erroneously misstatement of the Bank's books. The fact was it still represented an overdraft. * * * owed the Bank $195,000, and yet an entry was made on the Bank's books to reflect an increase in its correspondent account.
   At the time of the overdraft—it was shown on the Bank's books as an asset of * * *. Eventually there was a note signed which was dated November 14, 1981. From June 9 until September 30 it was reflected as an increase in the account of * * *. From September 30 until November 14 it was shown at one point as a loan in progress on the Bank's books, and at another point in time it was shown as an increase to the * * * National Bank correspondent account. At the point in time when it was shown as an increase to the correspondent account, there was no basis for that entry. "It misrepresented the bank's books." Interest has never been paid on the note and interest capitalized at that time, was added to the principal."
   Oral testimony notes that the loan was placed on non-accrual status as of May 13, 1983. Non-accrual status means that the Bank no longer earns income from these loans (* * *). During this period from 1981 until May 1983 even though the Bank had never collected any interest on the loan, it continued to show in its income statement that it earned interest on the loan, and that interest was very substantial in the total income picture of the Bank.
   When FDIC was in the Bank over the period of the * * * loan there was always a commitment or a representation made that it was just about ready to be sold, and that it was just a matter of weeks until it would be closed. As of the August 1983 examination the * * * line had not been sold. It is stressed that the respondent's actions in regard to this loan has had a very negative impact on the condition of the Bank. It resulted in a loss and it depleted the Bank's capital account. Ultimately the viability of the Bank is in question.
   A FDIC field office supervisor testified that —
       During the period of time when the loan or overdraft was represented as an increase to the correspondent bank account, that very definitely was a misrepresentation of the bank's books, and certainly to the extent that there were loans to individuals in the name of individuals where the proceeds and the source of repayment was from the * * * venture.
   This loan was in excess of Bank's loan limit. It was stressed that the state statute limits the amount that a bank can lend to any one entity. This is calculated to be 15 percent of the Bank's sound capital and, sound capital is defined to be common {{4-1-90 p.A-401}} stock and surplus. Concentration of credit is a group of related loans which are largely in relation to the bank's capital accounts. A general example of a concentration of credit would be—for instance—if a bank was lending to a lot of real estate developers. FDIC explains that the concentration of credit generally shows lack of adequate risk of diversification, and this is one of the most basic fundamental elements in banking. Concentrations normally are listed when they exceed 25 percent of the bank's total equity capital. * * * loan was shown as a concentration of credit at the August 1983 examination and it comprised 75 percent of the Bank's total equity capital in reserves.
   In 1982 the bank showed total operating income of $181,000 for that year. Income on the * * * loans alone accounted for $200,000 of that income. During this period of time that income was shown although it was never actually collected.
   On cross-examination the Bank's counsel brought out that even though respondent had majority control of the Bank, he still retained the same directors.
   * * * borrower and owner received a loan near the end of October 1980 and testified that he never made any payments. The interest payments were included in the renewals. The loans, plus interest, were to be paid "out of the * * *". For security he gave the bank a farm and a trailer park worth "in excess of a million dollars."
   In relation to a banking transaction, a bank examiner considers dishonesty to be misrepresentation of the financial condition of the bank. "It would include such things as embezzlement, shortages, false entries onto the bank records, concealment of materials, facts, circumvention of normal practices and procedures."
Regulation O defines an insider to be an executive officer, director, or a principal shareholder or any of their interest. Section 23A (as previously observed) restricts transactions in two regards. It restricts the total dollar amount of extensions of credit loans or investment to affiliates, and second, requires certain standards of collateral in relation to extensions of credit to affiliates. * * * is an affiliate of the * * * Bank. An affiliate includes a parent holding company or a company that controls a bank, and * * * owns 90 percent of the Bank.
Regulation O relates to transactions between an insider and the bank would be on terms that would be available to a regular customer of the bank who is no insider, and it would require that these, an extension of credit would be or would not contain more than the normal degree of risk. It would prohibit preferential treatment of an insider at the bank. * * * is a related interest to the respondent. He owns 100 percent of the stock of * * *.
Part 337.3 of the FDIC requires in certain cases that extensions of credit or lines of credit to insiders as well as the related interest must be brought before the board of directors and receive prior approval of the majority of the entire board.
   On May 2, 1983, a cashier's check was issued payable to * * * Bank for the first interest payment due on a loan to * * * (* * * had issued the loan). * * * did not pay for this cashier's check, and check was not properly recorded as a liability on the Bank's books. Check was in the amount of $19,321.92. * * * received this check on May 3, 1983. This check (cashier's) was paid on May 4, 1983 by the bank. At this point in time the Bank actually dispersed the funds to * * * Bank for the payment of interest on the * * * loan.
   The indebtedness of * * * is the indebtedness of the holding company, which is a separate entity from the Bank. Payment by the Bank is completely contrary to acceptable banking practices. The Bank had received nothing in exchange from * * * for those funds.
   The Bank created an understatement of the cashier's check account on the Bank's books, which would be a misrepresentation of the Bank's books. It was an extension of credit to the holding company, that is, there was no note to evidence this extension of credit. There was no interest rate established on this loan. There was no repayment terms established. There was no collateral obtained. It went to the direct benefit of the respondent, as this was his company, and the Bank was out $19,321.92.
   A "debit" entry was made by the Bank, dated May 20, 1983, for the amount of $19,321.92. The bank examiner explains that the ticket indicates that the Bank paid * * * interest with Bank funds which was an improper transaction for the Bank due to the fact that * * * interest is an obligation {{4-1-90 p.A-402}} of the holding company. The Bank should not pay * * * interest. On the May 20, 1983 date, the vice-president of the Bank received a cashier's check from respondent and was instructed to debit cashier's check to the Bank's expense.
   A checking bank account statement for May 1983, submitted as an exhibit, shows a balance of * * * as $8,630.86. There were no deposits made during this month, only a few withdrawals, and the end balance on May 31, 1983 was $5,466.86. Thus, it is evident that during May * * * had insufficient funds to make the interest payment to * * * during this time. FDIC concludes from the above that this transaction violates section 23A, a violation of regulation O, since * * * is an "insider", and a violation of Part 337, as the board did not approve this extension of credit. Also, respondent's role was a breach of fiduciary duty to the Bank. There was a potential loss at the Bank since no note was signed between * * * and the Bank.
   A $50,000 note was signed by respondent's father. The loaning officer was respondent and the note was not presented to the bank directors for approval. This line of credit exceeded the lending authority of respondent. FDIC examiner testified that the loan was to be repaid from dividends from the Bank. However, since respondent's father was not a shareholder of the Bank, he could not be receiving dividends from the Bank. So obviously repayment could not come from dividends from the Bank.
   This transaction shifted the payment of * * * interest from the expense account from the Bank to a loan. The $19,321.92 was not received in the form of cash. He merely repaid * * * interest. Thus, the father of respondent was extended a line of credit of $50,000, and only a part of it, the $19,321.92, was recorded as an entry on the Bank's books.
   This $50,000 loan to respondent's father was considered a violation of section 23A of the Federal Reserve Act. The proceeds of the loan were used for * * * benefit in that it transferred the payment of the cashier's check that * * * owed through the expense account to the loan of the father. It was considered an extension of credit to the affiliate because it was for * * * benefit. Also there should have been the proper collateral for an extension of credit between a bank and the affiliate. Thus, there was no security. This loan also considered a violation of Part 337 of FDIC. It was an extension of credit to an interest of an insider and prior approval by the majority of the Bank's directors was required. Herein - respondent's father did not receive any funds, they went to the benefit of * * *.
   On August 10, 1983 * * * Bank was instructed to withdraw funds from the correspondent account that * * * maintain at * * * and the withdrawal was used to pay the second interest payment ($21,743.94) on the * * * loan to * * *. The testimony is clear that * * * did not repay the Bank at this point in time for the use of these funds, and the Bank did not reflect this withdrawal of funds from the * * * account at the time of transaction. There was a failure to reflect the withdrawal of funds from * * * to accounts. * * * did not reflect that these funds were withdrawn on their books on date of * * * transaction and * * * had insufficient funds to pay the bank for the use of bank funds.
   * * * withdrew the funds from * * * account and applied it to * * * loan as an interest payment. In the case of the * * * account the Bank shows the balance in that account to be $21,743.94 larger than what it actually was, because * * * had withdrawn those funds. That misstates the Bank's books. The funds are gone, and the Bank has not put the entry through.
   Thus, FDIC witness emphasizes that this appears to be a violation of section 23A in that the Bank paid funds for * * * and it was not immediately reimbursed which created an extension of credit to * * *. As an extension of credit to the affiliate it required collateral, and the Bank received no collateral which would create the violation of 23A. It appears to be a violation of Regulation O in that it is an extension of credit to a related interest of an insider, and there was no interest rate, no repayment terms established, no notes signed, which would be clearly preferential treatment. Also, this was a violation of section 337 as prior approval of directors are necessary for an extension of credit to an insider's related interest. Again * * * did not have the financial resources to repay the Bank for this interest payment. However, on August 12, 1983 an entry was made to reflect the withdrawal of funds from the * * * account and the entry was made, the credit to the * * * account and the offsetting entry was a second {{4-1-90 p.A-403}} draw on the loan to respondent. Thus, an extension of credit to respondent repaid the Bank for the use of its funds for the * * * interest payment. The respondent did not disclose these transactions to the Bank's board. It was disclosed by the regulatory authorities.
   On November 2, 1983 respondent directed * * * to withdraw funds from the account that the bank held at * * * for payment of the third interest payment ($23,134.17) on the * * * loan, and * * * did not repay the Bank for those funds at the time of this transaction. * * * withdrew funds from the bank account on November 2, 1983, and this was for the interest payment due on the * * * loan of October 31, 1983. At the time the funds were withdrawn from * * * account, * * * failed to reflect that withdrawal of funds on their books. Respondent did request action at a later date, February 17, 1984. Failure to immediately offset an entry on the Bank's books to reflect the November 2nd transaction was considered by FDIC to be a misapplication of Bank funds, and is not a normal banking practice. It overstates the assets of the Bank's books which also overstates the capital or net worth of the Bank. The record notes that at this point there was a repayment of interest on the holding company's debt in excess of $60,000.00.
   In each of the three cases Bank funds were used for payment of interest. This latter case, as well as the other two "interest" payments, was considered a breach of fiduciary duty, and like the other two, a violation of 23A, Regulation O (section 215.4), and FDIC Part 337.
   As noted above, this November 2nd transaction funds had been withdrawn out of the * * * account and had not been reflected on the Bank's books, so the Bank's books were falsely stated in that this withdrawal was not recorded. The witness examiner spelled out that the Bank needed to correct these records, the loan to respondent's father (now exceeded $41,000) became delinquent, and it needed repayment on January 23, 1984. Thus a deposit was made into the * * * checking account in the amount of $67,000.00.
   Testimony details that the means by which this deposit was obtained was to increase the balance on the Bank's books at the * * * account by $67,000. To increase the Bank's books in the amount of $67,000 on the * * * account would indicate that funds had been deposited into the * * * account, however, this had not occurred, and this represented a false entry on the Bank's books at this point.
   A copy of deposit slip into the checking account of * * *, dated January 19, 1984, shows this was not run through the Bank's books until January 23, 1984. This was supposed to be a loan in the amount of $67,000 for the account of * * *. However, no loan was made on this date, so that was not an accurate entry. A monthly statement of * * * shows a deposit of $67,000 made on bank's books on January 23rd. In addition it shows a check written for the amount of $67,261.25. In addition it shows that the balance in the account was $8,798.91. A bank's document indicates an entry of $67,000, dated January 19, 1984. This represents an increase to the * * * bank account. The check for $67,261.25 was used for two transactions - (1) repayment of the loan to the father of respondent, principal was $41,065.86 and the interest was $3,061.22; and (2) withdrawal of funds in the amount of $23,134.17.
   The withdrawal of funds, dating back to November 2, 1983 from the * * * account had not been reflected on the bank's books, and * * * had not paid the bank for the use of those funds at this stage. Respondent had showed a deposit into the * * * checking account based on the assumption that a loan would be funded by * * *. In fact, there was not a loan funded by * * *, and the entries on the bank's books to show a deposit into the * * * account and to show an increase on * * * were erroneous and false entries. Bank's funds were used due to the fact that * * * did not fund the loan to respondent, so * * * did not actually receive the $67,000 deposit.
   * * * did eventually loan respondent $67,000. The note is dated February 16, 1984, and the bank actually received a credit to their correspondent's account on February 17, 1984, which was almost a month later after the respondent had taken credit for that loan or had disbursed the proceeds. The bank examiner testified that, in view of the above, respondent established a pattern of using bank funds for payment of holding company interests, "and that is not the best interest of the bank."

{{4-1-90 p.A-404}}
   On February 17, 1984, * * * withdrew $22,982.11 from * * * account which was used to pay interest due January 31, 1984 on the * * * loan. The debit by * * * was not reflected on the Bank's books. This was the third incidence when * * * account funds had been withdrawn from * * * account, and the Bank had not reflected that on their books. The examiner witness considered this a violation of 23A, Regulation O, and FDIC part 337.
   At this point over $80,000 of interest was paid by the Bank for * * * and normal banking practices have not been followed in regard to those extensions of credit. On February 18, 1982 a check was made to * * * in the amount of $7,282.11 and is drawn on the checking account of * * * and signed by respondent. Another check, made out on the same day, payable to * * * was in the amount of $15,700 and signed by respondent on his and his wife's account. On February 22, 1984 these two checks represent repayment to the Bank for the above interest.
   A loan of $15,000 (unsecured) for the respondent was approved by the board, dated February 21, 1984, and the next day such funds were deposited into respondent's checking account. At this time, the bank for the fourth time had paid * * * interest with their own funds, and the bank was owed this money by * * *. * * * did not have the financial resources to pay the bank, so respondent wrote a check on his personal account and what funds there were in the bank * * * used to repay this interest.
   The vice-president of * * * Bank testified that he orally approved a loan to respondent on January 27, 1984, and the loan was funded on February 16, 1984, in the amount of $67,000.00. This loan has been "charged off" and considered a loss. The * * * officer then explained the status of the loan to * * *. The original balance was $782,000. As of the time of hearing, the loan was in default. Of that $782,000, $457,000 was charged off to loan loss reserves. The asset was being carried as $325,000 value, which was roughly equivalent to the book value of the stock * * * held as collateral as of the March 31 call report. The opinion of the vice-president (at the time of the hearing) was that within a very short time the balance of the loan would be charged off in its entirety to loss loan provision. He also stressed that in his opinion respondent has not performed the job of chief executive officer of the * * * Bank in a prudent, orderly and efficient fashion.
   Assistant regional director of the * * * Regional office stressed that the check drawn on the bank for May 2, 1983, payable to * * *, constituted a violation of section 23A, Regulation O, and section 337.3(b) of FDIC. Also, the loan to respondent's father was considering a violation of the above statutes, and for the reasons as testified to earlier by an FDIC examiner.
   The Bank's attorney testified that set-off, as used in a bank, was easier than foreclosing on real estate. Also he stressed the independence of the Bank's board of directors, and that they were good people in the community and with excellent business experience. He explained the term capitalization of interest as taking the interest accruing on the loan and including it with the principal. He emphasized on cross-examination that there are occasions when he would do that if he were a banker. On cross - the bank's attorney admitted that he borrowed $40,000 about 1981 and that at one time he had not paid the interest. However, he stated that the loan had been paid.
   When respondent first went to the * * * Bank - the capitalization was around $30,000. About $5,000 was placed in reserve for bad debt. This was an account that the Bank would set aside to protect it against potential losses from loans. Respondent went to the bank as a director, an officer, and a shareholder. He owned in excess of 50 percent. He stressed that there was some bad loans when he took over the Bank.
   Respondent had about seven days in which to purchase the Bank. He talked with the * * * Financial Institution and he felt he did not know enough about the quality of the loans and the economic conditions in that area. The banking area consists of about 20,000 population of which about 90 percent of the people have no more than a high school education. There is something like 10 percent of the people that are skilled. Obviously, unskilled labor are the first to be laid off whenever there is a recession.
   Respondent stresses that he made every effort to improve the earnings of the Bank. He tried to improve the Bank's investments and eliminate certain costs. The Bank filed {{4-1-90 p.A-405}} suits against several of the "charge-offs" and attempted an aggressive collection. Problems included high unemployment, changes in the laws on bankruptcy, and the inability to locate and identify security. Weakness of the Bank was the personnel. The Bank had very young people and had no success in being able to attract older, more mature, and more experienced people to the area. Thus, it went into a training program of people better able to handle accounts.
   The bank president objected to the fact that FDIC had the inherent idea that any loan that goes into litigation is an automatic substandard loan. Reference was made to the * * * loans, classified as adverse. Respondent did not agree with that label. The litigation is not between * * * and the Bank but is in the estate and settlement of that estate. He explains that they have previously assigned all their interest in that estate to the Bank. The Bank is waiting for the Judge to approve the plan and execute it so the Bank can be paid. One part of the loan is secured by a $500,000 estate. The Bank has real estate involving all the parties, equipment livestock, and assignment of real estate. * * * loan was going for equipment and farm expense. The guardianship was money borrowed by the estate of Mrs. * * *, who formerly was in a nursing home, the older son's loan was used for the farm operations, and the younger son's loan was for the purchase of real estate and vehicles.
   Next respondent discussed the * * * and * * * loans, two loans classified as Doubtful. At the time the loans were made the Bank thought it had excellent collateral. These people had obtained a five-year farmlease for 2,200 acres. * * * has an agriculture operation and * * * a hog feeder operation. After one year the lease was broken due to the death of the lessor. There is considerable litigation regarding the breaking of the lease. The Bank's security for the loans include real estate, livestock, grain, equipment, and assignments of timber contracts. Respondent, because of the security, does not consider this loan as adverse, as classified by FDIC.
   Respondent then turns to two loans of * * * and * * * which are each secured. In the last couple of months these men filed bankruptcy "for protection from creditors" and the Bank is free to pursue the equipment and dispose of it. The Bank has been under a stay order for more than a year which prevents a creditor from seeking his security. The Bank has an offer for just one piece of equipment for $80,000 which will more than pay what is owed.
   Regarding the * * * loan, respondent considers it well-secured. Also, regular payments have been made, even though it is classified as substandard. The loan carries with it a personal guarantee, and there have been no problems. However, respondent stated he thought another bank in * * * County had had problems with * * *, * * * , and * * * had loans that were classified as substandard. Collateral consists of real estate, farm equipment, livestock, and crop and personal guarantees. The * * * loan, classified as substandard, has been reduced to $15,000 from $106,000 and rewritten over a five-year period.
   * * * had a loan made sometime in 1976 by someone other than respondent. Loan is classified as substandard. * * * had filed a foreclosure and the courts allowed reorganization and the Bank was forced to accept it. The Bank had a first lien on all his real estate and also an SBA 9 percent guaranty. SBA is like having an agency of the government cosign a note "for you for 90 percent of whatever the note is worth." Respondent considers it as good as the Federal government.
   There are three loans to the * * *, * * *, and * * * involved a group of attorneys that purchased the radio station and hired a man to operate it, who operated it very poorly. The attorneys walked away from it and "as creditor" said you can have it. A Judge allowed the * * * Bank to be the receiver. However, the judge has not acted although the Bank has tried to sell the station. For instance, the creditors could not agree and the bank could not get any action. Finally it was placed in Federal court, and there is now a sale in progress. * * * was permitted by the court to operated the station and a line of credit allowed for the operation of the station. * * * included a loan for capital improvements to the station. The Bank has first lien on the property. Respondent expressed the opinion that the Bank will receive full payment of interest and principal due on these accounts, labelled by FDIC as substandard loans.

{{4-1-90 p.A-406}}
   The * * * loan (two loans) classified substandard is secured by real estate and vehicles. * * * operates a plumbing and heating service and has a large number of rental units and equipment. Respondent testified that the loans had been reduced and * * * is very cooperative with the Bank.
   Reference is made to the * * * loan of $195,000 which was originally advanced June 1981 to cover an overdraft in the account. Officials of * * * had paid $255,000 for the property. The Bank made efforts for the * * * Bank to fund the loan. So far the efforts have not been successful. The loans are classified as substandard. These loans are secured by real estate and leases. Such leases are stated by respondent as worth about $2 million. The * * * and * * * are the principals in the loan and highly respected in their community. While efforts have been made to sell the property such efforts have failed. Additional collateral was secured in 1983 on these loans. Selling the property to pay the loans fell through principally for the reason that the State of * * * would not decide on permits. The permits included mining and heavy machinery permits. Respondent pointed out that not only would the Bank been made "whole" in the event of a sale but the principals would have made a profit.
   Respondent explained that he did not believe a suit would be helpful regarding these loans. He noted that a suit is triggered if there is not willingness to pay and the attitude of the borrower does not show willingness. Also litigation was not pursued since the Bank felt that the * * * was about to be sold.
   Respondent traced his efforts regarding * * * as forming a holding company to hold the stock of a bank rather than just holding it in his own name. Because of tax advantages he considered * * * feasible. His loan of approximating $782,000 was secured from * * * Bank in February 1983, and respondent owned 100 percent of the holding company. The loan documents required a quarterly interest payment, with the first interest payment due in April 1983. He asserted that a cashier's check was made out from * * * to * * * because of instructions from his CPA. The check was sent out around early May 1983.
   Respondent contacted the Department of Financial Institutions to verify whether the check should have been issued by * * *.
   The department stated that in a 90 percent transaction (respondent owned 90 percent of the Bank) the cashier's check could not be booked as an expense to the Bank. Thus respondent borrowed from his father - as heretofore detailed. The father had a checking and savings account and he had some certificates of deposit. The CPA advised that a loan be secured so the expense could be easier tracked. Also - there would be a tax advantage in a loan rather than a "straight out payment". Respondent's father received a line of credit loan. Respondent explained that a line of credit is money received over a period of time - say $20,000 - but one does not need all the money now. If the line of credit is approved - one can draw $10,000, for example - and then draw the rest at some future time. The point is that you are only borrowing on exactly the money you draw down from the bank, not any more. Respondent felt that the money ($50,000) that his father received as a line of credit was a secured loan. The father had bonds in his account at the Bank, the Bank had control of those accounts, and thus respondent felt the loan was amply secured. Certificates of deposit were kept in the Bank's lock box, the father gave the keys to respondent's secretary and she kept them in the loan file.
   Respondent admitted that the loan was approved by the board of directors after the loan was made, which was the most current board meeting as of that date. It would be in May. As indicated in the previous paragraph the Bank had the right of set-off regarding the loan to respondent's father. Respondent stressed that the Bank had a right of set-off as to every loan it made. As to the line of credit - * * * charged the father's account and sent a check for the $19,000 plus to * * *. Respondent states that technically it paid * * * to correct the cashier's entry on the expense account. Thereafter, the money was taken out of * * * "correspondent" account at * * * Bank.
   Respondent explained that the $67,000 loan, heretofore discussed, required a promissory note to * * * which was handcarried to that Bank and used by his father for loaning the money for the interest payments to * * *. His interpretation of the transaction was that when he delivered the note to be signed by * * * that * * * would deposit in the correspondent account. * * * was several days late.

{{4-1-90 p.A-407}}
   Direct testimony then hinged on a loan to respondent by * * * for $15,000. As the record shows an "insider loan" has to be approved by the board before it can be made. Respondent states that it was approved "prior" to the loan, and that he had a certificate of deposit maturing which served as security. Respondent stated that the bank examiner would not accept the assignment of respondent's savings account and he went ahead and redeemed the certificate of deposit and paid the complete note. He cashed it and took a penalty on the interest.
   Respondent discussed the fact that the FDIC examiner detailed there were so many days on the first interest transaction, so many days on the second transaction and so many days on the third transaction (regarding interest on the * * * loan) that he took the average interest rate per day at that time, determined the amount of money that was owed and he paid the bank that interest amount. The entire repayment amounted to "maybe $1,200", and, of course, was paid. He reiterated that as a result of all four interest transactions, * * * bank did not lose any principal or interest as to the $782,000 * * * loan to respondent. In January 1984 the board of * * * passed a resolution stating that they supported respondent and had confidence in him. They asserted respondent had applied prudent business management, had improved the quality of collateral of the loan portfolio, and that his management capabilities should no longer be questioned by the regulatory agencies. When respondent took over * * * Bank he invested roughly $400,000.
   Respondent points out that he worked about 14 to 15 hours per day. He disagrees with the FDIC that the Bank engaged in unsafe and unsound banking practices; that the bank operated with inadequate equity capital and loan valuation reserves; and did not agree with a number of the charge-offs and "several things that happened in the collection after that to improve the situation."
   He feels falsely accused in hazardous lending and lax collection practices. He feels that the number of suits that the Bank was involved in regarded litigation that concerned suits from other parties against its customers. Although there may have been indications of dishonesty, respondent feels that the greatest dishonesty was to himself and his family.
   On cross-examination, respondent appears to agree that if there is an element of risk that the loan would be substandard. He does believe that security dictates the quality of the loan as well as his ability to pay. He does agree that one of the elements of adequate security is that security with at least appraised value equal to the amount of the loan.
   Respondent admits that originally he would structure a loan to provide for capitalization of interest. A loan to a farmer, for example, would be granted only for the amount of money that he needed in the spring to purchase seed, fertilizer, gasoline, and living expenses to start the crop year, to put the crop in the ground. Such loans are made for 90 days. Then in 90 days the bank anticipates the farmer would need more money to continue to purchase his herbicides and do his cultivating of that growing crop. The interest accumulated to date would be added into the next loan and a new loan for higher amount would be made.
   In 1983 the board of * * * had considered paying a dividend. It was to be declared with the understanding there were some collections on the * * * and the radio station loans. On cross it was brought out that a few days before the board rescinded the dividend payment - that the FDIC and the * * * Department of Financial Institutions expressed their displeasure with the bank paying a dividend. On redirect, respondent noted again that rescinding of the dividend was contingent on the loans.
   On cross-examination, respondent agreed that the loan approved on February 21, 1984 allowed the Bank to pay his check for the account of he and his wife. That check was to reimburse the Bank for the debit made by * * * to * * * account on February 17. The check was used to pay interest for the benefit of * * *.
Briefs: — Both the Bank and FDIC counsel submitted briefs, reflecting in part, the testimony, exhibits, and references to various citations.
   Respondent emphasizes that the weight of the evidence would indicate that the loans in question ultimately will be collectible, and that the respondent received no financial gain from the loans classified adverse {{4-1-90 p.A-408}}by the FDIC, nor will the Bank suffer substantial loss, nor will the interests of depositors be seriously prejudiced by the handling of said loans by the Bank.
   Respondent also stresses that there is absolutely no authority in the statute to authorize the removal of the respondent from any other bank in the FDIC system, or prevent his participation in any other bank insured by the FDIC.
   The Bank refers to Charlton v. F.T.C., 543 F.2d 903 (1976) wherein the court required that an agency utilize the preponderance of evidence standard in most cases. As in cases where serious sanctions such as deprivation of livelihood through the revocation of a license may be imposed, a higher level of proof, such as clear and convincing, may be required. See Collins Sec. Corp. v. Sec. & Exchg. Com'n, 562 F2d 820 (1977). Respondent points out that although it is the responsibility of the agency to determine the weight and the credibility of testimony and to appraise conflicting and circumstantial evidence, determination of credibility must be made by the presiding officer at the hearing. Labor Board v. Walton Mfg. Co., 369 U.S. 404.
   FDIC spells out on brief that Congress imposed an additional tier of criteria for the inception of a section 8(e) proceeding. This provision mandates that the misdeeds and their attendant repercussions must either:

       (1) involve personal dishonesty; or

       (2) demonstrate a willful or continuing disregard for the safety and soundness of the bank.

   FDIC agrees on brief with the Bank that the standard of proof herein is that of the preponderance-of-the-evidence test unless otherwise provided by statute. Steadman v. Sec. Commission, 450 U.S.91, 102 (1981). Here there is no contrary statutory provision, so the preponderance of the evidence test applies.
   FDIC reminds the Judge that the legislative history of this act shows that Congress carefully considered the phrase "unsafe and unsound". By retaining that phrase in the final legislation, Congress concluded that the term "unsafe and unsound" was sufficiently clear and definite so as to be understood by those subject to its proscription. Both the Senate and House quoted with approval from a memorandum introduced by the former chairman of the Federal Home Loan Bank Board, John E. Horne, which explained the meaning of the term "unsafe or unsound" as it is used in the context of the regulation of the nation's financial institutions. (112 Cong. Rec. 24022 [bound ed. Octo. 4, 1966] [House]; 112 Cong. Rec. 25416 [bound ed. Oct. 13, 1966] [Senate]). The concept of "unsafe or unsound banking practices" was described (in part) by Chairman Horne as follows:
       At the outset, it should be noted that the term "unsafe or unsound," as used in the cease-and-desist provisions of S. 3158, is not a novel term in banking or savings and loan parlance. The words "unsafe" or "unsound" as a basis for supervisory action appear in the banking or savings and loan laws of 38 States. For more than 30 years, "unsafe or unsound practices" have been grounds for removal under section 30 of the Banking Act of 1933, of a director or officer of a member bank of the Federal Reserve System. See 12 U.S.C. 77. It has been grounds since 1935 for the termination of insurance of a bank insured by the Federal Deposit Insurance Corporation.
       However, despite the fact that the term "unsafe or unsound practices" has been used in the statutes governing financial institutions for many years, the Board is not aware of any statute, either Federal or State, which attempts to enumerate all the specific acts which could constitute such practices. The concept of "unsafe or unsound practices" is one of general application which touches upon the entire field of the operations of a financial institution.
       Generally speaking, an "unsafe or unsound practice" embraces any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds.
   The agency notes that judicial recognition has been given to the concept of unsafe or unsound banking practices. The courts have construed this phrase to encompass practices contrary to accepted standards of prudent operation that might result in abnormal risk or loss to a bank. In First Nat. Bank of Eden v. Department, 568 F.2d 610, 611 (8th Cir. 1978), an action to cease and desist brought under section 8(b) of the Act, {{4-1-90 p.A-409}} the U.S. Court of Appeals for the Eighth Circuit expressed its approval of a definition given to the phrase "unsafe or unsound" by the Comptroller of the Currency, stating:
       Congress did not define unsafe or unsound banking practices in section 1818(b). However, the Comptroller suggests that these terms encompass what may be generally viewed as conduct deemed contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder.
   The court therein also expressed general deference to the expertise of the Comptroller of the Currency in defining what constitutes an unsafe or unsound practice. It stated that the courts could only overturn an agency's determination based on a showing of arbitrary and capricious judgment. If substantial evidence supported the agency, its determination would stand. See also, Franklin Nat. Bank Sec. Litigation, 478 F. Supp. 210 (E.D. N.Y. 1979).
   In First Nat. Bank of LaMarque v. Smith, 610 F.2d 1258 (5th Cir. 1980), the Fifth Circuit Court of Appeals adopted the Comptroller's definition of "unsafe or unsound" practices affirmed by the Eighth Circuit Court of Appeals in Eden, supra. The court in LaMarque, based on deference to the Comptroller of the Currency, held that payment of credit life insurance commissions to bank insiders constituted an "unsafe or unsound" banking practice.
   FDIC also stresses that capitalization of interest by the respondent's Bank is a poor banking practice because it misrepresents the borrower's ability or willingness to pay and the status of the Bank's delinquent loans, defers collection action, and results in ultimate loss to the Bank. Also, the agency notes that most of the * * * loan to * * * has been charged-off to loan loss reserve with the balance to be charged-off in its entirety, and the Bank has been closed because of insolvency.
   The agency points out that the Legislative history of section 8(e) does not define the term "jeopardize the interest of the depositors". However, it submits that any action which, if continued, may ultimately cause loss to the Bank would fall within the meaning of that term. This interpretation is supported by the definition of unsafe or unsound banking practice as it is found in the legislative history of section 8(e).
   FDIC notes that the legislative history of section 8(e) does not define the term "jeopardize the interest of the depositors". However, any action which, if continued, may ultimately cause loss to the Bank would fall within the meaning of that term. As observed previously - Chairman Horne in discussing unsafe or unsound practice defines it as "* * * any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds." FDIC is critical of the fact that restitution to the Bank for use of the funds was only made by respondent once the matter was brought to his and the Bank's attention.
   FDIC takes the position that respondent engaged in dishonest acts in four areas relating to the repayment of * * * indebtedness to * * *; namely, the issuance of the Bank cashier's check on May 2, 1983, the debiting by * * * of the Bank's correspondent account for several interest payments; the $67,000 unsecured loan transaction with * * *, and the $15,000 unsecured loan transaction with the Bank.
   The agency explains that no reported cases define "dishonesty" as used in section 8(e)(1) of the Act. However, a dictionary definition states that it is a "disposition to lie, cheat or defraud; untrustworthiness; lack of integrity" (Black's Law Dictionary -421 [rev. 5th ed., 1979]). In a colloquy between members of the Committee on Banking and Currency of the House of Representatives and the General Counsel of the Federal Home Loan Bank Board, the term "dishonesty" was characterized as a generic term that would encompass primarily, but not exclusively, the kinds of things that are actionable under the various State and Federal criminal statutes.
   Finally, FDIC, in its brief, stresses that to the extent respondent's actions are not deemed "willful", the FDIC asserts in the alternative that the respondent's transactions be found to rise to the level of "continuing" disregard for the safety and soundness of the Bank.
Discussion and Conclusions: —As detailed above a mere reading of the facts {{4-1-90 p.A-410}} regarding only the four interest payments by the Bank of the * * * loan by * * * in the original amount of $782,000 warrants a finding that respondent violated section 23A and Regulation O of the Federal Reserve Act and Part 337 of the FDIC rules and regulations, specifically section 337.3(b).
   In each of the four interest payments - the Bank paid interest owed by * * * with Bank funds; in each instance the balance of * * * was less than $9,000 while the interest payments (each) was more than $19,000, between $19,331 and $22,982; in each instance the Bank's board of directors did not approve of the "loan"; in each instance there was a potential loss at the Bank since no note was signed between * * * and the Bank; in each instance there was a relationship between an insider that was not available to regular customers of the Bank; in each instance there was an extension of credit without collateral; and in each instance no interest rate was named. In the latter two instances, * * * failed to reflect withdrawal of funds from its account with * * *.
   At the time of the hearing the Bank had a composite uniform bank rating of 5 and as spelled out above this rating represents unsafe and unsound conditions so critical as to require urgent aid from stockholders and others.
   Although respondent appears to have made strenuous efforts to curtail losses and collect on loans - the fact remains he was not successful. However, if the sales of different businesses had taken place it is apparent that the losses could have been minimal.
   This record is clear that respondent and the Bank had been placed on notice more than once regarding the poor operation of the Bank and the evidence of adverse loans. Although the entire board of directors of the Bank had signed the "memorandum of understanding", dated april 28, 1983, they failed to meet the suggested requirements. The failure to comply damaged credibility of respondent and resulted in the continued deterioration in the condition of the Bank.
   While the personal dishonesty of the respondent was questioned and Black's law dictionary is cited; this record will not sustain such a charge. However, as to the four interest loans, plus others, the finding and conclusion is that the respondent has violated the various sections as detailed previously. Moreover, the record is replete with examples of poor judgment on the part of respondent.
   In its reply brief the FDIC regional counsel reiterates that the agency has statutory authority to issue the recommended order of removal and prohibition; and to prohibit respondent's participation in the affairs of any other insured bank. Although the Judge agrees with the argument of FDIC counsel that the agency has such authority, such argument is not persuasive that respondent should be prohibited from participation in other insured banks. Thus the Judge concludes that no such finding is warranted.
   Contentions of the parties as to fact or law not specifically discussed have been given due consideration and are found to be either not materially significant or not justified.
   Based upon the entire evidence of record, it is found and concluded that respondent has violated the sections of the banking regulations as detailed previously and that he should be removed from office at * * * Bank of * * *, and prohibited from further participation in that bank. However, reference is made to Appendix A attached hereto and made a part of this decision.
   Therein a letter written by the Department of Financial Institutions of * * * to * * *, Regional Director of FDIC, * * * dated August 10, 1984, reflects the fact that it had closed the * * * Bank on Friday, August 10, 1984, and that FDIC was appointed as receiver to take immediate possession.
   At Washington, DC, by Earl S. Dowell, Administrative Law Judge.
/s/Hoyle L. Robinson
Executive Secretary

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