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FDIC Enforcement Decisions and Orders

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   [5091] FDIC Docket No. FDIC-85-192K (6-9-87)

   FDIC concluded that the imposition of a civil money penalty against a bank director was inappropriate since the director attempted to comply with a cease and desist order, was a minority director in a family-run bank, and knew his tenure as a director would be over shortly.

   [.1] Cease and Desist Orders—Civil Money Penalties for Violations
   A bank director who was a minority director in a family-run bank and knew that he would not stand for re-election to the board of directors should not be assessed a civil money penalty as he may have been the only director who made any attempt to comply with a cease and desist order.

   [.2] Directors—Duties and Responsibilities
   The board of directors is legally responsible for the sound direction of a bank. It is obliged to select and maintain capable management and see that the bank operates in compliance with law and regulations. The board must formulate specific bank goals and policies covering investments, loans, asset, liability, and funds management, profit planning and budgeting, capital planning, internal routine and controls, and personnel policies. The board must also avoid selfserving practices.

In the Matter of * * * individually, and in
their capacities as officers and/or directors
of * * * BANK (INSURED STATE
NONMEMBER BANK)


DECISION AND ORDER
FDIC-85-192k

SUMMARY

   This proceeding seeks a civil money penalty in the amount of $2,500 against * * * ("Respondent")1individually and as a director of the * * * Bank * * * ("Bank"), for violation of a consent Cease-and-Desist Order under the authority of section 8(i)(2)(i) of the Federal Deposit Insurance Act (the "Act"), 12 U.S.C. §1818(i)(2)(i). For the reasons set forth below the Board of Directors (the "Board") of the Federal Deposit Insurance Corporation ("FDIC") concludes that imposition of a civil money penalty is inappropriate.

PROCEDURAL HISTORY

   Based upon an examination of the Bank as of May 4, 1984, the FDIC informed the Bank of its intention to seek issuance of an order to cease and desist pursuant to section 8(b)(1) of the Act, which would require the Bank, its directors, officers and other persons participating in the conduct of the affairs of the Bank, to cease and desist from the alleged unsafe or unsound banking practices and violations of law and/or regulations, and to take affirmative action to correct the conditions resulting therefrom. Without admitting or denying any such violations or practices, the Bank, through its board of directors, agreed to the issuance of a final Order by entering into a Stipulation and Consent to the Issuance of an Order to Cease-and-Desist ("Consent Agreement") dated August 15, 1984. The Consent Agreement was executed by director * * * and the other directors of the Bank. The FDIC


1 * * * , * * * and * * * , through counsel, moved to withdraw their requests for hearing. Administrative Law Judge Jack R. Reed (the "ALJ") made a Journal Entry sustaining their motion dated April 10, 1986. Thus, the hearing in this case proceeded against one director, Respondent * * *.
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accepted the Consent Agreement and issued the Order to Cease-and-Desist ("Order" or "Cease and Desist Order") on September 24, 1984; by its terms, the Order became effective on October 4, 1984.
   The FDIC subsequently examined the Bank to monitor compliance with the Order. Based upon the examination of the Bank as of January 18, 1985, the FDIC determined that the Bank had violated the Order.
   On July 3, 1985, the FDIC issued a Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing ("Notice"), assessing a civil penalty of $2,500 against * * * , a civil penalty of $25,000 against * * * , a civil penalty of $10,000 against * * * and a civil penalty of $2,500 against * * * , individually and in their capacities as officers and/or directors, and ordering payment thereof.
   A letter on behalf of * * * requesting a hearing was received on July 22, 1985. Counsel for Mr. * * * filed an Answer to the Notice received on August 5, 1985, and a Prehearing Brief received on or after February 17, 1985, which admitted certain allegations in the Notice and denied others. Counsel for Mr. * * * and the FDIC entered into a Stipulation dated April 22, 1986, regarding use of documents, designated as Joint Exhibit A.
   The hearing took place on June 3, 1986, in * * *; neither Mr. * * * nor his counsel was present. The hearing was continued to July 11, 1986, in * * * , to permit Mr. * * * an additional opportunity to present his case. Mr. * * * did testify briefly on July 11, at which time the hearing record was closed.
   The ALJ issued his Recommended Decision2 on February 20, 1987, recommending entry of an order assessing civil money penalties against Respondent in the reduced amount of $1,250 based upon his consideration of mitigating factors applicable to Respondent. (R.D. at 11.)
   On March 17, 1987, enforcement counsel for the FDIC filed an Exception to the Recommended Decision objecting to the reduction in the civil money penalty recommended by the ALJ.

FACTS

   The essential facts of this case are not in dispute. In brief, the FDIC's 1984 examination found that the Bank was engaging in numerous unsafe or unsound banking practices and violations of federal and state law and regulations:
   "A. Operating with an excessive level of adversely classified assets;
   B. Following hazardous lending and lax collection practices;
   C. Operating with an inadequate level of loan loss reserve for the volume, kind, and quality of loans held;
   D. Operating in violation of Federal and * * * laws and regulations as more fully set out on pages 6-1 through 6-1-f of the Report of Examination of the Bank as of May 4, 1984;
   E. Operating with management whose policies and practices are detrimental to the Bank; and
   F. Extending credit with inadequate diversification of risks."
   The Bank's board of directors signed a Consent Agreement on August 15, 1984, thereby agreeing to the entry of a final Cease-and-Desist Order on September 25, 1984, and to comply with the Order's provisions. The Order contained several provisions directed to the Bank, its officers and directors aimed at correcting the deficiencies and unsafe or unsound practices (Exhibit 1; Tr. at 30). On October 29, 1984, the Bank's board of directors met, but Respondent did not attend the meeting (Tr. at 108–109). By December 3, 1984, the next meeting of the board of directors, Respondent apparently knew he would not stand for reelection at the stockholders' meeting in January, 1985. (Tr. at 123–125). Nonetheless, he made two motions at that meeting —one regarding adoption of a new loan policy and the other regarding elimination of insider loans —related to compliance with the Cease-and-Desist Order.
   The re-examination of the Bank in January, 1985, revealed substantial non-compliance with the Cease-and-Desist Order by the directors and officers of the Bank as follows:
   a. The Bank violated Paragraph 1(b) of the Order by failing to submit a management plan to the FDIC Regional Director.


2 Citations to the Recommended Decision shall be "R.D. at ____" Citations to the Transcript shall be "Tr. at ____."
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   b. The Bank violated Paragraph 1(d) of the Order by failing to nominate after the effective date of the Order a sufficient number of independent candidates to form a majority of the board of directors of the Bank.
   c. The Bank violated Paragraph 2(b) of the Order by extending credit to adversely classified borrowers after the effective date of the Order without approval of two-thirds of the Bank's board of directors.
   d. The Bank did not take the necessary steps to correct violations of banking laws, rules and regulations, in violation of Paragraph 5 of the Order. As of January 18, 1985, the Bank continued to violate Section 23A of the Federal Reserve Act (12 U.S.C. Section 371c), Section 215.4 of Regulation O of the Federal Reserve System (12 C.F.R. Section 215.4), the State Banking Statutes ( * * * Sections 9-1104 and 9-903), and Section 337.3(a) of the FDIC's Rules and Regulations (12 C.F.R. Section 337.3(a)).
   e. The Bank violated Paragraph 6 of the Order by its failure to correct deficiencies of loan documentation and to take necessary steps to implement a written loan policy.
   f. The Bank failed to monitor problem lines of credit by use of a watch list in violation of Paragraph 7 of the Order.
   g. The Bank failed to eliminate the majority shareholders' concentration of credit in violation of Paragraph 8 of the Order. (R.D. at 17).
   As a result, the FDIC issued its Notice against Respondent and other officers and directors.

DISCUSSION

   In view of the fact that violations of the Cease-and-Desist Order are clearly established by the record, this case turns on whether Respondent is responsible for them and if so, whether imposition of a civil money penalty in the amount assessed is appropriate.

   [.1]The record substantiates the conclusion that the directors and officers of the Bank were, in varying degrees, responsible for the Bank's failure to comply with the Cease-and-Desist Order. On the basis of the record herein, it appears that Respondent * * * may have been the only director who made any attempt to comply with the Order. Nonetheless, he was handicapped in two respects: (1) he was a minority director in a family-run bank; and (2) he knew that he would not stand for re-election to the board and therefore, his tenure as a director would shortly be over. We think Respondent should have taken a more active role, but he should not be penalized for what he did.

   [.2]We reiterate our previously expressed views with respect to the role of a board of directors, including minority or outside directors. The board of directors is legally responsible for the sound direction of a bank. It is obliged to select and maintain capable management and see that the bank operates in compliance with law and regulations. The board must formulate specific bank goals and policies covering investments, loans, asset, liability, and funds management, profit planning and budgeting, capital planning, internal routine and controls and personnel policies. The board is also obliged to avoid self-serving practices.
   Ideally, Respondent could have been more active in the period between the Cease-and-Desist Order and his removal from the board of directors. However, the period was quite short. The Order became effective on October 4, 1984. Approximately three months later Respondent was no longer a director. Therefore, we find it significant that in the very short period of time involved he did take substantive action. During this period * * * attended only one of the two board meetings, but at that meeting made substantive motions to redress problems in the areas in which he was most likely to have an impact. He moved for the adoption of a loan policy that was supplied by the State Bank Examiner and he submitted a written plan to eliminate insider loans (Tr. at 127). We therefore decline to impose a penalty against Respondent * * * and we dismiss the Notice.

ORDER

   On the basis of the record in this proceeding, including the ALJ's Recommended Decision dated February 20, 1987, and after taking into consideration the appropriateness of the penalty with respect to the financial resources and good faith of Respondent * * * , the gravity of the violations, the history of previous violations, and such other matters as justice may re- {{4-1-90 p.A-1120}}quire, the Board has determined that the imposition of a civil money penalty is not appropriate in this case.
   ACCORDINGLY, IT IS HEREBY ORDERED, that the Notice against Respondent * * * is hereby dismissed.
   By direction of the Board.
   Dated at Washington, D.C. this 9th day of June, 1987.

/s/ Hoyle L. Robinson
Executive Secretary

RECOMMENDED DECISION

   This case is before the Administrative Law Judge upon a request for hearing filed by * * * , a former Director of the * * * Bank, * * * who disagrees with the monetary penalty imposed against him by the Federal Deposit Insurance Corporation (FDIC), individually and in his capacity as a Director of the Bank, under the authority of Section 8(i)(2)(i) of the Federal Deposit Insurance Act ("Act") 12 U.S.C. § 1818(i)(2)(i).

PROCEDURAL HISTORY

   On May 4, 1984, the FDIC conducted an examination of the * * * Bank * * * , and concluded from the examination that the Bank had engaged in unsafe or unsound banking practices and had violated banking laws and regulations. The FDIC informed the Bank of its intention to seek issuance of an order to cease and desist ("Order" or "Cease-and-Desist Order"), which would require the Bank, its Directors, Officers and other persons participating in the conduct of the affairs of the Bank to cease and desist from the alleged unsafe or unsound banking practices and violations of law and/or regulations and to take affirmative action to correct the conditions resulting therefrom. Based upon a consent agreement dated August 15, 1985, the Bank through its Board of Directors agreed to the issuance of a final order to cease and desist. The consent agreement was executed by the Directors of the Bank, including Director * * *. On September 24, 1984, the FDIC issued its order which became effective on October 4, 1984.
   The FDIC subsequently re-examined the Bank on January 18, 1985. Based upon the examination, the FDIC determined that the Bank had violated the order. Therefore, on July 3, 1985, the FDIC issued a Notice of Assessment of Civil Money Penalty, Findings of Fact and Conclusions of Law, Order to Pay, and Notice of Hearing. Therein, the FDIC assessed a civil penalty of $2,500.00 against * * * , a civil penalty of $25,000.00 against * * * , a civil penalty of $10,000.00 against * * * , and a civil penalty of $2,500.00 against * * * , individually and in their capacities as Officers and/or Directors, and ordering payment thereof.
   On July 22, 1985, * * * filed a request for appeal and hearing of the civil penalty assessment. On August 5, 1985, he answered the notice of assessment and on February 17, 1986, he filed a prehearing brief. He admitted in the brief certain allegations of the notice of assessment and denied others. * * * , * * * and * * * also appealed their civil penalty assessments but through counsel, moved to withdraw their request for hearing. The Administrative Law Judge sustained their motion by an order dated April 10, 1986.
   An initial hearing was held on Mr. * * *'s request for hearing on June 3, 1986 in * * *. The FDIC was represented by its duly authorized attorneys, * * * and * * * , Regional Attorneys, * * * and * * *. Also present for the FDIC were * * * , * * * , * * * and * * *.
   Neither * * * nor his attorney were present at the hearing of June 3, 1986. The hearing was continued to July 11, 1986 to be held in * * *.
   * * * appeared and offered his hearing testimony on July 11, 1986. He was represented by his duly authorized attorney, * * * . Attorneys * * * and * * * were present and continued to represent the FDIC. Also present for the FDIC were * * * and * * *.
   The hearing record in this case consists of a transcript in two volumes of approximately 133 pages and twelve exhibits from the FDIC, designated FDIC's Exhibits 1 through 12.

EVIDENCE CONSIDERED

   The Administrative Law Judge has carefully considered all of the hearing testimony, the arguments made, and the documents entered into the present record as Exhibits.

SUMMARY AND EVALUATION

   The * * * Bank is located in * * *. It is a corporation existing and doing business un- {{4-1-90 p.A-1121}}der the laws of the State of * * * and has been and is a State Nonmember Insured Bank. The Bank was and is now subject to the provisions of the Federal Deposit Insurance Act, 12 U.S.C. Section 1811, et. seq., and the rules and regulations of the FDIC, 12 C.F.R. Chapter III.
   At all times pertinent herein, * * * was President and Chairman of the Board of Directors of the * * * Bank. His wife, * * * , was Cashier. The * * * family owned a majority of the bank stock. * * * owned 56.8% of the stock in her name. * * * children, and * * * , and * * * , each owned one percent of the stock (Exhibit 7 pages 74–75; TR pages 31–32). The respondent, * * * owned about 22% of the bank's stock and was a Director of the Bank (Exhibit 7 page 74; TR pages 86, 122). The rest of the Board of Directors included * * * , * * * , * * * and * * *.
   On or about May 4, 1984, the Bank was examined by an FDIC examiner who also prepared a report of the examination. Based upon the findings, the FDIC concluded that there were apparent violations of law, rules and regulations and proposed to issue a cease-and-desist order against the Bank pursuant to Section 8(b) of the Act (TR pages 29-30). On May 18, 1984, FDIC examiners met with the Bank's Board of Directors to discuss the findings of the examination. The respondent, * * * , was present at the meeting. The Directors were advised of the major weaknesses and problems that were discovered in the examination and informed of the probability that a cease and desist action would be issued by the FDIC (TR pages 52–53). Thereafter, on July 24, 1984, the FDIC sent a letter to the Bank's Board of Directors concerning the bank's unfavorable status and the proposed entry of the cease-and-desist order. Receipt of the letter was acknowledged by * * * and the other Directors of the Bank (Exhibit 3).
   The FDIC representatives held another meeting with the Bank's Board of Directors on August 15, 1984. The five Directors all attended the meeting and signed a consent agreement, agreeing to the entry of a final cease-and-desist order. They were informed of the contents of the order and agreed to comply with the order's provisions (Exhibit 2; TR pages 94–95).
   The FDIC then issued its final cease-and-desist order against the Bank on September 24, 1984, which order became effective on October 4, 1984. The order specifically enumerated various unsafe or unsound banking practices and violations of State and Federal laws and regulations as follows:
   "A. Operating with an excessive level of adversely classified assets;
   B. Following hazardous lending and lax collection practices;
   C. Operating with an inadequate level of loan loss reserve for the volume, kind, and quality of loans held;
   D. Operating in violation of Federal and * * * laws and regulations as more fully set out on pages 6-1 through 6-1-f of the Report of Examination of the Bank as of May 4, 1984;
   E. Operating with management whose policies and practices are detrimental to the Bank; and
   F. Extending credit with inadequate diversification of risks."
   The order also contained several provisions directed to the Bank, its Officers and Directors aimed at correcting the deficiencies and unsound practices (Exhibit 1; TR page 30).
   On or about January 18, 1985, the FDIC conducted a re-examination of the Bank. This revealed substantial noncompliance with the cease and desist order by the Directors and Officers of the Bank (Exhibit 6; TR pages 62-63). The FDIC issued a Notice of Assessment dated July 3, 1985 and imposed a civil penalty against the Bank Directors pursuant to Section 8(a)(2) of the Act (12 U.S.C. Section 1818(a)(2)). The notice included a penalty of $2,500.00 assessed against * * * (Exhibit 4; TR pages 62, 96).
   The Bank examination of May 4, 1984, revealed signs of significant abusive transactions involving the * * * family and their related interests. The FDIC issued a memorandum of understanding in 1983 in an effort to correct the Bank's weaknesses which had not been substantially complied with. The Bank was holding insufficient fund checks of the * * *'s in cash items. The * * * family concentration of credit had increased sharply and was subject to adverse classification. Assets subject to adverse classification had become excessive. The capital of the bank had declined sharply. The Bank had operating losses for three {{4-1-90 p.A-1122}}calendar years prior to the examination and had violated various banking laws and regulations.
   Therefore, the FDIC found it necessary to issue its cease-and-desist order. Paragraph 1(b) of the Order required that not later than thirty days from the effective date of the Order, the Bank would prepare a management plan and submit it to the FDIC Regional Director and the State Bank Commissioner. The plan was to require the Bank's Board of Directors or committee thereof, which was to include at least two outside Directors, to supervise the lending, investment and operating policies of the Bank. The bank examination on January 18, 1985, confirmed the fact that the Bank had not prepared or submitted the required management plan. Only one Director of the Bank appears to have legitimately qualified as an outside or independent Director (Exhibit 6 page 4; Exhibit 7 pages 1–4; TR pages 49–50, 63).
   Paragraph 1(d) of the cease and desist order stated that at the next shareholder's meeting, the Bank was to nominate Directors, a majority of which would qualify as independent Directors (Exhibit 1 page 4; Exhibit 6 pages 4–5; TR page 49). The purpose of this provision was to preclude the controlling shareholders from dominating the affairs of the Bank and to permit the Loan Committee and the Board to function in the best interests of the Bank (TR page 51). An annual shareholders' meeting was held on January 30, 1985. * * * was not present at the meeting and was not reelected to the Board of Directors. However, of the Directors that were elected, only two out of the five legitimately qualified as outsider independent Directors (Exhibit 6 page 5; TR pages 64–65).
   The May 4, 1984 examination further revealed that documentation in the Credit Files of the Bank was deficient. There were no operating statements or cash flow projections. There had been a long standing high volume of overdue loans. Moreover, there appeared a lack of consideration of the ability of borrowers to repay the loans and there were deficiencies in the establishment of repayment programs for borrowers (Exhibit 7 page 2; TR page 37). Thus, Paragraph 2(b) of the Order precluded the Bank from extending credit to any borrower who had an extension of credit with the Bank that had been charged off or adversely classified and was uncollected, unless two-thirds of the Bank's Board of Directors would approve the advance after determining that it was in the best interests of the Bank (Exhibit 1 page 5; Exhibit 6 page 5; TR page 36).
   However, the Bank extended credit after October 4, 1984 (the effective date of the Order), without the requisite Board approval, to individuals whose line of credit had been adversely classified as of May 4, 1984. Further credit was extended through the use of overdrafts to members of the * * * family and their related interests drawn on the * * * family accounts. The * * * family lines of credit had been adversely classified by the May 4, 1984 examination of the Bank (Exhibit 6 pages 5, 13–16; TR pages 65–66).
   Noting the violations of law, rules and regulations shown by the May 4, 1984 examination, paragraph 5 of the Order required the Bank not later than sixty days from the effective date of the Order to take all steps necessary to eliminate or correct such violations and to insure compliance in the future (Exhibit 1 page 9; TR page 38).
   As of the May 4, 1984 examination, the Bank was in violation of Section 9-1104, * * * Statutes Annotated. This Section provides that loans to any bank customer shall not exceed 15% of the Bank's capital stock in unimpaired surplus funds and that loans to any active officer or employee of the Bank shall not exceed 5% of the Bank's capital stock in unimpaired surplus fund (Exhibit 5 pages 34–36). However, the Bank had extended credit to * * * and to * * * and her related interests which exceeded the Bank's customer lending limit of $65,700.00. Additionally, credit extended to other members of the * * * family to include * * *, * * * and * * * and their related interests exceeded the officer borrowing limit of $21,900.00 (Exhibit 7 pages 17–20; TR page 40). By January 18, 1985, the credit extended to * * * still exceeded the officer borrowing limit (Exhibit 6 page 11; TR page 74).
   As of May 4, 1984, the Bank extended unsecured credit to partnership interests of the * * * family which were affiliates of the Bank. This was in violation of Section 23A of the Federal Reserve Act which restricts loan transactions to affiliates of the Bank and requires such loans to be secured by specified types of collateral furnishing prescribed margins of protection (Exhibit 5 {{4-1-90 p.A-1123}}pages 21–24; Exhibit 7 pages 20–21; TR pages 40–41). By January 18, 1985, there was still an extension of unsecured credit to at least one of the partnership interests of the * * * family, namely the * * * (Exhibit 6 pages 11–12; TR pages 74).
   The May 4, 1984 examination also revealed that the Bank had extended the credit to members of the * * * family and their related interests through the payment of insufficient fund checks. No charges were assessed for these bad checks, but the Bank did assess such charges to other customers. The Bank thereby violated Section 215.4(a) of the Federal Reserve Board's Regulation O which requires that no bank may extend credit to any of its executive officers, directors or principle shareholders or their related interests, unless the extension of credit (1) is made on substantially the same terms as those prevailing at the time for comparable transactions with other bank customers and (2) does not involve more than the normal risk of repayment or present other unfavorable features (Exhibit 5 page 45; Exhibit 7 page 42; TR page 42).
   The Bank continued to violate Regulation O as of January 18, 1985, having renewed credit to * * * and * * * , which credit was unsecured. The * * * credit had been adversely classified as of May 4, 1984. * * * and * * * had assumed the loan obligation of their son, * * * , which was unsecured and considered lost to the Bank (Exhibit 6 pages 12–13; TR pages 75–76).
   Section 337.3(b) of FDIC's Rules and Regulations and Section 215.4(b) of Regulation O provide that no bank may extend credit to any of its executive officers, directors or principle shareholders or their related interests which exceeds the greater of $25,000.00 or 5% of the bank's capital and unimpaired surplus, or $500,000.00 unless (1) the extension or line of credit has been approved in advance by the Board of Directors and (2) the interested party has abstained from voting (Exhibit 5 pages 45, 53). As of May 4, 1984, the Bank's extension of credit to the related partnership interests of the * * * family through the use of cash items was not approved in advance by the Bank's Board of Directors (Exhibit 7 page 23; TR page 43).
   For the period subsequent to May 4, 1984 through January 18, 1985, the Bank was in violation of Section 215.4d of Regulation O. In effect, this Regulation prohibits the payment of overdrafts to an executive officer or a director of a Bank unless there is a written, preauthorized, interest-bearing extension of credit plan that specifies the method of repayment or a written, preauthorized transfer of funds from another account of the account holder at the Bank. The prohibition does not apply to payment of inadvertent overdrafts on an account in an aggregate amount of a thousand dollars or less, provided that the account is not overdrawn for more than five business days and the Bank charges the Executive Officer or Director the same fee charged any other customer of the Bank in similar circumstances (Exhibit 5 pages 45–46; TR pages 76–77). The violations occurred when the Bank paid overdrafts to the partnership interests of the * * * family represented by the Agency Account, Operator's Account and a * * * Account. This practice continued for more than sixty days after the effective date of the Order through December 3, 1984. The overdrafts of the * * * family accounts were not made in accordance with a written pre-authorized interest bearing extension of credit plan or a written preauthorized transfer of funds. The overdrafts to the partnership interest of the * * * family exceeded one thousand dollars and were overdrawn more than five business days. Moreover, service charges were not assessed against the accounts (Exhibit 5 pages 13–16; Exhibit 6 pages 13–16; TR pages 78, 80–81). As late as January 18, 1985, the Bank continued to pay overdrafts of the Agency Account and the * * * Accounts (Exhibit 5 pages 14, 16; Exhibit 6 page 16; TR page 82).
   According to Section 9-903 of the * * * Statutes Annotated, a registered owner of stock who is liable to the Bank for any debt may not validly transfer the stock against the issuing bank (Exhibit 5 page 31). However, the record shows that on October 10, 1984, * * * and * * * transferred their stock even though they were directly liable to the Bank on extensions of credit (Exhibit 6 page 16).
   The Bank adopted a loan policy in 1981. Results of the Bank examination confirmed the fact that the program was ignored by the Bank officials. There was minimal documentation of loans and credit files. Decisions to issue a loan to a borrower appear to {{4-1-90 p.A-1124}}have been based primarily on character and collateral protection without analysis of the borrower's ability to repay. Repayment programs were deficient. Thus, paragraph 6 of the cease and desist Order required the Bank to take all steps necessary to effectively implement the Bank's written loan policy and to correct deficiencies in the loan documentation. Although the Bank implemented a new loan policy at its December 3, 1984 Board of Director's meeting, the policy was subsequently violated when the Bank extended credit to two outside individuals, * * * and * * *. The purpose of the loans was to purchase assets of the * * * family but the loans were in contravention of the new loan policy which stated that any loan of $20,000.00 or more had to be approved by the Board of Directors. The loan to * * * exceeded $20,000.00 and was not given prior approval by the Bank's Board of Directors. The loan to * * * was booked by * * *. The loan policy did not give * * * any lending authority (Exhibit 6 page 8; Exhibit 7 page 2; Exhibit 11; TR pages 37, 45, 46, 48).
   The FDIC determined that the May 4, 1984 examination results revealed a need for the Bank to establish a watch list. The list was to include the weak loans issued by the Bank. It was to assist the Board of Directors in monitoring these loans and in determining an adequate loan loss reserve. However, there was no watch list available to the FDIC examiner on January 18, 1985 and presumably there was no such list made by the Bank (Exhibit 6 page 8; Exhibit 7 page 3; TR pages 46, 47, 69).
   Paragraph 8 of the FDIC Order required that as of the effective date of the Order, the Bank would have to take all necessary steps to eliminate the credit concentration to the * * * family and their related interests (Exhibit 1 page 10). As of May 4, 1984, the total loans extended to the * * * equaled $220,000.00 or 49.1% of the Bank's capital and reserves. This was in contravention of the banking laws and regulations and involved adversely classified loans. (A concentration of credit is defined as direct and indirect obligations of a Bank that compromise 25% or more of a Bank's equity capital and reserves with repayment dependent on a common source.) As of January 18, 1985, the * * * credit was still $172,000.00 significantly above the 25% limit of the Bank's equity capital and reserves (Exhibit 1 page 10; Exhibit 6 page 8; Exhibit 7 page 34; TR pages 44, 45).
   The Bank had 101 insufficient fund checks totaling $39,406.00 belonging to the * * * family and their related interests as of the May 4, 1984 examination. These were held as cash items and concealed in the Bank's cash account (Exhibit 7 page 3; TR pages 31, 33, and 70). To correct the deficiency, Paragraph 10(a) of the Order required the Bank to discontinue the practice of paying on the insufficient fund checks; however, overdrafts continued to be paid by the Bank on the multiple * * * family accounts in violation of the Order (Exhibit 1 page 11; Exhibit 6 pages 1 and 10; TR pages 31, 33, 70, and 78).
   Paragraph 1(a) of the Order required the Bank to acquire management acceptable to the Regional Director of the FDIC and the State Banking Commissioner. Such management was to include a qualified executive officer with authority and responsibility for implementing and maintaining investment policies in accordance with sound banking practices (Exhibit 1 page 3).
   * * * testified at the hearing that he was employed at the * * * Bank from June of 1984 to April of 1985. He was initially hired as a Vice President and was responsible for reviewing loan requests and working on past due accounts of the Bank that were in severe default. On October 29, 1984, in response to the FDIC Order, he was made Executive Vice President. However, his job duties remained essentially the same. At all times, he reported to * * * as a majority stockholder of the Bank. He was aware of the impending cease and desist order and attended the meeting of August 15, 1984 at the FDIC Regional Office. At that time, he had a conversation with * * * outside of the hearing room. According to Mr. * * * , Mr. * * * told him not to worry about the Order and that it was "no big deal" (TR pages 99–103). Mr. * * * in his testimony on July 11, 1986, in effect denied the statement, indicating that he told Mr. * * * ". . . Just get the thing cleaned up." (TR page 127).
   Mr. * * * testified that he next visited with * * * at the December 3, 1984 Board meeting. He also attempted to communicate with Mr. * * * towards the end of December 1984 about the Bank's problems. Mr. * * * indicated that he was busy with other affairs and referred Mr. * * * to his {{4-1-90 p.A-1125}}attorney. Mr. * * * had no other conversations with Mr. * * * about the Bank's business at any time and Mr. * * * offered him no assistance in the Bank's management (TR page 104–113).
   Section 9-1114, * * * Statutes Annotated provides that "any bank shall be managed and controlled by its Board of Directors." (Exhibit 5 page 36). In addition, Section 9-1118 requires each director to take an oath that he "will administer the affairs of such bank diligently and honestly and. . .will not knowingly or willfully permit any of the laws relating to banks to be violated."
   Generally, a Director must exercise ordinary care and prudence in the administration of affairs of his bank. Although the day to day business may be conducted by the Bank's Officers, this does not absolve the director from the duty of reasonable supervision. A Director has a fiduciary relationship to the Bank and its stockholders, and must exercise the utmost good faith in the discharge of his duties. He must give the Bank the benefit of his best judgment. Ignorance or lack of knowledge does not absolve a Director of his obligations. Briggs v. Spaulding, 141 U.S. 132, 165-66 (1891); Lane v. Chouning, 610 f.2d 1385 (8th Cir. 1979). Thus, the Director of a Bank may not totally abandon his duties or close his eyes to what is going on about him in the conduct of the business of the Bank. Harmon v. Wilborn, 374 F.Supp. 1149 (D. Kansas 1974) page 1161.
   The principles of a Director's accountability for corporate acts were stated in the case of Wilson v. United States, 221 US 361, 31 S.Ct.538, 55 L.Ed. 771 (1911):

       "A command to the corporation is in effect a command to those who are officially responsible for the conduct of its affairs. If they, apprised of the writ directed to the corporation, prevent compliance or fail to take appropriate action within their power for the performance of their corporate duty, they, no less, than the corporation itself, are guilty of disobedience, and may be punished for contempt."
   Generally, ignorance of the facts surrounding the management of a bank is not a defense for a Director. It is his duty to know the facts, to ascertain the violations of law, regulations or rules and to take action as appropriate to correct deficiencies and insure effective operation of his Bank.
   * * * has been Director of at least ten banks, three in the State of * * *, and has been involved in banking since the early 1970s. Clearly, he has a good working knowledge of most aspects of the banking business, including the restrictions and limitations placed on banks by statutes and regulations. He testified at the hearing that at all times he was fully aware of a Bank Director's responsibilities (TR page 131). There is no doubt that he had knowledge that the Bank was engaging in unsafe or unsound banking practices. He attended the meeting of Bank's Board of Directors with the FDIC on May 18, 1984, and was thereby apprised of the deficiencies of the Bank as revealed by the May 4, 1984 examination (TR pages 52–53). He received written notice of the FDIC's findings (Exhibit 3). He attended the August 15, 1984 meeting at the FDIC Regional Office and signed a consent agreement, thereby agreeing to the entry of a final cease-and-desist order and to comply with the order's provisions (Exhibit 2; TR page 95).
   There were two Board of Director's meetings between the effective date of the Order and the FDIC re-examination of the Bank on January 18, 1985. The first such meeting was held on October 29, 1984. Mr. * * * did not attend the meeting, apparently because he felt he lacked the practical ability to exert influence on the * * * as majority directors to make the changes mandated by the Order. Furthermore, he apparently realized that he would eventually be removed as Director of the Bank to make room for outside Directors mandated by the FDIC Order (TR pages 123–125). However, this did not excuse him from his fiduciary duty to make every reasonable effort to ensure that the Bank was in fact complying with the Order and to take some action to verify whether the Bank was making progress. The October 29, 1984 meeting was the first held after the effective date of the Order and was significant because * * * was designated as Chief Executive Officer of the Bank and charged with the task of achieving the Bank's compliance with the Order (TR pages 105–106, 109, 111–113). Not being present at the meeting, he was not able to offer his banking expertise to Mr. * * * , guide him in his new responsibilities, or {{4-1-90 p.A-1126}}make additional attempts to exert influence on the * * *. Thereafter, as admitted in his prehearing brief on page 2, he assumed that the Bank was complying with the Order. Nonetheless, he did not confer with Mr. * * * or the other Board members of the Bank about preparation of a management plan, the extensions of credit to adversely classified borrowers without prior approval of the Board of Directors, or about correcting violations of the law and regulations cited by the FDIC (TR pages 105–106). He sought no verification of implementation of the Bank's loan policy, of the establishment of a watch list, of elimination of the * * * concentration of credit, or of discontinuing payment of the * * * insufficient fund checks. He gave no direction to Mr. * * * in preparing a new loan policy and procedural manual referred to in the minutes of the October 29, 1984 Board meeting (Exhibits 9, 11; TR pages 108–109, 111–113).
   From the foregoing, the Administrative Law Judge concludes that from October 4, 1984 through January 18, 1985, the Bank, its Directors and Officers failed to properly exercise their duties by continuously violating or allowing the Bank to violate the cease and desist order. The hearing record indicates that Mr. * * * at best exercised minimal effort and showed little interest in accommodating the FDIC by complying with its cease-and-desist Order. His efforts fell far short of his statutory fiduciary duty to the Bank and its depositors.
   With regard to assessment of civil money penalties for violation of final cease-and-desist orders, Section 8(i)(2)(ii) of the Act (12 U.S.C. Section 1818(i)(2)(ii) provides:
       In determining the amount of the penalty the appropriate Federal banking agency shall take into account the appropriateness of the penalty with respect to the size of financial resources and good faith of the insured bank or person charged, the gravity of the violation, the history of previous violations, and such other matters as justice may require.
   Section 8(i)(2)(i) of the Act (12 U.S.C. Section 1818(i)(2)(i) provides for the imposition of civil penalties of up to $1,000.00 per violation per day for each day such violation continues. From October 4, 1984 through January 18, 1985, the Bank, its Directors and Officers continued to violate one or more provisions of the Order. Therefore, the total money assessment against Mr. * * * individually and in his capacity as Director of the Bank could be substantial, at least $106,000.00.
   As noted above, the FDIC assessed a penalty of only $2,500.00 (TR page 98). On considering several mitigating factors in this case, the Administrative Law Judge concludes that the penalty should be reduced. These factors include the fact that * * * held only a minority ownership interest in the Bank. He should have exercised more interest in the affairs of the Bank; however, it appears that he was not in a position to control the day to day affairs of the Bank. He did move for the adoption of a loan policy that was supplied by the State Bank Examiner and he submitted to the * * * a written plan to eliminate insider loans (TR page 127). Thus, it is recommended that the proposed monetary penalty of $2,500.00 assessed against Mr. * * * be reduced to $1,250.00.

FINDINGS OF FACT

   1. The * * * Bank, * * * is a corporation existing and doing business under the laws of the State of * * * with its principle place of business at * * *. At all times relevant to this proceeding, the Bank was a state nonmember insured bank.
   2. The Bank is now and was, at all times pertinent herein, subject to the provisions of the Federal Deposit Insurance Act, 12 U.S.C. Sections 1811 et. seq. and the rules and regulations of the FDIC, 12 C.F.R. Chapter III.
   3. At all times pertinent herein, * * * was a Director of the Bank and owned approximately 22% of the Bank stock (Exhibit 7 pages 74–75; TR pages 31–32).
   4. * * * and * * * were also members of the Bank's Board of Directors.
   5. The * * * family owned a majority of the Bank stock. * * * owned 56.8% and * * *, * * *, and * * * each owned 1% of the stock (Exhibit 7 pages 74–75; Tr pages 31–32).
   6. The Agency Account, Operator's Account, * * * Account and * * * Account were partnership accounts at the Bank owned by two or more members of the * * * family (Exhibit 6 pages 9–10; Exhibit 7 page 34; TR page 33).
   7. The FDIC conducted examinations of the Bank as of May 4, 1984 and January 18, 1985, pursuant to FDIC guidelines and procedures, and prepared examination reports {{4-1-90 p.A-1127}}based on the examinations (Exhibits 6 and 7; TR pages 25–26, 54).
   8. The examination of May 4, 1984 revealed that an existing memorandum of understanding issued by the FDIC in 1983 in an effort to correct the Bank's weaknesses had not been substantially complied with. There were signs of significant abusive transactions involving the * * * family and their related interests. The Bank had 101 insufficient fund checks of the * * * totaling $39,406.00. These were concealed in the Bank's cash account. The * * * concentration of credit had increased sharply and was subject to adverse classification. Assets subject to adverse classification had become excessive. The capital of the Bank had declined sharply and the Bank had operating losses for three calendar years prior to the examination (Exhibit 7 pages 1–4; TR pages 49–50).
   9. As of the May 4, 1984 examination, the Bank had not followed its loan policy mandated by the 1983 memorandum of understanding; credit files were deficient, and operating statements and cash flow projections were non-existent. In issuing credit, the Bank was not giving due consideration to the repayment ability of borrowers. There was a long standing high volume of overdue loans (Exhibit 7 page 2; TR page 37)
.    10. The * * * family lines of credit were adversely classified as of the May 4, 1984 examination of the Bank. Also lines of credit to * * * and * * * were adversely classified as of May 4, 1984 (TR page 65).
   11. The report of the May 4, 1984 examination stated that the Bank was in violation of the Banking laws, FDIC rules and regulations.
   12. Section 9-1104, * * * Statutes Annotated, provides in effect that loans to any bank customer shall not exceed 15% of the bank's capital stock and unimpaired surplus fund and that loans to any active officer or employee of the bank shall not exceed 5% of the bank's capital stock and unimpaired surplus fund (Exhibit 5 pages 34–36).
   13. As of May 4, 1984, the Bank's extension of credit to * * * , her related interests and to * * * exceeded the Bank's customer lending limit of $65,700.00. At the same time, credit extended to * * * , * * * and * * * and their related interests exceeded the officer borrowing limit of $21,900.00 (Exhibit 7 pages 17–20; TR page 40).
   14. As of May 4, 1984, the Bank had extended unsecured credit to partnership interests of the * * * family as affiliates of the Bank. In this respect, Section 23A of the Federal Reserve Act restricts loan transactions with affiliates of the bank and requires such loans to be secured by specified types of collateral furnishing prescribed margins of protection (Exhibit 5 pages 20–24; Exhibit 7 pages 20–21; TR pages 40–41).
   15. As of May, 1984, the Bank was engaging in the practice of extending credit to members of the * * * family and their related interests through the payment of insufficient fund checks without assessing charges for the checks, a practice which was not followed with the other bank customers. Such practice comes within the purview of Section 215.4(a) of the Federal Reserve Board's Regulation O. Said Regulation requires that no bank may extend credit to any of its executive officers, directors or principal shareholders or their related interests, unless the extension of credit (1) is made on substantially the same terms as those prevailing at the time for comparable transactions with other bank customers and (2) does not involve more than the normal risk of repayment or present other unfavorable features (Exhibit 5 pages 45; Exhibit 7 page 42; TR page 42).
   16. As of May 4, 1984, the Bank extended credit to related partnership interests of the * * * family through the use of cash items not approved in advance by the Bank's Board of Directors (Exhibit 7 page 23; TR page 43). In this regard, section 337.3(b) of the FDIC's Rules and Regulations and Section 215.4(b) of Regulation O provide that no bank may extend credit to any of its executive officers, directors or principal shareholders or their related interests in an aggregate amount which exceeds the greater of $25,000 or 5% of the bank's capital and unimpaired surplus, or $500,000, unless (1) the extension or line of credit has been approved in advance by the Bank's Board of Directors and (2) the interested party has abstained from voting (Exhibit 5 pages 45, 53).
   17. Section 215.4(d) of Regulation O prohibits the payment of overdrafts to an executive officer or a director of a bank unless {{4-1-90 p.A-1128}}there is a written, preauthorized interest bearing extension of credit that specifies a period of repayment or a written preauthorized transfer of funds from another account of the account holder at the bank. This prohibition does not apply to repayment of inadvertent overdrafts on an account in an aggregate amount of $1,000.00 or less, provided that the account is not overdrawn for more than five business days and the bank charges the executive officer or director the same fee charged any other customer of the bank in similar circumstances (Exhibit 5 pages 45–46; TR pages 76–77). In this respect, the Bank paid overdrafts to the partnership interests of the * * * family for a period subsequent to May 4, 1984 extending at least until January 1985. These overdrafts were not made in accordance with a written preauthorized interest-bearing extension of credit plan or a written preauthorized transfer of funds. Moreover, the overdrafts exceeded $1,000.00, were overdrawn more than five business days and service charges were not assessed against the accounts (Exhibit 5 pages 13–16; Exhibit 6 pages 13–16; TR pages 78, 80–81).
   18. On October 10, 1984 and January 30, 1985, * * * and * * * transferred stock when they were directly liable to the Bank on extensions of credit (Exhibit 6 page 16). Section 9-903, * * * Statutes Annotated, states that no transfer of stock shall be valid against the issuing bank so long as the registered owner thereof shall be liable to the bank for any debt (Exhibit 5 page 31).
   19. Based on the Bank Examination report of May 4, 1984, the FDIC issued its cease-and-desist order against the Bank on September 24, 1984, which became effective on October 4, 1984 and thereafter, was in effect at all pertinent times (Exhibit 1; TR page 30).
   20. Paragraph 1(b) of the Order required that within thirty days from the effective date of the Order, the Bank must prepare a management plan and submit it to the FDIC and the State Banking Commissioner for approval. The plan required the Bank's Board of Directors or Committee thereof, made up of at least two outside Directors, to supervise the lending, investment and operating policies (Exhibit 1 page 3; Exhibit 6 page 4; TR page 48). As of the re-examination of the Bank on January 18, 1985, the Bank had not prepared or submitted a management plan and only one Director of the Bank legitimately qualified as an outside or independent Director (Exhibit 6 page 4; TR page 63).
   21. Paragraph 1(d) of the Order stated that at the next shareholder's meeting, the Bank would have to nominate a slate of directors, a majority of which would qualify as independent directors (Exhibit 1 page 4; TR page 49). As of January 1985, only two out of five Directors qualified as outside or independent Directors (Exhibit 6 page 5; TR pages 64–65).
   22. Paragraph 2(b) of the Order mandated that as of October 4, 1984, the Bank could not extend credit to any borrower who had an extension of credit with the Bank that was adversely classified and uncollected, unless two-thirds of the Bank's Board of Directors would approve the credit extension in advance after determining that it would be in the best interests of the Bank (Exhibit 1 page 5; Exhibit 6 page 5; TR pages 3–6). Subsequent to October 4, 1984, the Bank extended credit to the adversely classified lines of credit of the * * * family and their related interests through overdrafts drawn on the * * * family accounts. The Bank also extended credit to * * * and * * * whose lines of credit had been adversely classified (Exhibit 6 pages 5, 13–16; TR page 65).
   23. Paragraph 5 of the cease-and-desist Order required the Bank, no later than sixty days from the effective date of the Order, to take all steps necessary to eliminate and/or correct violations of law, rules, or regulations existing on May 4, 1984, and to insure future compliance (Exhibit 1 page 9).
   24. As of January 18, 1985, credit extended to * * * exceeded the officer borrowing limit of $23,175.00 and was within the prohibition of Section 9-1104, * * * Statutes Annotated (Exhibit 6 page 11; TR page 74).
   25. As of January 18, 1985, the Bank extended unsecured credit to a partnership interest of the * * * family and an affiliate of the Bank within the prohibition of Section 23A of the Federal Reserve Act (Exhibit 6 pages 11–12; TR page 74).
   26. As of January 18, 1985, the Bank renewed unsecured credit to * * * and * * * and allowed them to assume the loan obligations of * * *, which loans were unsecured and considered a loss to the Bank, all within the prohibition of Section 215.4(a) of the Federal Reserve Board's Regulation O.
{{4-1-90 p.A-1129}}
   27. Paragraph 6 of the Order provided that effective with the date of the Order, the Bank must take all steps necessary to implement the Bank's written loan policy and to correct deficiencies in loan documentation (Exhibit 1 page 9). Subsequent to December 3, 1984, the Bank violated its new loan policy by extending credit to * * * and * * * (Exhibit 6 page 8; Exhibit 7 page 2; Exhibit 11; TR pages 37, 45, 46, and 48).
   28. Paragraph 7 of the Order provided that within thirty days from the effective date of the Order, the Bank must establish a watch list to monitor the volume of weak loans and for use in determining an adequate loan loss reserve (Exhibit 7 page 3; TR pages 46–47). There was no evidence of a watch list during the January 18, 1985 bank re-examination (Exhibit 6 page 8; TR page 69).
   29. Paragraph 8 of the Order required that as of October 4, 1984, the Bank must take all steps necessary to eliminate the * * * concentration of credit (Exhibit 1 page 10). As of January 18, 1985, the * * *' credit still exceeded the allowable limits with 32.4% of the Bank's total equity, capital and reserves (Exhibit 6 page 8).
   30. Paragraph 10A of the Order required that as of October 4, 1984, the Bank must discontinue the practice of paying on insufficient fund checks of members of the Bank's Board of Directors, their business interests and their immediate family members (Exhibit 1 page 11). Subsequent to the effective date of the Order, overdrafts were paid by the Bank on the * * * family and related accounts (Exhibit 6 pages 9–10; TR page 73).
   31. * * * has substantial experience in banking; he has been a Director of at least ten banks, three in the State of * * * (TR page 130).
   32. At all times pertinent herein, * * * was aware of a Bank Director's responsibilities and was entirely familiar with the laws, rules and regulations pertaining to banks and their directors (TR page 131).
   33. * * * attended the meeting of the Bank's Board of Directors with the FDIC on May 18, 1984, at which time he was apprised of the deficiencies of the Bank as revealed by the May 4, 1984 examination (TR pages 52–53).
   34. * * * and the Bank's Board of Directors were informed of the Bank's unfavorable status and of the proposed entry of a cease-and-desist Order in a letter from the FDIC of July 24, 1984 (Exhibit 3).
   35. At a meeting with the FDIC on August 15, 1985, * * * and the Bank's Board of Directors signed a consent agreement, agreeing to entry of a final cease-and-desist order; they were informed of the contents of the Order and agreed to comply with its provisions (Exhibit 2; TR pages 94–95).
   36. * * * did not attend the first Board of Directors' meeting held on October 29, 1984 subsequent to the effective date of the cease-and-desist order (Exhibit 9; TR pages 108–109).
   37. At the Board of Directors' meeting of October 29, 1984, * * * was designed as Chief Executive Officer of the Bank and charged with the task of achieving the Bank's compliance with the cease-and-desist order (TR pages 105–106).
   38. As a Director of the Bank, * * * did not at any time have any meaningful conversations with Mr. * * * concerning correction of the cited deficiencies of the Bank, preparation of a management plan, the extension of credit to adversely classified borrowers, correcting the Bank's violation of law and regulations, implementation of the Bank's loan policy, establishing a watch list, elimination of the * * * concentration of credit or discontinuing payment on the * * *' insufficient fund checks (TR pages 105–106).
   39. * * * gave no meaningful direction to Mr. * * * for achieving the Bank's compliance with the cease-and-desist order, in preparing a new loan plan policy or procedural manual (Exhibit 9; Exhibit 11; TR pages 108–109, 111–113).
   40. At all times pertinent herein, * * * was a minority shareholder of the Bank (Exhibit 7 page 74; TR pages 86, 122).
   41. * * * did not closely monitor the daily operation of the Bank; the extent of his usual involvement was attendance at Board meetings four times a year (TR page 124).
   42. * * * attended the Board of Directors meeting of December 3, 1984 (Exhibit 10; TR pages 59–60, 111).
{{4-1-90 p.A-1130}}
   43. * * * moved for the adoption of a loan policy that was supplied by the State Bank Examiner.
   44. * * * submitted a written plan to eliminate insider loans (TR page 127).
   45. * * * was aware of overdrafts by members of the * * * family at least as far back as 1978 (TR pages 122, 124).

CONCLUSIONS OF LAW

   1. The FDIC has jurisdiction over * * * , Director of the * * * Bank, * * * and the subject matter of this proceeding.
   2. On September 24, 1984, the FDIC issued a cease-and-desist order which became final against the Bank and its Board of Directors, as defined in Section 8(k) of the Act (12 U.S.C. Section 1818(k)).
   3. The Order was issued by the FDIC with the consent of the Bank, its Directors and Officers.
   4. The Order became effective October 4, 1984 and has remained in effect at all times pertinent herein.
   5. During the period October 4, 1984 extending through January 18, 1985, the Board of Directors was responsible for supervision of the active management of the Bank and for the actions of the Bank.
   6. At all times pertinent herein, * * * was a member of the Bank's Board of Directors.
   7. The Bank, its Board of Directors, including * * * violated the cease-and-desist Order within the meaning of Sections 8(i)(2) and 8(k) of the Act (12 U.S.C. Sections 1818(i)(2) and 1818(k)).
   8. The Bank, its Board of Directors and * * * , violated the cease-and-desist Order as follows:
   a. The Bank violated Paragraph 1(b) of the Order by failing to submit a management plan to the FDIC Regional Director.
   b. The Bank violated Paragraph 1(d) of the Order by failing to nominate after the effective date of the Order a sufficient number of independent candidates to form a majority of the Board of Directors of the Bank.
   c. The Bank violated Paragraph 2(b) of the Order by extending credit to adversely classified borrowers after the effective date of the Order without approval of two thirds of the Bank's Board of Directors.
   d. The Bank did not take the necessary steps to correct violations of banking laws, rules and regulations, in violation of Paragraph 5 of the Order. As of January 18, 1985, the Bank continued to violate Section 23A of the Federal Reserve Act (12 U.S.C. Section 371c), Section 215.4 of Regulation O of the Federal Reserve System (12 C.F.R. Section 215.4), Section 23A of the Federal Reserve Act, the State Banking Statutes (* * * S.A. Sections 9-1104 and 9-903), and section 337.3(a) of the FDIC's Rules and Regulations (12 C.F.R. Section 337.3(a)).
   e. The Bank violated Paragraph 6 of the Order by its failure to correct deficiencies of loan documentation and to take necessary steps to implement a written loan policy.
   f. The Bank failed to monitor problem lines of credit by use of a watch list in violation of Paragraph 7 of the Order.
   g. The Bank failed to eliminate the * * * concentration of credit in violation of Paragraph 8 of the Order.
   h. After October 4, 1984, the effective date of the Order, the Bank continued to pay on insufficient fund checks of its Directors, their families and business interests in violation of Paragraph 10(a) of the Order.
   9. The aforementioned violations occurred due to the failure of the Board of Directors of the Bank, including * * * , to exercise ordinary care and prudence in the administration of the Bank's affairs.
   10. The FDIC has assessed a civil penalty of $2,500.00 against * * * as Director of the Bank for violations of the final cease-and-desist Order issued against the Bank and its Board of Directors by the FDIC pursuant to Section 8(i)(2)(i) of the Act (12 U.S.C. Section 1818 (i)(2)(i)).
   11. On considering the mitigating factors applicable to * * * , his civil penalty should be reduced to $1,250.00.

PROPOSED ORDER

   Based upon the foregoing Findings of Fact and Conclusions of Law, it is recommended by the Administrative Law Judge that the following Order be entered:
   ORDERED, that the penalty previously assessed by FDIC against * * * in the amount of $2,500.00 should be reduced.
   FURTHER ORDERED, that a penalty of $1,250.00 should be, and is, assessed against * * * pursuant to Section 8(i)(2) of the Act (12 U.S.C. Section 1818 (i)(2).
   FURTHER ORDERED, that the penalty imposed hereby shall be payable and col- {{4-1-90 p.A-1131}}lected not later than twenty days from the date this Order became final.

/s/ Jack R. Reed
Administrative Law Judge
February 20, 1987

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