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FDIC Enforcement Decisions and Orders |
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Bank to cease and desist from practices such as operating in a manner as to produce a low net interest margin and unsatisfactory earnings and with management whose policies and practices are detrimental to Bank; failing to properly account for securities trading activities, to maintain adequate documentation of business expenses, to have a formal policy limiting payment of medical expenses to offices and directors, and to monitor transactions of officers and directors; and violating federal law and regulations. (A Motion for Stay Pending Review was denied 12-13-88. See [¶
[.1] Securities TradingIntent to Trade
[.2] LoansClassification of AdverseLoss
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[.4]] CapitalAdequacySecurities Trading Activity
[.5] DirectorsIndependent Directors Added to Board
[.6] Board of DirectorsReorganization of BoardIndependent Directors
In the Matter of *** BANK
DECISION AND ORDER
This proceeding arises under Section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(b). On October 23, 1987, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Charges and of Hearing ("Notice") against *** Bank *** ("Bank"), pursuant to Section 8(b) of the Act and the FDIC's Rules of Practice and Procedures (12 C.F.R. Part 308). The Notice charged the Bank with having engaged in unsafe or unsound banking practices and violating law and regulation. An Order was sought under section 8(b)(1) of the Act requiring the Bank to cease and desist from its unsafe and unsound banking practices and to take specific action to prevent future reoccurrences.
A. The Bank Was Engaged in Securities
[.1] The Board believes that an analysis of trading activity based simply on the length of the holding period is mechanical and overlooks the purpose for which securities are acquired by a financial institution. Both the examiner and the Bank's expert testified that intent was a critical factor in determining whether trading activity was present. (Tr. at 135-39 and 597600.) Moreover, the Bank's president testified that he manipulated the securities portfolio depending upon market conditions. (Tr. at 661-63.)
B. Adversely Classified Assets Included An
[.2] The ALJ found that total assets adversely classified "Loss" equalled $114,300. He then used this figure in determining that the Bank's capital ratio was 5.87 percent, below the minimum 6 percent required for safety and soundness. The Board concludes that "Loss" classifications totalled $131,300, resulting in a capital ratio of 5.85 percent. The Board reinstates a $17,000 "Loss" classification improperly rejected by the ALJ.
C. The *** and *** Loans
[.3] The Board reinstates the listing of "Special Mention" for two loans in the amount of $419,000 each to the Bank's president, ***, and its chairman of the board of directors, ***. The loans were criticized primarily due to inadequate appraisals of two properties held as collateral. The ALJ, however, concluded that because the Bank's lending policy required a loan to value ratio of 80 percent, a pledge of additional collateral (sought by the examiner) would lower, rather than raise, the loan to value ratio. He also concluded that "the record does not demonstrate that [[the Bank]] violated its policy or that a potential for loss was created by inadequacy of the collateral appraisals." (RD. at 3.)
D. The Bank Was Inadequately
[.4] The Board agrees with the ALJ's conclusion that the Bank was engaged in an unsafe and unsound practice by operating with a capital ratio of less than six percent and was in violation of 12 C.F.R. §325.3. (RD at 7.) Further, the Board agrees with the ALJ that the Bank should maintain a capital ratio of 6.5 percent. The Bank's undercapitalization for the past three years is attributable to its low net interest margin, an inability to make an operating profit without reliance upon securities gains, and the payment of dividends out of net income in amounts exceeding 50 percent of net income. The Board agrees with the ALJ's description of the Bank's poor earnings performance:
E. Directors and Management
[.5] Upon consideration of the record as a whole, the Board agrees with the ALJ's conclusion that the Bank has failed to supervise its officers, but rejects the finding that management practices and policies did not jeopardize the safety of deposits. The volume of adversely classified assets, poor earnings without reliance on gains from excessive securities trades, violations of Regulation O of the Board of Governors of the Federal Reserve System resulting from careless supervision of staff, together with a persistent failure to properly limit and document business and medical expenses, and other consistently poor business record maintenance, and the failure to properly amend Bank policies to reflect current practices require the Board to find that the Bank's officers and directors failed to pay proper heed to the safety and soundness of the Bank and placed its depositors in jeopardy. (RD at 911.)
Conclusion
For the reasons stated in the ALJ's Recommended Decision as modified herein, the Board adopts the Findings of Fact and Conclusions of Law set forth infra. The Board further adopts the Cease and Desist Order set forth herein at pages 16 through 26, which has been modified consistent with the foregoing discussion to require relief deemed necessary to correct the unsafe or unsound practices engaged in by the Bank.
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1. At all times relevant to this proceeding, the Bank is and has been an insured state nonmember bank organized and chartered under the laws of ***, having its principal place of business in ***.
CONCLUSIONS OF LAW
1. The Bank is subject to the Federal Deposit Insurance Act, 12 U.S.C. §§1811-1831d, the Rules and Regulations of the FDIC, 12 C.F.R. Ch. III, and the laws of ***.
ORDER TO CEASE AND DESIST
IT IS ORDERED that the Bank, *** Bank, ***, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of its affairs, cease and desist from the following unsafe or unsound banking practices and violations of regulation:
[.6] 1. Within 90 days from the effective date of this ORDER, the Bank shall add at least three "independent" members to its board of directors. The addition of the independent directors required by this paragraph may be accomplished, to the extent permissible by state statute and the Bank's by-laws, by means of appointment or by election at a regular or special meeting of the Bank's shareholders. Further, the Bank shall take all steps necessary to insure that its board of directors is and remains composed of a majority of independent directors. As used in this ORDER, the term "independent" is defined as an individual who is not: (1) an employee or officer of the Bank or an employee, officer, or director of *** ("Holding Company") or any other affiliate of the Bank as that term is defined in section 23A of the Federal Reserve Act, 12 U.S.C. §371c, related by blood or marriage to any officer or director of the Bank, Holding Company, any other affiliate of the Bank or any stockholder owning more than five percent of the Bank's or Holding Company's outstanding shares or (2) indebted to the Bank or to any of its affiliates, directly or indirectly (including the indebtedness of any "related interest" as that term is defined at 12 C.F.R. §215.2(k)) in an amount exceeding five percent of the Bank's capital and unimpaired surplus as defined at 12 C.F.R. §215.2(f).
[.7] 2. (a) Within 60 days from the effective date of this ORDER, the Bank shall have performed a detailed written study of its earnings performance and investment and funds management policies and practices. The study shall be performed by a qualified consultant, acceptable to the Regional Director of the FDIC's *** Regional Office ("Regional Director") and the Commissioner of Banks for the State of *** ("Commissioner"), and shall include written recommendations to improve the Bank's earnings performance and investment and funds management policies and practices.
[.8] 3. (a) Within 90 days from the effective date of this ORDER, and quarterly thereafter during the life of this ORDER, the Bank's board of directors shall review the Bank's investment and funds management policies and practices for adequacy in coordination with the written study required by paragraph 2(a) and, based upon this review, shall make appropriate revisions in the policies that are necessary to strengthen investment and funds management practices. The minutes of the meeting of the board of directors at which each such review is undertaken shall expressly state the results of the review.
[.9] 4. (a) Within 30 days from the effective date of this ORDER, the Bank shall establish an Investment Committee consisting of a least three board members. Within 90 days from the effective date of this OR-
{{4-1-90 p.A-1361}}DER, the Investment Committee shall include a majority of "independent" board members as defined by paragraph 1 of this ORDER.
[.10] 5. Within 30 days from the effective date of this ORDER, the Bank shall:
[.11] 6. (a) The Bank shall formulate and fully implement on an annual basis written plans and a comprehensive budget for each succeeding year for all categories of income and expense. The written plan required by this paragraph shall consider the results of the written study required by paragraph 2 of this ORDER and shall contain formal goals and strategies to improve the Bank's net interest margin and its overall earnings.
[.12]] 7. (a) Within 90 days from the effective date of this ORDER, and in coordination with the written plans and budgets required by paragraph 6 of this ORDER, and the written study required by paragraph 2 of this ORDER, the Bank shall adopt and implement a detailed written policy covering expense reimbursements to its directors, officers, and employees. At a minimum, the policy shall include the following:
[.13] 8. (a) Within 30 days from each June 30 and each December 31 following the effective date of this ORDER, the Bank's board of directors shall determine the Bank's level of primary capital as a percentage of its total assets, as of the respective June 30 and December 31 dates. If that percentage is less than 6.5 percent of
{{4-1-90 p.A-1362}}total assets, the Bank's board of directors shall, within 60 days from the date of that determination, increase that capital/asset relationship to not less than 6.5 percent as of the end of that preceding semi-annual period. For the purpose of this ORDER, "primary capital" and "total assets" shall be defined as those terms are defined in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325.
[.14] 9. While this ORDER is in effect, the Bank shall not declare or pay any cash dividends without providing a minimum of 30 days advance written notice to the Regional Director and Commissioner.
[.15] 10. Within 30 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets properly classified "loss" as of December 31, 1986.
[.16] 11. Within 30 days from the effective date of this ORDER, the Bank shall replenish its loan valuation reserve by an expense entry in an amount equal to those loans required to be charged-off by paragraph 10 of this ORDER.
[.17] 12. (a) Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of regulation as of December 31, 1986. In addition, the Bank shall adopt procedures to insure future compliance with all applicable laws, rules, and regulations.
[.18] 13. Within 60 days from the effective date of this ORDER, the Bank shall correct all deficiencies in the loans properly listed for "special mention" as of December 31, 1986.
[.19] 14. Within 50 days from the effective date of this ORDER, the Bank shall amend and refile Reports of Condition and Income for the periods ending December 31, 1986, and subsequently, if the original filings do not reflect all of the adjustments required by paragraphs 5, 10, and 11 of this ORDER.
[.20] 15. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER (1) in conjunction with the Bank's next shareholder communication and (2) in conjunction with the Bank's notice or proxy statement preceding its next shareholder meeting. The description and any accompanying communication, statement, or notice shall be sent to the FDIC Registration and Disclosure Unit, Washington, D.C. 20429, for review at least 15 days prior to dissemination of the description, communication, notice, or statement.
[.21] 16. On the last day of the second month following the date of issuance of this ORDER, and every second month thereafter, the Bank shall furnish written progress reports, signed by each member of the Bank's board of directors, to the Regional Director and Commissioner detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and Commissioner have released Respondent in writing from making further reports.
Hoyle L. Robinson
In the Matter of *** BANK
A. Loan Loss Reserves
Petitioner alleges that Respondent has "failed to maintain an adequate reserve for loan losses." Operating with inadequate loan loss reserves is an unsafe or unsound banking practice. Docket No. FDIC-83-172b, [1984]] F.D.I.C. Enf. Dec. (P-H) ¶5030, at 5657. It has been stipulated that Respondent had loans outstanding on December 31, 1986 of $10,488,000, while its loan loss reserve on that date amounted to $115,000. Petitioner contends that $79,000 of Respondent's outstanding loans should be classified "loss" and deducted from the reserve and that an "additional provision" (of unspecified amount) should be made to the reserve for $1,446,000 in loans classified "special mention." Respondent contests several of the classifications and the resulting diminution of its loan loss reserve.
B. Earnings
Petitioner charges that Respondent was "operated in a manner which produces a low net interest margin and unsatisfactory earnings." Respondent denies that its earnings are unsatisfactory.
C. Capital Adequacy
Plaintiff alleges that Respondent "failed to maintain a ratio of total capital to total assets of at least 6 percent," which failure is contended to be an unsafe or unsound banking practice as well as a violation of 12 C.F.R. §325.3. Petitioner further alleges that Respondent's December 31, 1986 ratio of capital to assets constituted an unsafe or unsound banking practice in light of Respondent's low net interest margin and inability to make an operating profit without relying on securities gains.
It was stipulated that Respondent's total capital amounted to $3,720,000 and that its loan reserve was $115,000. Respondent's average total assets were shown to amount to $61,376,000.14 The remaining factor in the equation, the amount of loss properly identified in the December 31, 1986 Report of Examination, is contested.
D. Securities Transactions
Petitioner alleges that Respondent engaged in an unsafe or unsound banking practice by failing "to properly account for securities trading activities in accordance with generally accepted accounting practices. . ." Petitioner further alleges that such a failure constitutes a violation of its reporting requirements. See 12 C.F.R. §304.4. In partial remedy of both the alleged practice and violation, Petitioner seeks to require Respondent to account for the latter's entire security portfolio as of December 31, 1986 as a trading account. Respondent contends that it has not engaged in securities trading and that it has properly reported its securities holdings as an investment account.
E. Documentation of Expenses
Petitioner's Notice of Charges alleges that Respondent's failure "to prepare and maintain adequate supporting documentation for business and employee medical expenses" constituted an unsafe or unsound banking practice. Respondent denies the allegation.
F. The Automobile
Petitioner alleges that Respondent engaged in an unsafe or unsound banking practice by failing to "prepare and retain documentation justifying a sale of a Bankcontrolled automobile to a relative of Bank management." The relief sought by Petitioner consists of an order requiring Respondent "to make an objective good faith review of the sale and possible reimbursement if warranted." Respondent denies engaging in an unsafe or unsound banking practice and contends that the automobile's sale price fairly reflected the car's value.
A provision of Regulation O of the Federal Reserve System, 12 C.F.R. §215.4(a)(2), prohibits any extension of credit by a bank to one of its directors where the extension presents "unfavorable features." Petitioner's Notice of Charges alleges that Respondent has violated this provision by (1) extensions of credit to its Directors ***, *** and *** in the form of cash items or unposted overdrafts which resulted from "restraints" on their respective checking accounts35 and (2) extensions of credit to *** which lacked a formal repayment program and were secured only by stock in a closelyheld corporation. Petitioner also alleges that Respondent engaged in an unsafe and unsound banking practice in that it "permitted Bank officers and directors to violate Regulation O. . .."
1. Overdrafts
When Respondent places a "restraint" on a checking account, the account holder's checks are removed from Respondent's automatic processing system and are manually posted to the account. This practice causes a longer period to pass between payment and posting than would occur if the check had been automatically processed. Such a delay gives the account holder additional float and prevents overdraft from being reflected on Respondent's books.
2. ***'s Loans
Petitioner contends that a series of loans made by Respondent to *** are not subject to a formal repayment program. *** executed seven single-payment, 90-day term notes in favor of the Bank between May 20, 1980 and February 26, 1986. All of these notes were thereafter renewed on a quarterly basis and were in effect on December 31, 1986. The notes originally executed on March 6, 1984 and February 15, 1986 contained explicit repayment provisions; the five remaining notes did not. On November 8, 1983, a memorandum was prepared for ***'s loan file which documented a repayment plan for all existing and future loans.37 *** also testified concerning an oral repayment agreement of uncertain date, which was inconsistent with the requirements of the 1983 memorandum. Since it was not demonstrated that the oral agreement postdated the 1983 memorandum, I find that the repayment plan set forth in the memorandum was applicable to each of ***'s loans which did not contain an explicit, subsequently executed repayment provision.38
3. The Alleged Practice
Finally, we reach Petitioner's allegation that Respondent has permitted its officers and directors to commit the foregoing violations of Regulation O. While intent is of no relevance to the existence of a violation of the technical requirements of Regulation O, the same cannot be said with respect to the question of whether Respondent had a practice of allowing such violations. The record contains probative evidence that the checking account "restraint" system was administered by an individual since discharged for incompetence, and the possibility of a good faith difference of opinion over the marketability of ***'s stock is not without record support. In the absence of any probative evidence that Respondent was aware that its officers were in violation of Regulation O, I find that Respondent did not have a practice of permitting its officers and directors to commit such violations.
H. The October 20, 1986 Note
Petitioner alleges that Respondent's extension of credit pursuant to a note executed on October 20, 1986 by Vice-President *** and his son violated the state law setting Respondent's lending limits, *** REV. STAT.ch. 17, §339, and Petitioner's regulation requiring prior approval of such loans by Respondent's board of directors, 12 C.F.R. §337.3(b). Respondent contests both allegations.
I. Real Estate Holding Period
Petitioner alleges that "[a]s of December 31, 1986, the Bank...violated section 5(9) of the *** Banking Act...by holding real estate in excess of five years and any extensions given by the *** Commissioner of Banks." Respondent demurs.41 A letter from the *** Commissioner of Banks granted Respondent an extension of the relevant real estate holding period until January 1, 1987. I therefore find the alleged violation of section 5(9) of the *** Banking Act to be without record support.
J. Teller's Cash
The Notice of Changes alleges that Respondent violated "12 C.F.R. Section 326.4(b)(2)...by keeping unreasonably high levels of currency at each teller's station." Petitioner's pleading is in error; section 326.4(b)(2) deals with currency kept at "each banking office," while section 326.4(b)(3) treats currency kept at "each teller's station." The Bank presented extensive evidence at the hearing concerning teller cash levels, and the record contains no indication that Respondent was prejudiced by Petitioner's pleading error.
K. Law Enforcement Consultation
Plaintiff alleges that Respondent violated 12 C.F.R. §326.5(b) by "failing to maintain records of consultation with law enforcement officers." The cited section of the regulations requires the recordation of any consultation which occurs between a bank's security officer and law enforcement officials concerning the future "installation, maintenance, and operation of appropriate security devices."48
L. Respondent's Management
Petitioner's Notice of Charges contains no final allegations by way of summation. First, it alleges that Respondent's failure "to adequately staff and/or supervise its officers" in order to prevent the offenses alleged in the Notice constitutes an unsafe or unsound banking practice. Second, the Notice alleges that the offenses set forth therein demonstrate that Respondent was "operated with management whose policies and practices are detrimental to the Bank and jeopardize the safety of the Bank's deposits."
FINDINGS OF FACT52
1. At all times relevant to this proceeding, Respondent was a commercial bank organized and chartered under the laws of ***, having its principal place of business in ***.
CONCLUSIONS OF LAW
1. Respondent is subject to the Federal Deposit Insurance Act, 12 U.S.C. §§1811-1831b, the Rules and Regulations of the FDIC, 12 C.F.R. Ch. III, and the laws of ***.
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IT IS ORDERED that Respondent, *** Bank ***, its directors, officers, employees, agents, successors, assigns and other persons participating in the conduct of its affairs, cease and desist from the following unsafe or unsound banking practices and violations of regulation: |
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Last Updated 6/6/2003 | legal@fdic.gov |