Federal Deposit
Insurance Corporation

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   [¶5171A] In the Matter of Steven J. Hirsch, James V. Hirsch, C.R. Hackworthy, Paul W. Hamblin, Bradley C. Lundeen, James W. O'Connell, William J. Radosevich, Richard R. Schmitz, and Richard O. Stout, Bank St. Croix, Roberts, Wisconsin, Docket No. FDIC-91-24k (12-19-91).

   Board rejects ALJ's recommendation and finds that Respondents violated FDIC and Wisconsin regulations by opening a Bank branch after FDIC's Regional Director withdrew his approval for the branch; remands case to the ALJ for a determination of appropriate civil money penalties. (A Federal District Court denied Bank St. Croix an injunction to suspend enforcement of a temporary cease and desist order issued by the FDIC when the branch opened, 755 F. Supp. 455 (D.D.C. 1991). See also ¶10,195 and ¶15,374 for related matters.)

   [.1] Bank Branches—Application Process—Authority of FDIC Regional Director
   Regional Director has delegated authority to approve application for establishment of a branch; this includes the authority to impose standard conditions and to alter or suspend the approval during the pendency of the application if developments warrant.

   [.2] Bank Branches—Application Process—Withdrawal of Approval
   Withdrawal of approval by Regional Director, pending determination on the application by FDIC's Division of Supervision, does not deny the application, but forwards it to the Director or Associate Director of the Division of Supervision for approval or denial.

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   [.3] Bank Branches—Operation in Violation of State Law
   Operating a branch without meeting a condition imposed by state banking commissioner (failure to increase capital stock by infusion of funds from outside the Bank) constitutes operating without the commissioner's approval and is a violation of state law.

   [.4] Civil Money Penalties—Liability—Factors Determining
   In determining the civil money penalty for opening a branch after withdrawal of FDIC's conditional approval and in violation of state law, the ALJ may consider that the violations were short-lived and have been rectified, and that the Bank is now operating under a consent agreement.

In the Matter of
STEVEN J. HIRSCH, JAMES V.
HIRSCH, C.R. HACKWORTHY,
PAUL W. HAMBLIN, BRADLEY C.
LUNDEEN, JAMES W. O'CONNELL,
WILLIAM J. RADOSEVICH,
RICHARD R. SCHMITZ, and
RICHARD O. STOUT, individually,
and as institution-affiliated parties of
BANK ST. CROIX
ROBERTS, WISCONSIN
(Insured State Nonmember Bank) DECISION AND ORDER
REMANDING PROCEEDING
FOR FURTHER
DETERMINATION
FDIC-91-24k

   The Federal Deposit Insurance Corporation ("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") against Steven J. Hirsch, James V. Hirsch, C.R. Hackworthy, Paul W. Hamblin, Bradley C. Lundeen, James W. O'Connell, William J. Radosevich, Richard R. Schmitz, and Richard O. Stout, ("Respondents") as individual directors and institution-affiliated parties of Bank St. Croix, Roberts, Wisconsin ("Bank"), on February 11, 1991. This Notice seeks to impose civil money penalties in the amount of $5,500.00 on each Respondent for violations of section 18(d)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1828(d)(1); section 221.04(1) (jm)(1) of the Wisconsin Statutes, Wis. Stat. § 221.04(1)(jm)(1); and section 328.2 of the FDIC Rules and Regulations, 12 C.F.R. § 328.2, by opening and operating a branch bank in Hudson, Wisconsin ("branch"), without approval of the FDIC or the Commissioner of Banking for the State of Wisconsin ("Commissioner"). Respondents admitted violating 12 C.F.R. § 328.2 by failing "to display at the branch an `official bank sign'" in their Answer, but denied all other violations. Answer at 3–4.¹
   Prior to the issuance of the Notice², the Bank³ filed suit against the FDIC in the United States District Court for the District of Columbia seeking an injunction to sus-pend the effect of a temporary cease-and-desist order issued by the FDIC. On January 30, 1991, the District Court issued its order denying the requested relief. Bank St. Croix v. FDIC, 755 F. Supp. 455 (D.D.C. 1991). The Bank sought an order from the Court:

to suspend or set aside the temporary cease

and desist order pending completion of an administrative hearing and to declare the FDIC's denial of its branch application ineffective and void.

[b]ecause the Court has found the FDIC's denial of the Bank's branch application to be both valid and effective, it must also hold that the FDIC did not abuse its discretion in issuing the temporary cease and desist order in this case.

   On June 29, 1989, Respondent Steven J. Hirsch, president of the Bank, submitted an application to the Commissioner requesting approval for the establishment of a branch of the Bank in Hudson, Wisconsin. R.D. at 2., Joint Stip. No. 1. The Commissioner issued an Order approving the branch on July 25, 1989, and informed the Bank of the approval by letter dated August 4, 1989. R.D. at 3, Joint Stip. No. 2. The Bank submitted its second application⁸ to the FDIC for approval of the branch on March 22, 1990. R.D. at 3, Joint Stip. No. 3. Thereafter, in a letter dated May 30, 1989, the Bank requested that the Commissioner extend the approval of the branch application until November 1, 1990. R.D. at 3, Joint Stip. No. 4.
   The Commissioner granted the extension contingent on the Bank's satisfying three conditions:

1) The Bank's board of directors (Respondents herein) was to execute the FDIC's

and Commissioner's proposed Memorandum of Understanding ("MOU")⁹;
2) The Bank was to eliminate all assets classified as loss in the May 22, 1990, examination from the books of the Bank; and
3) The Bank was required to increase its capital stock or surplus by no less than $75,000 from a source outside the Bank.¹⁰

I am withdrawing approval of the branch application and have forwarded to our Washington office a formal recommendation for denial of the application based upon the condition of the Bank as we now know it.

[the Commissioner's] approval had expired November 1st, that they needed to close the branch immediately, and that if they didn't, our office would take whatever action necessary to close the branch.

The original condition imposed in the Regional Director's September 27 approval of its branch application was not authorized by the applicable statute. Thus, the Bank asserts, the FDIC's later withdrawal of its approval and its later denial of the approval were ineffective and void.

[t]he Bank operated its branch in flagrant disregard of the FDIC's denial of the branch application; because the denial ... was supported by the FDIC's concerns for the Bank's financial condition, the FDIC was justified in issuing a temporary cease and desist order to enjoin the operation of that branch ... . For the foregoingreasons, the plaintiff's Application for a Preliminary Injunction is DENIED, and the defendant's Motion for Summary Judgment is GRANTED.

[w]hile this ORDER is in effect, the Bank shall not establish the operation of a branch, including the acceptance of deposits and making of loans, in Hudson, Wisconsin, or at any other location ...

   The Board has carefully and thoroughly reviewed the entire record in this proceeding, including the parties' submissions¹⁴, the cases cited in the briefs, the ALJ's Recommended Decision, and the March 15, 1991, Consent Order entered into by the parties. Initially, the Board finds that all issues of material fact as to the violations of law and regulations have been resolved by stipula-

   [.1] A. Regional Directors Have Authority To Withdraw Conditional Branch Application Approval.
   The FDIC's Regional Directors have authority to impose "standard conditions," as defined in 12 C.F.R. § 303.0(a)(26), in the branch application process. The "standard condition" applicable to this proceeding provides that the Regional Director, during the pendency of a branch application, may "alter, suspend or withdraw [FDIC's] commitment should any interim development be deemed to warrant such action" until such time as "the conditional commitment of the FDIC becomes effective." 12 C.F.R. § 303.0(a)(26)(iii).
   Although Regional Directors have delegated authority to approve an application for establishment of a branch pursuant to 12 C.F.R. § 303.7(a)(1)(i), authority to deny a branch application is only delegated to the Director or Associate Director of the Division of Supervision. The delegation of authority to "deny applications for consent to establish branch facilities" to the Director or Associate Director¹⁷ does not prohibit, as the ALJ determined, the Regional Director from exercising his authority "to alter, suspend or withdraw [FDIC's] commitment should any interim development be deemed to warrant such action"¹⁸ or impose any standard condition. Any other construction of the regulation leaves the Regional Director without an ability to quickly respond to a change in the Bank's condition¹⁹ and leaves the FDIC and depositors open to potential losses.

   [.2] Withdrawal of the Regional Director's approval, pending a determination of the Bank's application by the FDIC's Director or Association Director of the Division of Supervision, is not a denial of the appli-

   B. Operation of the Branch Violated Wisconsin Statutes.

   [.3] The Recommended Decision concluded that the Bank met all of the conditions imposed by the Commissioner for establishment of a branch prior to November 5, 1990. R.D. at 15–17. This conclusion is based on the ALJ's finding that the infusion of $55,000.00 into the surplus account, as transferred from the Bank's undivided profits account, is sufficient to meet the Commissioner's third condition²¹. To the contrary, the Board finds that the infusion of funds from one capital account, the undivided profits account, into another capital account, the surplus account, did not increase the Bank's capital.
   FDIC regulations at 12 C.F.R. § 325.2(h) define primary capital as "the sum of common stock, perpetual preferred stock, capital surplus, undivided profits ... " The Commissioner's third condition, as articulated by the Commissioner and in light of FDIC regulations and accounting principles, intended that the Bank raise its overall capital by $75,000.00, including primary capital. The increase was to be accomplished by infusion of $75,000.00 into either the capital stock or surplus accounts from a source outside the bank. The expert testimony of Michael Mach, the Division Administrator for the Bank Division of the Commissioner's office, established that the $55,000.00 of the required $75,000.00 did not come from the source outside the Bank, and, therefore, did not satisfy the third condition. See Tr. at 38–39 and 46–47.
   After a review of the entire record, the Board concludes that the transfer of $55,000.00 from the Bank's undivided profits capital account to the Bank's surplus capital account is not an infusion of additional

Because applying an agency's regulations to complex or changing circumstances calls upon the agency's unique expertise and policymaking prerogatives, we presume that the power authoritatively to interpret its own regulations is a component of the agency's delegated lawmaking powers. See Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 566, 568, 100 S.Ct. 790, 797, 798, 63 L.Ed. 2d 22 (1980).

   C. The Admitted Violation of 12 C.F.R. § 328.2.

   In light of the aforementioned violations of law, the Board finds that the ALJ's refusal to impose civil money penalties as to the admitted violation of 12 C.F.R. § 328.2, which requires insured banks to display an official bank sign, is inconsistent with the record, and therefore is reversed and remanded for reconsideration of the penalty issue.²³

   D. Imposition of an Appropriate Civil Money Penalty.

   [.4] The Board, after a careful and thorough review of the entire record in this proceeding, remands this case to the Administrative Law Judge for a finding on the appropriate amount of civil money penalties to be imposed for opening a branch after receiving notice of the Regional Director's withdrawal of his conditional approval, and operating in violation of Wisconsin law and without an official bank sign. In light of the entry of the Consent Order, In the Matter of Bank St. Croix, supra., and the subsequent establishment of a branch after obtaining the requisite approvals from the Division of Supervision and the Commissioner, and consideration of the FDIC's "Interagency Policy Regarding the Assessment of Civil Money Penalties by the Federal Financial Regulatory Agencies," 45 Fed. Reg. 59,423 (September 9, 1980) ("Interagency Policy"), the Board remands for the imposition of an appropriate civil money penalty consistent with this Decision. The Board recognizes that the violations at issue were shortlived, have been rectified, and the Bank is now operating under a consent agreement.

   This proceeding is remanded for a further hearing on the sole issue of the amount of appropriate civil money penalties to be imposed on Respondents pursuant to 12 U.S.C. § 1818(i)(2)(G) and the Interagency Policy as set forth in this Decision.

   The Board of the FDIC, having considered the entire record in this proceeding, hereby finds that the Administrative Law Judge's Recommended Decision granting a verdict in favor of Respondents is rejected, and the proceeding is remanded for a further hearing on the issue of appropriate civil money penalties to be assessed against Respondents consistent with the Notice of Assessment of Civil Money Penalties.
   ACCORDINGLY, IT IS HEREBY ORDERED THAT, the Respondents' Motion for a Directed Verdict is denied; and
   IT IS FURTHER ORDERED, that the matter is remanded to the Administrative Law Judge for a further hearing for assessment of appropriate civil money penalties for Respondents' violations of section 18(d)(1) of the Act, 12 U.S.C. § 1828(d)(1); section 221.04(jm)(1) of the Wisconsin Statutes, Wis. Stat. § 221.04(jm)(1); and section 328.2 of the FDIC's Rules and Regulations, 12 C.F.R. § 328.2.
   IT IS FURTHER ORDERED, that the Executive Secretary, or his designee, is instructed to execute and serve copies of this Decision and Order Remanding Proceeding for Further Determination on counsel for all parties, on the Administrative Law Judge, and on the Commissioner of Banking for the State of Wisconsin.
   By direction of the Board of Directors.
   Dated at Washington, D.C. this 19th day of December, 1991.

/s/ Hoyle L. Robinson
Executive Secretary

In the Matter of
Steven J. Hirsch, James V. Hirsch,
C.R. Hackworthy, Paul W. Hamblin,
Bradley C. Lundeen, James W.
O'Connell, William J. Radosevich,
Richard R. Schmitz, and Richard
O. Stout, individually, and as
institution-affiliated parties of
Bank St. Croix,
Roberts, Wisconsin
Steven M. Charno, Administrative Law Judge:

   On February 11, 1991, pursuant to the provision of the Federal Deposit Insurance Act("Act"), 12 U.S.C. §§ 1811-1831k, Notices of Assessment of Civil Money Penalties ("Notices") were issued by the Federal Deposit Insurance Corporation ("Petitioner" or "FDIC") alleging that Respondents Steven J. Hirsch, James V. Hirsch, C.R. Hackworthy, Paul W. Hamblin, Bradley C. Lundeen, James W. O'Connell, William J. Radosevich, Richard R. Schmitz and Richard O. Stout ("Respondents"), as individual directors and institution-affiliated parties of Bank St. Croix, Roberts, Wisconsin ("Bank") had violated section 18(d)(1) of the Act, 12 U.S.C. § 1828(d)(1), section 221.04(jm)(1) of the Wisconsin Statutes, Wis. Stat. §221.04(jm)(1), and section 328.2 of the FDIC's Rules and Regulations, 12 C.F.R. §328.2, by opening and operating a new branch bank in Hudson, Wisconsin ("branch") without FDIC or State approval. The Notices sought to impose civil money penalties ("CMP") of $5,500 on each Respondent for the alleged violations. Respondents' Answer denied that Respondents had violated 12 U.S.C. § 1828(d)(1), denied that Respondents had violated Wis. Stat. §221.04(jm)(1), and admitted that Respondents had violated 12 C.F.R. §328.2 by failing to display at the branch an "official bank sign."
   This case was heard before me in Chicago, Illinois on July 2, 1991. Prior to the hearing and pursuant to a Pretrial Scheduling Order, the parties submitted extensive briefs on the legal issues in the matter, and stipulated to virtually all of the relevant facts in the case. Indeed, only two witnesses were present at the hearing, and their proposed testimony was limited to two factual disputes. The following facts were stipulated to by the parties:¹
   1. On June 29, 1989, Bank St. Croix ("Bank") submitted to the Commissioner of Banking for the State of Wisconsin ("Commissioner of Banking") a complete application requesting approval to establish and maintain a branch of the Bank in Hudson, Wisconsin.
   2. On July 25, 1989, the Commissioner of Banking issued an order to the Bank approving the application (attached as Stipulated Exhibit 3(A)),² and by letter dated August 4, 1989, the Commissioner informed the Bank of the approval (attached as Stipulated Exhibit 3(B)) (see, ALJ Ex. 2).
   3. On March 22, 1990, the Bank made its second application to the Federal Deposit Insurance Corporation ("FDIC") pursuant to section 18(d) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1828(d) (1), to establish a branch of the Bank in Hudson, Wisconsin.
   4. In a letter dated May 30, 1990 (attached as Stipulated Ex. 3(C)) (see, ALJ Ex. 2), the Bank requested that the Commissioner of Banking extend until November 1, 1990, the approval of the branch application.
   5. In a letter dated July 26, 1990, the Commissioner of Banking notified the Bank that pursuant to the Bank's request, the approval was extended to November 1, 1990, contingent on the Bank satisfying three conditions:

a. The Bank's Board of Directors was to execute the Memorandum of Understanding proposed by the Federal Deposit Insurance Corporation and the State Commissioner on May 17, 1990 (this was done on August 15, 1990);
b. The Bank was to eliminate from the books of the Bank all assets classified as loss in the Examination dated May 22, 1990 (this was done on August 31, 1990); and
c. The Bank was to increase its capital

stock or surplus by no less than $75,000 from a source outside of the Bank.
The July 26, 1990 letter is attached as Stipulated Exhibit 3(D) (see, ALJ Ex. 2).

That until such time as the branch is established, the Corporation shall have the right to alter, suspend, or withdraw its approval should any interim development be deemed to warrant such action.

   I am withdrawing approval of the branch application and have forwarded to our Washington office a formal recommendation for denial of the application based upon the condition of the Bank as we now know it. It is fully recognized that this decision will undoubtedly be a difficult one for the Bank; however, we feel the present circumstances dictate such an action, and, in fact, leave us with no other alternative.

A. THE BANK'S OPENING AND OPERATION OF ITS BRANCH DID NOT VIOLATE 12 U.S.C. § 1828(d)(1), BECAUSE REGIONAL DIRECTORS HAVE NO AUTHORITY TO WITHDRAW BRANCH APPLICATION APPROVAL; THEREFORE, THE FDIC'S SEPTEMBER 27, 1990 APPROVAL WAS VALID AND IN EFFECT AT ALL RELEVANT TIMES.
   12 U.S.C. § 1828(d)(1) provides in relevant part that "[n]o State nonmember insured bank ... shall establish and operate any new domestic branch unless it shall have the prior written consent of the [FDIC] ... ". By letter dated September 27, 1990, Regional Director George Masa, on behalf of the FDIC and pursuant to delegated authority,⁵ approved in writing the Bank's application for a new domestic branch in Hudson, Wisconsin.
   In its approval letter, the FDIC included as a condition precedent the following language:⁶
   That until such time as the branch is established, the corporation shall have the right to alter, suspend or withdraw its approval

Section 303.8(a), relating to extensions of time, is amended by adding a new paragraph (a)(2). Paragraph (a)(2) clarifies that a delegate may exercise authority to deny a request for an extension of time within which to perform acts or meet conditions required by prior FDIC action on an application only if the delegate had authority to deny the underlying application. Considering that the denial of an extension of time has the same practical effect as a denial of the original application, this clarification precludes the delegate from indirectly denying an application that he or she could not have denied directly.

i) That the applicant had obtained all necessary and final approvals from the appropriate state authority or other applicable authority;
(ii) That if the transaction does not take effect within a specified time limit, or unless, in the meantime, a request for an extension of time has been approved, the consent granted shall expire at the end of the said time period;
(iii) That until the conditional commitment of the FDIC becomes effective, the FDIC retains the right to alter, suspend or withdraw its commitment should any interim development be deemed to warrant such action ...