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   [5193] In the Matter of Gary A. Dorris, Bank of Arizona, Scottsdale, Arizona, Docket No. FDIC-92-128jj (3-16-93).

   FDIC Board rejects recommendation of presiding officer and denies petitioner's application to serve as a director and officer of a newly chartered institution. It finds that because of his continued pattern of imprudent underwriting, lending and credit decisions, as cited by three regulatory agencies, his employment would not be in the public interest or the best interests of the bank.

   [.1] FDI Act Section 32—Application for Approval of Employment— Competence and Experience
   A pattern of unsettling practices, including failure to perform adequate financial analysis, to value collateral, to update appraisals and to ascertain the financial condition of guarantors, is evidence that petitioner lacks the competence and experience required by Section 32 for officers and directors of newly chartered institutions.

   [.2] Evidence—Post-hearing Evidence—Section 32 Proceedings
   The Board bases its Section 32 decision on all relevant, reliable, available information, including that which became available after the hearing record had been certified. Re-opening the record is the mechanism for the Board to obtain the settlement agreement between petitioner and the Resolution Trust Corporation executed after the hearing.

In the Matter of
GARY A. DORRIS
BANK OF ARIZONA
SCOTTSDALE, ARIZONA
(Insured State Nonmember Bank)
DECISION AND ORDER
FDIC-92-128jj

Introduction

   This proceeding is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") pursuant to section 32 of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §1831i, for final decision following the disapproval of a Notification of Addition of a Director or Employment of a Senior Executive Officer ("Notification") filed by the Bank of Arizona, Scottsdale, Arizona ("Bank") and Gary A. Dorris ("Petitioner") and following the appeal of that disapproval.
   The Petitioner requested and received a hearing before the Honorable Daniel H. Hanscom, retired Administrative Law Judge as presiding officer ("Presiding Officer"), after the Director of the FDIC's Division of Supervision ("Director") denied his appeal. After a five day hearing, the Presiding Of- {{5-31-93 p.A-2171}}ficer issued a Recommended Decision in favor of the Petitioner.1
   Upon a review of the record, the Board determined that supplemental information would be helpful for the Board to make a fully informed decision and on January 5, 1993, it issued an Order to Reopen Record. Counsel were requested to submit written statements to the Board regarding any claims or action taken against the Petitioner by the Resolution Trust Corporation ("RTC"), the Office of Thrift Supervision ("OTS"), of the FDIC. On January 25, 1993, submissions were filed by counsel for Petitioner and by FDIC Enforcement Counsel.
   The Board considers this to be a difficult case. Although the record supports many of the findings of the Presiding Officer, it also supports many of the concerns raised by FDIC Enforcement Counsel in their presentation. On balance, when viewed as a whole, the record reflects repeated, substantial criticisms of the Petitioner, coming from several different sources, during a period of more than two years, which cannot be ignored by the Board in the discharge of its responsibilities pursuant to section 32 of the FDI Act.
   The Board is persuaded that the history of questionable underwriting, lending, and related decisions made by the Petitioner and supported by the record is sufficient to support the decision that it would not be in the best interests of the depositors of the Bank, or in the best interests of the public to permit the Petitioner to serve as a director, senior vice president, and chief lending officer of the Bank.

Facts

   The Petitioner is seeking to serve as a director, senior vice president, and chief lending officer of the Bank of Arizona, Scottsdale, Arizona, a newly chartered insured institution.2The Regional Director (Supervision) of the FDIC's San Francisco Regional Office ("Regional Director") disapproved the Petitioner's Notification based on his actions at Republic National Bank, Phoenix, Arizona ("Republic"), and at Sun State Savings and Loan Association, Phoenix, Arizona ("Sun State"). The Regional Director found that the Petitioner had engaged in unsafe and unsound underwriting practices and otherwise exhibited judgment not suitable for a senior executive officer or director of a newly chartered insured depository institution. FDIC Ex. 2. The Director of the FDIC's Division of Supervision in Washington, D.C., denied the Petitioner's appeal from the disapproval of the Regional Director, concluding that, while at Sun State, the Petitioner had engaged in unsafe and unsound underwriting and credit practices which had contributed to Sun State's failure, and which were continued by the Petitioner while at Republic. FDIC Ex. 5.
   FDIC Enforcement Counsel cites three loans3while the Petitioner was at Sun State, the "Garcia Loan," and "Buttrum Loan," and the `AzStar Loan," and one loan while he was at Republic, the "Isbell Loan," as support for the FDIC's disapproval.4

Discussion

   The Presiding Officer set forth a detailed analysis of the FDIC's allegations and evidence related to these four loans and the responses of the Petitioner. R.D. at 3–18. He concluded that "the record as a whole does not provide a sufficient basis for funding unfavorably for the Petitioner with respect to any of the factors of competence, experience, character or integrity." R.D. at 22. Even though we may elect not to quarrel with the Presiding Officer's assessment of the individual loan transactions, the Board


1References to the record shall be as follows:
   Recommended Decision . . . "R.D. at ____."
   Transcript ____ "Tr. at ____."
   Petitioner's Exhibit . . . "Pet. Ex. ____."
   FDIC's Exhibit ____ "FDIC Ex. ____."
   
2Bank of Arizona has been operating as an insured depository institution since February 1992. Tr. at 119. If an insured depository institution has been chartered less than two years, section 32 of the FDI Act requires that the appropriate Federal banking agency be given notification of the proposed addition of any individual to the board of directors or the employment of any individual as a senior executive officer of such institution at least 30 days before such addition or employment becomes effective. 12 U.S.C. §1831i(a)(1).

3Several of these loans were actually extensions of or modifications to pre-existing loans, additional loans to existing borrowers, or multiple loans. For convenience they are referred to as single loans.

4Each of these loans was also cited in examination reports by the respective primary regulators, the Federal Home Loan Bank Board ("FHLBB") succeeded by OTS for Sun State, and the Office of the Comptroller of the Currency ("OCC") for Republic. See pages 15–18, infra.
{{5-31-93 p.A-2172}}concludes that the Presiding Officer did not give adequate weight to certain evidence, and therefore did not correctly consider the record as a whole.
   Section 32 sets a special standard for the Board to follow in disapproving senior executive officers and directors of newly chartered or troubled institution.5It was added to the FDI Act because of heightened concern for the safety and soundness of financial institutions and was intended to serve as an additional means of protecting bank depositors and the public against incompetent or unscrupulous bank management. The statute recognizes, and thus so must the Board, that an individual who might be an acceptable officer or director of an existing, healthy institution nonetheless may not have the requisite competence or experience to participate as a director or senior executive officer in the commencement of a recently-chartered institution or in the work-out of a troubled institution.6

   [.1] If this were a case in which the Board were called upon to analyze an isolated loan transaction or credit decision by the Petitioner, our conclusion might be different. Perhaps none of the problems with any one of the transactions cited in the record, standing alone, would be sufficient to cause us to disapprove the Petitioner's section 32 application. But the record before us reflects a continued pattern of what at best, must be viewed as imprudent underwriting, lending and credit decisions, cited by three bank regulatory agencies since 1988. It is this pattern which ultimately persuades the Board that the Petitioner does not now satisfy the standard of competence which is required by section 32.7
   The Petitioner, of course, has asserted defenses to each of the FDIC's complaints, and the Board carefully has considered all of them. Although none of the loans appears to be a model of sound underwriting, loan administration, or credit analysis, the Petitioner has provided reasonably credible explanations and responses for many of the criticisms. Giving him the benefit of the doubt and noting the exigencies of some of the circumstances described by the Petitioner which were the result, in part, of the decline in the metropolitan Phoenix real estate market,8the Board is still left with a pattern of unsettling practices.
   The record contains numerous examples of the Petitioner's failure to perform adequate financial analysis, to value collateral, to update appraisals, to analyze the financial condition of guarantors or entities whose notes were being acquired, and to obtain required approvals.9Tr. at 172, 224-25, 242-43, 341-2, 939, 1113-14, 1117-18; FDIC Ex. 43. The Board discusses a sample below.

Garcia Loan

   The Garcia Loan consisted of a $8.5 million loan, a restructuring of the first payment of that loan when it could not be made on time, a swap of collateral to avoid the borrower's bankruptcy, and an additional loan of $475,000 to meet a margin call on the borrower (admittedly intended to avoid a further decline in the value of the stock purchased on margin which was held by Sun State as collateral).
   Although the Petitioner was not responsible for the preliminary financial work-up on the Garcia Loan, which had been brought to


5See Fn 2, supra. There is no question that the position the Petitioner seeks to fill falls within the requirements of section 32.

6The Board has described section 32 as:
    a regulatory tool by which the FDIC may further the safety and soundness of insured depository institutions by screening those persons who seek to manage the affairs of institutions that have been newly chartered, have recently changed control, and/or are in a troubled condition. The senior officials of a troubled institution must be persons with demonstrated management ability.

In the Matter of Stanley A. Smith, FDIC-90-182jj, 2 P-H FDIC Enf. Dec. ¶5164A (1991). The Board is similarly concerned with the demonstrated ability of senior officials of newly chartered institutions and institutions which have recently changed control.

7This is not to say that a healthy institution which has been in existence for more than two years could not hire the Petitioner as an officer or director. The Board today reaches no judgment regarding his skills in such an environment.

8The Presiding Officer stated that "Mr. Dorris was in the position of trying to salvage what was possible from the Garcia and Buttrum loans through modifications and work-out efforts. Criticisms reasonably applicable if the situation had been normal do not seem justified under the circumstances faced by Mr. Dorris." R.D. at 21.

9Several criticisms which focused on alleged absences of approval, are not supported by the record. For example, the FDIC's review examiner, Timothy D. Lacke, testified that the First Amendment to the Azstar Loan Agreement never received committee ratification. However, at the time of this loan the FHLBB was reorganizing Sun State and the committee review was disrupted. Sun State's Managing Agent, an FDIC employee, signed the loan presentation. Tr. at 820, 1050-51, FDIC Ex. 36.
{{5-31-93 p.A-2173}}Sun State before he was hired, Tr. at 928-29, 330-31; FDIC Ex. 14, he quickly became significantly involved in the credit. The loan presentation, for which the Petitioner was responsible, is troubling. In computing the loan-to-value ratio, the Petitioner relied on an appraised value of $27.9 million for the property which was to be purchased with the loan proceeds, even though he knew the property was to be sold for $15 million. The Petitioner subsequently testified that the sales price was significantly reduced because of pending litigation, but at the time of his presentation to the loan committees of Sun State, he never explained this "fire sale" price.
   Equally significant—if not surprising—is that the Petitioner relied on the $15 million value when negotiating the collateral swap that occurred just six months later. Either his analysis of the valuation of the collateral for purposes of the loan or for purposes of the collateral swap is incorrect; unreconciled, both cannot be correct.
   The Petitioner performed no analysis of the various entities' past performance or current ability to repay the notes receivable which also were part of this transaction. In fact, he testified that he did not spend sufficient time analyzing the notes receivable. Tr. at 939. The Petitioner did not review or confirm the stated appraised value of the underlying collateral, nor did he verify the status of prior liens against the collateral. Tr. at 172, 341-2.
   In addition, the weakness of the repayment source was obvious. The primary repayment source is stated to be the operational cash flow of E.C. Garcia & Co. FDIC Ex. 14. However, the presentation clearly shows that Garcia was obligated to repay a minimum of $10.5 million, plus interest, by the first week of 1988, even though his financial statement shows a total cash flow of only $3.7 million. Id. There is no indication how this shortfall was to be met. Garcia's failure to meet the first principal payment on April 1, 1988, three months after the origination of this credit, served only to document the obvious and could hardly have been a surprise.
   In light of Garcia's inability to meet the first payment, the Petitioner presented a modification of the loan agreement which would provide Garcia additional time to make the first $2.5 million payment from operating cash flow. The modification required $750,000 payments on April 1, 1988, and May 15, 1988, and a $1 million payment, plus the second principal payment of $1.5 million, on July 1, 1988. FDIC Exs. 17, 18. By the end of May 1988, however, with the May 15, 1988, payment past due, the Petitioner agreed to release a $500,000 certificate of deposit pledged as collateral and certain notes receivable held as collateral, in order to permit Garcia to make the first two payments due under the modified agreement. FDIC Exs. 18, 19.
   The Petitioner responds to criticism that he failed to obtain new financial information on Garcia at this time by asserting that Sun State had no information to suggest that Garcia was having financial difficulty. Petitioner's Brief at 33 n.42. On the record before us, we reach a very different conclusion. The fact that by May 15, 1988, Garcia had missed two payments on a four-month-old loan would have put any prudent banker on notice of a problem, and likewise should have put the Petitioner on notice.
   Although the Garcia Loan had become troubled by the spring of 1988, the action that precipitated the ultimate crisis with the loan—the sudden call on Garcia by a subsidiary of American Continental Corporation ("ACC") to pay $37.8 million in notes— cannot be blamed on the Petitioner's underwriting.10In order to avert Garcia's threatened bankruptcy, the Petitioner negotiated an asset swap with ACC on behalf of Sun State. Setting aside the wisdom of the swap itself, which is not criticized in this action, several deficiencies in the Petitioner's handling of the transaction are of concern. Sun State exchanged land it held as collateral for stock of a thinly traded, troubled financial institution which had been ex-
10In November 1987, prior to the Petitioner's employment at Sun State, when the original Garcia loan proposal was being studied by Sun State, the question whether the notes held by a savings and loan association subsidiary of ACC (and now a failed depository institution) were subject to call at any time had been raised by Sun State's analyst. The chief financial officer of Garcia advised Sun State that the recourse feature of the notes had been removed. This information turned out to be incorrect. While one might speculate why the Sun State analyst did not ask senior management at the savings and loan whether it believed the notes were subject to recourse, rather than taking the word of the borrower, there appears no reason for the Petitioner to have been suspicious of this provision until the problem arose.
{{5-31-93 p.A-2174}}periencing a decline in the value of its stock for two years. The entire transaction was consummated without adequate financial analysis of the notes receivable or real estate which Sun State obtained in the swap. Subsequent review showed that the Garcia debt, as well as the $7.5 million in new notes receivable, were past due at the time of the swap. FDIC Exs. 8 and 24. Although the Petitioner offers a credible explanation why he was unable to seek loan committee approval of the transaction at the time of the negotiation, he provides no explanation for his failure to have the swap transaction ratified, contrary to Sun State policy.11

Buttrum Loan

   Initial lending to Buttrum Construction Company ("Buttrum Construction") predated the Petitioner's employment with Sun State, and the lending in which he participated primarily involved additional loans or extensions of loans to facilitate work-outs. The Board recognizes that once a business judgment is made on the basis of sufficient financial information to attempt to work with a borrower, rather than force the borrower into bankruptcy, creative arrangements may be necessary. Nonetheless, the insufficient financial analysis and sloppy underwriting attributable to the Petitioner on these loans cannot be excused by the exigencies of a work-out.
   Mr. Buttrum came to Mr. Dorris to seek an extension on his original loan and an additional loan because Buttrum Construction was experiencing a cash shortage and was unable to cover its operating expenses, including interest on its $12 million credit line. With respect to each loan modification and the additional credit, the Petitioner failed to establish current collateral value. Tr. at 246, 566, 912, 1132; FDIC Exs. 38, 47, 54. This was significant because the Petitioner stated in his loan presentation that the primary source of repayment would be generated from the proceeds of the sale of properties held as collateral, and the decline in the collateral value was well known. FDIC Ex. 42.
   The Petitioner also failed to analyze and explain the relationship between Buttrum Construction and its affiliate, American Century. Buttrum had made interest-free advances of $2.7 million to American Century without proper documentation and without obtaining security. Tr. at 1093; FDIC Exs. 47, 54. The day before the Petitioner's presentation for the second loan modification, American Century ceased operations. This represented an immediate, potential loss to Buttrum Construction of $2.7 million, which was likely to tender Buttrum Construction insolvent.12In spite of this, the Petitioner noted only that it was too early to assess the impact of the failure of American Century on Buttrum Construction and recommended that Sun State grant the loan extension.

AzStar Loan

   AzStar Insurance Company ("AzStar Insurance") primarily writes casualty policies for ambulance companies engaged in the nonemergency transportation of patients. The $5 million loan made by Sun State to the parent holding company, AzStar Holdings, Inc. ("AzStar"), was to be downstreamed to the operating subsidiary, AzStar Insurance, as a capital contribution to be used to increase policy writing, allowing expansion into additional states which was expected to generate new revenues. R.D. at 14. The loan was secured by a $4.7 million capital note receivable from AzStar all of the outstanding common stock of AzStar Insurance and 51 percent of the common stock of AzStar. The loan was guaranteed by the president of AzStar Insurance, Glenn Miller, and by E.C. Garcia & Co. (See "Garcia Loan," supra, at 6–9.) FDIC Ex. 27.
   The Presiding Officer overlooked several aspects of the evidence related to this loan which cause the Board concern. First, the loan was extended without adequate collateral. The $4.7 million capital note receivable from AzStar was unsecured, and in re-


11The Petitioner acknowledges that neither of the two loan committees nor the board of directors approved the swap, but testified that during the course of an intense three or four day negotiating period, with the threat of Garcia's bankruptcy looming, he was calling his superior, Mark Grumley, "pretty much on the hour . . . certainly seven or eight times per day a call would be made. In most cases it was arranged to where I would have both Mark Grumley and [Sun State President] Greg Janos available for the conversations." Tr. at 966. The Board notes that approval by the bank president is not the equivalent of independent review by loan committees or the board of directors.

12The Petitioner testified that American Century's debt to Buttrum Construction was not included in Buttrum Construction's balance sheet. Tr. at 1106-08. However, the financial analysis which was included in his presentation states that $2.7 million of debt from American Century was included in the "Due from Affiliates" entry on Buttrum Construction's balance sheet. FDIC Ex. 47.
{{5-31-93 p.A-2175}}ality, reflected the back-to-back borrowing of the subsidiary from its parent of the proceeds of the loan made by Sun State. Tr. at 224; FDIC Ex. 35. The outstanding common stock of AzStar Insurance, 100 percent of which was pledged as collateral, had a book value of only $3.28 million. FDIC Ex. 35. Thus, at least $1.72 million of the loan remained unsecured.13
   What the Board views as significant here is that there was no diversity of collateral and no real collateral protection for Sun State. Ultimately, the value of all of the collateral was dependent upon the success of AzStar Insurance. See Tr. at 460. In the event of default, after applying $3 million held by Sun State in a compensating balance, a net $2 million risk remained if AzStar could not adequately liquidate its investment portfolio. It is thus noteworthy that at least $3.6 million of investments (or approximately 30.25% of the total) shown on AzStar's books were in E.C. Garcia & Co. and had little, if any, value. FDIC Ex. 35. At a June 26, 1989, meeting with the Petitioner, Timothy J. Dorn, the chief financial officer of AzStar, stated that at least $1 million of investments in E.C. Garcia & Co. would be written off in 1989. FDIC Ex. 37.
   The Presiding Officer found that AzStar's balance sheet showed ample assets to repay the loan including $6.795 million of cash or cash equivalents. R.D. at 21. However, because the subsidiary insurance company was required by statute to maintain a certain capital level, in the event AzStar Insurance were unsuccessful, its assets could not be fully liquidated to repay Sun State. See FDIC Ex. 34.
   In addition, Mr. Lacke explained that liquidity refers to the generation of working capital. He testified regarding his concern that capital involves "additional cash flow provided by earnings", and at the time of the loan the company has not yet been profitable. Tr. 479. The Petitioner describes AzStar's insurance reserves as "adequate" having been certified by Tillinghams, a Dallas, Texas actuarial firm. Tr. at 1264. In fact, only the amount of the reserves was certified, not the adequacy of the reserves, and AzStar's certified accountants could not determine the adequacy of the reserves at the time of the loan, because the company was only two years old and did not have adequate claims experience upon which a judgment could be based. Tr. at 456, 1157; FDIC Exs. 27, 34.
   Moreover, the Petitioner extended credit without performing adequate financial analysis of the borrower and the guarantors. No analysis was made of AzStar Insurance's cash flow projections or on its ability to generate additional revenue.14No analysis of the value of AzStar Insurance was documented in the file. Projections and assumptions used to determine future cash flow —the primary repayment source —were provided orally by the borrower, and were not tested or reviewed by Sun State. Tr. at 224-5, 459, 471; FDIC Ex. 27.
   Financial data for the guarantors consisted of only an unsigned balance sheet from the company's president, Glenn Miller, and a company-prepared balance sheet and income statement from Garcia. At the time of this loan, the Petitioner already knew that Garcia was in financial difficulty, and it appears that the guarantee was worthless at the time it was provided.
   The FDIC also criticized the AzStar Loan because Sun State lacked the expertise required to assess adequately the risks of lending to a casualty insurance company. The Presiding Officer found that "whether Sun State should have made a loan to AzStar as an insurance company is a matter of opinion, not proof of incompetence or a lapse of character or integrity" on the part of the Petitioner. R.D. at 21. His conclusion fails to credit the fact the Sun State did not have the in-house capability to properly assess the risks of this credit. The FDIC's assertion here is supported by the expert testimony of its witness and the Petitioner's loan presentation. Mr. Lacke credibly testified that it is generally recognized that because of the unique character of their operations and the presentation of their balance sheets, loans to insurance companies are specialized and han-
13Sun State also held 51 percent of AzStar common stock as collateral. The value of this stock was dependent, however, on the success of its subsidiary, AzStar Insurance. Tr. at 460.

14The Petitioner and the Presiding Officer point out that the AzStar loan had not appeared on the delinquent list. Petitioner's Brief at 43; R.D. at 21. It seems unnecessary here to point out that performance of a loan at any given —and perhaps atypical —point in time does not equate to prudent underwriting of the loan in the first instance.
{{5-31-93 p.A-2176}}dled by "only certain senior officers." Tr. at 223. The loan presentation itself indicates that Sun State did not have the expertise to fully evaluate the credit risk of this loan and the financial capabilities of the borrower. Id.; FDIC Ex. 27.15

Isbell Loan

   In April 1990, Petitioner was an unpaid officer of Republic, working for Dakota Bankshares which was negotiating to purchase Republic. Mr. Dorris and the principal owner of Dakota Bankshares, Inc., ("Dakota Bankshares") Raymond Lamb, were working in the bank conducting due diligence. Tr. at 1056-57. Mr. Dorris performed the majority of the underwriting of the Isbell Loan on behalf of Dakota Bankshares and Republic. Tr. at 148, 1159, 1238; FDIC Ex. 4.
   The FDIC criticized several aspects of the $1.5 million Isbell Loan16to finance a new car dealership: the loan was over-leveraged, repayment was based on overly optimistic cash flow projections, vacant land was "suspect" collateral and inadequate analysis was done of Isbell and the business. Tr. at 138-39, 153-54. These criticisms of the underwriting are valid and supported by the record, although, as the Petitioner points out, in the end, no loss was suffered on this loan.
   In response to the assertion that the loan was over-leveraged, the Petitioner testified that the borrowers "put up a substantial group of other assets that had real value . . . that were at risk as well." Tr. at 1069. Collateral risk notwithstanding, the loan amount represents the total purchase price of the dealership, leaving the borrower with no cash equity in the purchase. Absent evidence of circumstances to the contrary, not here present on the record before us, 100% financing of a start-up business is fundamentally contrary to prudent, safe and sound banking.
   Both the repayment source and vacant land pledged as collateral were criticized. Although the cash flow projections, upon which the Bank relied as the repayment source, were in fact met, at the time the loan was made, there was no past performance to consider, and they were subject to criticism. Tr. at 153. The vacant land ultimately was sold to the City of Scottsdale. The Petitioner asserts that the amount of the loan was actually less than the full purchase price of the dealership, because soon after the loan was made, the Bank received a payment of $240,000 as a result of the sale of the land. Tr. at 326. This assertion strikes the Board as circuitous. Many an expected land sale subject to contract fails to close. As the record makes clear, a contract and expected sales proceeds are not the equivalent of a certificate of deposit pledged at the bank. Tr. at 326. The transaction was not consummated at the time of the loan and reasonably could not be considered to reduce the loan-to-value ratio.17Furthermore, the additional collateral held by Republic represented a junior lien on the new car assets of the dealership, subject to a senior lien securing substantial indebtedness. Tr. at 136, 153; FDIC Ex. 6. Republic's first lien on other dealership assets consisted of used cars and equipment, which were not nearly as valuable or marketable as the new car inventory.

Regulatory Agency Reports

   The Presiding Officer notes in his recitation of criticisms and responses that the Federal regulators criticized each of the loans at issue. But he offers no analysis of this evidence and appears to have afforded it little weight, if any, in arriving at his conclusions. The Board, by contrast, attributes great weight to this evidence and finds it significant that three agencies have found similar, repeated problems with the Petitioner's underwriting and credit practices.
   Both Sun State's primary regulator, the FHLBB, and its internal auditor criticized the Garcia collateral swap transaction. Following a detailed list of underwriting deficiencies, very similar to the FDIC's criticisms, the FHLBB classified the Garcia note obtained in the swap as "substandard" and concluded that "overall, the underwriting of this transaction is considered unsafe and un-


15The loan presentation, signed by Gary A. Dorris describes as a weakness of this credit the "inability for us to underwrite, from a credit standpoint, future losses from policies and write-offs. Consequently, asset quality is difficult to assess." FDIC Ex. 27.

16This was actually a $750,000 personal loan to Mr. and Mrs. Isbell and a $750,000 loan to Isbell Motor Corporation. It was always recognized that proceeds of both loans were to be used to finance the dealership. The OCC expressed concern regarding the structure of the loans and Republic's potential lender liability. FDIC Ex. 11. See discussion of Regulatory Agency Reports, infra.

17The vacant land was considered "suspect" collateral support because the Bank held only a junior lien in what was a recognized bad real estate market. Tr. at 326.
{{5-31-93 p.A-2177}}sound." FDIC Ex. 8. The transaction also was criticized by the institution's internal auditor for documentation and underwriting deficiencies. FDIC Ex. 23. With respect to the $475,000 personal loan to permit Garcia to meet his margin call, Sun State's internal auditor stated:
    This loan is secured by shares of common stock of Arizona Commerce Bank. No documented analysis of the Bank's financial statements were found, and no documented analysis was performed as to what the liquidated value of the collateral would be to Sun State in the event of default. It should be noted that the current value of the stock as of October 14, 1988 is $521,108 as opposed to the stated value of $663,229 at September 29, 1988. FDIC Ex. 23.
   In its September 12, 1988, Report of Examination of Sun State, the FHLBB criticized the Buttrum Loan, noting the continued declining value of the collateral pledged, as well as the poor financial condition of Buttrum Construction. FDIC Ex. 8. The FHLBB pointed out that despite this continued deterioration, loans to affiliates increased steadily. Furthermore, the FHLBB noted that essential documentation was not contained in the loan file. It concluded that given the borrowers' deteriorating position and the current depressed real estate market, timely and orderly sale of the underlying collateral was unlikely. The FHLBB therefore classified the loan as "substandard," and the Petitioner agreed with this classification. Id.
   In a Summary of Audit Exceptions, dated July 10, 1989, prepared by Paul V. Colman for the government's managing agent, it was noted that the Buttrum Construction loan file was deficient in that it contained no documentation to establish collateral value. FDIC Ex. 38. Further, the summary criticized the Buttrum Construction workout because it did not provide for any structured repayment of the loan, and instead apparently relied upon intermittent sales of property. Id.
   The Office of Thrift Supervision and Sun State's internal auditor classified the AzStar Loan as "substandard". FDIC Exs. 9, 35. The internal auditor stated: "During our review, we became aware of several underwriting and documentation concerns which, taken together, cause concern as to the quality, credit risk and ultimate collectability of this loan." FDIC Ex. 35. The Petitioner himself later agreed with this "substandard" classification. FDIC Ex. 4.
   The Board is aware that the OCC did not disapprove of the Petitioner's section 32 application for a position at Republic in 1990. However, on the record before it, the Board has additional evidence of events which occurred subsequent to the Petitioner's 1990 application which it adjudges to be relevant and significant.18
   In its June 14, 1990 Report of Supervisory Activity, the OCC classified the Isbell Loan as "substandard" and described the loan as being of "significant concern". FDIC Ex. 11. It noted that the Isbell credits were viewed as "unsafe and unsound" and asserted that:
    "The manner in which these credits were granted presents an unwarranted risk of potential lender liability to the bank. . . . Records indicate that the bank made an agreement that the lessor of the dealership property was not to be informed of certain loan relationships.19In addition, prior to the existing loans, the bank originally granted a $750M loan, placed the proceeds in a deposit account, and used this account as partial security for the loan. The credit memorandum stated that the purpose of this loan was to show a $750M deposit at the bank which was needed to qualify for the purchase of the dealership. It is also apparent that the bank was aware that the total indebtedness of the obligor for the purchase of the dealership franchise exceeds the limits stipulated in the franchise agreement20 . . . These credits may pose civil liability should either of the third parties (lessor and franchisor)

18The OCC took no further action because Republic was indemnified regarding the Isbell credits: one of its affiliates purchased Republic's participated portion, and the Petitioner withdrew from participation in Republic when his sponsor, Dakota Bankshares, decided not to purchase control of Republic.

19Republic responds to the OCC that no such agreement was found. Rather, the borrower is reported to have indicated that his personal borrowing relationship with the bank was not the business of the lessor and the borrower did not want this information provided by the bank. FDIC Ex. 11 at p. 13.

20The bank responds that there was no franchise agreement. The borrower allegedly "indicated that he was restricted to securing up to $750,000 by assignment of business assets. The division of credit appears to accomplish this requirement." FDIC Ex. 11 at p. 14.
   As a result of these concerns, the OCC required Republic to conduct a "full and independent investigation of these transactions." Id. Beeson & Cook, the independent financial consultants which conducted a review of the Isbell Loan transactions, reached the following conclusions:
    "While there does not appear to be any justification for referral to the U.S. Attorney regarding possible criminal violations, it is noted that the Petitioner's activities appear to show poor judgment on his part, and his personal dealings with the borrower may represent a conflict of interest. . .
       When these items are viewed together, it appears to reflect adversely on the Petitioner's decision making capabilities and the regulators. Based on the factors in this letter report, it appears reasonable that the regulatory examiners raised certain questions with respect to these loan transactions." FDIC Ex. 11.
   This additional evidence of the Petitioner's underwriting deficiencies and poor judgment observed not only by the regulatory agencies, but also by independent reviewers must be viewed in context and against this record, taken as a whole, as the Board considers the competency of the Petitioner within the meaning of section 32. The Board finds that the Presiding Officer did not give sufficient weight to this documentary evidence, which in the Board's view, is significant and probative.

Analysis

   Section 32 of the FDI Act places special responsibilities on the Board to weigh all relevant factors and evidence before judging the competence, experience, character, or integrity of an individual who proposes to serve as a director or senior executive officer of an insured depository institution.21
   Congress specifically recognized this special responsibility as it relates to institutions chartered for less than two years or those in a troubled condition. Congress enjoined the Board to disapprove service by proposed individuals when it determines that the best interests of the depositors of the institution or the best interests of the public would not be served by allowing them to serve as directors or senior executive officers of those institutions. The Board recognizes that competent senior management of a recently chartered institution or a troubled institution provides the most likely basis to ensure the institution will conduct itself in a manner consistent with safe and sound banking and the first line of defense against problems in the future.
   As the Board reaches its determination in this case, it is incumbent upon it to exercise its discretion. The Board does not undertake its review of the record, however, without considering the purpose of section 32 of the FDI Act. Each of the transactions in evidence, as the Board has earlier acknowledged, may not, considered individually, be sufficient to substantiate disapproval of service by the Petitioner. They must be considered, however, in their totality, and weighed accordingly.
   Moreover, the Board need not review the transactions here in evidence in the abstract. The Board affords weight to the analyses and assessments of those transactions by its fellow regulatory agencies and by senior examiners of the FDIC itself. The record is clear on the assessments by its fellow regulators, and it is also clear concerning the judgments made by senior members of our supervisory staff, bank examiners with almost 40 years of experience between them. In fulfilling its obligations under the FDI Act, the Board looks closely at these judgments.
   The Board has considered this type of issue before, although not in the context of a section 32 proceeding. Almost seven years ago, the U.S. Court of Appeals for the Eleventh Circuit had occasion to consider a decision of this Board permanently prohibiting individuals from participating in the activities of the FDIC-insured bank. That decision was based in principal part on assessments made by FDIC examiners and the resulting classifications reached by those examiners relating to numerous loans held on the bank's books.
   Citing the Board's decision in that case verbatim and adopting our decision as its own, the court held:

    Although there are no court opinions addressing the weight to be given examiners' loan classification, the Board's inquiry on this point is guided by several

21No question has been raised on the record regarding the Petitioner's character or integrity.
{{5-31-93 p.A-2179}}decisions addressing agency functions which require similar exercises of expert judgment and informed discretion. The courts have uniformly recognized that certain types of agency judgments are not susceptible to strict "proof" because they involve the exercise of discretion, technical expertise and informed prediction about the likely course of future events.
Sunshine State Bank v. Federal Deposit Insurance Corporation, 783 F.2d 1580, 1582 (11th Cir. 1986). The court specifically stated that the U.S. Supreme Court has "consistently recognized the deference which should be afforded to judgments and predictions made by an agency within its area of special expertise," Id. See also Missouri-Kansas-Texas Railroad Co. v. United States, 632 F.2d 392, 406 (5th Cir. 1980) (citations omitted).
   This is helpful guidance. The judgments of the examiners regarding the Petitioner's underwriting practices are the kind of informed prediction upon which agencies must be able to rely. The record provides ample substantiation for this reliance.
   The decision of the Regional Director and the concurrence of the Director of the Division of Supervision were based in large part upon the underlying judgment and discretion exercised by experienced, expert examiners, which are adequately documented on the record. The Board has tested those judgments by examining them against the evidence before it. Sunshine, 783 F.2d 1584. And, the Board has considered the weight to be afforded those judgments, as this Board has considered the weight to be afforded those judgments, as this Board exercises its own, independent judgment and discretion. The Board concludes, that the decision—at each step in these proceedings—to disapprove service by the Petitioner as a director and senior executive officer of the Bank was correct.

Post-Hearing Evidence

   [.2] In response to the request of the Board, both parties submitted information regarding any claims against or action taken against the Petitioner by the OTS, the RTC, and the FDIC.
   Both parties submitted copies of a December 31, 1992 settlement agreement between RTC, as Receiver for Sun State, and the Petitioner, which states that it is "a compromise of disputed claims and is not an admission of negligence, breach of duty, liability or any wrongdoing by Dorris."
   Petitioner's counsel suggests that the Board's request for additional information was solely for the purpose of delay. See letter from Mary E. Curtin to Hoyle Robinson, Executive Secretary, January 21, 1993. However, the record is clear that the RTC's settlement with the Petitioner occurred after the record on this matter initially was closed.
   This Board reaches its determinations in section 32 cases based upon all relevant, reliable, available information. In the Matter of Donald E. Thompson, FDIC-91-246jj, 2 P-H FDIC Enf. Dec. ¶8014 [emphasis added]. The record made reference to an investigation which, in the Board's view, was relevant and raised questions that should be resolved. Reopening the record is the mechanism for obtaining such information after the record is certified to the Board. Accordingly, in order for this information to be properly before the Board, and to afford both parties an opportunity to address any issues presented by it, the Board re-opened the record. The Board's inquiry was appropriate and justified.
   Finally, as noted by Petitioner's submission of January 27, 1993,22FDIC Enforcement Counsel proferred materials in response to the Board's Order of January 5, 1993, which, it is asserted, were outside the scope of the Order. The Board concurs. Accordingly, the Board has not considered these materials.

Conclusion

   The Board concludes where it began, acknowledging that this is a difficult case. As the Board seeks to strike an appropriate balance, it recognizes that an individual's employment opportunities—at least this


22Petitioner made a written submission to the Board on January 21, 1993, in response to the Board's Order of January 5, 1993. On January 27, 1993, Petitioner made another submission responding to FDIC Enforcement Counsel's submission of January 22, 1993. Petitioner's counsel requested that the comments of January 27, 1993 "be considered a part of the Petitioner's original submission in response to the Order." They have been so considered.
{{5-31-93 p.A-2180}}particular opportunity for the Petitioner —hangs in the balance.
   In view of the myriad of problems facing recently chartered and insured depository institutions, and the Board's special responsibility under section 32, the Board is unwilling on the record before it to balance the concerns in favor of the Petitioner. To do so risks burdening the interests of the depositors of this Bank and the public with the additional risk of a director, senior vice president, and chief lending officer, whose competence during his lending career at other institutions is reasonably called into question and justifiably has been subject to regulatory criticism on this record.
   Accordingly, the Board concludes that the pattern of underwriting, credit analysis and lending deficiencies of the Petitioner supported by the substantial evidence on the record in this case is sufficient to affirm the disapproval of the Notification filed on behalf of the Petitioner.

ORDER

   The Board of the FDIC having fully considered the entire record in this proceeding, hereby declines to adopt the recommendation of the Presiding Officer.
   ACCORDINGLY, IT IS HEREBY ORDERED THAT Gary A. Dorris' Notification of Addition of a Director or Employment of a Senior Executive Officer is disapproved.
   IT IS FURTHER ORDERED, that the Executive Secretary, or his designee, is instructed to execute and serve copies of this Decision and Order on all parties, the Presiding Officer, the Bank, and the Superintendent of Banks for the State of Arizona.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 16th day of March, 1993.

/s/ Robert E. Feldman
Deputy Executive Secretar

________________________________________________
RECOMMENDED DECISION

In the Matter of
Gary A. Dorris
Bank of Arizona
Scottsdale, Arizona
(Insured State Nonmember Bank)
FDIC-92-128jj

Daniel H. Hanscom, Presiding Officer:

Recommendation to the Board of
Directors

   This is a proceeding under Section 32 of the Federal Deposit Insurance Act (Act), 12 U.S.C. Section 1831i (FDIC Ex. 56).
   On April 8, 1992, Gary A. Dorris and the Bank of Arizona notified the Federal Deposit Insurance Corporation that Mr. Dorris was being added to the Board of Directors of the Bank and as a Senior Vice President and Chief Lending Officer. The requisite financial report, biographical information and other supporting documentation were submitted (FDIC Ex. 1). Notification was given pursuant to the requirements of Section 32 inasmuch as insured (FDIC Ex.57; Tr.119).
   The San Francisco Regional Office disapproved service of Mr. Dorris in the aforestated positions on the ground that it could not find favorably for him with respect to the statutory factors of competence, experience, character, or integrity enumerated in Section 32 of the Act (FDIC Ex. 2).
   Mr. Dorris appealed (FDIC Ex.4), but the Director of Supervision in Washington on June 17, 1992, denied the appeal.
   As provided by FDIC regulations, 12 U.S.C. Section 308.151, et seq., Mr. Dorris and the Bank of Arizona were entitled to a hearing if desired. In accordance with the foregoing provision, a hearing was requested by letter of counsel on June 25, 1992.
   The hearing was scheduled by the Office of the Executive Secretary to commence September 1, 1992, and the undersigned was appointed Presiding Officer.
   As scheduled, the hearing was held commencing September 1, 1992, in Phoenix, Arizona, and took five days, being completed on September 9, 1992, following the Labor Day weekend. Substantial documentary and testimonial evidence was received. Eight witnesses were called, three by the FDIC and five by petitioners. Mr. Dorris testified on his own behalf. Fifty-eight ex- {{5-31-93 p.A-2181}}hibits were received, many of them multipage.
   The transcript numbering 1201 pages was received from the reporter on September 30th, and written arguments and replies were filed by counsel for both sides on October 14th and October 20th, respectively.

Statement of the Case

   In disapproving service by Mr. Dorris as a Director and Senior Officer of the Bank of Arizona, the San Francisco Regional Director wrote that the Regional Office had evaluated his competence and believed that based on his actions at a National Bank in Phoenix, Arizona, and at Sun State Savings and Loan Association, he had engaged in unsafe and unsound underwriting practices, and otherwise exhibited judgment not suitable for a senior executive officer or director of a newly chartered insured institution (FDIC Ex.2).
   The FDIC Director of Supervision in Washington, D.C., in denying Mr. Dorris' appeal from the disapproval of the San Francisco Regional Office states that while at Sun State, Mr. Dorris had engaged in unsafe and unsound underwriting and credit practices which had contributed to Sun State's failure. Such practices, according to the Director of Supervision, were also engaged in by Mr. Dorris while at Republic National Bank ("Republic").
   In reaching this decision the Director of Supervision wrote that all available information had been reviewed including (i) Federal Home Loan Bank Board Reports of Examination of Sun State Savings and Loan Association, (ii) FDIC and Office of the Comptroller of the Currency Reports of Examination of Republic National Bank, and (iii) correspondence from the Resolution Trust Corporation, the Office of Thrift Supervision and the Comptroller of the Currency on Mr. Dorris' tenure at Sun State and Republic (FDIC Ex.5).
   The prehearing statement submitted by counsel for the FDIC cites three loans while Mr. Dorris was at Sun State, and one loan while he was at Republic, as support for disapproving him as a Director and Senior Officer of the Bank of Arizona. These loans are known in the record as the "Garcia", "Buttrum", and "AzStar" loans while Mr. Dorris was with Sun State, and the "Isbell" loan while he was at Republic.

The "Garcia" loan

   E.C. Garcia was the founder and proprietor of E.C. Garcia & Co., Inc. (together "Garcia"), an Arizona developer and entrepreneur. In early January 1988, he negotiated a loan from Sun State of $8.5 million for the pruchase of 6250 acres of undeveloped land known as Canoa Ranch in the vicinity of Green Valley, a retirement area south of Tucson, Arizona.
   Mr. Dorris was the loan officer who presented the loan to Sun State management. Of the loan proceeds, $6.5 million was to permit Garcia to complete the purchase of Canoa Ranch from the seller, Pennsoil Company, and to pay off $2 million of an existing $3 million in liens against $6.75 million notes/receivable which Sun State would hold as collateral (FDIC 14, pp.9,11).*Garcia was to pay the other $1 million of the $3 million of liens.
   Repayment was scheduled for $2.5 million due April 1, 1998, $1.5 million July 1, 1988, and $4.5 million due one year from the loan date. Repayment was to come from cash flows of Garcia, collection of principal and interest on notes receivable taken as collateral, or the liquidation of Canoa Ranch collateral (FDIC Ex. 14, p.11–12).
   Collateral consisted of a deed of trust subordinate to the $8 million first lien of Pennsoil, notes receivable with a face value of $6.75 million, and $500,000 in a certificate of deposit held by Sun State (FDIC Ex,14, pp. 15–21; Tr. 931-32, 1144). $4.25 million of the notes receivable were from sales of limited partnerships of E.C. Garcia & Co. (prior liens being handled as stated above), and $2.5 million consisted of a note from a brokerage firm known as Young, Smith & Peacock. A demand deposit, also from loan proceeds, was set up to assure payment of taxes. See FDIC Ex. 14 and 15; Tr.154, 166-69, 175, 555, 30–42).
   The Garcia loan was approved by the Sun State Executive Loan Committee and by the Senior Loan Committee with one dissenting vote (FDIC Ex.14, pp.8, 52).
   Three months after the grant of the loan, in April 1988, the loan was modified. The $2.5 million which was to have been paid


*Page numbers refer to the Exhibit page number, not the original number in the multi-page document.
{{5-31-93 p.A-2182}}on April 1, 1988, by the redemption of the $2.5 million note receivable by Young, Smith & Peacock could not be made. That firm was undergoing a review by the New York Stock exchange and redemption of the $2.5 million note held by Sun State had to be deferred for 60–90 days.
   The Garcia loan was restructured to provide for payment of $750,000 in April and $750,000 in May 1988, with the $1.5 million payment due July 1, 1988, increased to $2.5 million (FDIC Ex. 17, 18). Mr. Dorris released the $500,000 certificate of deposit held as collateral to pay part of the April installment of $750,000, and Garcia paid $250,000 in cash (FDIC Ex.17, p. 8). Shortly thereafter Mr. Dorris agreed to release some notes receivable to pay the May $750,000 installment.
   The April 1988 modification was approved by both the Executive Loan and the Senior Loan Committees (FDIC Ex.17, pp. 19–20).
   Garcia had previously issued $37 million in notes which were held by American Continental through subsidiaries and affiliates known the Lincoln Group. These were subject to call at any time, a fact which a Sun State loan analyst had raised in November 1987 when the proposed Garcia loan was being studied and the financial analysis being prepared at Sun State. The Chief Financial Officer of Garcia at that time advised the Sun State analyst that the recourse feature of the notes had been removed (FDIC Ex. 14, p28, 93; Tr.362, 365-71, 945). Advice that the recourse feature of the notes had been removed turned out not to be true.
   As a consequence of the recourse feature, in August 1988 payment of the $37 million in notes was demanded by American Continental (Tr.193, 960).
   Garcia was unable to make payment and bankruptcy loomed (Tr.195). An emergency meeting which included Sun State was convened at Garcia's bankruptcy law firm in an effort to avoid a bankruptcy filing, which was considered probably harmful to the interests of all parties (Tr.372-76, 959-68; FDIC Ex.23). In an atmosphere of urgency, those at the meeting, including Mr. Dorris, declared their holdings and those deemed most suitable by each party were exchanged.
   As a result Sun State exchanged Canoa Ranch, then paid down to $7 million, an investment debenture with a face value of $2 million, and made a cash payment of about $670,000 (Tr.969-72). In return, Sun State received a $2.2 million personal note of Garcia secured by approximately 600,000 shares of the Arizona Commerce Bank, and other notes with a face value of $7.5 million, for a total face value of $9.7 million (FDIC Ex.21; Petitioners' Ex.7; Tr. 194-95, 975). At the time, Arizona Commerce Bank stock was worth about $3.50 a share, but was thinly traded and all bank stocks were trending down.
   In September, Arizona Commerce Bank stock had declined to the point that the large block of stock still held by Garcia was subject to a margin call (Tr.982-84). A large block of stock being put on the market for whatever it would bring would have undermined or destroyed the value of the 600,000 shares held by Sun State, at the time worth approximately $2 million (Tr.984). Intervention by Sun State to meet the margin call to protect its collateral became an issue. After a brief meeting at Sun State it was decided to advance $475,000 to Garcia to meet the margin call (FDIC Ex.22; Tr.985-89). Collateral obtained consisted of additional shares of Arizona Commerce Bank stock put up by Garcia. The transaction was approved by the president of Sun State (Tr.988-89, see also Tr.790).

Criticism of "Garcia" loan transactions

   The Review Examiner, Mr. Timothy D. Lacke, of the FDIC San Francisco Officer testified concerning the loans identified earlier, and the role of Mr. Dorris as loan officer.
   Mr. Lacke criticized the $8.5 million loan to Garcia in January 1988 on the ground that it was for speculative purposes. Based on the purchase price of $15 million and the retained $8 million first lien of the seller, Mr. Lacke believed that Garcia had no equity in the land purchased and little or no risk (Tr.170).
   Mr. Lacke testified that financial information in possession of Mr. Dorris and Sun State showed negative trends for Garcia, declining capitalization and increased leverage. Based upon the selling price of $15 million, the loan to value ratio in the loan presentation of 32 per cent was inaccurate according to Mr. Lacke. $4.75 million of notes pledged as collateral were stated at face value without a reduction for prior liens never cleared (Tr.170-73).
   Mr. Lacke stated that current appraisals {{5-31-93 p.A-2183}}were not obtained by Mr. Dorris and his loan staff, and operating statements of the limited partnerships involved including the status of the notes and first lien holder also were not obtained (Tr. 172). Some notes appeared to be delinquent. In Mr. Lacke's opinion the limited partnership notes were not properly analyzed. The Federal Home Loan Bank Board made similar criticisms after its examination in September 1988 (FDIC Ex. 8).
   When the Garcia loan was modified three months later in April 1988 due to Young, Smith & Peacock being unable to make the $2.5 million loan payment as provided in January, Mr. Lacke testified there were various deficiencies. There was no update of financial information from Garcia, there was no update of cash flow analysis, and no further information was obtained on the notes receivable held (Tr. 182). No documentation showed ratification by Sun State loan committees of the release of collateral to pay the April and May installments established under the modification (Tr. 191-93).
   In Mr. Lacke's opinion there were also underwriting deficiencies in the August 1988 collateral exchanges. No additional credit analysis was obtained for the third party notes taken, and no appraisals were received. The Federal Home Loan Bank Board in its examination of September 1988 made similar criticisms concerning the August 1988 collateral swap, noting that no financial statements were obtained from Garcia, that the $2.2 million Garcia note purchased from American Continental was in default, and that Sun State used funds from Garcia's savings account to bring the note current.
   Mr. Lacke criticised the loan made to Garcia to meet the margin call in September as further credit to a troubled borrower without adequate analysis of the Arizona Commerce Bank stock obtained as collateral (Tr.203).
   Counsel for the FDIC in their posthearing submissions state that the initial $8.5 million loan to Garcia was extended in reliance on vague and unsupported repayment sources. The primary repayment source was stated to be cash flows but, according to counsel, Mr. Dorris' presentation showed that Garcia owed $1 million on the first deed of trust, and $1 million to help clear prior liens on notes receivable. When added to the $8.5 million of the loan, Counsel state that Garcia was obligated to pay $10.5 million with interest by the first week of 1989. Counsel contend that Mr. Dorris' presentation failed to show how this amount of debt could be serviced other than through conversion of long term assets such as the collateral supporting the loan.
   With respect to the modification in April 1988 when the $2.5 million repayment installment could not be made by Garcia due to problems faced by Young, Smith & Peycock, Counsel criticize Mr. Dorris for releasing collateral rather than enforcing the terms of the loan agreement.
   Concerning the August 1988 collateral swap, FDIC counsel are critical of Mr. Dorris for accepting Arizona Commerce Bank stock, which was declining in value, in exchange for a security interest in land, and for entering into the exchanges without adequate financial analysis, for example, reviews of Garcia's condition or that of individuals whose notes were obtained or the repayment status of such notes. Proper authorization or ratification were also not obtained by Mr. Dorris, according to counsel. FDIC Counsel endorse the report of the Federal Home Loan Bank Board alleging underwriting deficiencies by Mr. Dorris relating the collateral swap (see FDIC Ex. 8, pp. 18–20), and contend that they had not been corrected nearly six weeks after the swap.
   The September loan of $475,000 to cover a margin call on Garcia stock was criticised as another case of extending more credit to a troubled borrower, also done it is argued, without adequate financial analysis of the collateral obtained or the underlying situation. Arizona Commerce Bank stock was going down in value and Mr. Dorris took more of it for Sun State in making the loan, funding the loan even though the loan to value ratio in Garcia's loan agreement was exceeded.

Replies

   With respect to the initial $8.5 million Garcia loan, it was established that although Mr. Dorris was the loan officer and presented the Garcia loan January 5, 1988, this was only three weeks after he began work at Sun State in the first week of December 1987 (Tr.928). The financial analysis underlying the proposed Garcia loan had already been done at Sun State and Mr. Dorris had no part in this (Tr.928-29, 330-31; FDIC {{5-31-93 p.A-2184}}Ex. 14, pp.23-24). He did not underwrite the $8.5 million loan (Tr.1242-43), others at Sun State did. Nor was Mr. Dorris solely responsible for the Garcia loan, rather Mr. Dorris was only one of a number of officials at Sun State who participated in granting the loan. Mr. Dorris had no lending authority (Tr.790).
   According to Mr. Dorris, the $15 million paid for Canoa Ranch was a discounted price and not necessarily the market value. The price was discounted because Canoa Ranch was bought from Pennsoil when that firm was engaged in a corporate struggle with Texaco and was in urgent need of cash. Further, the Canoa Ranch tract had been appraised only about three months before on September 12, 1987 at $27.86 million (FDIC Ex. 14, p.17). The loan to value ratio stated in the loan presentation was not inaccurate in Mr. Dorris' view.
   Both the Sun State Executive Committee and the Senior Loan Committee approved the Garcia loan (Tr.946; FDIC Ex.14, pp.8, 51).
   Mr. Dorris testified that the Garcia limited partnership notes taken as collateral consisted of a pool and as such possibly included some delinquent notes. In a pool situation this could not be avoided (Tr.936-39).
   When Young, Smith & Peycock could not make the $2.5 million April payment due from Garcia, Mr. Dorris took the matter to the Executive Loan Committee. Mr. Dorris told the Committee that collateral would be used in part to make the payments (FDIC Ex.17, p.8). Both the Sun State Executive Loan Committee and the Senior Loan Committee approved the April modification (FDIC Ex.17, pp.19–20). Mr. Dorris testified that release of collateral to make the installment payments was not anything he would have done unilaterally, such action would have been approved by a committee or the president of Sun State (Tr.956-58).
   Mr. Dorris was designated to attend the August creditor sessions by Sun State management, was accomplished by Sun State counsel and kept in constant communication, in fact hourly, with senior Sun State officials including the president (Tr.966-76). The Sun State president was advised of the transactions entered into and directed that they be concluded (Tr.977). Inasmuch as Garcia was in a bankruptcy situation, some notes and credits exchanged were possibly delinquent.
   The underwriting deficiencies claimed by Mr. Lacke and the Federal Home Loan Bank Board arising from the August exchange between creditors of Garcia resulted from the exigencies of the situation. Three days of day and evening sessions were held among creditors in a climate of extreme urgency to avoid a bankruptcy filing (Tr.960-76; see also Tr.1212-13). Customary underwriting procedures were not possible under the circumstances.
   Mr. Dorris and Sun State sought to get rid of Canoa Ranch because in August 1988 it did not want $15 million of additional OREO. Real estate prices had gone down, and were still going down rapidly (Tr.1209-12). It was feared that a large acreage of undeveloped land might be difficult to liquidate (Tr. 969). The collateral swap reduced Sun State's exposure to Garcia from $7 million to approximately $2 million (Tr.194-95).
   Mr. Dorris testified that the $475,000 Garcia loan in September 1988 to cover a brokerage margin call was entirely a matter of collateral protection and gathering (Tr.984). Mr. Dorris pointed out that the money went to the brokerage firm not to Garcia (Tr.986-88). The problem then faced by Sun State was the protection of the value of the approximately 600,000 shares of Arizona Bank Stock then held, worth a substantial sum at the time (Tr.986-88; FDIC Ex.23, p.9). The loan was approved by Mr.Janos, the Sun State president, and was well within his lending authority (FDIC Ex. 23, p. 10; Tr.989).
   Mr. Raymond A. Lamb, an experienced banker with holdings in a number of banks, testified that the $475,000 loan in September was a sound transaction in view of the circumstances (Tr.1214-15).
   Counsel for Mr. Dorris in their posthearing submissions essentially elaborate on the replies to criticism of the Garcia loan contained in the testimony of Mr. Dorris and others, and point out claimed inaccuracies in the testimony of Mr. Lacke. Counsel for Mr. Dorris repeat that the argument that Garcia had no equity in Canoa Ranch is invalid, again citing the recent appraisal of September 12, 1987, which placed its value at $27.86 million. Counsel emphasize that because of the circumstances of the seller at the time, a discounted price had been obtained. Garcia, therefore, had substantial equity in Canoa Ranch at the time of the loan. {{5-31-93 p.A-2185}}
   Counsel take issue with the criticism of Mr. Lacke that liens on $4.75 million of limited partnership notes were never cleared when the initial $8.5 million loan to Garcia was made. Counsel state that such liens were in fact cleared in that $2 million of loan proceeds was used for this purpose with Garcia paying the balance of $1 million (FDIC Ex. 14, p. 11; Tr.1141).
   Counsel also question the criticism that at the time of the modification no new financial information was obtained from Garcia. In April 1988, Garcia's financial statements were less than one year old and, according to Counsel, Mr. Dorris had no information that Garcia was having financial difficulty. The release of the $500,000 certificate of deposit held as collateral to pay part of the April $750,000 installment was not a unilateral decision by Mr. Dorris as he did not have such authority (Tr.956-57).
   Counsel point out that Mr. Lacke did not second-guess Mr. Dorris concerning the transactions at the credit swap in August 1988. He did not testify that it was an unsound business decision. His comment was that it was not approved by any committee at Sun State. Mr. Dorris, however, testified that he was in constant communication with the Sun State executive vice-president and president who followed the decisions being made and approved them.
   Concerning the $475,000 advanced in September 1988 to meet the margin call on Garcia's Arizona Commerce Bank stock, counsel for Mr. Dorris maintain that this was a necessary move to protect collateral held by Sun State and that the transaction was endorsed by Mr. Lamb, who is knowledgeable about such problems. At the time, Counsel state that Arizona Bank Stock was trading at $3.50 a share and that the 209,494 shares taken as collateral for the $475,000 advanced were worth $733,229 (Tr.401; FDIC Ex23, p.9). $475,000 was well within the lending limit of the president of Sun State who approved the loan (Tr.988-89, 790; FDIC Ex.23, pp.9-10).

The "Buttram" loan

   The Buttram Construction Company owned by Donald Buttram (together "Buttram") had a revolving line of credit with Sun State dating back to December 26, 1986, amounting to approximately $12 million secured by various real estate holdings (FDIC Exs.8, 47–51, 54,55). The line of credit was for the purpose of providing working capital to Buttram who was principally engaged in the construction and sale of single family residences on land which had been acquired and developed by the company. Select commercial and multi-family projects, usually in the Phoenix, Arizona, area were also developed by Buttram.
   In late 1987 a downturn in the Phoenix real estate market began and developed into what has been described as the worst real estate decline in the history of Arizona (Tr.676). As a consequence, in early 1988 Buttram had a cash shortage and was having trouble servicing his borrowings (FDIC Ex.42; see also Tr.1209).
   Buttram met with Mr. Dorris and other officers of Sun State in April 1988 to determine what could be done, and indicated that if come accommodation was not reached he would have to go into bankruptcy (Tr.864-67). A companion line of credit in the form of a personal loan to Mr. Buttram in the amount of $950,000 in addition to the existing $12 million revolving line, and an extension and modification of payment terms of the latter, was requested from Sun State (FDIC Exs.43, 54, 55). The maturity date of the whole was to be extended to 12-23-88. The purpose of the additional credit and extension was to give Buttram additional time to market properties and to service and pay his loans (Tr.504; FDIC Ex.43, p.11).
   Mr. Dorris was the loan officer who presented the foregoing to Sun State loan officials recommending that the package be approved. $750,000 of the $950,000 (later changed to $650,000) was to be retained by Sun State to constitute an interest reserve for the entire line pending sales of commercial real estate and the balance was to add to working capital (FDIC Exs. 42–43, 54–55).
   Collateral added to the line for the $950,000 was a lien on the Buttram residence in which he had an equity of about $900,000, certain other residential lots, and stock in a Las Vegas savings and loan in which Buttram held a major ownership worth about $440,000 (Tr.502-03; Ex.54, p.8). The primary source of repayment for both lines was to be through the sale of all or portions of the properties held by Sun State as collateral, and cash from the sale of real estate completions of Buttram.
   The package was approved by the Sun {{5-31-93 p.A-2186}}State Executive Loan Committee and three of five members of the Senior Loan Committee, and the modification and additional $950,000 were granted (FDIC Ex.54).
   In December 1988 Buttram continued to be a distressed borrower with the May 1988 loan and the original line of credit extended by Sun State, coming due. A new extension and modification to April 30, 1989, was sought (FDIC Ex.47).
   Mr. Dorris recommended and presented the proposal and it was approved by the Executive Loan and the Senior Loan Committees, and was granted 12-20-88 (Tr.914). The loan memorandum stated that increased efforts to dispose of Buttram properties were being made, the sales prices of all being reduced from a total of $24 million to about $16 million with an agreement to allow Sun State to present the properties. The loan memorandum also pointed out that four properties had been sold for $1.25 million since the May 1988 added credit grant and extension, and that additional collateral was being put up consisting of two shopping centers and 20 acres of residential land (FDIC Ex.47). Partial release of collateral were to be permitted to facilitate sales.

Criticism of "Buttram" loan transactions

   Mr. Lacke criticised the May 1988, $950,000 additional line of credit and extension package to Buttram as additional credit and extension to a troubled borrower, with a major purpose being to maintain a distressed loan in a current status (Tr.242). He considered the repayment source cited to be suspect in that Buttram was already having difficulty generating cash flows sufficient to service the line of credit already on Sun State's books. Real estate sales and values were declining (FDIC Ex.42). Mr. Lacke asserted that the value of property held as collateral was not updated by Mr. Dorris (Tr.246). The existing line of credit was extended without analyzing the current financial condition of Buttram.
   The same criticisms, according to Mr. Lacke, applied to the December extension to April 30, 1989. Repayment was not only suspect but was to come from liquidation of collateral (Tr.244). The appraisal values of the collateral were not current but dated to September 1, 1986, making the value of the collateral uncertain (Tr.246). Buttram's personal financial statement submitted with the December 1988 extension was deficient in that it did not list the additional $950,000 loan, his statement was not fully investigated and his current financial condition determined (Tr.246-49).
   Mr. Lacke further testified that additional collateral obtained from Buttram in the course of the December 1988 modification and extension was released by Mr. Dorris in January 1989 and this was not submitted to any loan committee (Tr.254-55).
   Mr. Lacke was critical of the fact that interest payments on Buttram's line of credit has always been made from loan proceeds (Tr.256-60; FDIC Ex. 53). He was critical of the statement in the December 1988 loan presentation of Mr. Dorris, as was the Federal Home Loan Bank Board (FDIC Ex.8, p.8), that interest was paid on the Buttram borrowings from operating cash flows (FDIC Ex.47, p.13).
   FDIC counsel reiterated the criticisms voiced by Mr. Lacke of the handling by Mr. Dorris of the $950,000 credit to Buttram in May 1988, and the modification and extension at that time and in December 1988. Counsel repeat that the value of collateral held was not ascertained by updated appraisals, and that the financial condition of Buttram in May and December 1988 was not determined and documented. Counsel argue that Mr. Dorris' staff found the condition of Buttram at the time to be marginal at best, yet the due date of Buttram's line of credit was extended. Further, according to counsel, the January 1988 waiver of collateral weakened Sun State's position by allowing Buttram to retain more of the sale proceeds without commensurate benefit to Sun State.

Replies

   Mr. Dorris testified that the April $950,000 additional credit to Buttram was made to buy time to begin the orderly liquidation of Buttram properties (Tr.888-90). $300,000 was advanced to finish the construction on some houses so they would be saleable. Mr. Dorris states that as a result by December 1988, $1.2 million was received by Sun State (Tr.890).
   A major purpose of the additional loan and the extension was to avoid a bankruptcy filing. Mr. Raymond A. Lamb, an experienced banker as described, testified that bankruptcy filings were undesirable for creditors because they put all of a debtor's assets out of a creditor's control (Tr.1212-13). After the Phoenix real estate downturn begin- {{5-31-93 p.A-2187}}ning in late 1987, the bankruptcy courts were clogged with proceedings taking long periods of time (Tr.693-94).
   Concerning the statement that interest had been paid by Buttram from cash flows, Mr. Dorris testified that loan proceeds are part of working capital and the statement that debt service was from cash flows was not wrong. Use of a different term in the loan presentations, however, would have been better (Tr.896). The former Executive Vice-President of Sun State also testified that operating cash flow can be considered working capital which includes loan proceeds (Tr.690).
   With respect to up-to-date appraisals, Mr. Dorris testified that Buttram in 1988 had no cash and appraisals are expensive, especially on commercial real estate (Tr.911-12). Sun State also had an in-house appraiser who was well acquainted with values in the Phoenix market and knew what the Buttram properties were worth. Mr. Dorris did not believe, in the situation that prevailed, that it was necessary or prudent to make outlays for new appraisals.
   Waiver of the additional collateral requirements imposed on Buttram in the December 1988 package, criticised by Mr. Lacke, was done to sell the properties by permitting a realistic lower price to be set (FDIC Ex.49; Tr.921). Property sales were necessary for Sun State to realize anything from the collateral.
   Counsel contend that everyone recognized at the time, in view of the depressed state of the real estate market and Buttram's difficulties, that for the most part repayment of the loans from Sun State could only come from collateral sales. The criticism that the repayment source was "suspect", therefore, has little or no meaning.
   Counsel likewise point out that Mr. Lacke agreed that in December 1988 he would not necessarily have liquidated Buttram's collateral, but suggested that the alternatives of liquidation of collateral or a work-out with Buttram were not sufficiently analyzed by Mr. Dorris. Counsel for Mr. Dorris say, on the contrary, that the alternatives were analyzed and a decision was made to work with Buttram.
   Criticisms that Buttram financial analysis was incomplete are irrelevant since the only viable repayment source Sun State really was looking to at the time was collateral. Release prices on Buttram properties were lowered to promote sales. Mr. Lamb testified that this was a sound and prudent practice, and often necessary to sell collateral so a bank could get as much cash as possible (Tr.1209-11). In the depressed Phoenix market in 1988 real estate could not be sold at prices prevailing in former periods. Counsel maintain that the agreement to accept a lower portion of the sales price, criticised by Mr. Lacke, was beneficial to Sun State by promoting sales which provided cash to Sun State (Tr.921).

The "AzStar" loan

   The AzStar loan was made in late December 1988 and was presented to Sun State loan committees by Mr. Dorris as loan officer (FDIC Ecs.27–29). The loan was a $5 million credit to Azstar Holdings, Inc. ("Azstar"). AzStar was a two and one-half year old insurance company mailing writing casualty policies for ambulance companies engaged in the non-emergency transportation of patients.
   The $5 million was to be used as a capital injection and downstreamed to the operating subsidiary, AzStar Insurance Company. The additional capital was to enable an increase in policy writing allowing expansion into additional states to generate new revenues.
   At this time Sun State was trying to broaden lending into areas other than real estate and to reduce its exposure to Garcia (Tr.999). $3 million of the loan was to be retained by Sun State as a compensating balance, $1.6 million was to be used by AzStar to purchase a note held by Sun State ("Samuels" note) received as part of the Garcia collateral swap, and $300,000 was to be put into an operating account. The balance covered costs such as attorney fees, loan fees and the like (Tr.1003-04).
   AzStar was required by the loan agreement to use its own funds to purchase $1 million of preferred stock of Garcia, $500,000 of which was to be used by Garcia pay indebtedness to Sun State (FDIC Ex.29, p.14; Tr.1027). In the initial loan proposal, Sun State was to receive the entire $1 million from the AzStar purchase of Garcia preferred stock. This was changed to $500,000 in the final terms agreed upon.
   Collateral consisted of $4.7 million of capital notes issued by AzStar, 51 percent of the capital stock of the holding company, {{5-31-93 p.A-2188}}and all of the capital stock of the operating subsidiary (FDIC Ex.35). The loan was guaranteed by the president of AzStar and Garcia.
   The AzStar loan agreement was modified by an amendment in March 1989. $1.6 million was released in loan proceeds to enable AzStar to purchase the "Samuels" note and certain other changes were made (FDIC Ex.33).

Criticism of "AzStar" loan transactions

   The AzStar loan was criticised because the borrower was an insurance company. Evaluating the credit risk of insurance company loans is a specialized area and Mr. Lacke did not consider Sun State and Mr. Dorris qualified to make the proper evaluation (Tr.222-23). The weaknesses of AzStar, in Mr. Lacke's opinion, were not fully evaluated. Mr. Lacke considered AzStar to be highly leveraged with a tight working capital position.
   Mr. Lacke did not believe that sufficient analysis was made of AzStar or that the collateral pledged covered the full amount of the loan. The capital notes received essentially represented the proceeds of the loan and the book value of the stock taken as collateral was only about $3.3 million. AzStar was a relatively new company and had been unprofitable up to the time of the loan (Tr.223-25).
   Mr. Lacke stated that Mr. Dorris did not obtain loan committee permission for the change made in the AzStar loan between its presentation to the Senior Loan Committee, and the final loan provisions agreed upon by December 30, 1988, which reduced to $500,000 what Sun State would receive for liquidation of Garcia debt from the purchase of AzStar of $1 million of Garcia preferred stock (Tr.226-28).
   Mr. Lacke criticised Mr. Dorris for the modifications in the AzStar loan made by amendment March 13, 1989, stating that these were made without proper authorization at Sun State. The changes included a provision by which Mr. Dorris released $1.6 million in loan proceeds to AzStar before verification that AzStar was licensed to do business in Pennsylvania and Illinois (Tr.226).
   Sun State's internal audit committee and the Federal Savings and Loan Insurance Corporation made similar criticisms of the AzStar loan (FDIC Ex.9 and 35; Tr.236-37). The criticisms of FDIC counsel in post-hearing submissions are also essentially those above stated.

Replies

   Mr. Dorris testified that although Sun State had no prior experience with lending to an insurance company, the AzStar portfolio of investments was very strong, totalling $13.3 million (FDIC Ex.27, p.9; Tr.1263). Although AzStar showed a loss from its operations, this was planned and resulted from building up its loss reserves, which avoided tax liabilities (Tr.1002, 1265).
   The modification in loan terms from presentation to the Senior Loan Committee, and the final loan terms agreed to by December 30, 1988, reducing the amount to be received from AzStar's purchase of Garcia preferred stock from $1 million to $500,000, was not done by Mr. Dorris unilaterally but was approved by the Sun State president and Senior Vice-President (Tr.1026-27).
   At the time of the March 1989 amendment, Sun State was in the process of being reorganized by the Federal Home Loan Bank Board, officials were leaving, normal work was disrupted and committee meetings became irregular or were not held at al (Tr.818-22). Because of the disruption, approval of the March amendment was not obtained at the time. From April 1989 and thereafter, regulatory agencies were in charge of Sun State.
   According to Mr. Dorris, the purpose of Sun State in reducing exposure from Garcia was accomplished to some degree by the AzStar loan (Tr.1025-27). Sun State received about $500,000 in Garcia debt reduction, and AzStar bought a Garcia related note of $1.6 million obtained during the August 1988 asset swap among American Continental's creditors, taking it off Sun State's hands (Tr. 1034).
   Mr. Dorris testified that loan proceeds were released to AzStar before licensing in Pennsylvania and Illinois so AzStar would purchase the foregoing note, and this was to the advantage of Sun State (Tr.1039-41). According to Mr. Dorris, the loan provision relative to licensing in Pennsylvania and Illinois was inserted for the benefit of AzStar so that it would not be required to buy the note before being licensed in those states (Tr. 1039-40).
   Neither Mr. Dorris nor anyone at Sun State approved payment of a $100,000 finder's {{5-31-93 p.A-2189}}fee to Garcia. This was done by AzStar without Sun State's knowledge (Tr.1021, 1051). Mr. Dorris was ignorant of this payment when $40,000 was released from the $500,000 coming to Sun State from the purchase by AzStar of preferred stock in Garcia. The money was to pay Garcia for expenses in issuing the preferred stock.
   Counsel for Mr. Dorris state that of the $5 million in loan proceeds only $300,000 left Sun State's control. $3 million remained at Sun State in a compensating balance, $1.6 million was kept at Sun State in payment for the "Samuels" note, and $100,000 was kept by Sun State as a loan fee.
   Pointing out that AzStar had $11.9 million in investments and $6.79 million in cash and cash equivalents (FDIC Ex.34, p.3), Counsel for Mr. Doris maintain the the risk in the AzStar loan was virtually nonexistent. If AzStar failed to meet its increased revenue projections, moreover, Sun State could draw down the compensating balance (Tr.461; FDIC Ex.33, p.35).
   According to counsel, AzStar's financial statements were carefully analyzed at Sun State, the liquidity of its assets and the adequacy of its reserves being well noted. The AzStar loan was never delinquent.

The "Isbell" loan

   The "Isbell" loan was made in April 1990 by the Republic National Bank ("Republic") to finance the purchase of an Acura dealership. The total amount of the loan was $1.5 million, $750,000 to Phillip R. Isbell and wife and $750,000 to the Isbell Motor Corporation.
   At the time, Mr. Dorris was an unpaid officer of Republic working for Dakota Bank Shares which was owned in major part by Raymond L. Lamb (Tr.1178-82). Dakota Bank Shares was negotiating to purchase Republic and Mr. Dorris and Mr. Lamb were working in the bank to determine its condition (Tr.1056-57). Mr. Isbell was brought to Republic by Mr. Lamb as a candidate for a loan which was ultimately negotiated by Republic officers, and Mr. Lamb and Mr. Dorris.
   Collateral for the loan to the dealership consisted of a lien on all its assets, except new cars on which the financing bank had a prior lien, and the guarantee of Isbell and wife. Collateral for the personal loan consisted of a 2nd deed of trust on two parcels of real estate in central Scottsdale one of which was under contract of sale to that city.
   When the $1.5 million loans were concluded, $1.4 million was purchased by participating banks owned or affiliated with Mr. Lamb's banks, leaving $100,000 with Republic as the lead bank (Tr. 1060, 1187-88). The $100,000 kept by Republic was ultimately purchased by one on Mr. Lamb's banks taking it out of Republic entirely (Tr.1196).

Criticism of "Isbell" loan transactions

   The Office of the Comptroller of the Currency ("OCC") examined Republic in April 1990 and criticised the Isbell loans on the ground that they amounted to 100 per cent financing for the purchase of the dealership, and repayment was based on too optimistic cash flow projections.
   OCC classified the loans as substandard (FDIC Ex.11, p.7). The loans were criticised as secured by assets subject to a large prior lien for new car financing, and vacant land suspect as collateral support (FDIC Ex.6, p.5). The FDIC report of its examination of Republic also criticised the Isbell transactions on substantially the same ground as the OCC, classifying them as substandard (FDIC Ex.7).
   Mr. Lacke thought the loan transactions highly leveraged in that the car dealership had a high debt to worth relation and criticised the underwriting on the ground that there was inadequate analysis of Isbell and the motor corporation (Tr.153). Otherwise Mr. Lacke agreed with the OCC and FDIC criticisms. Counsel for the FDIC in their post-hearing submissions set out essentially all of the criticisms in the preceeding paragraphs.

Replies

   Responding to these criticisms, Mr. Dorris pointed out that the collateral obtained to support the Isbell loans was real estate belonging to the Isbells which had an appraised value of $6 million subject only to a prior lien of $1.9 million, and that a portion of the property was already under contract to the city of Scottsdale for a price of about $1.4 million (Tr.1060-61, 1191-92). The loans were both personally guaranteed by Isbell and his wife. The loan to the motor corporation and the personal loan were cross-collateralized and cross-defaulted (Tr.1059, {{5-31-93 p.A-2190}}1185). Accordingly, he did not believe it was value to say that the dealership was financed without risk to the borrower (Tr.1060).
   Mr. Dorris testified that the criticism that the cash flow projections were overly optimistic was based on the performance of the prior dealership, without considering that Mr. Isbell was an experienced auto dealership operator who was able to and planned to improve the dealership cash flow (Tr.1062-64). Mr. Dorris testified that the prior dealership was analyzed before the loan was granted to Isbell and it was clear that the cash flow being realized was well under what could have been obtained (Tr.1062-64).
   Mr. Lamb testified in disagreement with the criticism of the Isbell loan transactions. He had brought the Isbell loan to the Republic bank, was the moving force behind it and was very much in favor of it (Tr.1184-90, 1201-05). Mr. Lamb testified that the criticism of OCC and others that the loan was overleveraged and the cash flow projections too high was unwarranted and completely in error (Tr.1190-91, 1239-42). Mr. Lamb repeated that the loan was fully supported by collateral consisting of a tract of land worth $6 million in a prime location in Scottsdale, a portion of which at the time of the loan was already being sold for $1.4 million (Tr.1191). The loan also was personally guaranteed by Isbell and wife, as noted, and they owned significant assets (Tr.1192).
   Mr. Lamb endorsed the replies of Mr. Dorris, testifying not only to the large collateral supporting the loan, but that Isbell was experienced from prior operation of an Oldsmobile franchise and knew the automobile dealership business. He testified that Isbell had exceeded the cash flow projections used in making the loan, that the loan was never delinquent—"never missed a payment"—and was ultimately sold to another Phoenix bank (Tr.1189-99). As a banker, Mr. Lamb considered the Isbell loan properly underwritten (Tr.1243-44).
   Counsel for Mr. Dorris state that the value of the collateral supporting the Isbell loan exceeded the loan by about $4.1 million and reiterated that it was the property of the Isbells, giving them a substantial risk of loss (Tr.1061, 1192). Every level of Isbell projections was exceeded, the cash flow results were sent to Mr. Lacke, and no bank experienced any loss.

Conclusions

   Based on all the evidence and the arguments of Counsel, the "Garcia", "Buttram, "AzStar" and "Isbell" loans neither individually nor collectively impugn the competence of Mr. Dorris, or his experience, character, or integrity. There is no basis on this record to find unfavourable for him with respect to any of the foregoing factors in considering whether he should be approved to be a senior office of the Bank of Arizona.
   Mr. Dorris testified for more than a day and the undersigned perceived him to be straight-forward and credible. His testimony and that of others who testified on his behalf provided adequate answers and explanations for the criticisms of his actions involving the loans in issue.
   Without repeating all of the criticisms of the various loans and the replies to them, several points stand out.
   At the time of the Garcia loan there does not appear to have been any reason to think the collateral for the loan was not adequate. A recent appraisal of Canoa Ranch purchased with the loan proceeds was $27.86 million, and the first deed of trust was $8 million. The differential between the first deed plus the loan, and the appraisal, would appear to have been adequate security, even with declining real estate values. Moreover, this does not take into account the added collateral.
   The $15 million price of the tract of land purchased by Garcia did not necessarily mean that that was its true market value at the time of the purchase. It is commonplace that buyers can often for one reason or another buy property below market value. The record indicated that this was true in the case, and that it is incorrect to state that Garcia had no equity in the property.
   When the brokerage firm of Young, Smith & Peycock was under examination at the New York stock exchange and could not pay off its $2.5 million note to make the April 1988 payment of Garcia, modification of the Garcia loan and use of collateral to make the loan payments was a reasonable business judgment. As stated, the appropriate loan committees at Sun State approved the course taken and the executive loan committee or the president of Sun State approved release of collateral to make the required loan payments.
   The crisis of Garcia in July and August {{5-31-93 p.A-2191}}1988 could not have been anticipated by Mr. Dorris. He did not prepare the financial analysis of Garcia at Sun State and the loan personnel at Sun State who did the analysis had been misled by the chief financial officer of Garcia. In the emergency three day meetings of creditors it was not possible to perform usual underwriting procedures. The collateral to keep, and that to exchange, was a matter of judgment under the circumstances. Mr. Dorris was in constant communication with superiors at Sun State who approved the transactions he concluded.
   Likewise whether Sun State should have advanced funds for the September margin call on Garcia's Arizona Commerce Bank stock was a judgment call at the time. Hindsight reveals this transaction to have been a mistake, but at the time Mr. Dorris and Sun State had a strong motivation to protect the value of the approximately 600,000 shares held. The Arizona Commerce Bank stock was worth $2 or $3 a share at the time, and it was impossible to forsee that it would ultimately become worthless, as did the stock of many other banks. Mr. Lamb strongly supported Mr. Dorris' judgment on this issue.
   Mr. Dorris had nothing to do with establishing the Buttram line of credit at Sun State. At the time of the May 1988 loan of $950,000 and extensions of the established line of credit, then and in December 1988, Buttram was a distressed borrower and repayment of his borrowings constituted a work-out situation. Again, it was a matter of judgment whether to foreclose, force Buttram into bankruptcy or to work with him in an attempt to salvage what Sun State could. Mr. Lamb testified that forcing a troubled borrower into bankruptcy is often one of the worst things a lender can do (Tr.1212).
   The $950,000 did not in fact go to Buttram. This has been set forth. $650,000 was retained at Sun State and applied to pay interest on Buttram's line of credit. $300,000 went to Buttram as working capital and was used to finish houses so they could be sold. As a result Sun State realized $1.2 million by December 1988. Criticisms that financial statements from Buttram were not brought up to date appear unrealistic since it was clear at the time that Buttram was in a bankruptcy condition. $650,000 of the loan seems to have been little more that a transaction on Sun State's books since it did not leave Sun State. The balance of the loan, $300,000, went to provide funds so Buttran could finish construction on some projects, recouping $1.2 million for Sun State.
   The problems with the Garcia and Buttram loans stemmed not from bad judgment or incompetence of Mr. Dorris, or alleged underwriting deficiencies, but from the drastic decline in the real estate market in Arizona including the Phoenix area. The decline in the real estate market undoubtedly precipitated the sudden call on Garcia by American Continental to pay $39 million in notes, but whether that is true or not, Mr. Dorris had no way of forseeing this crisis when he presented the Garcia loan or the modification in April 1988.
   The collapse of the real estate market reached the point where residential and commercial property sales had come to a virtual standstill and new development had all but ceased. There was testimony that over 300 builders went out of business in Arizona in 1988 and following years (Tr.676). The Special Assets Division at Sun State, which was set up to monitor troubled loans or loans needing special attention, increased from around $24 million in late 1987, when Mr. Dorris jointed that concern, to $100 million in 1988 (Tr.791-92).
   Mr. Dorris was in the position of trying to salvage what was possible from the Garcia and Buttram loans through modifications and work-out efforts. Criticisms reasonably applicable if the situation had been normal do not seem justified under the circumstances faced by Mr. Dorris.
   The AzStar loan produced no loss to Sun State. As of March 31, 1990, the AzStar loan was current (FDIC Ex.50).
   Again, some points should be noted. When the loan was made to AzStar, its consolidated balance sheet showed ample assets to repay the loan, $23.79 million by a CPA audit (FDIC Ex.34). AzStar had $11.9 in investments which were highly liquid consisting primarily of U.S. Treasury notes and triple AAA rated corporate bonds (Tr.1263). The balance sheet further showed $6.795 million of cash and cash equivalents. Even if $3.6 million of AzStar assets were Garcia notes receivable and of questionable or no value, AzStar had substantial assets remaining. That AzStar had resources adequate to repay the loan seems apparent, even allow- {{5-31-93 p.A-2192}}ing for retention of assets for regulatory purposes.
   The security for the loan was adequate. In addition to capital notes taken as collateral, Sun State took 51 percent of the holding company stock and all of the operating company stock with a book value of about $3.28 million (FDIC Ex.35, p.5). Also, $3 million was held in the compensating balance. When the foregoing is added to the $1.6 million of loan proceeds used to purchase the so-called "Samuels" note held by Sun State, together with the $100,000 loan fee, it may be seen that only $300,000 left Sun State's control, as Counsel for Mr. Dorris state. Finally, if AzStar's increased revenue projections were not met and AzStar became delinquent, Sun State had the right to draw down the $3 million compensating balance.
   Whether Sun State should have made a loan to AzStar as an insurance company is a matter of opinion, not proof of incompetence or a lapse of character of integrity. It has proved to have been a performing loan.
   Like the AzStar loan, the Isbell loan at Republic did not produce a loss to that bank or any other bank. It was adequately collateralized. The real estate put up was appraised at $6 million with a prior lien of $1.9 million, leaving $4.1 million to support the $1.5 million combined loans of $750,000 to the Isbells and $750,000 to the car dealership. A portion of the real estate, moreover, was under contract to the City of Scottsdale for $1.4 million, as stated earlier. Collateral also included the assets of the dealership except new cars. The loans were cross-collateralized and cross-defaulted, and were personally guaranteed by Isbell and his wife. It is clear that Isbell bore a risk.
   Taking into consideration all the criticisms made and weighing them in the context of all of the replies and explanations, the record as a whole does not provide a sufficient basis for finding unfavourably for Mr. Dorris with respect to any of the factors of competence, experience, character or integrity.

End of service by Dorris at Sun State
and OCC position

   In April Sun State was reorganized under the Federal Home Loan Bank Board, and in May 1989 Sun State was put into conservatorship under the RTC. At or before this time all but a few of the executive officers were terminated. However, Mr. Dorris was retained until late July when he was asked to leave (Tr.821-26). Mr. Dorris was given severance pay, not granted if service was ended for cause (Pet.Ex.2). After a short period, Mr. Dorris was hired by Dakota Bank Shares.
   The OCC interposes no objection to service by Mr. Dorris as a senior officer of the Bank of Arizona after reviewing the Garcia, Azstar, and Isbell transactions (Tr.1122-24).

Recommendation

   It is recommended to the FDIC Board of Directors that Mr. Dorris be approved for service at the Bank of Arizona as a Director, Senior Vice-President and Chief Loan Officer.

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