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FDIC Enforcement Decisions and Orders |
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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 32Application for Approval of Employment Competence and Experience
[.2] EvidencePost-hearing EvidenceSection 32 Proceedings
In the Matter of
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 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.
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 318. 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
[.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 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).
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.
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 69.) FDIC Ex. 27.
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 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.
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
[.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.
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 opportunitiesat least this
The Board of the FDIC having fully considered the entire record in this proceeding, hereby declines to adopt the recommendation of the Presiding Officer.
/s/ Robert E. Feldman
In the Matter of
This is a proceeding under Section 32 of the Federal Deposit Insurance Act (Act), 12 U.S.C. Section 1831i (FDIC Ex. 56).
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 "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.
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.
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).
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, 4751, 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.
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.
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).
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.2729). 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.
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.
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 "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.
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.
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).
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.
End of service by Dorris at Sun State
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.
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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Last Updated 6/6/2003 | legal@fdic.gov |