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   [5231] In the Matter of the Application for Federal Deposit Insurance, Bank of Michigan, Bloomfield Township, Mich., FDIC Docket No. FDIC-95-185aa (12-19-95)

   FDIC denies proposed bank's application for deposit insurance based on negative findings on two factors: general character and fitness of management, and risk to the deposit insurance fund. (This decision was affirmed by the United States Court of Appeals for the Sixth Circuit, 124 F.3d 196.)

   [.1] Federal Deposit Insurance Act §6—Failure to Satisfy Factors
   A negative finding on even one of the factors in Section 6 of the Federal Deposit Act can be sufficient to justify denial of an application for deposit insurance.

   [.2] Federal Deposit Insurance Act §6—Failure to Satisfy Factors
   Despite controls placed on individual who previously was found to have engaged in questionable and deficient banking practices, his significant role as majority shareholder and vice chair of proposed bank creates too great a risk for a newly chartered depository institution.

   [.3] Federal Deposit Insurance Act §6—Failure to Satisfy Factors
   FDIC Board of Directors denies proposed bank's application for deposit insurance because of negative findings on the general character and fitness of management and the risk to the deposit insurance fund.

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In the Matter of
Application for Federal Deposit Insurance
BANK OF MICHIGAN
BLOOMFIELD TOWNSHIP,MICHIGAN
(Proposed Insured Depository Institution)
DENIAL
FDIC-95-185aa

DECISION AND ORDER

I. STATEMENT OF FACTS

   This is the second application for Federal deposit insurance submitted to the Federal Deposit Insurance Corporation ("FDIC") by Bank of Michigan, Bloomfield Township, Michigan ("Proposed Bank"), pursuant to section 5 of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1815.

A. The First Application and its Disposition

   The Proposed Bank submitted its first application for Federal deposit insurance to the FDIC's Chicago Regional Office on August 16, 1993. On June 21, 1994, the Board of Directors of the FDIC ("Board") denied the application based upon a negative finding on two factors: general character and fitness of management, 12 U.S.C. § 1816(4), and risk to the deposit insurance fund, 12 U.S.C. § 1816(5). Both findings were based upon a determination that there was insufficient evidence to demonstrate that Mr. Stanford C. Stoddard ("Mr. S.C. Stoddard") was fit to be the major shareholder, chairman of the board, and chief executive officer of a newly chartered institution and that his proposed service in these roles constituted a risk to the deposit insurance fund. A copy of the June 21, 1994, Board determination is attached hereto and made a part hereof as Exhibit 1.
   The Proposed Bank filed a petition for reconsideration on July 5, 1994, requesting that the FDIC reconsider its denial of Federal deposit insurance for the Proposed Bank. On October 18, 1994, the Board issued its Decision and Order ("Board Decision") denying the petition for reconsideration and affirming its initial determination to deny Federal deposit insurance for the Proposed Bank.
   The Board's rationale was twofold. First, the Board undertook a comprehensive review of Mr. S.C. Stoddard's extensive career in banking. This included analyzing the allegations brought against Mr. S.C. Stoddard by the Office of the Comptroller of the Currency ("OCC") during administrative enforcement proceedings and Mr. S.C. Stoddard's responses, including his admissions. Based upon these admissions, the Board found that Mr. S.C. Stoddard engaged in questionable and deficient banking practices during his tenure at Michigan National Bank of Detroit, Detroit, Michigan ("MNBDetroit") and Michigan National Corporation ("MNC"), the holding company of Michigan National Bank, Farmington Hills, Michigan. These practices consisted of Mr. S.C. Stoddard's commingling of personal business with banking business and the charging of his personal expenses through the bank's expense records.
   Second, the Board reviewed the structure of management of the newly chartered institution as proposed by the organizers. It concluded that Mr. S.C. Stoddard's role as the largest shareholder, chairman of the board and chief executive officer of a newly chartered institution, coupled with his banking record, placed Mr. S.C. Stoddard in positions of considerable power and influence that were unacceptable to the FDIC. A copy of the Board Decision is attached hereto and made a part hereof as Exhibit 2.

B. The Second Application

   The second application is similar to the first. With the exception of Steven E. Jacob and Mark Lesnau, the incorporators and shareholders in the first continue to be part of this application. Their identities, their occupations, and the number of shares to which each has subscribed are as follows: (1) Mr. S.C. Stoddard, banking consultant; 160,000 shares of stock valued at $2 million; (2) Martin J. McInerney, automotive salesman; 40,000 shares of stock valued at $500,000; (3) H. George Levy, physician; 8,000 shares of stock valued at $100,000; (4) Joseph B. Anderson, Jr., car and truck bumper manufacturer; 4,000 shares of stock valued at $50,000; and (5) Linda D. Bernard, attorney; 2,000 shares of stock valued at $25,000. Replacing Mr. Jacob is Stanford D. Stoddard ("Mr. S.D. Stoddard"), son of Mr. S.C. Stoddard. He currently is vice president, International Division/Asia, Comerica Bank, Detroit, Michigan, and is subscribing to 4,000 {{2-29-96 p.A-2754}}shares of stock valued at $50,000. In addition, Robert E. Parker is subscribing to 400 shares valued at $5,000.
   Other subscribers to the capital stock of the Proposed Bank subscribing to more than 8,000 shares of stock include the Claire Ann Company for 48,000 shares of stock. Incorporator Mr. S.C. Stoddard is a partner in the Claire Ann Company, of which he is a 25 percent partner. The Claire Ann Company is a real estate investment partnership and under the application would own 12 percent of the total issuance of capital stock of the Proposed Bank. Mrs. Howard J. Stoddard, the mother of Mr. S.C. Stoddard, is subscribing to 19,200 shares of stock valued at approximately $240,000.
   Among the changes from the first application, the proposed chairman of the board of directors is now Linda Bernard, and the proposed vice chairman is Mr. S.C. Stoddard. While the president and/or chief executive officer was not named in the second application, the application was amended to propose that Mr. S.D. Stoddard, son of Mr. S.C. Stoddard, be made president and chief executive officer of the Proposed Bank.

C. Due Process Accorded Incorporators

   Since the issuance of the Board Decision, the incorporators have had a significant amount of contact with staff of the FDIC both in the Chicago Regional Office and in Washington, D.C., in an attempt to resolve the FDIC's concerns with Mr. S.C. Stoddard's involvement in the Proposed Bank. In addition to the Board Decision which discussed in detail the problems of the Proposed Bank's management structure wherein Mr. S.C. Stoddard was the major shareholder and held the most significant positions, FDIC staff has repeatedly indicated that the degree of Mr. S.C. Stoddard's ownership and operation control has been the objectionable aspect of the Proposed Bank's application for Federal deposit insurance. At a meeting on March 8, 1995, the incorporators were advised that any subsequent application for Federal deposit insurance wherein Mr. S.C. Stoddard continued to have ownership control and active participation in management would more than likely not receive a favorable ruling. This position was reiterated repeatedly in a series of letters from senior FDIC staff to Keith R. Fisher, attorney for the Proposed Bank. The Proposed Bank was advised that the role of Mr. S.C. Stoddard would be viewed in the context of the overall management team but that Mr. S.C. Stoddard's role should be limited to that of a director of the institution and a qualified and independent chief executive officer should be appointed.
   To address FDIC staff concerns regarding the role of Mr. S.C. Stoddard in the Proposed Bank, Mr. Fisher submitted several voluntary commitments on behalf of the incorporators. With regard to Mr. S.C. Stoddard's ownership interest, it was proposed that all of Mr. S.C. Stoddard's direct equity interest of approximately 32 percent in the Proposed Bank and any other shares in which he may have a beneficial interest be placed into a blind voting trust. The trust is proposed to be irrevocable and not subject to amendment or dissolution without the prior written consent of the Commissioner, Financial Institutions Bureau, for the State of Michigan and the FDIC.
   The trust will be administered by six trustees, three of whom are children of Mr. S.C. Stoddard and beneficiaries of the trust, and three others, plus an alternate, who will be non-related individuals. The non-related trustees are Mr. Rex Lee, retiring president of Brigham Young University; Mr. M. Richard Olson, senior trust officer of Sterling Bank and Trust, FSB, Southfield, Michigan; and Mr. John W. Butler, chairman of Alliance Steel of Detroit. The alternate trustee is Dr. Barry Mayo. While none are related, Mr. S.C. Stoddard is associated with these individuals through church membership, family trust business, or prior real estate partnerships. In the case of tie votes, Mr. Lee will cast the deciding vote.
   To resolve FDIC staff concerns regarding officials of the Proposed Bank engaging in conduct involving insider abuse, the incorporators proposed to establish at the first meeting of the board of directors a Special Director Operations Audit Committee ("Committee") that will be made up of two outside directors and an independent certified public accountant. It is proposed that this Committee will establish broad guidelines for the general bank auditor to follow and will report directly to the Commissioner, Financial Institutions Bureau, for the State of Michigan and the FDIC, if requested.
   With respect to FDIC staff concerns regarding officials of the Proposed Bank understanding conflicts of interest, the incor- {{2-29-96 p.A-2755}}porators also proposed to adopt at their first meeting of the board of directors a code of ethics that specifically addresses expected standards of conduct and conflict of interests issues. As part of this code of ethics, all directors' and executive officers' business expenses will be approved by the Internal Audit Committee.
   In their attempts to address the issue of Mr. S.C. Stoddard's role in the Proposed Bank, the incorporators made a number of proposals but each proposal gives Mr. S.C. Stoddard an active and extensive role in the Proposed Bank. The incorporators' final position on the definition and clarification of the role of Mr. S.C. Stoddard in the Proposed Bank, set forth in a letter dated December 11, 1995, from Linda Bernard, is as follows:

    Pursuant to your request, we wish to expand upon and clarify the role of Mr. Stanford C. Stoddard as defined by the Board of Directors:
      The Board of Directors is desirous of Mr. Stanford C. Stoddard having an active role in the Bank as a member of the Board of Directors and as Vice Chair. As Vice Chair he will be fully subordinate to the Chair of the Board and President & CEO. The dual approval of the Chair and the President & CEO are required for all material decisions and transactions. Material is defined as a transaction of more than five percent of capital or gross revenue, whichever is less. ...
      The Vice Chair may participate in a CoChair capacity on the following committees: personnel/operations; loans; investments. The Vice Chair will not serve on the internal or external audit committee's of the board. It is anticipated that the Vice Chair will be involved in soliciting and reviewing loans and making loan recommendations; reviewing and making recommendations regarding personnel and operational issues and reviewing and making recommendations regarding investments. (Emphasis supplied.)
December 11, 1995 Letter from Linda D. Bernard to A. David Meadows. A copy of this letter is attached hereto and made a part hereof as Exhibit 3.

II. DISCUSSION

   The FDI Act, 12 U.S.C. §§ 1813 et seq., sets forth the law governing the granting of Federal deposit insurance. Specifically, under section 5 of the FDI Act, 12 U.S.C. § 1815, a depository institution that engages in the business of receiving deposits other than trust funds, upon application to the FDIC, may become insured where the Board determines that the depository institution satisfies the factors in section 6 of the FDI Act, 12 U.S.C. § 1816. Section 6 of the FDI Act requires that FDIC to consider the following factors when determining whether to grant an application for Federal deposit insurance: the financial history and condition of the bank; the adequacy of its capital structure; its future earnings prospects; the general character and fitness of its management; the convenience and needs of the community to be served by the institution; the risk presented to the deposit insurance funds; and whether or not its corporate powers are consistent with the purposes of the FDI Act.
   This second application for Federal deposit insurance submitted by the Proposed Bank presents the Board with a new and different case from the first application. The incorporators have gone a considerable distance to address the concerns raised by the FDIC concerning Mr. S.C. Stoddard's role in the Proposed Bank. The incorporators have agreed that Mr. S.C. Stoddard will not serve in the roles of chairman of the board or chief executive officer. Further, Mr. S.C. Stoddard has agreed to place his direct stockholdings, and those is which he has any beneficial interest, into a voting trust with six trustees. Other controls which the incorporators have voluntarily committed to include creating a Special Director Operations Audit Committee, consisting of two outside directors and an independent certified public accountant, which will establish guidelines for the general bank auditor and will report directly to the State and Federal regulators if requested.
   The Board is mindful that newly insured depository institutions are vulnerable to the myriad risks of today's banking climate. In the Matter of Patrick G. Huycke, Bank of Southern Oregon, Medford, Oregon, FDIC-91-86jj, 1 P-H FDIC Enf. Dec. Par. 5168A at A-1808.1. The Board recognizes that "competent senior management of a recently chartered institution ... provides the most likely basis to ensure the institution {{2-29-96 p.A-2756}}will conduct itself in a manner consistent with safe and sound banking and the first line of defense against problems in the future." In the Matter of Gary A. Dorris, Bank of Arizona, Scottsdale, Arizona, FDIC-92-128jj, 1 P-H FDIC Enf. Dec. Par. 5193, at A-2178.
   While the incorporators have taken steps to impose controls upon Mr. S.C. Stoddard's role in the Proposed Bank, the Board finds that the incorporators have insisted on having Mr. S.C. Stoddard actively participate in the Proposed Bank despite senior FDIC staff advice to the contrary. In the last letter dated December 11, 1995, from proposed chairman of the board Linda D. Bernard to FDIC staff defining the role of Mr. S.C. Stoddard, Ms. Bernard states, "[t]he Board of Directors is desirous of Mr. Stanford C. Stoddard having an active role in the Bank as a member of the Board of Directors and as Vice Chair."
   The position of Vice Chair is defined as a full-time officer position wherein Mr. S.C. Stoddard will be participating in reviewing and making loan recommendations, reviewing and making investment decisions, and reviewing and making recommendations regarding personnel and operations. The Board finds that these are significant day-to-day management responsibilities for the Proposed Bank and that Mr. S.C. Stoddard will be playing a significant role in the exercise of these duties. Further, the Board finds that while the incorporators have sought to impose some controls on Mr. S.C. Stoddard's role in the Proposed Bank, these controls are not sufficient. Thus, while Mr. S.C. Stoddard is fully subordinate to, required to report to, and obtain the approval of the proposed chairman of the board Linda Bernard and the proposed president and CEO Mr. S.D. Stoddard for material transactions, Ms. Bernard has no prior banking experience and will participate in bank affairs on a part-time basis and Mr. S.D. Stoddard is the son of Mr. S.C. Stoddard with banking experience that is not comprehensive in the areas of consumer and residential lending and managing a bank's securities portfolio. Both Ms. Bernard and Mr. S.D. Stoddard have indicated that they will seek and rely upon the advice, experience, and knowledge of Mr. S.C. Stoddard.
   Further, viewing the profile of ownership of the Proposed Bank, the Board finds that, despite the fact that the shares will be in a voting trust, Mr. S.C. Stoddard is still proposed as the largest shareholder with a 41.6 percent interest in the Proposed Bank. Other family holdings listed in the application include 4,000 shares for the proposed president and chief executive officer, Mr. S.D. Stoddard, the son of Mr. S.C. Stoddard, and 19,200 shares for Mrs. Howard J. Stoddard, the mother of Mr. S.C. Stoddard. In the aggregate, the known holdings of the Stoddard family stock in the Proposed Bank would total 231,200 shares or 46.2 percent of the proposed outstanding shares. This does not include any beneficial interest which Mr. S.C. Stoddard or one of his family members may acquire. The next largest shareholder who is not related to the Stoddard family is Mr. McInerney, who has only an 8 percent interest. Mr. McInerney, however, is a longtime associate and friend of Mr. S.C. Stoddard.
   Finally, viewing the profile of management of the Proposed Bank, the Board finds that there are only three members of the board of directors who could be considered independent of Mr. S.C. Stoddard: Ms. Bernard, Mr. Anderson, and Mr. Levy. The Board finds that the remaining members of the board have less independence, except for Mr. S.C. Stoddard, Mr. McInerney (who served with Mr. S.C. Stoddard at MNC and MNB- Detroit), and Mr. S.D. Stoddard.

   [.1] As the Board stated, in denying the previous insurance application by Bank of Michigan, insurance may be granted "where the Board determines that the depository institution satisfies the factors in section 6 of the FDI Act." (Emphasis added). In the Matter of Bank of Michigan, Bloomfield Township, Michigan, FDIC-94-162aa, 2 P-H FDIC Enf. Dec. Pa. 5219, at A-2496. Failure to meet the statutory standards may cause the FDIC to refuse an application for deposit insurance. United States v. Philadelphia National Bank, 374 U.S. 321, 328 (1963). Indeed, a negative finding on but one factor can be sufficient to justify denial. See Board of Governors, etc. v. First Lincolnwood, 439 U.S. 234 (1978); Camp v. Pitts, supra.

   [.2] Based upon our review of the record developed for the Proposed Bank's second application for Federal deposit insurance, the Board finds that despite the controls attempted to be placed upon him, Mr. S.C. Stoddard will assume a significant role in the Proposed Bank under this second application. As detailed in the Board's Decision {{2-29-96 p.A-2757}}and Order on the first application of the Proposed Bank, In the Matter of Bank of Michigan at A-2497-A-2500, given the past activities engaged in by Mr. S.C. Stoddard, the Board continues to find that they demonstrate, at the least, Mr. S.C. Stoddard's disregard for the distinctions between personal matters and accounting and corporate business. No new evidence has been presented by the incorporators in this second application which changes the Board's finding on this issue. Since the incorporators continue to propose a significant role for Mr. S.C. Stoddard in the institution, the Board finds that such a significant role creates too great a risk for a newly chartered depository institution.

III. CONCLUSION

   [.3] Based upon the record before it, the Board denies the second application for Federal deposit insurance submitted by the Proposed Bank. The Board finds that Mr. S.C. Stoddard continues to be proposed as holding one of the most significant positions in the Proposed Bank. Given the Board's finding in the Proposed Bank's previous application that Mr. S.C. Stoddard has engaged in a pattern of conduct of failing to make distinctions between personal and business assets and of being unable to identify and comprehend conflicts of interest, coupled with his proposed position in this second application, the Board makes an unfavorable finding on the factor of general character and fitness of management of the Proposed Bank and finds that the significant role which Mr. S.C. Stoddard is proposed to fulfill in this newly chartered institution presents a risk to the deposit insurance fund. Mr. S.C. Stoddard is not prohibited from serving in an insured institution. The findings made herein are determined solely by the circumstances of this particular application and case which involves a newly chartered institution where senior management, a major factor in the success of such an institution, is dominated by an individual whose past banking practices raise grave concerns for the Board.
   By order of the Board of Directors.
   Dated at Washington, D.C., this 19th day of December, 1995.

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