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FDIC Enforcement Decisions and Orders |
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FDIC removed a bank director from his office and prohibited him from further participation in the affairs of the bank for engaging in unsafe or unsound banking practices, violations of law, and for breaching his fiduciary duty. The director's conduct resulted in financial loss to the bank and personal financial gain. The improper conduct included unauthorized extensions of credit to bank insiders, extending credit that resulted in over 90% of the bank's adversely classified loans, deviating from normal and acceptable lending practices, and failing to provide for an adequate loan loss reserve.
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[.2] Bank ExaminationsPurpose
[.3] Loan Loss ReservesPurpose
[.4] Cashier's ChecksReflection on Books
[.5] Regulation OLending LimitationsApproval by Board of Directors
[.6] Prohibition, Removal, or SuspensionStatutory Standard
[.7] Prohibition, Removal, or SuspensionFinancial Loss
[.8] Prohibition, Removal, or SuspensionDisregard for Safety and Soundness
[.9] Unsafe or Unsound Banking PracticeStatutory Standard
[.10] DirectorsPersonal Benefit from Bank Funds
In the matter of * * * BANK OF * * *
STATEMENT OF THE CASE
On March 19, 1984, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Intention to Remove from Office and to Prohibit from Further Participation ("Notice") to * * * ("Respondent") pursuant to the provisions of Sections 8(e)(1) and 8(e)(5) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. 1818(e)(1), (e)(5)) and Part 308 of the FDIC Rules and Regulations (12 C.F.R. Part 308). The Notice charged the Respondent, in his capacity as officer and director of * * * Bank of * * * County, * * * ("Bank"), with engaging or participating in unsafe or unsound banking practices, violations of law and regulations and/or breaches of his fiduciary duty which evidenced personal dishonesty and/or a willful or continuing disregard for the safety
{{4-1-90 p.A-377}}and soundness of the Bank. The Notice further alleged that, as a result of Respondent's actions and conduct, the Bank had sustained or would probably sustain substantial financial loss or other damage and/or that the interests of the depositors could be seriously jeopardized, and/or Respondent has received financial gain.
FINDINGS OF FACT
A. GENERAL FINDINGS OF FACT
1. The Bank was a corporation duly chartered to conduct the business of banking under the laws of the State of * * * and had its principal place of business at * * *, at all times pertinent to this proceeding. (Notice at 1, Answer at 1).
[.1] 13. * * *'s obligations are separate and distinct from those of the Bank; the Bank is not responsible for their payment, and payment by the Bank of holding company indebtedness is contrary to acceptable banking practices. (Tr. 464-465)
[.2] 19. The purpose of an examination of a financial institution by the FDIC is to determine the financial condition of the institution and to maintain public confidence in the integrity of the banking system and its individual banks. An examination analyzes a bank's assets, earnings, capital, and management, and determines if there are any violations of law or regulation. (Tr. 18, 21)
B. FINDINGS REGARDING THE FINANCIAL CONDITION OF THE BANK
(1) Findings Regarding the Lending and Collection Practices of Respondent.
(2) Findings Regarding the Bank's Equity Capital.
[.3] 72. The purpose of a loan valuation reserve is to provide for loan losses a bank may encounter in the future based on the risk in the bank's loan portfolio. (Tr. 101).
C. FINDINGS REGARDING RESPONDENT'S TRANSACTIONS TO, OR FOR THE BENEFIT OF * * *
(1) Findings with Respect to the May 2, 1983 Transaction.
82. A cashier's check is an official bank check purchased by the remitter upon the bank's receipt of consideration from the remitter in the form of cash or its equivalent, and is reflected on the bank's books when the check is issued. (Tr. 461462)
[.4] 88. Failure to reflect the issuance of a cashier's check as a Bank liability at the time said check was issued was an improper and imprudent banking transaction which misrepresented the Bank's books and its financial condition by understating the Bank's cashier's check account and overstating capital or net worth of the Bank and caused a shortage in the Bank's books. (Tr. 465, 467-468, 711-712, 828-829, 846)
[.5] 100. Prior board of director approval for this extension of credit to * * * was not given although it is the normal and customary practice of the board of directors of the Bank to be apprised of loans to "insiders", to approve such loans prior to the disbursement of loan proceeds and to approve loans which exceed the lending authority of the loan officer of record. (Tr. 299-300, 485-486, 492, 591, 830, 1118, 1140)
(3) Findings Regarding the August 10, 1983 Transaction.
109. A second interest payment was owed by * * * to * * * on July 30, 1983 in the
{{4-1-90 p.A-383}}amount of $21,743.94. (Tr. 507, FDIC Exh. 14)
(4) Findings Regarding the August 12, 1983 Transaction.
124. On August 12, 1983 a second unsecured advance on the $50,000 line of credit in favor of * * * was made in the amount of $21,743.94. (Tr. 519520, 523, 645, 832833, 11221125)
(5) Findings Regarding the November 2, 1983 Transaction.
132. On November 2, 1983, pursuant to standing instructions, * * * debited, at the direction of Respondent, the Bank's correspondent account in the amount of $23,134.17 for interest due * * * on the * * * indebtedness on October 31, 1983. (Tr. 527-529, 592, 834, FDIC Exhs. 18, 19 and 20)
(6) Findings Regarding the January 23, 1984 Transaction.
140. A debit ticket dated January 19, 1984, initiated by Respondent and initialed by * * * , was processed by the Bank on January 23, 1984 in the amount of $67,000; said ticket was an increase in the Bank's account with * * * and was characterized as a Bank loan to Respondent that was sold to * * * even though * * * had not purchased the loan. (Tr. 538-539, 648, FDIC Exh. 23)
D. FINDINGS REGARDING RESPONDENT'S REIMBURSEMENT TO THE BANK FOR * * * QUARTERLY INTEREST PAYMENT TRANSACTIONS AND TO * * * FOR THE * * * INDEBTEDNESS
174. In addition to the principal sum borrowed upon each of the Bank's payments of * * * four quarterly interest payments, the Bank was deprived of interest for the following days: May 2 through May 30, 1983, August 10 through August 12, 1983, November 2, 1983 through January 22, 1984, January 23, 1984 through February 16, 1984, and February 17, 1984 through February 21, 1984. (Tr. 632, 685, FDIC Exh. 3)
FINDINGS OF FACT OF THE ADMINISTRATIVE LAW JUDGE
The Board has determined not to adopt the Findings of Fact recommended by Judge Dowell. The Board believes that the findings as noted below are not in an appropriate format. Additionally, some are erroneous and not supported by the evidence presented at the hearing. The balance of the findings are not material to the case.
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[.6] This action was brought pursuant to Section 8(e)(1) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e)(1). That section authorizes the removal of a bank director or officer for any one of three acts:
2. The engagement or participation in any unsafe or unsound practice in connection with the bank; or
3. The commission or engagement in any act, practice or admission which constitutes a breach of said officer's or director's fiduciary duty.
[.7] If any of the above three acts occur, the FDIC must look to the effects of the act. One of the following three things must occur as a consequence of the act:
2. The interest of depositors could be seriously jeopardized by reason of one of the aforementioned acts; or
3. The officer or director has received financial gain by reason of one of the aforementioned acts.
[.8] In addition to the occurrence of an act which causes a specific consequence, the statute requires that the bank official must, at the time when he/she committed the acts, have either:
3. Demonstrated a continuing disregard for the safety and soundness of the bank. See generally, Brickner v. FDIC, 53 U.S.L.W. 1081 (8th Cir., November 5, 1984).
[.9] Additionally, the conclusions of law, supported by the findings of fact, show that the Respondent engaged or participated in certain unsafe or unsound banking practices related to the management of the Bank that contributed to its resulting condition. An unsafe or unsound banking practice would include "any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk of loss or damage to an institution, its shareholders, or the agencies administering the insurance funds" Financial Institutions Supervisory and Insurance Act of 1966: Hearings on S. 3158 before the House Comm. on Banking and Currency, 89th Cong., 2d Sess. 50 (1966). Judicial recognition has been given to the concept of unsafe or unsound banking practices. The courts have construed this phrase to encompass practices contrary to accepted standards of prudent operation that might result in abnormal risk or loss to a bank. First National Bank of Eden v. Department of the Treasury, 568 F. 2d 610, 611 (8th Cir. 1968). This includes the improper perfection of a security interest in personal property under the laws of the State of * * *.
[.10] Respondent also breached his fiduciary duty as a director and officer of the Bank through his use of Bank funds for his personal benefit. The evidence shows that he appropriated Bank funds for the benefit of * * * and thus himself in violation of federal banking laws and regulations. Misappropriation of Bank funds for one's own use constitutes a breach of the fiduciary duty of loyalty to a bank, its depositors and shareholders.
CONCLUSIONS OF LAW
In view of the foregoing discussion the Board makes the following conclusions of law.
Having found and concluded that Respondent * * * , in his capacity as an officer and director of the * * * Bank of * * * ("Bank") has engaged or participated in unsafe or unsound banking practices, violations of law and regulation, and breaches of his fiduciary duty which evidences both a willful and a continuing disregard for the safety and soundness of the Bank; and
RECOMMENDED DECISION
Decided: October 19, 1984
Bank Official violated banking statutes;
By Earl S. Dowell, Administrative Law
On March 19, 1984, the Board of Directors of the Federal Deposit Insurance Corporation submitted a notice of intention to remove from office and to prohibit from further participation * * * , respondent, in his capacity as an officer, director and/or person participating in the conduct of the affairs of * * * Bank of * * *. The head of the Bank is in * * * but most of the banking directors meet in * * *.
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(2) demonstrate a willful or continuing disregard for the safety and soundness of the bank. |
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Last Updated 6/6/2003 | legal@fdic.gov |