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FDIC Enforcement Decisions and Orders |
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FDIC denied application for acquisition of control under the Change in Bank Control Act. The FDIC ruled that (1) applicants and proposed management lacked competence, experience, and integrity necessary for the change to be in the interest of the Bank's depositors or the public; and (2) application contained conditions which if accepted would restrict the FDIC's regulatory responsibilities.
[.1] Change in Bank Control ActApplication EvaluationFactors Considered
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[.3] FDICAuthorityChange in Bank Control Act
[.4] Change In Bank Control ActApplication EvaluationFactors ConsideredImpairment of Regulatory Authority
[.5] Practice and ProcedureBurden of ProofChange in Control Proceedings
[.6] Practice and ProcedureRight to Hearing
[.7] Practice and ProcedureBurden of ProofChange in Control Proceedings
[.8] EvidenceCriminal ProceedingChange In Bank Control Act
[.9] Change In Bank Control ActApplicant EvaluationQualifications
[.10] Change In Bank Control Act ApplicationRemoval Action Distinguished
[.11] Federal Deposit Insurance CorporationSupervisory Functions Impairment of Regulatory Authority
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[.14] Federal Deposit Insurance CorporationSupervisory FunctionsImpairment of Regulatory Authority
In the Matter of
The applicants, Paul E. Oberstar (Oberstar), a founder and former director of the Bank, and James A. Peterson (Peterson), a businessman with limited banking experience, filed an application for change of control of Boundary Waters State Bank, to acquire more than 80% of the voting shares of the Bank. The Bank, which had total assets of $13 million as of March 1989, had been the subject of various supervisory proceedings. ALJ's Recommended Decision (R.D.) at 68.
FDIC enforcement counsel introduced evidence of deficient business conduct and judgment to demonstrate Oberstar's lack of competence and integrity. Specifically, evidence was introduced that Oberstar, a former senior lending officer of *** Bank, had been asked to resign by that bank's board of directors as a result of his handling of a number of problem loans. For example, Oberstar administered a $400,000 loan to *** on which no principal or interest payments were received, R.D. at 2326; Oberstar had allowed unauthorized, unsecured overdraft advances to this bank client, R.D. at 31; he had represented to a bank "discount committee" that a second *** loan was guaranteed by the Farmers Home Administration when, in fact, it was not. R.D. at 25 and 33. The *** Bank experienced significant losses on these problem loans as a result of Oberstar's management, particularly his handling of the *** loans. Following Oberstar's resignation from the *** Bank, an "employee dishonesty" claim was filed by the bank with its fidelity bond insurer for reimbursement of losses on the *** loans.
FDIC Enforcement Counsel asserts in its exceptions that FDIC examiner judgments as to the competency, integrity, and experience are entitled to deference under Sunshine State Bank v. FDIC, 783 F.2d 1580 (11th Cir. 1986). The ALJ found (R.D. at 5) that these opinions are not entitled to deference. The ALJ reasons that examiner assessments of CBCA applications are not sufficiently "predictive." R.D. at 5. The Board does not agree with the ALJ's analysis and reasoning with respect to this issue. However, in view of the ALJ's conclusion that the facts establish that applicant Oberstar and Ellefson do not have the requisite competence and integrity, with which the Board fully agrees, the Board concludes that it need not reach the issue of deference to be afforded to examiners in this context. Therefore, the Board declines to adopt the final three paragraphs on page five of the ALJ's Recommended Decision.
Accordingly, the Board agrees with the ALJ's analysis of the primary issue and his factual and legal conclusions that the applicants' Change in Bank Control Act applica-
ORDER
IT IS HEREBY ORDERED, pursuant to 12 U.S.C. §1817(j) and the FDIC Rules of Practice and Procedures, 12 C.F.R. Part 308, that the proposed Notice of Acquisition of Control by Paul E. Oberstar and James H. Peterson be, and it hereby is, DISAPPROVED.
In the Matter of
This matter involves a Notice of Disapproval of Acquisition of Control issued by the Federal Deposit Insurance Corporation (FDIC), on August 11, 1989, pursuant to its authority under the Change in Bank Control Act (CBCA), 12 U.S.C. §1817(j). Inasmuch as the application for change in control was filed before August 9, 1989, the effective date of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub.L.No. 101-73, 103 Stat. 183 (1989), the standards for disapproval are those existing prior to the enactment of FIRREA.
In the Notice of Disapproval, the FDIC specified two reasons for its disapproval: 1) the competence, experience, or integrity of the Applicants and proposed management were such that the change in control was not in the interest of the Bank's depositors or the public, 12 U.S.C. §1817(j)(7)(D); and 2) the notice of Acquisition contained conditions, acceptance of which would unduly restrict the FDIC's ability to fulfill its regulatory responsibilities.
In Sunshine, a principal issue was the appropriate classification of a large number of credits. The administrative law judge undertook to make his own determination of the classifications, and in many cases rejected the conclusion of the examiner. With approval of the Court, the FDIC Board rejected this approach, holding that the opinions of bank examiners in matters involving their predictive judgment is entitled to deference. The judge may make de novo findings as to the underlying facts of the examiner's opinion and can test the opinion for rationality. But if the facts supporting the examiner's conclusion are accurate and if the opinion is not arbitrary or capricious, then it must be accepted.
The FDIC contends that the CBCA application must be evaluated in light of the Bank's condition. Specifically, the competence, experience, and integrity of the applicants and proposed management in a CBCA application are to be evaluated in terms of their effect on the interests of the depositors or of the public in the "the bank," i.e., bank to be acquired. See 12 U.S.C. §1817(j)(7)(D). FDIC Brief, 4748. Without disputing this point, the Applicants appear to contend that the financial condition of the Bank in this instance should be considered, not only in terms of its current status but also what it would be if the CBCA application were approved. Applicants' Brief, 9.
[.1] Therefore, the size, condition, and nature and complexity of the Bank's operations when the application was filed will be considered in evaluating the application.
In the Notice of Disapproval, the FDIC determined that the CBCA application was inadequate because it contained unacceptable "conditions:"
[.2] I conclude that even before FIRREA, the FDIC necessarily had the power to protect the integrity of its regulatory authority. The FDIC could disapprove an application where approval would impede that authority. Therefore, the FDIC has the authority to deny CBCA applications on grounds other than those specified in section 1817(j)(7)(A)-(E) and is not estopped from asserting the conditions as a basis for denying the applications in the Notice of Disapproval.
[.3],[.4] Thus, the FDIC's authority is, and must be, sufficiently broad, under the CBCA and its inherent powers, to consider other bases for denial of a CBCA application in addition to those specifically enumerated. To conclude otherwise would result in the anomalous situation of an agency compelled to approve an application for acquisition which contains provisions totally inconsistent with the fulfillment of its duties but which is otherwise acceptable.
[.5] Thus, the conditions set forth in the application can be a basis for denial of a CBCA application. The FDIC bears the burden of coming forward with evidence demonstrating that the application should be denied because of the conditions. The burden then shifts to the Applicants to prove the application should be granted.
[.6] Section 1817(j)(3)-(5) is clear on its face. The agency is to issue a notice which states the basis for its disapproval of the application. The acquiring party then has the statutory right to request a hearing "on the proposed acquisition." The issues to be determined on-the-record at the hearing are to include all issues about the proposed acquisition. The statute does not indicate that there are some bases for disapproval which are not subject to review in on-the-record proceedings.
The Applicants contest the adequacy of the investigation conducted by the FDIC, pursuant to 12 U.S.C. §1817(j)(2)(B) concerning their competence, experience and integrity. The statute provides in relevant part:
[.7] However, as noted by the Applicants, the FDIC has an obligation to conduct an accurate and careful inquiry. Applicants' Reply Brief, 67. And, the FDIC has the burden of presenting a prima facie case, based on its investigation, that the change of control should be denied. Then the burden shifts to the Applicants to demonstrate that the FDIC's case is not supported by the evidence. FDIC Decision (FDIC-89-40j), March 27, 1990, Slip Op. p. 3. Thus, the Applicants can certainly introduce evidence indicating that the facts presented by the FDIC are distorted or incomplete. Such will
{{12-31-90 p.A-1552}}be taken into consideration in deciding whether the application should be granted.
In the Notice of Disapproval, the FDIC stated that:
Oberstar is a successful businessman who owns and operates two auto repair shops and engages in real estate development. TR 642. He has a background in banking, including three and a half years as an assistant national bank examiner with the Office of the Comptroller of the Currency, one and a half years as a credit analyst for *** Bank, and six years at *** Bank, where he rose to the position of Senior Vice President in charge of commercial lending. He was also one of the original founders of Boundary Waters State Bank which opened for business in 1978, and he served as a director of the Bank until 1982. TR 252, 598600.
The primary basis for the FDIC's criticism of Oberstar's competence, experience, and integrity relates to his handling of certain loans as a lending officer at *** Bank, as reflected in the July 9, 1982, Report of Examination of the Federal Reserve Board. X 35: FDIC Brief 5052.
Groe testified that the *** loan was classified as loss ($874,970). The loss portion of the loan included a $400,000 note which had been represented, apparently by Oberstar, to the bank Discount Committee as supported by an FmHA guarantee, but which in fact lacked the documentation to support such a guarantee. TR 129; X 35, p. 5(a). No interest or principal had been received on the $400,000 note since the FRB's August 1980 examination and the collateral for the loan was extremely deficient. Nonetheless, the borrower was permitted to build up an overdraft in excess of $400,000 during the latter part of 1980 and 1981. X 35, p. 5(a); TR 128-29. Groe stated
Examiner Groe testified that four other loans were for the benefit of *** in that the proceeds, directly or indirectly, went to the *** business. TR 131-33.
Groe classified the loans to *** and related interests as substandard ($120,000), doubtful ($126,342), and loss ($100,000).3The collateral was deficient, with invalid liens and other unperfected collateral. Oberstar was the lending officer who handled the credit until his departure from the bank. Groe was of the opinion that the credit had been "sloppily handled." It was difficult to determine what funds had gone to what project, and additional funds kept being provided to different projects, despite the delinquent nature of the loans. TR 133-34.
The FDIC investigation was conducted by Kirchoff. TR 250-51. He reviewed reports of examination, minutes of board meetings, and other information from the *** Bank concerning Oberstar's performance. He reviewed Oberstar's past bankrelated employment, and he reviewed a recent Boundary Waters State Bank examination report. From his review, he concluded that the *** Bank had experienced significant losses as a result of Oberstar's unsafe and unsound banking practices, particularly his handling of the *** loan.
Although Applicants' counsel questioned the accuracy and completeness of the FDIC's investigation of Oberstar, basically they argue that additional factors should be considered. For instance, they contend that the FDIC failed to interview Oberstar with respect to his performance at the *** Bank and failed to consider numerous facts demonstrating Oberstar's positive competence, experience, and integrity. Applicants' Brief, 812; Applicants' Reply Brief, 813.
The evidence concerning the *** and *** credits is uncontradicted. Oberstar handled these loans in a fashion which reflects poorly on his ability and judgment as a loan officer. On this matter the FDIC's investigation was accurate and thorough.
[.8] The failure to prosecute indicates only that there was thought to be insufficient evidence to support a criminal prosecution. It does not exonerate Oberstar's actions. Nor does it establish that he exhibited competent banking judgment.
Peterson is a successful businessman involved in entertainment, personnel, and real estate. TR 585. In the course of his business ventures, he has had frequent dealings with banks. TR 586.
[.9] The lack of banking experience on the part of an acquirer does not, in and of itself, compel the conclusion that a CBCA application should be denied. The expertise which a nonbanker brings to a bank can be of special value in broadening the bank's exposure to the business community and the general business environment. For example, in the Office of the Comptroller of the Currency's Director's Book (August 1987), p. 11, it is stated:
Ellefson has been the president and chief executive officer at the Bank since April 1988. He has over 16 years in banking, including experience in installment lending, real estate lending, and commercial lending. TR 427. He also has extensive experience with handling problem loans. TR 428-29. The Applicants propose to continue to employ Ellefson in a management capacity as
{{12-31-90 p.A-1558}}chief executive officer after their acquisition of control. X 1.
The evidence concerning Ellefson's management of the Bank is mixed. The FDIC produced some evidence and testimony indicating that his efforts to manage the Bank were not entirely successful. On the other hand, there is evidence indicating that Ellefson had made some improvements.
In the March 1989 Report of Examination, the FDIC criticized the Bank's approval of a $65,000 loan to Ellefson for the purchase of a property containing a homestead and various rental units as a violation of Regulation O, 12 C.F.R. §215.4X 6, p. 6-2; TR 268. Specifically, Ellefson was cited for violating 12 C.F.R. §215.4(b) which requires that a bank not make a loan to an executive officer in excess of 5 percent of the bank's capital and surplus without following certain procedures, including obtaining prior approval of the loan from the Board. Ellefson's loan represented ten percent of the Bank's capital and surplus and thus required Board approval.
During the March 1989 examination, Ellefson was requested to provide personal financial information in support of his loan at the Bank. In response to this request, Ellefson submitted a loan application dated August 31, 1988, which he had previously submitted in support of a loan at the *** Bank. TR 183-84; X 22. The FDIC examiner noted that some of Ellefson's known debts were not listed on the financial statement. TR 184. This omission was cited in the FDIC's Report of Investigation. X 2.
Upon the foregoing analysis, and the record as a whole, I conclude that the FDIC established prima facie that Oberstar and Ellefson lacked the competence and integrity to support an application for change in control of the Bank with Oberstar as an acquiring party and Ellefson as proposed president and chief executive officer.
As noted, the application set forth conditions purporting to bind the FDIC if it approved the change in control. Because the conditions were considered unacceptable, the application was denied. The issue is whether such was an appropriate basis for denial. There is no contention by the Applicants that the FDIC could have approved the application without the conditions.
The CBCA application states that the Applicants would provide additional capital of $550,000, which would initially increase the Bank's equity capital to 1.98 percent of total assets. The proposed capital plan projects that equity capital would increase to 7.58 percent by the sixth year. Total capital (plus reserves) is shown at 6.23 percent of assets initially, drops to 5.82 and 5.88 in years 2 and 3 and then increases to 8.30 percent by year 6. X 1, pp. 3, 11.
The Applicants agreed to allocate an additional $170,000 to the Bank's loan loss reserve, as required by the FDIC in the most recent examination of the Bank, despite the Applicants' opinion that such was not required by the state of the Bank's loan portfolio. X 1, p. 4. In consideration for adding to the reserve, the Applicants would require the FDIC to reevaluate the loan classification upon the submission of additional documentation:
1. Boundary Waters State Bank, Ely, Minnesota (Bank) is an "insured depository institution," as that term is defined in 12 U.S.C. §1813(c)(2). TR 36; Joint X 1.
1. The proposed acquisition of control of the Boundary Waters State Bank, Ely, Minnesota (Bank) by Paul E. Oberstar and James A. Peterson (Acquiring Parties) is subject to the requirements of the Federal Deposit Insurance Act, 12 U.S.C. §1811 et seq., including the Change in Bank Control Act (CBCA), 12 U.S.C. §1817(j).
ORDER
IT IS HEREBY ORDERED, pursuant to 12 U.S.C. §1817(j) and the FDIC Rules of Practice and Procedures, 12 C.F.R. Part 308, that the proposed Notice of Acquisition of Control by Paul E. Oberstar and James H. Peterson be, and it hereby is, DISAPPROVED.
James L. Rose |
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Last Updated 6/6/2003 | legal@fdic.gov |