Federal Deposit
Insurance Corporation

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   [¶5192] In the Matter of David W. Mann, Docket No. FDIC-90-125jj(12-18-90).

   FDIC denied an application for approval of employment under Section 32 of the Federal Deposit Insurance Act. FDIC found that Applicant lacked the competence, experience, character or integrity required by law for employment as Bank's chairman and chief executive officer and that Applicant's employment in such positions would not serve the best interests of Bank or the public.

   [.1] Practice and Procedure—Exceptions to Recommended Decision—Federal Deposit Insurance Act §32
   Exceptions to the Recommended Decision in a proceeding under Section 32 of the FDI Act were properly rejected because FDIC regulations do not provide for the filing of such exceptions.

   [.2] Federal Deposit Insurance Act §32—Constitutionality
   Section 32 of the FDI Act is not unconstitutionally vague. It is sufficiently clear as applied to the Applicant's conduct and the denial of an application does not reach any constitutionally protected interest.

   [.3] Federal Deposit Insurance Act §32—Scope of Proceeding
   An application under Section 32 of the FDI Act must be considered in light of the position sought by the Applicant and the risks that Applicant would pose to Bank's safety and soundness.

   [.4] Practice and Procedure—Burden of Proof—Federal Deposit Insurance Act §32
   In applications under Section 32 of the FDI Act, FDIC may reject an application where preponderance of the evidence demonstrates that Applicant lacks competence, experience, character or integrity required by the statute.

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In the Matter of
DAVID W. MANN
FIRST STATE BANK OF MARLIN
MARLIN, TEXAS
(Insured State Nonmember Bank)
DECISION AND ORDER

   This proceeding arises out of an application dated February 27, 1990 ("Application"), by David W. Mann ("Applicant" or "Mann") submitted to the Dallas Regional Office under section 32(a) of the Federal Deposit Insurance Act ("the FDI Act"), 12 U.S.C. § 1831i, seeking approval to be employed as chairman of the board and chief executive officer of the First State Bank of Marlin, Marlin, Texas ("Marlin"), a troubled institution. The Dallas Regional Office of the Federal Deposit Insurance Corporation's ("FDIC") Division of Supervision disapproved the Application on April 16, 1990, based on a determination that Mann lacked the statutory prerequisites to become a senior official of Marlin. On June 28, 1990, the Director of the FDIC's Division of Supervision ("Director") denied the Applicant's appeal from the Regional Director's disapproval.
   The Applicant requested and received a hearing before a presiding officer, who is a retired administrative law judge. The Presiding Officer recommended that this Application be denied after finding, based on a preponderance of the evidence in the record as a whole, that the Applicant lacked the "competence, experience, character or integrity" required of a section 32 applicant and that this Applicant's service as senior executive officer of Marlin would not be in the best interests of Marlin or the public. The Presiding Officer found that the Applicant consistently failed to protect the banks' interests in which he served as an officer or director, particularly when they conflicted with his own. Accordingly, the Presiding Officer concluded that the Director was justified in denying the Applicant's request to serve as chairman and chief executive officer of Marlin.

   [.1] After a review of the entire record of this proceeding, the Board of Directors ("Board") of the FDIC adopts and incorporates herein by reference the Presiding Officer's Recommended Decision, without modification, and denies Applicant's section 32 Application.¹

A. Application

   On February 27, 1990, a Notification of Addition of a Director or Employment as a Senior Executive Officer was submitted to the FDIC Dallas Regional Office by David W. Mann seeking approval for his employment as chairman of the board and chief executive officer of the First State Bank of Marlin.² The FDIC's Dallas Regional Director ("Regional Director") disapproved the Application on April 16, 1990, based on a review of the Applicant's competence, experience, fitness of character and integrity under section 32(e). The Regional Director advised the Applicant that regulatory reports indicated that the Applicant had participated in undesirable and/or objectionable practices detrimental to the financial institutions with which he had previously been associated.³
   The Applicant met with staff of the Regional Office on April 25, 1990, whereupon the Applicant was provided additional information with respect to the disapproval of his employment application. The specific transactions and practices criticized were clarified to the Applicant in a letter dated May 7, 1990, from the Regional Director.⁴

   [.4] Finally, the Board also finds that the preponderance of the evidence standard is appropriate in reviewing a section 32 application and adopts the Presiding Officer's Recommended Decision with respect to this standard. See, e.g., Herman & McLean v. Huddleston, 459 U.S. 375 (1983).

   Section 32 is 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 need to be persons with demonstrable records of proactive management. The Applicant's record demonstrates a pattern of reactive management, taking corrective action only after apparent violations are reported and penalties threatened. In each of the transactions cited, the Applicant could and should have known of the apparent violations and conflicts of interest either at their inception or after assuming the duties of a senior officer. The record demonstrates that the Applicant failed to take action to protect the interests of the banks which he served, particularly when those interests conflicted with his own. The chief executive officer of a troubled institution must recognize potential regulatory violations and conflicts and steer the institution clear of such hazards.
   This decision is not based on any one isolated transaction, but rather, on the record as a whole and the patterns evident from the record. The Board does not necessarily find that the Applicant's record demonstrates a pattern of malfeasance, but that the record does demonstrate a pattern of inaction or acquiescence amounting to unacceptable nonfeasance to serve as the chief executive officer of this troubled institution. The preponderance of the evidence demonstrates that the Applicant does not possess the requisite competence, experience, character, or integrity required to serve as the chief executive officer of Marlin.

ORDER

   The Board of Directors of the Federal Deposit Insurance Corporation, having considered the entire record in this proceeding, hereby adopts the recommendation of the Presiding Officer to deny the appeal of David W. Mann.
   ACCORDINGLY, IT IS HEREBY ORDERED THAT, the Notification of Addition of Director and/or Employment of Senior Executive Officer, submitted by David W. Mann and the First State Bank of Marlin on February 27, 1990, be and is hereby denied.
   IT IS FURTHER ORDERED, that the Executive Secretary, or his designee, is instructed to execute and serve copies of this Decision and Order on counsel for all parties, on the Presiding Officer, and on the Banking Commissioner for the State of Texas.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 18th day of December, 1990.

In the Matter of
David W. Mann
First State Bank of Marlin
Marlin, Texas
Hearing under Part 308 of FDIC's
Rules and Regulations

Background

   On February 27, 1990, a Notification of Addition of a Director or Employment of a Senior Executive Officer was submitted to the FDIC by Chairman of the Board and Chief Executive Officer of the First State Bank of Marlin, Marlin, Texas.
   After requesting certain additional information by letter by March 5, 1990, the Director of the Dallas Regional Office on April 16, 1990, disapproved the employment of Mr. Mann as Chairman of the Board and Chief Executive Officer of the First State Bank of Marlin pursuant to Section 32(a) of the FDIC Act. He advised that the disapproval was based upon the criteria of Section 32(e), that is, competence, experience, fitness of character, and integrity.
   More specifically, the Regional Director advised that reports of regulatory authorities indicated that David W. Mann had {{5-31-92 p.A-1597}}participated in undesirable and/or objectionable practices detrimental to the financial institutions with which he had previously been associated. According to the Regional Director, these practices included insider transactions which in some instances resulted in excessive and unwarranted fees on the depository institutions, and furthered the pecuniary interests of entities in which he had an interest. Additionally, it was stated that the nature and extent of David W. Mann's business affiliations were such that, in the estimation of the Regional Office, he lacked sufficient time to fully and faithfully discharge his proposed duties at the First State Bank of Marlin.
   After a meeting with the Regional Office staff on April 25, 1990, additional and more specific information was furnished to David W. Mann relative to the reasons for the disapproval of his proposed employment at the Marlin bank.
   By letter of May 7, 1990 (FDIC Ex. 11), the Regional Director recited that Mr. Mann had been a Director of the Citizens State Bank, Woodville, Texas, the Farmers State Bank of Madisonville, Texas, the United Bank of Waco, and United Bankers, Inc., a bank holding company. The Regional Director identified a number of transactions or practices of the foregoing banks and their affiliates with which it alleged that David W. Mann was associated and which it criticised.
   With respect to the Citizens State Bank, the Regional Director advised that the available body of evidence indicated that Mr. Mann participated in a violation of Section 23B of the Federal Reserve Act arising from the lease of an automated teller machine by the Citizens State Bank from The Omnibus Corporation, an affiliate. Because of the circumstances surrounding the handling of this lease, it was the position of the Regional Director that the lease arrangement was on preferential terms to the bank affiliate, and constituted an unsafe and unsound practice.
   The May 7, 1990, letter also questioned the sale by Citizens State Bank of a real estate tract to an organization known as the Pine Tree Trust. This was a Trust set up by Robert A. Mann (the father of David W. Mann) who was then Chairman of the Board of the Citizens State Bank. The beneficiaries of the Trust were two of his children and his six grandchildren, three of whom were David W. Mann's own children (FDIC Ex. 1 and FDIC Ex. 11).
   A third transaction of the Citizens bank criticised was a month-to-month equipment lease of furniture and fixtures, also from the affiliated Omnibus Corporation. According to the Regional Director, the lease payments were under circumstances such that the charges were not consistent with those customarily charged in the business community between unrelated third parties.
   With respect to the Farmers State Bank of Madisonville the May 7, 1990, letter alleged that David W. Mann had participated in or acquiesced in arrangements between the bank and its holding company and affiliates which had resulted in the imposition of excessive fees for data processing services, and in connection with his attendance at Directors meetings.
   Finally it was asserted that the Comptroller of the Currency and the Federal Reserve Board had raised questions about other actions of the banks and affiliates where David W. Mann had served as an Officer or Director.
   Based on the transactions and practices cited, the Regional Director questioned whether David W. Mann would protect the interests of the First State Bank of Marlin when in conflict with other organizations in which he had an interest. In consequence, the Regional Director disapproved him as a Director and senior official of the Marlin bank.

Appeal of David W. Mann

   On May 29, 1990, David W. Mann appealed the determination of the Dallas Regional Director. In a detailed submission accompanied by extensive documentation (Rx 1), Mr. Mann took issue with the facts and conclusions of the Regional Director's letter of May 7, 1990. In summary, without repeating every argument or assertion of fact, David W. Mann through counsel took up each of the items or transactions recited by the Regional Office and sought to refute the facts relied on and the inferences drawn. Mr. Mann's contentions were again made at the hearing and will be clear from discussion later in this recommendation.

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Denial of Appeal

   On June 28, 1990, the Director, Division of Supervision of the FDIC in Washington, denied David W. Mann's appeal contained in the letter of May 29, 1990, from his counsel, noting that the FDIC could not find favorably with respect to his competence, experience, character and integrity, that service as the senior executive officer of the First State Bank of Marlin would not be in the best interests of either the depositors of the bank or the public, that inherent conflicts of interest might exist due to his serving in positions with interrelated financial institutions and business enterprises, and that Mr. Mann did not possess the specialized expertise necessary to address the many problems associated with the bank. The Director, Division of Bank Supervision, observed that the Marlin bank required a full-time and more experienced Chairman of the Board and Chief Executive Officer than Mr. Mann. A hearing was directed in the event David W. Mann so requested.

Hearing

   Pursuant to David W. Mann's request, a hearing was held in Waco, Texas, on August 29, 30 and 31, 1990. Eight witnesses testified, including David W. Mann. Approximately one-thousand pages of testimony were compiled and a large number of exhibits were received. The transcript was received from the reporter on September 26, the main briefs of the parties on October 12 and the reply briefs on October 26, 1990.

Evidence and Decision

   Testimony and documentary evidence was received on David W. Mann's participation or position as a Director or Officer in connection with the following transactions or matters:

I. Transactions at Citizens State Bank

   1. Lease of ATM facility from The Omni-
bus Corporation, an affiliate.

   The Citizens State Bank of Woodville, as described, leased an automated teller machine, the structure in which it was housed, and the land on which it was situated from The Omnibus Corporation (FDIC Ex. 1, p. 7-a; TR. II, p. 316). This lease was dated August 1, 1982, and became effective September 1, 1982. It provided for monthly payments of $2430 for the machine, housing and land, and provided an option to purchase the ATM at the expiration of five years for $3800, 10 percent of the original cost of the machine (Rx 1, Tab 9A).
   The annual rental cost for the whole installation was allocated as follows: $13,557.60 for the ATM, $13,300 for the building and improvements, and $2304 for the land. On a monthly basis this was $1130 for the ATM, $1108 for the building and improvements, and $192 for the land.
   The Omnibus Corporation was one of a complex of affiliates or partly or wholly subsidiaries of the bank holding company, United Bankers, Inc. These affiliates and subsidiaries included the banks, United Bank of Waco, the Farmers State Bank of Madisonville, the First State Bank of Marlin, the Citizens State Bank of Woodville, and the bank service firms United Bankers Service Corp., United Data Services, MidStates Capital Corp., and many others (Rx 5).
   Citizens State Bank of Woodville is owned 100 percent by a one-bank holding company, Security Bankshares, Inc., and David W. Mann's father, Robert A. Mann, controls and has power to vote 52.27 percent of Security Bankshares, Inc. (FDIC Ex. 1, p. 6-c). He is Chairman of the Board and Chief Executive Officer of The Omnibus Corporation.
   The Omnibus Corporation is owned by Robert A. Mann, the D.P. Mann Trust, the Hattie B. Mann Trust and the Mann Group Investment Company (FDIC Ex. 1, p. 6-c-1).
   There are many other affiliated or associated firms in the complex in which United Bankers, Inc., is the main bank holding company (see Rx 5; FDIC Ex. 3; pp. 14–21; and TR. I, 309-39). Citizens State Bank and The Omnibus Corporation are affiliates under the provisions of Sections 23A and 23B of the Federal Reserve Act (Rx 1, p. 3).
   After five years elapsed, the Citizens State Bank had the option to purchase the automated teller machine from The Omnibus Corporation in September 1987. At this time the lease provided for an increase in rental payments based on the Consumer Price Index (TR. III, p. 6). Citizens State Bank did not exercise the option to purchase the ATM but continued to pay its affiliate, The Omnibus Corporation, the monthly rental, at this time increased to $1322. According to the FDIC report, the President of the Citizens State Bank at- {{2-28-91 p.A-1599}}tempted to exercise the option to buy the ATM but was informed by the then vice-president of The Omnibus Corporation that exercise of the option to buy would not be permitted (FDIC Ex. 1, pp 6-a-1, 7-a; see also FDIC Ex. 11, p. 2). Consequently, Citizens State Bank continued to pay a monthly rental of $1332.
   The inability or failure of the Citizens State Bank to exercise the option to purchase the ATM machine from The Omnibus Corporation caused the bank a substantial monetary loss and enriched The Omnibus Corporation.
   The FDIC report of examination submitted in December 1988 cited this transaction as an apparent violation of Section 23B of the Federal Reserve Act. The Board of Directors, Citizens State Bank, however, was informed by letter of April 27, 1989, that civil penalties would not be pursued if prompt efforts were made to correct the violation and restitution was sought (Rx 1, Tab 7).
   These steps were taken by the Citizens State Bank and The Omnibus Corporation then reimbursed the bank $22,471, allowed it to purchase the ATM, and cancelled the lease (Rx 1, Tab 8).
   With respect to the building or structure which housed the ATM and the land upon which it was situated, after adjustments for increases in rentals were made after September 1987 based on the Consumer Price Index (Rx 1, Tab 9A, p.88), the Citizens State Bank was paying The Omnibus Corporation $1297 per month for the ATM building or structure and $224 for the land rental (Rx 7, attached at the end of TR. Vol. III). The combined monthly payment thus was $1521.
   After the report of the FDIC examination of the Citizens State Bank rendered December 31, 1988, the bank engaged an independent real estate appraisal firm to conduct a market rental analysis of the building or structure housing the ATM and the proper rental of the land on which it was situated.
   The independent real estate appraisal firm by letter of May 31, 1989, advised that the fair market rent value of the installation, exclusive of the ATM machine itself, was properly $675 a month rather than $1521. The Omnibus Corporation then made a reimbursement to the Citizens bank of the difference between what it had received from its Citizens State Bank affiliate and the fair rental value, that is, $846 a month for 22 months or approximately $18,620 (Rx 1, Tab 10).
   David W. Mann had been named as a Director of Citizens State Bank as of November 17, 1983. He became a Vice-President and Director of Omnibus in January 1988 (TR. II, pp. 317-19; Rx 1, Tab 5, pp. 52–53).
   Although he had been a Director of the Citizens bank since the November 1983, David W. Mann testified that he had no knowledge of the operating lease of the ATM facility by his bank from the affiliated Omnibus Corporation or of the inability or failure of the bank to purchase the ATM machine in September 1987 (TR. II, pp. 317-22).
   The minutes of the meetings of the Citizens bank Board of Directors do not show that the option to purchase the ATM machine came before the Board in August, September or October of 1987 (Rx 1, Tab 6; TR. II, P. 320–321).
   According to David W. Mann, the ATM lease was the responsibility of the management of the Citizens State Bank and he had no knowledge of the matter until the transaction, the terms of the lease, and the failure to exercise the option to purchase the machine, were criticised by the FDIC examiners at the end of December 1988 (TR. II, p. 322).
   In the opinion of the undersigned, lack of knowledge and the fact that the ATM lease did not come before the Board of the Citizens State Bank when the purchase option could have been exercised, does not relieve David W. Mann from responsibility. He was a Director of the Citizens State Bank for four years before September 1987. Although a Director may not be required to know about every minor expenditure of his bank, the ATM lease payments were not minor. Furthermore, they were recurring monthly payments. The ATM installation was a significant aspect of the operations of the Citizens State Bank. The importance of the costs born by the bank of this installation are clear from the repayments made by The Omnibus Corporation, $22,471 for the machine itself and $18,620 for the building and the rental allocated to the land. These are substantial sums.
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   The Citizens State Bank paid out excess charges for the ATM machine rental which the bank would not have had to pay if the bank Directors, including David W. Mann, had fulfilled their responsibilities to monitor properly bank expenses. If David W. Mann did not know the provisions of the lease agreement with Omnibus and the option to buy the ATM machine, and thus to save substantial rental payments to Omnibus, he should have known those matters, and it was his duty as a Director of Citizens to know them.
   Excess rental payments by the Citizens State Bank to The Omnibus Corporation were not terminated until the FDIC bank examiners criticised them and threatened a civil penalty action for violation of Section 23B of the Federal Reserve Act. The fact that David W. Mann, as Vice President and a Director of Omnibus in the first half of 1989, approved reimbursement to the Citizens State Bank for the excess payments to Omnibus, and worked to ensure such reimbursement, does not rectify his failure to fulfill his responsibility as a Director of Citizens to monitor substantial expenses and to prevent excess payments in the first place.

2. Sale of Real Estate to the Pine Tree
Trust

   The Citizens State Bank, after approval of the transaction by its Board of Directors, sold a five acre tract of land containing a shopping center to an organization known as the Pine Tree Trust.
   This trust was established for the purpose by Robert A. Mann, the father of respondent in this matter, who was then Chairman of the Board of the Citizens State Bank, as Trustor. The beneficiaries were two of his children and his six grandchildren. Three of the beneficiary grandchildren, as noted, were respondent David W. Mann's own children (FDIC Ex. 1 p. 2-a-17; FDIC Ex. 11; TR. III, p. 134).
   The real estate sold was a parcel of land on which was located a 20,000 square foot building which was leased to a grocery store for a 20 year term (TR. III, p. 31). The property had been acquired by the Citizens bank through foreclosure. It was held on the bank's books as "other real estate" with a book value of $532,000 after depreciation at the time the property was transferred out of the bank's "OREO" portfolio to the Pine Tree Trust on December 30, 1986 (TR. I, pp. 68–69, 74–75).
   The sale price to the Pine Tree Trust on the records of the bank was $532,000 which was financed by a loan of $558,000 to the Trust, $26,000 of which was credited to a deposit account of the Trust at the bank to enable the Trust to pay outstanding property taxes for 1986, insurance coverage for the following year, and legal fees (TR. 1, pp. 69–70). The rate of interest on the $558,000 loan was 6 percent (Id.; TR. III, p. 46).
   The Pine Tree Trust made no down payment, risked no money, and the costs of the transaction were paid out of the $558,000 loan by the bank (TR. I, pp. 70–75). Further, at the time of the loan to the Pine Tree Trust, the Citizens Bank was charging 11 percent on comparable real estate loans (TR. I, pp. 77–79).
   At the time of the sale of the property to the Pine Tree Trust, the supermarket tenant was paying the Citizens State Bank a $6236.48 monthly rental (FDIC Ex. 1, p. 2-a-17; TR. III, p. 135). According to the FDIC bank examiner, the Citizens State Bank received about $1200 a month less from the loan to the Pine Tree Trust than it would have received from the lease payment (TR. I, p. 80). Although the bank was responsible for paying $565 per month in insurance and taxes on the property and exterior maintenance costs, possibly $500 per month as a conjecture (see TR. III, pp. 37–41), it seems apparent that the income from the lease to the supermarket exceeded the income from the loan to the Pine Tree Trust at 6 percent interest.
   In any event, the bank made the loan of $558,000 at 6 percent interest at a time it could have obtained 11 percent in the determination of the FDIC bank examiners.
   An adjustment of $119,000 was required by the FDIC to the bank's capital account which represented the financial loss that had been incurred by the bank due to the lower return realized as a result of the 6 percent interest rate charged to the Pine Tree Trust (FDIC Ex. 1, p. 2-a-17; TR. I, pp. 83–85). In other words, it was determined that the Citizens State Bank could have realized the same income from a loan at $439,000 at 11 percent as it received from the $558,000 loan to the Pine Tree Trust at 6 percent, and the bank thus failed to realize a potential income on $119,000 over the life of the loan (TR. III, p. 48).
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   There were other aspects of this loan to the Pine Tree Trust worthy of note. David W. Mann testified that he did not know if an appraisal of the property was performed prior to the sale to determine if the price of $532,000 was a proper price for the bank to obtain for the property (TR. III, p. 127). Additionally, the Pine Tree Trust was created for the specific purpose of acquiring the property from the bank and had no record of credit worthiness, and had no assets until it acquired the property (TR. III, pp. 154–168). The note executed by the Pine Tree Trust was a non-recourse note so there was no possibility of a deficiency judgment in case of default (TR. III, pp. 166–168).
   When the Board of the Citizens bank took up the proposed sale to the Pine Tree Trust David W. Mann was present during the entire discussion along with his father, the Chairman of the Board of Citizens. The elder Mr. Mann brought up the matter, proposed that the Pine Tree Trust was an organization that could be formed and would be ready to bury the property, and described his reasons for wanting to do it. David W. Mann testified that the sale to Pine Tree Trust was fully discussed by the Board but that he did not attempt to influence the Board at the meeting or outside the meeting. When the proposed sale came up for a vote David P. Mann remained present at the meeting but abstained from voting (TR. III, pp. 367-69; see also TR. III, pp. 46–47, 128–132).
   It is clear that the Citizens State Bank suffered a loss or detriment from this transaction in that it made a substantial loan at an interest rate of 6 percent when it could have gotten 11 percent according to the FDIC bank examiner. The yearly differential is $27,000, which is the difference between interest at 6 percent, $33,480, and interest at 11 percent, which is $61,380, on a principal sum of $558,000.
   Although David W. Mann abstained from voting on this transaction and testified that he did not attempt to influence the Board at the meeting or outside it regarding the sale, more was required of him under the circumstances. The sale of the property to the Pine Tree Trust was not an arms length transaction (TR.I, p. 134). If it was a good deal for the Pine Tree Trust, David W. Mann had an interest in it insofar as his children were beneficiaries of the Trust.
   A Director is not properly fulfilling his responsibilities by remaining neutral or silent while the bank of which he is a Director makes a transaction detrimental to its interests. Although regulations prohibit a Director from participating in decisions of their banks involving extensions of credit to them or in their interest (Rx 10), it would be contrary to the intention of this regulation to construe it to prevent a Director from speaking up against a transaction contrary to the banks interest (see TR. III, pp. 176-78; TR. II, p. 204).
   David W. Mann defends the property sale by the Citizens State Bank to the Pine Tree Trust on several grounds, all of which are unfounded in the opinion of the undersigned.
   It is argued that the sale to the Pine Tree Trust was a good deal compared to an offer of $200,000 which an Officer and Board member stated he had received (TR. 53–55, 106). However, that such a price was a fair alternative is not credible on this record. The bank carried the property on its books at a value of $532,000. There is no evidence in the record that the bank obtained any appraisals prior to the sale to the Pine Tree Trust, and there is no evidence that any systematic effort was made by the bank to obtain other offers to compare with the proposed sale price to the Pine Tree Trust.
   Furthermore, the bank was not in a distressed situation with respect to the property. It was leased to a supermarket and producing income sufficient to cover its costs and greater than that realized from the 6 percent interest it received from the loan to the Pine Tree Trust.
   It is contended that the bank was under an obligation to sell other real estate in its possession within five years under Texas law, but there is no evidence that the bank was nearing this time limit (see TR. III, p. 122, 129), and an extension of this time limit could have been applied for in any event (TR. III, P. 130).
   It is argued that the bank will sustain no loss if the loan to the Pine Tree Trust is paid off (TR. II, p. 362). This argument ignores the loss or detriment to the Citizens bank by the failure to realize the difference in income between a loan at 6 percent and a loan at 11 percent.

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   3. Lease of Furniture and Fixtures by the
Citizens State Bank from The Omnibus Cor-
poration
   Certain furniture and fixtures were leased by the Citizens State Bank from The Omnibus Corporation. The original lease of March 1, 1967, was amended a year later and the terms were made month-to-month with per month payments to Omnibus of $2354 at that time.
   At the time of the FDIC examination the monthly payment was at the rate of $3800 of which $829 represented items that the bank had been leasing for 21 years and which had an economic life of 5 to 10 years. Since the lease was on a month-to-month basis it could have been terminated at any time, and if the items had been purchased and expensed and/or depreciated they would have been written off sometime between 1972 and 1977.
   However, from March 1, 1977 to February 1, 1989, the Citizens State Bank made 144 payments to Omnibus for these old and superannuated items such as wastebaskets, tables, chairs, lamps, etc., in the aggregate of $118,457 (FDIC Ex. 1, p. 6-a-1; TR. I, pp. 58–64; Rx 1, Tab 17).
   The FDIC report of the examination of the Citizens Bank cited these payments to Omnibus as an apparent violation of Section 23B of the Federal Reserve Act, and they were among the matters discussed by the Board of Directors of Citizens with the staff of the FDIC Regional Office on May 18, 1989. Reimbursement was promised. On June 19, 1989, The Omnibus Corporation submitted a check for $118,547 to the Citizens State Bank in repayment of excess charges (Rx 1, Tabs 10 and 17).
   David W. Mann testified that the equipment lease from Omnibus was never discussed by the Board of the Citizens bank from the time he became a Director on November 17, 1983, that he had never noticed anything in reviewing records of Citizens bank as a Director which brought this lease to his attention, and that the lease had never been criticised by prior examinations of the Citizens State Bank (TR. III, pp. 58–59).
   As in the case of the lease of the automated teller machine, David W. Mann as a Director of the Citizens State Bank since November 1983 was not a mere figurehead. He had the responsibility to oversee the management and ensure that the bank was run properly, and in the best interest of its depositors and the public. Although he was not involved in day-to-day management (TR. II, p. 212) and was not required to be conversant with every small matter or item of expanse (TR. I, p. 143) an unnecessary and excess payment of $829 a month, $9948 a year, is not a small or minor matter. Overall the equipment leased from Omnibus involved a monthly recurring expense of $3801, or $45,612 annually.
   It is the responsibility of Directors to review such items of expense on a regular basis, and Texas banking regulations so require. That David W. Mann did not know about the furniture or fixtures lease, and the unnecessary and excess payment of $829 every month to Omnibus, does not free him from responsibility as a Director. If he did not know, in the exercise of his responsibilities he should have known. The fact that repayment was made and that Mr. Mann was active in achieving this does not change matters, as reimbursement was made after FDIC criticism and the threat of Civil penalties (TR. III, pp. 173–176; Rx 1, Tab 10).

II. Charges and Fees Imposed by Holding
Company, United Bankers, Inc.

   1. Data Processing Fees Paid to United
Data Services, Inc. and Management Fees
paid to United Bankers, Inc., by Farmers
State Bank

   In 1988 the Farmers State Bank of Madisonville paid its affiliate, United Data Services, Inc., $116,000 in data processing fees and paid $40,000 in such fees up to May 31, 1989, at which time the bank was examined by the FDIC.
   These charges were questioned by the FDIC bank examiners on the ground that they were non-competitive and appeared to be in excess of what a nonaffiliated company would charge for comparable services. The bank examiners also considered that the volume of charges for a small country bank, such as the Farmers State Bank, were excessive. Competitive bids would have reduced these fees about 20 percent (Rx 1, Tab 18; TR. II, pp. 219-31).
   Management fees assessed against the Farmers bank were also deemed by the FDIC bank examiners to be excessive. These charges were imposed on the Farmers bank by its controlling holding company, United Bankers, Inc., and that concerns' 100 percent owned subsidiary, United {{2-28-91 p.A-1603}}Bankers Service Corporation (Id.; see also Rx. 5).
   Both the data processing fees and the management fees were cited by the FDIC bank examiners as apparent violations of Section 32B of the Federal Reserve Act.
   A controlling interest in United Data Services, Inc., was owned by United Bankers, Inc., through its 100 percent ownership of the United Bank of Waco and its 100 percent ownership of the First State Bank of Marlin through its ownership of Marlin Bankshares, Inc., the holding company for the Marlin bank (Rx 5).
   The Farmers State Bank was also a controlled subsidiary of the holding company, United Bankers, Inc., as earlier noted.
   David W. Mann became a Director of United Bankers, Inc., in January 1985, and remained a Director for approximately four years until October 13, 1988. About three months later, however, he returned to that holding company as a Director and chief executive officer.
   Although Mr. Mann did not become a Director of the Farmers State Bank until February 1989 he has been a long-term Director of United Bankers, Inc., which controlled the Farmers bank. As such, he shares responsibility with the other Directors and Officers of United Bankers, Inc., for the data processing and management fees paid by the Farmers bank. Such fees were deemed to be excessive, high or noncompetitive and to have violated Section 23B of the Federal Reserve Act by the FDIC bank examiners (see TR. II, pp. 225-26).

   2. Fee of $1200 paid by the Farmers State
Bank for attendance of David W. Mann at
its Board of Directors meeting

   The report of the examination of the Farmers State Bank of May 31, 1989, by the FDIC criticised a $1200 fee paid by the Farmers State Bank for David W. Mann to attend its Board of Directors meeting. The report stated that as a Director of the Farmers bank he should only be entitled to the normal director's fee of $100 per meeting attended. At this time Mr. Mann was also Executive Vice-President of United Bankers, Inc.
   Prior to the hearing it was alleged in the May 7, 1990, letter of the Regional Director that this $1200 fee amounted to "double dipping" on the part of Mr. Mann. However, the evidence at the hearing established that this fee was paid to United Bankers, Inc., not to David W. Mann. Since the $1200 fee was paid to the holding company and no fee was paid to Mr. Mann, there was no "double dipping", as such, on his part. Nevertheless, as described, United Bankers, Inc., owned a controlling interest in the Farmers State Bank, and the $1200 fee imposed for Mr. Mann's attendance was to its benefit.
   As a Director of Farmers State Bank as of February 25, 1989, David W. Mann was expected to attend its directors meetings as part of his duties as a Director. Since other directors were paid only $100 for their attendance, David W. Mann shares responsibility with the other Directors and Officers of United Bankers, Inc., as well as in his capacity as a Director of Farmers, insofar as this $1200 fee was inappropriate or improperly paid or imposed on the Farmers bank. As a Director of the Farmers State Bank David W. Mann owed it a fiduciary duty to prevent inappropriate or improper payments to its detriment.

   3. Compliance by United Bankers, Inc.,
with Federal Reserve Policies relating to
Fees Imposed upon its subsidiary or affili-
ated banks.

   In March 1988 there was a Federal Reserve examination of United Bankers, Inc. (TR. III, p. 66). The report issued criticised the fees imposed on its subsidiary banks as excessive and stated that the methodology for imposing the fees did not comply with Federal Reserve policy.
   The report stated that fees based on asset size were not in compliance with the Federal Reserve policy statement, that documentation to support the fees had to be submitted, that unsubstantiated fees had to be reimbursed, and that the management of United Bankers, Inc., and its Board of Directors must ensure that fees charged were appropriate and complied with Federal Reserve requirements (TR. III, pp. 82–85).
   Although the Federal Reserve bank examiners criticised the charges imposed on subsidiary banks by United Bankers, Inc., in the March 1988 report, it is clear that charges not in conformance with Federal Reserve policy had been imposed by United Bankers, Inc., and its affiliated bank service {{2-28-91 p.A-1604}}companies, for years (see TR. II, pp. 220-23).
   The Federal Reserve policy on charges and fees billed subsidiary banks was not new in 1988, but was a long-standing policy promulgated in 1979. The policy was aimed at charges and fees of holding company banks which siphoned income from subsidiary banks by charges or fees not reasonably related to the fair market value of the services for which the charges or fees were imposed, or for services which were not needed or inappropriate for the subsidiary banks involved, i.e., sophisticated data processing services for a small country bank.
   Directors of a bank holding company are required to manage its affairs so that it complies with regulatory policy and all regulations of supervisory bodies. Inaction until bank examiners identify a practice as violation of regulatory policy is not a satisfactory fulfillment of Directors' responsibilities (see TR. II, pp. 224-26). Directors' are required to monitor and review holding company bank practices and policies on a continuing basis.
   David W. Mann had been a Director of United Bankers, Inc., for over four years before the Federal Reserve bank examiners flagged the charges and fees imposed upon its subsidiary banks as excessive and/or inappropriate. He is responsible along with the other Directors of United Bankers, Inc., for its failure to conform to Federal Reserve policy over a long period of time, amounting to a number of years.
   Further, a second Federal Reserve examination of United Bankers, Inc., was conducted in March 1989 (TR. III, p. 97). Again, the examiners found that fees charged to subsidiary banks were still excessive and that the methodology of assessing the fees was not in compliance with the Board policy. As before, the report stated that the majority of United Bankers, Inc., fees were based on asset size rather than on the specific services provided to each bank, that fees were assessed which were related to parent or non-bank activities which were not overhead expenses, and that cost savings were not passed down to the banks in a timely manner (TR. III, pp. 97–100).
   The Federal Reserve examination report based on the examination in March 1988 was received by United Bankers, Inc., in July 1988, yet nine months later the charges and fees were still out-of-compliance with Federal Reserve policy.
   David W. Mann was a Director or chief executive officer of United Bankers, Inc., for approximately six months of this nine month period following the March 1988 examination by the Federal Reserve. He is therefore responsible with the other Directors of United Bankers, Inc., for the failure for a considerable period to bring United Bankers, Inc., fees into compliance with Federal Reserve policy after they were specifically questioned in the report of the March 1988 examination.

III. Other Issues

   1. Contention that David W. Mann lacks
sufficient time to effectively fulfill the duties
of Chief Executive Officer of the First State
Bank of Marlin

   A very large number of subsidiary and affiliated firms were connected directly or indirectly with United Bankers, Inc. (see TR. I, pp. 301-39). In all there were 49 business entities with which David W. Mann was connected (TR. II, p. 4). At the time of his application for approval as Chairman and Chief Executive Officer of the First State Bank of Marlin, he was receiving a salary from four, the United Bank of Waco, the First Financial Corporation, the Farmers State Bank of Madisonville, and United Western Life Insurance Company.
   Shortly before the hearing in this case the United Bank of Waco was declared insolvent and was closed by the Comptroller of the Currency (TR. I, p. 320). However, duties in connection with the First Financial Corporation and its eleven subsidiaries, United Bankers, Inc., United Western Life Insurance Company and its subsidiaries, Chairman and Chief Executive Officer of Farmers State Bank of Madisonville, and duties relating to miscellaneous enterprises including The Omnibus Corporation, Blue Bonnet Enterprises, Inc., Citizens Land Corporation, Marlin Bankshares, Inc., Security Bankshares, Inc., required a substantial commitment of time.
   Based on David W. Mann's testimony FDIC counsel calculated that he would be spending about 62 hours a week on duties at other entities, exclusive of the time he would be required to spend as Chairman and Chief Executive Officer of the Marlin bank. Counsel therefore argued that it was {{2-28-91 p.A-1605}}improbable that Mr. Mann would have adequate time to perform the required duties at the Marlin bank, and that Mr. Mann could not function effectively as its senior operating officer.
   The analysis of FDIC counsel was based upon a transcript (TR. I, p. 333) which reported Mr. Mann as testifying that he spent 32 hours a week on the affairs of The Omnibus Corporation. A post-hearing submission of Mr. Mann states that this was an error of transcription and that he testified that the time he devoted to Omnibus was "three to two" hours per week. An affidavit verifying this was submitted by the Court Reporter who reviewed the cassette tapes and her stenographic notes.
   Correcting the transcript in this manner is unusual but not inherently incredible. Moreover, The Omnibus Corporation on this record does not appear to be the sort of business entity which would require 32 hours of Mr. Mann's time every week. David W. Mann did testify that he would devote the time to the Marlin bank which that institution required (TR. II, p. 310).
   In any event, it is within the control of an individual how that individual's time is allocated. Priorities can be established and particular responsibilities dropped. Whether Mr. Mann spent 32 hours a week at the time of the hearing on this case on The Omnibus Corporation, or two or three hours a week, is immaterial. He can drop that commitment, whatever it was, if necessary.
   In my opinion it was not established that David W. Mann could not spend as much time on the affairs of the Marlin bank as that bank required.

   2. Contention that David W. Mann lacks
specific technical expertise to handle the
problems of the First State Bank of Marlin

   The First State Bank of Marlin is a troubled institution under the supervision of a Texas banking supervisor, James Scamardo. It is a small bank located in an agricultural community. The financial problems of the bank derive mainly from participation loans purchased from its affiliate, the United Bank of Waco (TR. III, p. 244). Although the bank had some problem agricultural loans, these are not the main cause of the bank's troubled state (Id.). These nonperforming or defaulted participation loans of the Marlin bank are beyond the control of David W. Mann or any Chief Executive Officer to rectify.
   The Supervisor of the First State Bank of Marlin testified that the Chief Executive Officer of the bank required someone with experience lending to the local community and who had technical training in agricultural loans. David W. Mann has no special expertise in agricultural lending and admitted this (TR. II, p. 13). In fact, the Texas appointed supervisor of the Marlin bank (TR. III, p. 232) testified that he did not think Mr. Mann had much lending experience in general (TR. III, p. 243). The Marlin bank already has two long-term and experienced officers in the agricultural lending area, and the Texas bank supervisor testified that he could not see what Mr. Mann could contribute to the bank (TR. III, p. 248). Further, in the opinion of this supervisor, the Marlin bank did not need any more overhead (TR. III, p. 249). According to the supervisor, the Marlin bank needed capital and, although Mr. Mann had tried to raise capital for the Farmers State Bank of Madisonville, he had not been successful (TR. III, p. 255).
   Mr. Scamardo did not believe that David W. Mann was qualified or could be an effective Chief Executive Officer of the First State Bank of Marlin (TR. III, pp. 232-43, 247-49).
   James Scamardo is an expert in the banking field and has direct experience in the Marlin bank as its supervisor. He has had an opportunity to study the bank and to observe David W. Mann. Mr. Scamardo's testimony is persuasive, and outweighs that of witnesses who testified for Mr. Mann, Mr. McKinley, Mr. Reed and Mr. Duhr.
   In sum, the evidence does not establish that David W. Mann possess the expertise and skills needed to handle the problems of the First State Bank of Marlin. As a troubled institution, it has a Texas bank supervisor monitoring its operations, as does the Farmers State Bank and the Citizens State Bank (TR. III, pp. 227-34).
   Although David W. Mann contended that he was qualified to or would be able to raise the capital needed by the Marlin bank, the evidence does not sustain this position. As noted above, he was not able to raise the capital required to restore the Farmers State Bank of Madisonville to a healthy {{2-28-91 p.A-1606}}condition, notwithstanding strenuous efforts in this endeavor. Testimony that he participated in raising a large sum for the United Bank of Waco in England was not documented. The Texas bank supervisor did not endorse any special capabilities of David W. Mann in raising capital (TR. 254-55).

Conclusion and Recommendation

   Based upon the record of Mr. Mann at other banks and affiliates with which he has been associated, the FDIC Regional Director was fully justified in disapproving him as Chairman of the Board and Chief Executive Officer of the First State Bank of Marlin.
   The preponderance of the evidence on the record as a whole supports the decision of the FDIC Director, Division of Supervision, denying David W. Mann's appeal from the disapproval of the Regional Director on the ground that the FDIC was unable to find favorably with respect to the competence, experience, character or integrity of Mr. Mann, and that service by him as a senior executive officer of the First State Bank of Marlin would not be in the best interests of the Bank or the public.
   Accordingly, it is recommended that the Order issued June 28, 1990, denying the Appeal of the Notice of Disapproval of David W. Mann as Chairman of the Board and Chief Executive Officer of the First State Bank of Marlin be affirmed.