Federal Deposit
Insurance Corporation

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   [¶5163] In the Matter of Steven E. Smith, Docket No. FDIC-90-159jj(2-5-91).

   In a FDI Act §32 proceeding, the FDIC affirmed the denial of an application for service as officer and director at a troubled institution. The FDIC held that Applicant failed to rebut the FDIC's prima facie case, which was based on Applicant's repeated violations of banking law, and that his record warranted disapproval of the application, despite the extent of his education and experience in the banking industry. The FDIC rejected the recommended decision of the presiding officer at hearing on the denial.

   [.1] Practice and Procedure—Burden of Proof—FDI Act §32
   In an administrative challenge to a Notice of Disapproval, FDIC has the initial burden of going forward with the evidence to establish its prima facie case. Thereafter, the applicant bears the "burden of non-persuasion" to refute the FDIC's evidence.

   [.2] Directors and Officers—Duties and Responsibilities—Standard of Care
   A director who is also a senior executive officer is held to a higher standard than an outside director.

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   [.3] FDI Act §32—Competence and Experience—Quality of Experience
   The quality, not just the extent, of Applicant's experience is considered in evaluating a Section 32 application.

   [.4] FDI Act §32—Competence and Experience—Violation of Law
   Applicant's repeated violations of federal banking laws and requlations, in derogation of his fiduciary responsibilities as a director and senior executive officer, established a prima facie case for disapproval of his application under Section 32.

In the Matter of
STEVEN E. SMITH
MAINLAND BANK
TEXAS CITY, TEXAS
(Insured State Nonmember Bank)
DECISION AND ORDER

   This proceeding arises out of an application dated May 31, 1990 ("Application"), by Steven E. Smith ("Applicant" or "Smith") submitted to the Dallas Regional Office of the Division of Supervision under section 32(a) of the Federal Deposit Insurance Act ("the FDI Act"), 12 U.S.C. § 1831(i), seeking approval to continue employment as president, chief executive officer, and vice-chairman of the board of directors of Mainland Bank, Texas City, Texas ("Mainland"), a troubled institution. The Dallas Regional Office of the Federal Deposit Insurance Corporation's ("FDIC") Division of Supervision disapproved the Application on July 5, 1990, based on a determination that the Applicant lacked the statutory prerequisites of experience and competence to become a senior executive officer and/or director of Mainland. On August 23, 1990, the Associate Director of the FDIC's Division of Supervision ("Associate Director") denied the Applicant's and Mainland's appeal from the Regional Director's disapproval.
   The Applicant requested and received a hearing before a presiding officer, a retired administrative law judge. The Presiding Officer recommended that this Application be approved after determining that the Applicant demonstrated that he has the experience and competence required of a section 32 applicant and that this Applicant's service as a senior executive officer and director at Mainland would be in the best interest of Mainland and the public. The Presiding Officer found that the "failure or near failure" of Wilcrest National Bank, Houston, Texas ("Wilcrest"), * * *, and Memorial Bank, National Association, Houston, Texas ("Memorial") (collectively referred to as "the Banks"), where the Applicant serves as chief executive officer, president, and/or as a director "may not be laid at his feet" and that the Applicant "possesses the experience and competence needed at Mainland Bank." See Recommended Decision¹ of Presiding Officer Richard A. White, December 20, 1990. R.D. at 20. The Presiding Officer further found that the Applicant's testimony "disclosed knowledge of both the business and professional aspects of banking" and that the Applicant, as a banker, "though desirous of earning a profit [knows he] has responsibilities to the larger community." R.D. at 20. Accordingly, the Presiding Officer concluded that the FDIC Dallas Regional Director ("Regional Director") was not justified in denying Smith's request to serve as vice-chairman of the board, chief executive officer, and president of Mainland.
   After a review of the entire record of this proceeding, the Board of Directors ("Board") of the FDIC rejects the Presiding Officer's Recommended Decision and affirms the denial of the section 32 Application.

A. Application.

   On May 31, 1990, Applicant submitted a Notification of Addition of a Director or Employment of a Senior Executive Officer ("Notification" or "Application") on behalf of

B. Appeal.

   The Applicant and Mainland appealed the decision of the Regional Director. On or about August 23, 1990, the Applicant and Mainland were notified of the decision of the Associate Director⁵ not to reverse the Regional Director's disapproval of July 5, 1990. Thereafter, the Applicant, and not Mainland, requested a hearing pursuant to section 308.97 of the FDIC Rules of Practice and Procedures, 12 C.F.R. § 308.97.

C. Hearing.

   A hearing was held in Houston, Texas on November 14–16, 1990. After opening statements by the FDIC and the Applicant, ⁶ the FDIC called two witnesses. Commissioned national bank Examiner David Grum ("Grum") and Assistant Regional Director Harris Winkler testified regarding the Applicant's responsibility for violations of federal banking laws and regulations during his tenure as a senior executive officer and director of Wilcrest, * * * and Memorial. Tr. at 44–52, 54–86. FDIC Ex. Nos. 1–5. Applicant called seven witnesses, including the Texas Associate Banking Commissioner, a bank consultant, a certified public accountant, a former loan review officer for Memorial, a former director of Memorial, a director of Mainland, and himself. Further, post-hearing closing statements were filed by the FDIC and Applicant pursuant to section 308.98(b)(7) of the FDIC Rules of Practice and Procedures, 12 C.F.R. § 308.98(b)(7). On December 20, 1990, the Presiding Officer issued his recommendation that the July 5, 1990 Notice of Disapproval of Notification of Addition of a Director and/or Employment of a Senior Executive Officer ("Notice of Disapproval") of Steven E. Smith as a senior executive officer of Mainland be rescinded.

D. The Presiding Officer's Recommended
Decision.

   In reaching his recommendation, the Presiding Officer focused on four issues: the educational background and the extensive banking experience of the Applicant (R.D. at 6–7 and 19–20); the effect of the economy on financial institutions in Texas during the 1980's (R.D. at 10); Applicant's attribution of the problems at the three national banks to the chief executive officer and chairman of the board, * * * (R.D. at 9 and 10); and the Applicant's success as the Texas State Banking Department's Supervisor and as president, chief executive officer, vice-chairman of the board, and as

   ... was perhaps not a hero at * * *, Wilcrest, and Memorial, but I find that the failure and near failure at these institutions may not be laid at his feet. His record as a banker in terms of education and experience, including his record at Mainland, establishes that he possesses the experience and competence needed at Mainland Bank.

   [.1] This is the third appeal from a denial of a section 32 application to come before the Board since the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA''), and the first section 32 appeal wherein the Presiding Officer has recommended that the Notice of Disapproval be rescinded. Notwithstanding the testimony favorable to the Applicant, the Board is persuaded by the facts adduced in the Comptroller's Examination Reports and the testimony of national bank Examiner Grum concerning violations of federal banking laws and regulations. The evidence establishes, based on a preponderance of the evidence as a whole, that the Applicant failed to properly execute his fiduciary duty during his tenure as a senior executive officer and as a director of Wilcrest, * * *, and Memorial. R.D. at A-1 through A-4. Applicant did not refute

A. Duty of an Officer and Director.

   Officers and directors occupy a position of trust and must safeguard the interest of their depositors and shareholders. They have the duty to act diligently, prudently, honestly, and carefully in carrying out their responsibilities and must ensure their bank's compliance with state and federal banking laws and regulations. Applicant had a duty to Wilcrest, Memorial, and * * *, both as an officer and as a director, to discharge his responsibility "with prudence and good faith, and with ordinary care and diligence." First State Bank v. Metropolitan Casualty Ins. Co., 79 S.W. 2d 835, 839 (Tex. 1935). The United States Supreme Court has stated that

   Directors must exercise ordinary care and prudence in the administration of the affairs of a bank, and this includes something more than officiating as figure heads. They are entitled under the law to commit banking business, as defined to their duly authorized officers, but this does not absolve them from the duty of reasonable supervision, nor ought they be permitted to be shielded from liability because of want of knowledge or wrongdoing, if that ignorance is the result of gross inattention, ....

B. FDIC's Prima Facie Case.

   [.2] Applicant, as a director and/or senior executive officer of * * *, Wilcrest, and Memorial, is responsible for the violations of federal law and banking regulations which occurred during his tenure. The FDIC introduced into evidence OCC Examination Reports as of February 28, 1989, for * * *, and as of December 31, 1987, and February 28, 1989, for Memorial. FDIC's Ex. Nos. 1, 3, and 5. A review of each of the Examination Reports reveals numerous violations, including repeated violations, of federal law and banking regulations which occurred during the Applicant's tenure.

   FDIC's Ex. No. 1, an examination report for the period ending December 31, 1987, reviews the activity of Memorial and Wilcrest, whose merger was approved by the OCC on August 20, 1987, and completed November 20, 1987. Applicant's Ex. No. 16A; Tr. at 47–48. At the

   Numerous violations of law were noted, indicating management's lax attitude and insufficient knowledge of national banking laws. There are repeat violations of 12 USC 161—Call Reports, 12 USC 29— Authority to Hold Real Estate, Regulation O—Loans to Executive Officers, and Regulation U—Loans secured by margin stock. A continuing violation of 12 USC 84—Lending Limits exists. Continued and repeated violations may be subject to Civil Money Penalties, and the matter has been forwarded to the Deputy Comptroller for consideration.

   Compliance with banking laws and regulations has been poor as numerous repeat and continued violations are cited. Management has failed to establish procedures for compliance and for corrective actions on previously cited violations. Compliance with the Formal Agreement has declined. The Committee appointed to establish and monitor compliance with the Formal Agreement fails to meet. The bank is in noncompliance with all articles and the Formal Agreement has been ineffective in correcting management's lending weaknesses. You stated that you were informed by senior management that compliance was satisfactory. However, you failed to monitor this area.

   During the Applicant's tenure as the president, chief executive officer, and director of * * *, the Bank entered into, and the Applicant was a party to, a Formal Agreement with the Comptroller dated June 25, 1986. FDIC Ex. No. 4. Notwithstanding the Formal Agreement, the senior management of * * * continued to commit violations of federal banking laws and regulations. The letter to the board of directors accompanying the February 28, 1989, Examination Report stated, in relevant part:

   Compliance with banking laws and regulations has been poor as numerous repeat and continued violations are cited. Management has failed to establish procedures for compliance and for corrective actions on previously cited violations. Compliance with the Formal Agreement has declined. The Committee appointed to establish and monitor compliance with the Formal Agreement fails to meet. The bank is in noncompliance with all articles and the Formal Agreement has been ineffective in correcting management's lending weaknesses.

the weak and/or deficient management practices of the candidate when he was employed as president of Memorial Bank, N.A., and as president and chief executive officer of * * * evidence an unfitness to exercise significant influence and/or control over the daily affairs of a troubled institution.

C. Applicant's Response to FDIC's
Evidence.

   Applicant, through the testimony of six witnesses, established that he was not the originator of the criticized loan transactions¹⁷ and attempted to place the blame for the violations of law and regulations on chief executive officer and chairman of the board * * *. Tr. at 404-05. Applicant's first witness, Deputy Banking Commissioner Securlock, testified concerning the economy in Texas and its effect on the banking industry (Tr. at 247-53), the appointment of the Applicant as a supervisor of Mainland (Tr. at 255-56), his opinion that the Applicant "did a good job" as a supervisor (Tr. at 257), and his approval of Applicant's appointment as the president, chief executive officer, and vice-chairman of Mainland. Tr. at 258. Mr. Scurlock admitted that the OCC examinations were not reviewed by his office until after the Applicant was denied approval under section 32 by the FDIC's Regional Director. Tr. at 275-78. Mr. Scurlock did not address the violations of banking laws and regulations during Smith's tenure at the three Banks. Neither did he testify as to whether the Texas Banking Department would have appointed Applicant as supervisor of Mainland if it had prior knowledge of his regulatory violations.
   Applicant's second witness, bank consultant Huston, testified regarding the economy in Texas during the 1980's. Mr. Huston also testified about the results of a management study performed for Memorial pursuant to the Formal Agreement with the Comptroller. Tr. at 299–305. He testified that the Applicant answered directly to chairman of the board * * * who was the "dominating force" at Memorial (Tr. at 305); and * * * did not effectively utilize senior management (Tr. at 307-08 and 311-13); and that the Applicant had the credentials and experience to fulfill his position as president of Wilcrest. Tr. at 308 and 319. Huston's partner, certified public accountant Bill Kacal, testified regarding his audit of Mainland, the Applicant's progress at the Bank, and the Texas economy. Tr. at 348-54. Again, neither Mr. Huston nor Mr. Kacal addressed the issue of the violations of federal banking laws and regulations during Smith's tenure at the Banks.
   Texas bank examiner Walker testified regarding his experience with the Applicant when they both were employed at Memorial, * * *, and Wilcrest. He testified that the Applicant did object to certain loans originated by * * * (Tr. at 392), that Smith went

D. Rejection of Presiding Officer's
Decision.

   [.3] In recommending that the Board rescind the July 5, 1990, Notice of Disapproval, the Presiding Officer overvalues the Applicant's experience by looking at the extent of the experience, rather than the quality of the Applicant's experience. Further, the Presiding Officer failed to adequately consider the violations of federal banking laws and regulations which directly reflected on the quality of experience and the competence of the Applicant. The Presiding Officer stated that the Applicant "was but a senior employee." R.D. at 19. The Recommended Decision minimizes his fiduciary duties as a director at the Banks as well as a senior executive officer.
   Moreover, the Presiding Officer's review of the OCC Examination Reports recognizes Applicant's breach of those responsibilities. As to the December 31, 1987, examination of Memorial, the Presiding Officer concedes that the oversight in loan underwriting and documentation were attributable not only to the originating loan officers, but also to the Applicant who was responsible for reworking problem loans; "in the final analysis the bank's president, who oversees the loan portfolio" is responsible. Tr. at A-1. Further, the Presiding Officer noted that the Banks failed to make appropriate "charge offs" which are "not discretionary but are required by GAAP [Generally Accepted Accounting Principles] and national banking law." Id.
   Regarding the February 28, 1989, examination of Memorial, the Presiding Officer noted that "management deficiencies noted in the earlier report continued and even worsened." Tr. at A-2. Further, he stated:

   Applicant as president of the bank could have obtained appraisals of the foreclosed real estate, taken the write downs from loan value to market value, established procedures to properly fix the level of the loan loss reserve, reported accurately to the board on the condition of the bank, and fashioned a viable contingency plan, none of which he did.

   [a]s a member of the board and as chairman of the management committee... could have corrected what might be called technical violations of law and formulated an adequate capital policy.

E. Applicant Lacks the Requisite
Competence and Experience.

   [.4] The violations of federal banking laws and regulations which occured at the Banks directly reflect on the Applicant's lack of high quality experience and his failure to exercise independent judgment, which is a primary element of competence in banking. Even upon giving weight to the Applicant's evidence regarding the domination of the Banks by the chief executive officer and chairman of the board, the Board finds that the Applicant failed to fulfill his fiduciary duties as a senior executive officer and/or as a director of the Banks. As a president of a national bank and as a director, the Applicant was responsible for the day-to-day operations of the Bank and took an oath to "diligently and honestly administer the affairs of such association, and [to] not know- {{5-31-92 p.A-1642}}ingly violate, or willingly permit to be violated any of the provisions" of Chapter Two of the National Bank Act. 12 U.S.C. § 73. (Emphasis added.)
   The record before this Board demonstrates that the Applicant failed to utilize that independent judgement required of him in his role as a president and/or as a member of the board of a national bank. Moreover, the Board finds that Applicant's recent experience at Mainland offers no solace that the circumstances at the Banks will not be repeated. Applicant testified that he has located a new investor to provide the necessary funds to pay off a substantial debt which currently hinders Mainland's growth. Tr. at 496-97. Applicant states that the investor is waiting for this regulatory proceeding to be "worked out." Id. In light of the Applicant's experience with a majority shareholder who also served as chairman of the board of the Banks, the Board is extremely concerned that the Applicant again may abdicate his independent judgment when dealing with a dominant controlling shareholder. The Board is unwilling to take such a risk with a troubled bank.

   It is clear from the record before the Board that the Applicant has failed to rebut the evidence underlying the FDIC's prima facie case, which established by a preponderance of the evidence that the Applicant's lack of experience and competence is sufficient to warrant the disapproval of his Application to serve as senior executive officer and director of a troubled institution. Therefore, the Board rejects the Presiding Officer's Recommended Decision to Rescind the Notice of Disapproval. The Applicant was provided an opportunity to be heard regarding the FDIC's basis for denial: the violations of federal banking laws and regulations. Rather than address the violations, the Applicant attempted to establish that economic forces and another individual's negligence were responsible for the failure or near failure of the Banks. However, the evidence before this Board relating to the Applicant's experience and competence is conclusive.
   The Board does not necessarily find that the Applicant lacks the business acumen or judgement necessary to serve as a director or senior executive officer of a depository institution. However, in reviewing the record, the Board concludes, in this situation, that the violations of federal banking laws and regulations which occurred at the Banks during the Applicant's tenure reflect his inability or unwillingness to apply any such acumen or judgment independently in the discharge of his responsibility and duty as a director and/or senior executive officer of a troubled depository institution. Accordingly, the record reflects adversely on his experience and competence and therefore supports a finding that his continued employment at Mainland poses a risk to the conduct of the affairs of that institution, which admittedly is in a troubled condition. The Board does not adopt the Recommended Decision of the Presiding Officer and sustains the denial of Mr. Smith's application.

   The Board of Directors of the Federal Deposit Insurance Corporation, having considered the entire record in this proceeding, hereby rejects the recommendation of the Presiding Officer to rescind the Notice of Disapproval of Steven E. Smith.
   ACCORDINGLY, IT IS HEREBY ORDERED THAT, the Notification of Addition of a Director or Employment of a Senior Executive Officer, submitted by Steven E. Smith and Mainland Bank on may 31, 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 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 5th day of February, 1991.
/s/ Hoyle L. Robinson
Executive Secretary

In the Matter of
Steven E. Smith
Mainland Bank
Texas City, Texas
(Insured State Nonmember Bank)
   Recommended decision that the notice of disapproval be rescinded.
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By: Richard A. White, Presiding Officer
   On May 31, 1990, Steven E. Smith (applicant) submitted a Notification of Addition of a Director or Employment of a Senior Executive Officer (Notification) or Mainland Bank under Section 32 of the Federal Deposit Insurance Act (12 U.S.C. § 1831i). That section is part of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. In pertinent part Section 32 provides that a "troubled" bank shall notify the Federal Deposit Insurance Corporation (FDIC or agency) of the proposed addition of any person to the board of directors or the employment of any person as a senior executive officer at least 30 days prior to the time such addition or employment becomes effective. It is further provided that the bank may not place the person on the board or employ the person as a senior executive officer if the FDIC issues a notice of disapproval before the end of the 30 day period beginning with the date the FDIC receives notice of the proposed action. Finally it is provided that the FDIC shall issue a notice of disapproval if the competence, experience, character, or integrity of the person under consideration indicates that it would not be in the best interests of the depositors of the bank or in the best interests of the public for the person to be placed on the board or employed by the bank. The procedures applicable to implementing the mandate of Section 32 are contained in Subpart L of Part 308 of the FDIC's Rules and Regulations, 12 C.F.R. §§ 308.94–308.98.
   On July 5, 1990, the Regional Director of the Dallas Regional Office of the Division of Supervision of the FDIC (Walker) disapproved the Notification mainly on the grounds, as set forth in Section 32(3), that because of applicant's competence and experience approval of the appointment would not be in the best interests of the depositors of the bank or in the best interests of the public. The disapproval notice referred to applicant's performance as President of Memorial Bank, N.A., and as President and Chief Executive Officer of * * *, and to the fact that representatives of the Office of the Comptroller of the Currency (OCC) were critical of applicant's management practices during his stay at the aforementioned institutions including failure to timely recognize loan losses, improper accounting for loan related assets, failure to comply with national banking laws, and improper administration of the loan portfolio.
   Consistent with the provisions of section 308.96 of the FDIC rules and regulations (12 C.F.R. § 308.96) applicant appealed the disapproval of his appointment. The appeal was denied August 23, 1990, by the Associate Director, Division of Supervision, who referred again to applicant's weak and/or deficient management practices during his period of employment with Memorial and * * *.
   In accordance with the provisions of Section 308.97 of the FDIC Rules and Regulations applicant requested a hearing. The hearing was held November 14, 15, and 16, 1990, at Houston, Texas. Evidence in support of disapproval of Notification was presented by the FDIC, while applicant, appearing in his own behalf, offered evidence in support of rescinding disapproval of Notification. The bank was represented by counsel but she took no active role limiting herself to acting as an advisor to applicant. At the outset of the hearing both the FDIC and applicant presented opening statements. At the request of both parties the record remained open for five business days or through November 26, 1990, to submit closing arguments. Arguments were submitted by both parties and they are incorporated in the record.

   Counsel for FDIC points out that disapproval of the application was based on unfavorable findings of experience and competence while applicant was employed in a management role at Memorial, Wilcrest, and * * *, all "troubled" institutions; that in making these findings the agency relied on Reports of Supervisory Activity prepared by personnel of the Office of the Comptroller of the Currency (OCC); that in reaching its conclusions the agency considered applicant's performance as a Texas Department of Banking supervisor for Mainland Bank, also a "troubled" institution, but the length of time and the quality of experience in that position did not outweigh the weak and deficient management practices which characterized applicant's tenure at the named banks; and that under the statutory scheme of Section 32 disapproval of an application is required if unfavorable findings are made with respect to any one of the four criteria— "experience", "competence", "integrity", {{4-30-91 p.A-1644}}"character", or stated another way, disapproval need not be promised on negative findings with respect to all four criteria.
   Applicant submits that under Section 32 he must satisfy four criteria—"character", "integrity", "competence", and "experience"; that he was turned down on competence and experience, but not on character and integrity which are by far the most important of the tests; that the effect of Section 32 is anomalous in that it would not apply if he were being considered for employment, or a directorship, in a healthy bank; that by reason of education, training, experience both as a bank examiner and as a banker, and through familial association he is qualified to assume the sought positions; that numerous events occurred in the 1980s such as competition from non bank financial institutions, a surge of bank charters, the lifting of Regulation Q, the increase in deposit insurance coverage, and the downturn in the Texas economy, all conspired to adversely affect the financial health of many Texas banks especially those chartered in the early 1980s; that the aforementioned events rather than weak and deficient senior management were the primary cause of the banks' distress; that the FDIC's failure to approve his application ignores his good work at Mainland since August 1989 first as a supervisor appointed by the Texas Department of Banking, and more recently as a Bank employee; that the FDIC was remiss in not informing Mainland Bank in January 1990 that applicant could not serve unless he was approved; that the FDIC in disapproving the application placed too much credence on the critical comments of an over zealous OCC bank examiner; and that the time taken up with the processing of the application is harmful to the interest of Mainland Bank as well as applicant.

   Witness Wikler, Assistant Regional Director of the agency's Dallas Office, testified of the processing of applicant's Notification from advising the FDIC of his appointment as President, Chief Executive Officer, Director and Vice Chairman of the Board of Directors of Mainland Bank. The application was executed by applicant May 31, 1990 (FDIC-7) and was accepted as substantially complete on June 5, 1990 (FDIC-8).
   The witness worked for 5 to 10 years in a small independent state non-member bank first as teller and then as executive vice president where his functions were akin to those of a chief executive officer. In the latter capacity he established policies and procedures for the bank.
   The witness joined the FDIC in 1966. Between 1969 and early 1987 he served as field office supervisor in several locations. During this period he participated in more than 200 bank examinations including more than 100 where he was the examiner-in-charge. Most of the examinations were classed as Safety and Soundness reviews. In January 1987 the witness was appointed to his present position where he is charged with supervision of three field offices in Texas. He oversees the work of 130 field examiners and is charged with the supervision and regulation of 230 banks. During his career with the FDIC the witness participated in more than 20 government sponsored educational programs relating to banking subjects totaling some 39 weeks of education. Among those courses was one at the University of Wisconsin Graduate School of Banking. He has been singled out for special achievement awards and one award for sustained superior performance.
   The witness concedes that there have been many changes in the banking business since the time he was working as a commercial banker. The changes accelerated during the 1980s and this was a difficult period for both industry and regulators. At one time there were perhaps 250 to 260 banks in the area supervised by the witness whereas now the number is about 230.
   The FDIC serves as the primary regulator of State chartered banks which are not members of the Federal Reserve System, whereas the Office of the Comptroller of the Currency is the primary regulator of national banks. However, the agency has an interest in the condition of national banks and State non-member banks because in both cases deposits at these institutions are insured by the FDIC. The main purpose of the FDIC is to prevent bank failures and to instill public and depositor confidence in the banking system. The newly enacted Section 32 is not a punitive measure but rather a tool to regulate troubled banks all to end of protecting the insurance fund and restoring the vigor of the troubled bank. It is emphasized that disapproval of an application does not preclude an individual from working in the banking industry though he concedes that finding em- {{4-30-91 p.A-1645}}ployment in a healthy bank might be difficult in todays economic environment. Furthermore, disapproval of a particular application does not mean that a subsequent application in the same or another "troubled" bank would be denied. Section 32 is not to be equated to a proceeding seeking removal and prohibition under Section 80 of the Act. In evaluating a Section 32 application the FDIC looks to the particular needs of the bank applicant seeks to serve, to the management skills the bank requires if it is to prosper, and whether applicant is deemed to possess such skills. More scrutiny will be given an applicant who seeks approval to become a CEO as contrasted with an applicant who seeks a directorship.
   The witness became aware of the current application on or about June 5, 1990. Relying on the employment history disclosed in the application the agency contacted the Comptroller of the Currency seeking to obtain information complied by that agency relating to applicant's tenure with Memorial Bank, Wilcrest Bank, and * * * (FDIC-9). Information was secured from the OCC and that data was received in evidence as FDIC exhibits 1–5. Prior to the processing of the instant application, other Section 32 applications were processed and it is standard procedure to seek information from other regulatory agencies.
   On June 28, 1990, the witness contacted applicant by phone and stated that the agency had serious reservations about his qualifications to serve as a senior executive officer and inquired whether he wished to withdraw the application or proceed. On July 2, 1990, applicant visited the witness to discuss the dispute and furnish additional materials including a study of management practices at Memorial, Wilcrest, and * * * (applicant's exhibit 11), a letter setting forth applicant's response to the OCC concerning the possibility of instituting a civil money penalty proceeding against applicant, among others, for management practices while employed at Memorial Bank, documents relating to the officers at Memorial, Wilcrest, and * * * who originated problem loans, applicants' efforts to obtain an infusion of capital for Mainland, and finally a complaint that the OCC examiner (witness Grum sponsor of FDIC 1–5) sometimes acted in an overzealous manner and sought to exercise power. Witness Winkler had no knowledge, as of the hearing, of the contents of the management study. His recollection is that applicant contended he was not the originating officer of the problem loans at the three banks, but he had no knowledge as to whether applicant's contention is correct concerning the charge against the bank examiner, the witness concedes that such a claim leveled at one of his staff would be reviewed, but is his experience most such charges are leveled by personnel of problem banks.
   Sometime in June 1990 the witness contracted the Texas Department of Banking and spoke with a departmental examiner who expressed "some concerns" when told of the conclusions in the OCC examination reports.
   As heretofore noted, on July 5, 1990, applicant and Mainland Bank were notified that the application was disapproved because of unfavorable findings relating to experience and competency. (FDIC-10). The decision to disapprove was made by Kenneth Walker, Regional Director and one other person. In reaching the decision consideration was given to the application from including applicant's banking school programs, work experience as a bank examiner with the Texas Department of Banking, work experience as a banker from May 1978 to May 1989, and work experience as a supervisor, for the Texas Department of Banking, of Mainland Bank from August 1989 to January 1990, and the materials supplied at the July 2 meeting. A major element in the decision to disapprove was the three Safety and Soundness examinations made by the OCC (FDIC 1, 3, 5) and the two Formal Agreements (FDIC 2, 4). An analysis of these reports is found in the appendix which is incorporated in the report at this point.
   Based on the aforementioned examinations including the numerous management deficiencies and oversights and applicant's role as a senior management official in the three troubled banks, the FDIC concluded that applicant was lacking in experience and competency in the successful operation of troubled banks. Troubled banks are specially vulnerable and require a greater degree of experience and competency than do healthy institutions. Applicant's service as a supervisor of Mainland during the last 4 months of 1989 was very satisfactory, but it was not sufficient to outweigh the unsatisfactory work at the three named banks.
{{4-30-91 p.A-1646}}Applicant appealed the disapproval on July 24, 1990, as provided for in 20 C.F.R. § 308.96. On July 11, 1990, witness Scurlock of the Texas Department of Banking sent a letter to the Regional Director (applicant 4) urging applicant be allowed to serve. On August 1, 1990, the Board of Directors of Mainland Bank sent a four page letter to the Regional Director giving reasons why it supports the applicant. The above materials were reviewed in the Dallas Office and forwarded to Washington where the appeal was denied August 23, 1990.

   Applicant was born in 1953 and graduated from high school in Abilene, Texas, in 1972. He attended Texas Tech University in Lubbock, Texas, and McMurry College in Abilene from 1972 to 1976 and graduated from the latter institution in 1976 with a degree, Bachelor of Business Administration in Finance. His grade point average was 3.5 and he was on the Dean's List. In addition he completed courses at three professional banking schools and was President of his class at Southwestern 1984–1986. In August 1976 he began working as a bank examiner for the State of Texas Department of Banking where he remained until May 1978 when he became senior vice president of Jacinto City Bank, Houston. He remained there until December 1980 when he became associated with Southwestern Bank, Stafford, Texas, as Senior Vice President. In late 1983 he became President. He resigned in 1984 and in May of that year became President and Chief Executive Officer of * * *. He was the organizer of the Bank (1984), wrote policies, established procedures, hired staff, and helped to sell stock. The Bank was capitalized at $2,640,000. In May 1986 he departed * * * and assumed the Presidency of Wilcrest National Bank and Memorial Bank.
   Wilcrest and Memorial are affiliated by reason of having common shareholders. Wilcrest and Memorial were merged in November 1987 in order to reduce costs at Memorial and supply Wilcrest with additional capital. Applicant left Wilcrest-Memorial in May 1989. In August 1989 he began working for the State of Texas Department of Banking as Supervisor of Mainland Bank, a state chartered bank, located at Texas City, Texas. The bank was assigned a rating of 5 which in banking parlance means an institution which is in danger of failing in the near term. In early January 1990 the board of directors offered applicant the positions of President, Chief Executive Officer, Director, and Vice Chairman of the Board. Applicant accepted the positions, and on May 31, 1990, completed the application form which is the basis for the agency determination of approving or not approving the appointment.
   Applicant points out that Wilcrest, * * *, and Memorial opened in late 1983, 1984, and 1985, respectively. This was a difficult period for several reasons including low net interest margins. Wilcrest had a high loan ratio with many of the loans unsecured. Applicant was not an organizing director of Wilcrest but only became a director in 1984 when he acquired 200 shares. He was employed by Wilcrest in May 1986 to work out problem credits. This is a difficult task and success depends on fashioning solutions to meet the borrower's special circumstances. Efforts were made to collect principal and interest but if that was impossible because of the economy downturn, he went after the principal or as much of it as could be recovered. This all had to be accomplished with due consideration to lendor liability court rulings, the threat of borrower bankruptcy, and escalating legal costs. Applicant's exhibit 16B shows that of 19 bank with offices in a 5 mile radius of the * * * on the west side of Houston, all but four were closed (13) or merged (2) by early 1990.
   Applicant submits during his stay at Mainland the capital ratio has improved, earnings on an annual basis are about $600,000, and volatile deposits have declined. The bank still has problems but it is being turned around.
   Applicant submitted as evidence of improved condition two financial statement reviews, one dated December 1989 and the other October 1990, exhibits 13A and 13B, respectively. Also submitted were two graphs reflecting capital and income trends, exhibits 15A and 15B, respectively. All four exhibits were admitted into evidence, see tr. 503. Upon further consideration I now decide to exclude these exhibits. The proffered exhibits were prepared by an outside-the-bank consultant who did not testify. No consideration will be given these exhibits in the disposition of the proceeding.
   Witness Scurlock, Deputy Commissioner for the Texas Banking Department since July 1987, testified. Following graduation from {{4-30-91 p.A-1647}}college he joined the Department in early 1978 and remained there until early 1982 working primarily as a bank examiner. Between early 1982 and July 1987 he worked in executive positions for four different banks including two which he organized. His last stint as a banker was with an institution that failed. The Texas Banking Department is the primary regulator for state chartered banks of which there were about 590 as of the hearing date, a significant decline from the 900 in existence in early 1986. The decline is attributable to closing and consolidations. A number of events occurred during the late 1970s and early to mid 1980s which drastically altered the banking business in Texas. Among the changes was a de-regulatory mindset which reduced regulatory oversight but made it possible for a significant number of new national and state chartered banks to enter the market; new competition from the liberated savings and loan industry; boom followed by bust in the oil and gas industry; and the 1986 tax law changes which shrunk the value of commercial real estate. In an expanding economy establishment of adequate loan loss reserves and realistic real estate appraisal practices are not as critical as they are in a deflationary environment as is the case now. The witness concedes that bank managers to be effective ought to address the consequences of changing economic conditions. Also in making a loan a prudent banker should look primarily to repayment through cash flow rather than the value of collateral though, of course, cash flow in some cases is dependent on real estate values.
   The Department conducted an examination of Mainland Bank in July 1989 that disclosed the continuation of disturbing practices which had been noticed in an earlier examination and which remained uncorrected. In August 1989 applicant was placed in the Bank as a supervisor. The Department's chief examiner reviewed applicant's qualifications for the job but the witness has no knowledge whether the chief examiner reviewed the critical OCC Safety and Soundness reports. At the time of the appointment the witness did not review the aforesaid reports. He and the Department were aware that applicant worked for several 5 rated banks.
   The function of the supervisor is to help management and the Board of Directors turn the bank around. The supervisor has veto power over loan, loan renewals, investments, and sale or purchase of assets. The supervisor also works with the Board of Directors, and where possible with management to develop the policies and procedures to restore vigor to the institution. The witness believes applicant's performance as a supervisor was good.
   On January 7, 1990, a member of the Board informed the witness that the Board intended to offer applicant a management position. The witness advised that applicant's selection for a senior management position would be acceptable to the Department. He believes that applicant in accepting the offer of employment undertook a difficult task in attempting to turn around a 5 rated bank. One of Mainland Bank's needs is for an infusion of capital. The witness recalls that applicant made some preliminary but yet impressive progress in lining up an investor to inject capital into the bank.
   The witness upon learning of the July 5 disapproval of the application was angry frustrated, and incredulous. On July 11, 1990, he wrote the FDIC Regional Director urging that applicant be allowed to serve in a senior management capacity. (Applicant-4). Prior to writing the letter he examined the OCC Safety and Soundness reports, which were the principal basis for the disapproval, and believes that criticisms contained therein are not of character as would warrant disapproval of the application. The same is true regarding the possibility that applicant may be subject to civil money penalties because of actions at Memorial Bank. It is not often that the Department disagrees with the FDIC on a banking matter.
   The witness believes that applicant has done a good job at Mainland from August 1989 to July 5, 1990.
   Witness Houston a bank consultant with the accounting and professional services firm of Deliotte & Touche testified. He was employed in the office of the Comptroller of the Currency for 13 years, until 1980, where his primary duties related to bank examinations. In 1980 he joined Interfirst, a bank holding company where he remained until 1987 when he assumed his present position.
   On November 19, 1987, the witness completed a study (applicant-11) of the management and management practices of Memorial, Wilcrest, and * * * as was required by {{4-30-91 p.A-1648}}Article III of a Formal Agreement between the Board of Directors of Wilcrest and the OCC. In making the study, employee and officer resumes, position questionnaires, oral interviews, reports to the OCC, the loan portfolio, various bank internal documents, and minutes of board of director meetings were all examined. Though the study made recommendations concerning management attitudes and practices, it concluded that the management team including applicant is experienced and capable and no changes were recommended. The Comptroller of the Currency did not object to selection of the witness to prepare the report and the banks forwarded a copy to the OCC. There have been no contacts with the OCC regarding the study.
   Most of the criticism or failures noted in the report are directed at management and Board of Director practices and the only individual singled out for lapses or failings is the Chief Executive Officer and Chairman of the Board, * * *. Thus at page 16 it stated that the effectiveness of the Bank could be improved if Chairman * * * were to share more authority and responsibility with his senior management team, noting that senior management is reluctant to make decisions for fear that their actions will be contrary to or overridden by the Chairman. Along the same vein at page 27 it is stated that the Chairman is the "main man at three relatively new banks, Chairman, Director, lender, workout man, problem solver, decision maker, organizer, negotiator with financing banks, funds finder, and capital raiser, etc." On the same page it is stated that the Chairman "has the largest percentage of credits on the watch list as well as the largest percentage of loans charged off compared to the other officers." The report refers to the applicant at pages 12 and 27. At page 27 there appears the following "President Smith appears to possess the credit skills of a conservative lender. He appears to be loaded with problem and workout credits, most of which, he inherited." Regarding the activity of the Board of Directors the report states on page 20 that the Board does not receive information about the Banks' problems in a form which would enable it to respond adequately or take appropriate corrective measures. At page 23 there appears the following "Indications are that the Board relies very heavily on Chairman * * * to carry out its duties and responsibilities." The report's "Overall Summary and Recommendations" on page 30 is to the effect that senior management is qualified and experienced but that the Chairman should share responsibilities with the directors and senior management.
   Concerning management's responsibility for the banks plight the report state that all three banks were adversely affected by the downturn, beginning in 1983, of the Houston economy. The condition of the banks must be charged to management but the circumstances causing the downturn were largely beyond management's control.
   The witness concedes that a successful chief executive officer must be able to manage the risks associated with bank lending. Depending on the command structure, risk management might also fall on the bank's president or a senior vice president. A prudent manager when faced with a borrower's diminished ability to repay a loan would increase the funds set aside in the loan reserve fund. Calculation of the amount to set aside in the loan reserve loss account is not an exact science. The amount of such reserves have been a source of disagreement between the banks and bank examiners, with the latter pressing for greater reserves. The witness concedes that effective management requires that a banker ought to anticipate problems rather than reacting after they occur, but this seldom happens in the real world. Bank regulators also react to problems but they are in a position where it is difficult to impose changes before problems become apparent. The witness points out that Interfirst which he joined in 1980 became the subject of a Formal Agreement with the OCC in 1984 and was purchased by Republic in 1987. The combined entity, Republic First, failed in 1988.
   From his examination of * * * records the witness determined that the bank opened October 1984, that applicant was an organizer and served as President from the opening until May 1986 when he departed and associated with Wilcrest Bank. Day-to-day decisions concerning the bank were made by applicant and all employees reported to applicant. Applicant served as President at Wilcrest Bank and was responsible for overseeing the daily operations. With the exceptions of * * *, Chief Executive Officer and Chairman, and the loan review officer, all Wilcrest employees reported to applicant. Applicant's primary duty at Wilcrest was to {{4-30-91 p.A-1649}}work on problem loans which had been originated by another officer.
   The Bank's Board of Directors hires the Chief Executive officer and he owes a duty to the board and the bank to work toward the best interests of the bank. Generally the Board of Directors will hire the President but the Chief Executive Officer may have a large say in the selection. The President also owes a fiduciary duty to the bank and the Board of Directors. The fact that the President may report to the Chief Executive Officer does not limit his obligation to act in the bank's best interest. A President who recognizes a problem but fails to act or fails to stand up to Chief executive officer who is acting against the bank's best interests has failed in his duty to the Bank. The witness testified that he knows of no significant information on the bank's status that management neglected to forward to the board of directors, though he also stands by the statement on page 20 of his study, referred to above.
   Witness Kacal, a certified public accountant and a general service partner in the accounting and professional services firm of Deloitte & Touche, testified. The witness holds a B.B.A. degree in accounting, has been an instructor in bank practices for several professional schools, is a writer on banking and allied subjects for professional journals, and is national director of the firm's community bank practice division. The division has an extensive business providing auditing, consulting, and third party loan review services for community banks. In late fall or early winter of 1989 applicant contacted the witness with the view of obtaining his service to provide an audit of Mainland Bank applying generally accepted auditing standards. During the discussions the witness came to realize that Mainland, like many Texas banks was a troubled institution for reasons explained by previous witnesses. Before the witness would accept Mainland as an audit client he evaluated bank management's integrity and competence. He concluded that the Bank's management, including applicant, possessed the requisite qualities, and accordingly he was comfortable with the Board of Directors decision in early January to offer applicant a senior management position. Prior to the Bank's decision to retain Deloitte & Touche, applicant had disclosed that the fee heretofore paid for a so called directors examination was too costly. The fee agreed upon by the witness for a full audit meant a saving to the bank over what it had heretofore paid for a more limited service.
   Deloitte & Touche conducted an audit of mainland covering calendar 1989 and significant post balance sheet items up to March or early April 1990 when the audit report was released. The audit was not offered in evidence. The witness was unable to recall any significant post balance sheet items included in the audit report. The witness as general services partner was not the person who actually performed the audit but he did oversee the work of the auditor doing the actual work. He made some three or four visits to the Bank and on each occasion spoke with applicant and other managers concerning the affairs of the bank including compliance issues, improvement of loan review procedures, and preliminary measures to obtain a major investor. The witness has also seen internal financial statements prepared by the Bank between January and September/ October 1990. He is aware of the strategies the bank is using to manage its size, capital, and loan loss reserve. He believes that during applicant's stay at the bank there has been a turnaround and that applicant possesses the experience and competence to serve as chief executive officer.
   Witness Walker, currently employed as a bank examiner by the Texas Department of Banking, testified. A 1974 college graduate he worked as a bank examiner for the Department for some years prior to 1981 and is a graduate of two professional banking schools. From 1981 to 1984 he worked for Southwestern Bank. In September 1984 he began working for Wilcrest remaining there until the merger with Memorial. He remained at Memorial until April 1989 when he resigned in the belief that there was no opportunity for advancement and opted instead to return to the Department of Banking. The witness has known applicant since about 1977.
   During the first year of employment at Wilcrest the witness worked as a loan officer. After about a year and at the suggestion of a bank examiner and the approval of Chairman * * * he assumed a new position as loan review officer for all three of the affiliated banks, Wilcrest, * * *, and Memorial. In November 1987 Wilcrest merged {{4-30-91 p.A-1650}}into Memorial where he continued as a loan review officer. At * * * he provided loan watch lists to the loan officers and the board of directors, but he did not report to any bank officer. While working at Wilcrest and Memorial he reported to Chairman * * *.
   About May 1986 applicant was transferred from * * * to Wilcrest to work on problem loans which were originated by other people. Workout of problem loans is a difficult assignment because of borrower reluctance to provide information which would assist the bank in recouping all or a portion of the amount borrowed. Applicant performed well in a difficult situation and loan documentation improved. The documentation on loans applicant originated was proper and only a few such loans had to be charged off. As secretary to the loan committee the witness recall instances where applicant called in question loans that were presented by Chairman * * * but the advice was not heeded. From the inception of the bank until 1987 or 1988 Chairman * * * had the authority to approve loans in any amount. Sometime during 1987 or 1988 all loans over $100,000, even those originated by the Chairman, had to be presented to the loan committee. By that time there were a number of problem loans on the books.
   The witness reviewed the "Summary of Assets Subject to Criticism" in FDIC exhibit 1, pp. A-4 and A-5, FDIC exhibit 3, pp. 19 and 20, and FDIC exhibit 5, pp. 10 and 11 and testified that none of the listed loans were originated by applicant. Applicant's exhibits 33A, 33B, and 33C, on the stationary of Memorial, Wilcrest, and Memorial, respectively, are lists of loans charged off. The parties stipulated that in no instance was applicant the originating officer. The witness could recall only two loans where the work out was made by applicant.
   Concerning the statement in FDIC exhibit 3, page 1 to the effect that weaknesses shown by Chairman * * * and President Smith are continuing followed by a recitation of the faulty practices, the witness stated that decisions on all these matters were within the domain of Chairman * * *. In summary applicant was not the dominant force in banks though the witness believes he is an experienced and competent banker.
   Witness Skipton, Vice President and Regional Manager of Firemaster, testified. He served on the Board of Directors of Wilcrest Bank begining in late 1984 and continued in this capacity until Wilcrest was merged into Memorial where he also served as a Director until late July 1989. He resigned at that time because he disagreed with a conclusion regarding violations of legal lending limits made in a 1988 report of the OCC relating to Memorial Bank. The witness became acquainted with applicant as a banker prior to the time applicant began working for Wilcrest. The witness was a borrower and found the loan arrangements satisfactory. In his capacity as board member he heard nothing bad of applicant and believes the bank managers supplied the board with sufficient information to keep the board informed of the banks conditions. Prior to the closing of Memorial in May 1990 the directors gave up their monthly meeting fees, pay of employees was reduced, company cars were given up, most country club memberships were terminated, additional capital was raised, and a merger was being sought with * * *. As the witness recalls applicant resigned from Memorial in May 1989 because the bank was dominated by Chairman * * *, he (applicant) had no control over the affairs of the bank, was frustrated over the bank examination processes, and remaining at the bank would not be in the best interests of his career, or the future of Memorial Bank. The witness believes applicant to be a good banker and that his leaving was harmful of Memorial. He voiced support of applicants' request for approval on July 6, 1990, and believes applicant to be experienced and competent and fully qualified to serve in a senior management capacity at Mainland Bank.
   Witness Hamon, a new car dealer for many years in Texas City, testified. He is on the board of directors of Mainland Bank and has been for 13 years, and is testifying in support of applicant on behalf up the bank's board of directors. The bank's regulators have been critical of the bank and its management for some time. Following the Department of Banking examination in July 1989 which resulted in a composite rating of 5, the department decided to appoint a supervisor. At the time of applicant's appointment as supervisor bank personnel and the board members were concerned that the appointment would result in adversarial contest between the newly appointed supervisor and top management who were also the primary stockholders. The initial misgivings were misplaced because it soon was apparent that applicant began identifying problems, helping with the problems, and advis- {{4-30-91 p.A-1651}}ing management and the Board what could be done as a team to resolve the bank's problems. Both as a supervisor and then as chief executive officer, until July 5, applicant brought new insights and vitality to the bank. Prior to applicants' arrival the board was not properly informed of conditions at the bank. With applicants' arrival the board began receiving detailed watch lists, UPBA reports, advice on the bond portfolio, and the identification of certain unprofitable accounts both in-bank and in correspondent banks. Among the positive measures that were begun after applicants' arrival were reductions in expenses and executive salaries, the hiring of a compliance and loan review officer answerable only to the board, and an outside consultant that keeps the board informed on how the bank is performing relative to other banks of comparable size.
   In late December the witness and another director examined applicant's resume, made calls to people in the banking business, and spoke with witness Scurlock and another person in the Department of Banking all toward determining whether to offer applicant a position. All the responses were positive and at the stockholders meeting on January 9, 1990, the position of chief executive officer, president, and vice chairman of the board was offered applicant.
   On August 1, 1990, the board of directors sent a four page letter to the FDIC's Regional Director in Dallas explaining in some detail why the board supports applicant for a senior management position. The board was never contacted by the FDIC concerning the letter.
   On September 12, 1990, the board sent a six page letter to the Regional Director, concerning the conclusions in the FDIC's March 31, 1990, examination report of Mainland and the possible imposition of a cease and desist order, pointing out the progress being made at the bank.
   Among the concrete positive steps taken by applicant were efforts to work out several problem loans. One a $568,000 indebtedness had been non performing and the bank's top management and the borrower couldn't arrive at a solution. Applicant and another board member were able to negotiate a payback and the loan is now performing. Another was a $280,000 debt by a borrower severely impacted by the energy crunch. The borrower declared bankruptcy. Applicant and the same director working with the bankruptcy court, the borrower, and exercising some leverage which the old management declined to use, was able to put the loan on a payback status while still retaining the borrower's business. Another was a $110,000 unsecured loan which had been written off. Applicant, applying some leverage, contacted the borrower and was able to recoup a portion of the money owed. Applicant, unlike the old managers, was willing to contact delinquent borrowers and workout a settlement. In addition applicant attracted new loans that are performing. Applicant also begun preliminary efforts to persuade a wealthy investor to put new capital into the bank. Further efforts along this line are in abeyance pending the outcome of the proceeding. The FDIC bank examiner at the wrap up meeting said applicant had performed well.

   Applicant emphasizes that his education, professional training, experience with the Texas Department of Banking, his approximately nine years of working in banks prior to May 1989, and his record as supervisor and later chief executive officer of Mainland all support approval of the application. The FDIC's emphasis on applicants' tenure with Wilcrest, Memorial, and * * * as indicating inexperience and lack of competence is misplaced. The downturn in the economy, the record number of bank openings, and the other factors mentioned in the record were chiefly responsible for the difficulties experienced by the three banks. To the extent bank management contributed to the banks' problems, the testimony of witnesses Huston and Walker shows that applicant was not the decision maker for the banks. The charged off loans described in FDIC exhibits 1, 3, and 5 were all originated by someone other than applicant. Applicant's experience and competency as a banker is corroborated by the testimony of witnesses Kacal and Hamon, one a CPA and the other a board member of Mainland.
   Counsel for FDIC refers to the crisis in the thrift industry and the perceived threat to commercial banks as background for the passage of Section 32 which gives the agency a new tool to instill confidence in the banking system. Support for agency disapproval of the application is premised on managements' failings as revealed in Reports of Su- {{4-30-91 p.A-1652}}pervisory activity, FDIC exhibits 1, 3, 5, and the Formal Agreements, FDIC exhibits 2, 4. Counsel points out that applicant was part of * * *'s original management team and served as President and Chief Executive Officer for about two years. On June 25, 1986, the bank was subjected to a Formal Agreement. Though applicant gave up his executive position at * * * on May 1986, he remained on the Board of Directors and served on the Compliance Committee and thus he cannot escape responsibility for the deficiencies noted in the OCC report of February 28, 1989, FDIC exhibit 5.
   Applicants' poor performance continued at Wilcrest where he assumed the duties of President and Chief Executive officer during May 1986. Though he did not originate any of the classified loans referred to in the December 31, 1987 OCC report (FDIC-1), a significant portion of the loans had been worked out by applicant using deficient procedures. The OCC reports of December 31, 1987, and February 29, 1989 (FDIC 1, 3) found that Memorial had failed to comply with the terms of the Formal Agreement (FDIC 2) and also identified the same weaknesses and deficiencies that had been noted at * * *. Applicant cannot evade responsibility because as President he was responsible for the affairs of the bank on a day-to-day basis.
   The oversights at * * *, Wilcrest, and Memorial are not outweighed by applicant's record at Mainland because his role as supervisor was limited, and his tenure short. Little weight can be accorded the opinion of Mainland's directors because these were the people who abdicated their responsibilities and brought on the need for appointment of a supervisor.

   Applicant's request for approval of appointment having been denied at the administrative level, the question now for determination is whether the evidence developed at the hearing supports rescinding disapproval of the application or justifies continuing the disapproval.
   Before taking up the substantive issues several questions relating to procedure or the processing of the application at the administrative level need to be addressed. Thus applicant complains that the FDIC was remiss when it failed in early 1990 to advise him and the bank that the former could not be appointed to an executive position without complying with the provisions of Section 32. It appears that copies of correspondence from Mainland to the Department of banking, a Department memo to the file, and a letter from the Department to Mainland, all made in January 1990, and relating to appointment of applicant to an executive position, were forwarded to the FDIC Office in Dallas apparently as part of an ongoing practice of exchanging information. (Applicant 2B, 2C, 2D). It was not until May 15, 1990, that the FDIC's Dallas Office advised the bank of the new rules and enclosed the necessary forms. This action was taken in response to a call from an agency examiner who had recently concluded a Safety and Soundness examination of the bank. In the July 5, 1990, notification of disapproval it was noted that the failure to timely comply with the law was considered in evaluating the merits of the Notification but it was not the determining factor in the decision to disapprove.
   The agency practice is not contrary to precepts of fair dealing. Applicant and the bank were responsible for complying with the newly enacted law whose requirements were widely circulated in the banking community. Furthermore it may not be assumed that the routine circulation to the FDIC of communications from the Department of Banking places a duty on the agency of alerting applicant and the bank to Section 32. The FDIC is a regulatory agency but it is not the overseer of the bank.
   Because of the delayed filing, applicant served as an executive officer of the bank until July 5, 1990 when the application was disapproved. Inasmuch as Section 32 was only recently enacted, I conclude that applicants' service as an executive officer between January and July 5, 1990, should be evaluated, along with the other evidence, in determining experience and competency.
   Applicant seems to suggest in some of his arguments that disapproval is only justified when unfavorable findings are made with respect to all four of the test criteria, namely experience, competence, character, and integrity. In disapproving the notification unfavorable findings were made only with respect to experience and competence. There were no adverse findings with respect to character or integrity. Clearly all four criteria are important in evaluating a banker's qualifications, but the statutory scheme of Section {{4-30-91 p.A-1653}}32(e) makes it clear that disapproval may be premised on any one of the four tests.
   Certain of applicant's questions directed at witness Winkler seem to suggest that the agency was negligent in not contacting the Department of banking upon receiving the July 11, 1990 letter from witness Scurlock (applicant 4) and not contacting Mainland's Board of Directors upon receiving the letter of August 1, 1990 (applicant-6). In both instances the writers told the FDIC that they supported applicant and furnished reasons for their support. Clearly there is no requirement or notions of fair dealing which requires the agency to ask "do you have anything more to say." The provisions of Section 32 and the corresponding rules and regulations envision that applicant and the bank take the initiative in the notification seeking approval and in the appeal should the notification be disapproved. It is also apparent that, except perhaps in special circumstances, because of the time constraints imposed at the administrative level, that the data supplied by applicant and the Bank at the notification phase and the material which is to constitute the appeal be furnished to the FDIC as a package at one time.
   Taking up the substantive issues it is clear that the three OCC reports and the related Formal Agreements disclosed real, serious, and widespread lapses in prudent banking practices as well as infractions of national banking laws and failure to conform to the two Formal Agreements. Applicant was president and chief executive officer of * * * from its inception in late 1983 to May 1986 and was president of Wilcrest and Memorial from May 1986 to May 1989. Applicant was thus part of the banks' senior management team. Testimony of witness Grum establishes that he had several conversations with applicant concerning the deficiencies he and the other examiners uncovered during their examinations. Applicant attended the wrap up meetings and was thus aware of the deficiencies, oversight, and infractions, and he did promise to do better. I give no credence to the statements that over zealous examiners somehow contributed to the banks' poor compliance record and weakened condition. Other than to make the allegation, applicant referred to no loans on which a charge off was not justified.
   It is also clear that Wilcrest and Memorial were 5 rated banks and that they failed in the spring of 1990, while * * * , which was 4 rated in 1986 became 5 rated in 1988.
   Recognizing all of the above the next question to be considered is whether the failings referred to in the examination reports and in the testimony of witness Grum can be charged to applicant. Applicant contends that the banks' problem are in the main due to the economic environment in which they operated. He refers to the numerous bank failures which have occurred during the last half of the eighties. Almost parenthetically he states that if management was a contributor, he was not responsible.
   Witness Huston made a study of the banks' management in response to Article III of the Wilcrest Formal Agreement. His study was made in late 1987 long before the issue which is central to this proceeding arose. In the report (applicant-11) he declares that Chairman * * * is the main man at the three banks being lender, problem solver, decision maker, and capital raiser. Elsewhere in the report it is said that senior management was reluctant to make decisions in the fear that their decisions will be contrary to or overridden by the Chairman. In addressing management qualifications, witness Huston states that applicant has the ability to handle problem credits and is considered a conservative lender.
   Witness Walker a former loan review officer in the three banks states that at loan committee meetings applicant would question the advisability of loan requests submitted by Chairman * * * but his advice went unheeded. Also, that Chairman * * * was the dominant force at all three banks, that the other officers could make recommendations but it was the Chairman who made the decisions.
   One of the main problems at all three banks was the number of loans that had to be charged off. Witness Grum was unable to state the number of problem loans listed in FDIC exhibit, 1, 3, and 5 which were originated by applicant. Witness Walker testified that none were originated by applicant. Witness Huston in his study of management states that Chairman * * * has the largest percentage of credits on the watch list as well as the largest percentage of loans charged off compared with the other officers.
   In summary I conclude that applicant despite his role as a senior manager was not {{4-30-91 p.A-1654}}responsible for the significant loan losses which were the main cause of the banks' problems.
   Applicant was president and chief executive officer at * * * from late 1983 to May 1986, and president of Wilcrest and Memorial from May 1986 to the time he resigned in May 1989. As several witnesses explained the chief executive officer is appointed by the board of directors and owes a duty to the board and the bank to work toward the best interests of the bank. The bank president may be appointed by the board or in some cases by the chief executive officer but regardless of the source of the appointment, the president owes a duty to the board and the bank to work toward achieving the best interest of the bank. There is evidence of record adduced of witnesses Grum and Huston that the board of directors was not kept fully informed on the affairs of the banks. Witness Huston states (applicant 11, p. 11) that the directors depend on Chairman * * * not only for technical expertise but for ideas to promote the plan for the future. Witness Grum states that applicant could have kept the board properly informed. This is true, but the record shows that applicant, who was not a significant stockholder, was but a senior employee. At the operational level people reported to him and in certain respects he did manage the bank, but in the critically important areas of loan originations and establishing loan loss reserves Chairman * * * ran the show as illustrated by the four substantial unsecured loans listed on page 6 of the February 1989 report (FDIC 3) all of which were originated by the Chairman and by his consistent overdraft practices (FDIC 3, p. 16). As testified to by witness Skipton applicant gave as one of his reasons for resigning in May 1989 that the bank was dominated by Chairman and he had no real control of its affairs.
   Witnesses Huston, Walker, and Skipton all of whom knew applicant at * * *, Wilcrest, and Memorial believe him to possess the experience and competency necessary to be a good banker.
   Evaluation of applicant's competence and experience may also be determined from his record at Mainland Bank. He was deemed qualified by the Department of banking to become supervisor of the bank in August 1989. His success as supervisor is testified to by witnesses Scurlock, Kacal, Hamon and even Winkler. Witness Scurlock was not aware of the OCC reports at the time the appointment was made, but he was aware that applicant had been employed by 5 rated banks. As of the hearing he was aware of the OCC reports but continues to believe applicant qualified in terms of experience and competence to assume the sought management positions. Witness Kacal, a bank consultant and CPA had contacts with applicant in late 1989 concerning retention of the witness to perform an audit using GAAP standards. He met with applicant during the auditing process and came to know of applicants' work on bank compliance issues, loan review procedures, efforts to obtain an investor, and the strategies being used to manage the deposit base and the loan loss reserve. He believes the bank is being turned around.
   Finally witness Hamon on behalf of the board of directors supports applicant. He was impressed with his work as a supervisor which included emphasis on keeping the board fully advised on the progress of the bank. Since January 1990 steps were taken to reduce expenses, collect on loans which the prior management had virtually written off, and reduce exposure to volatile deposits.
   Applicant in his testimony disclosed knowledge of both the business and professional aspects of banking. He is aware that a banker though desirous of earning a profit has responsibilities to the larger community. He spoke of the difficulty of collecting on loans in a downturn, the need to be pragmatic, to be watchful of lender liability pitfalls, to discourage borrower bankruptcies, and to control costs. He was perhaps not a hero at * * *, Wilcrest, and Memorial, but I find that the failure and near failure at these institutions may not be laid at his feet. His record as a banker in terms of education and experience, including his record at Mainland, establishes that he possesses the experience and competence needed at Mainland Bank. Accordingly, I recommend that the board or its designee rescind the July 5, 1990 notice of disapproval.
/s/ Richard A. White
Presiding Officer
December 20, 1990

   Witness Grum, a commissioned bank examiner for the Office of the Comptroller of the Currency, the agency that has primary {{9-30-91 p.A-1655}}regulatory responsibilities over national banks testified. He is a college graduate, with honors, has served eight years with the OCC conducting about 80 examinations of which 20 involved troubled institutions where he was the examiner in charge. In evaluating a bank's soundness, five areas are checked, namely, capital, asset quality, management, earnings, and liquidity. The examination results in the bank being assigned a numerical rating ranging from 1 to 5 with 1 being assigned to a well run, financially sound institution while 5 is applied to a bank with near term failure prospects unless immediate steps are taken to restore viability.
   In evaluating the condition of a bank, management skills and attitude are the most critical factors because they affect in some degree the other areas. In the experience of the witness poor management is manifested by weak underwriting and questionable investment practices.
   The witness was the examiner in charge of an examination of Memorial Bank as of December 31, 1987 (FDIC - 1). The examination disclosed that the bank had poor loan underwriting practices, such as unsecured loans without repayment programs or documented sources for repayment and collateral based loans without valuing the collateral. These oversights were attributable not only to the officers which originated the loan, but also to applicant who was responsible for reworking problem loans. Obtaining proper loan documentation is the responsibility of the loan officer, loan committees and in the final analysis the bank's president, who oversees the loan portfolio.
   Another lapse noted during the examination was poor identification of problem assets in that the bank did not charge off losses totaling $660,000 of which $294,000 was attributable to loans, $123,000 to accrued interest, and $215,000 to foreclosed real estate. Failure to recognize these losses misrepresents the overall condition of the bank. The charge offs are not discretionary but are required by GAAP and national banking law.
   Pages A-4 and A-5 of the examination report is headed "Summary of Assets Subject to Criticism". The witness had no knowledge as to the number of loans listed thereon which were made by applicant. He would be surprised however if applicant were not responsible for some of the loans.
   Memorial Bank at the time of the examination had recently merged with Wilcrest National Bank and the latter bank was the subject of a Formal Agreement with the OCC (FDIC-2). These Agreements are made when it appears bank management is not able to correct problems. Applicant as a director of Wilcrest had signed the agreement along with all other directors in June 1986. When Wilcrest merged with Memorial in November 1987 it retained its charter but took the Memorial name. The examination disclosed that Memorial was in substantial non compliance with 15 of the 16 articles comprising the agreement.
   Article III of the Formal Agreement required that a management study be undertaken. The study was made (applicant-11) and the witness has seen the study but could not recall details. Page 5 of the examination report states that the study was acceptable, but that the suggested recommendations were never implemented by the bank.
   The formal agreement required the bank to submit monthly progress report to the OCC. Only three such reports were submitted and they were incomplete in matters relating to problem assets.
   Finally the examination report cites instances where the banks' operations fail to conform to various national banking laws including laws relating to the OREO, accurate internal bank reports, loans to executive officers and directors, and loans secured by stock. Many were repeat violations.
   During the course of the examination contact was had with most of the officers and directors of Memorial including Chairman * * * and the applicant who was president. The conversations with applicant related to the loan portfolio, contingency planning, the loan loss reserve, and the foreclosed real estate. Responsibility for establishing the loan loss reserve lies with senior management. Applicant attended the wrap up meeting at which the examiner strive to get management to correct deficiencies. He agreed to correct the violations of law. The bank was assigned a rating of 5.
   The witness was also the examiner-in-charge of an examination made of Memorial Bank as of February 28, 1989. (FDIC-3). The management deficiencies noted in the earlier report continued and even worsened. Applicant as president of the bank could have obtained appraisals of the foreclosed real estate, taken the write downs {{9-30-91 p.A-1656}}from loan value to market value, established procedures to properly fix the level of the loan loss reserve, reported accurately to the board on the condition of the bank, and fashioned a viable contingency plan, none of which he did.
   The examination report, page 1 of the section headed "Letter to the Board of Directors" states that "Weaknesses shown by CEO and President Smith in prior reviews continue to be exhibited at this review." In the section of the report headed "Summary of Assets Subject to Criticism", pages 19 and 20, the witness had no knowledge as to the number of loans originated by applicant. Pages 6 and 7 of the report refer to four loans which were cited for weak underwriting practices. All were originated by Chairman * * *.
   Following the merger of Wilcrest into Memorial in November 1987, the Bank's officers' took a 5 percent pay cut, gave up company automobiles, the directors suspended meeting fees, and the director who owned the bank building reduced the rent.
   The witness concedes that some of the problems could be blamed on the economy, but prudent banking practices and compliance with law could have prevented a portion of the problems. The bank was assigned a 5 rating and subsequently failed during the spring of 1990.
   The witness participated in an examination of * * * for the period ending December 1987. The bank was in poor condition attributable to management practices. At the time of the examination * * * was the subject of a Formal Agreement (FDIC-4) which was executed by the bank's board of directors including applicant on June 25, 1986. During the examination it was concluded that the bank was in substantial non compliance with a majority of the 21 articles comprising the agreement.
   During the examination there were conversations with applicant concerning the examiners' proposed loan classifications. Applicant challenged the classification to a limited degree but did not get specific. It appeared however that applicant was familiar with the bank's affairs including the loan portfolio and the loan loss reserve. As a member of the board and as chairman of the management committee applicant could have corrected what might be called the technical violations of law and formulated an adequate capital policy. The existing plan was inadequate in that it did not take into account the bank's history of losses and showed the bank as making money when such was not the case. The examination resulted in a 4 rating which means failure is expected but not in the short term.
   It appears that applicant departed * * * in May 1986 to go to Wilcrest Bank to work on problem credits. A new president and chief executive officer was elected. At the time of the December 1987 examination * * * was the Chief Executive Officer.
   The witness was examiner in-charge of an examination made of * * * as of February 28, 1989. (FDIC-5). The bank's condition was poor due mainly to poor underwriting practices and significant loan charge-offs. The very same weaknesses noted at Memorial Bank were applicable also at * * *. The banks had the same senior management, common directors, and a majority of the shareholders were common to both institution. Senior management comprised Chairman * * * and applicant who was director and chairman of the executive committee. Discussions were had with applicant about the quality of the loan portfolio. Applicant challenged in a general way the proposed loan classifications but did not raise specifics. The witness believes applicant was familiar with the affairs of the bank. He had no knowledge whether applicant was responsible for any of the troubled loans listed on p. 10 of the report.
   The deficiencies noted in the earlier examination continued to exist and the condition worsened. The bank was given a 5 rating and as of the hearing was under a cease and desist order. It is on the brink of insolvency.