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FDIC Enforcement Decisions and Orders |
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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 ProcedureBurden of ProofFDI Act §32
[.2] Directors and OfficersDuties and ResponsibilitiesStandard of Care
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[.4] FDI Act §32Competence and ExperienceViolation of Law
In the Matter of
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.
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 1416, 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 4452, 5486. FDIC Ex. Nos. 15. 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
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 67 and 1920); 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
[.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
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 4748. At the
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:
C. Applicant's Response to FDIC's
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.
D. Rejection of Presiding Officer's
[.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.
E. Applicant Lacks the Requisite
[.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.)
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 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.
In the Matter of
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.
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).
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 19841986. 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.
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.
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.
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. |
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Last Updated 6/6/2003 | legal@fdic.gov |
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