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NEW S

R ELEASE

FEDERAL DEPOSIT INSURANCE CORPORATION

FOR RELEASE UPON DELIVERY

P R -g 3 -7 7

(9 -2 6 -7 7 )

Statement by

G eorge A . L eM a istre, Chairman
F ed eral D eposit Insurance C orporation

b e fo re the

C om m ittee on Banking, Housing and Urban A ffa irs
United States Senate

Septem ber 26, 1977

FED ERAL DEPOSIT INSURANCE CORPORATION, 5 5 0 Seventeenth St. N.W., Washington, D.C. 20429



202-389-4221

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NEW S

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FOR RELEASE UPON DELIVERY

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Statement by ,

G eorge A. L eM a istre, Chairman
F ed eral D eposit Insurance C orporation

b efore the

Com m ittee on Banking, Housing and Urban A ffa irs
United States Senate

Septem ber 26, 1977

FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St. N.W., Washington, D.C. 20429



202-389-4221

TABLE OF CONTENTS
Page
I.
II.

III.

INTRODUCTION

1-6

FD IC ’ S APPROACH TO INSIDER ABUSE, INCLUDING
P R EFE R E N TIA L LOANS TO INSIDERS

6-13

BANK STOCK LOANS AND ABUSE OF THE
CORRESPONDENT RELATIONSHIP

13-37

A.

IV.
V.

F requen cy of Bank Stock Loans and Loans
A sso cia te d with a C orrespondent Relationship
and Eixtent of P o s sib le Abuse

14-20

B.

FDIC P o lic ie s and P ra ctic e s

21-27

C.

Additional Safeguards

28-33

D.

Advantages and Disadvantages of Other
M easures fo r M inim izing Abuse A sso cia te d
with Bank Stock Loans

33-37

LOANS TO FAVORED CUSTOMERS

37-39

OVERDRAFTS

39-47

A.

F requ en cy of the P ra ctic e

39-45

B.

FDIC P ro ce d u re s and P ra ctic e s with
R espect to O verdrafts

45-47

An A ssessm en t of the Need fo r Additional
Laws and Regulations Pertaining to O verdrafts

47

C.

VI. FAILURE TO COM PLY WITH CERTAIN
BANKING LAWS OR REGULATIONS
VII.

48-49

INSURANCE COMMISSIONS

49-57

A.

P ra c tic e s with R espect to Insurance C om m ission s

50-51

B.

FDIC P o lic y and P ra ctic e s with R espect to
Insurance C om m ission s

51-54

C om plete D isclo su re and A pproval v s. P roh ibition

54-57

C.




î

TABLE OF CONTENTS
P aSe
VIII. ACTIONS UNDER THE FINANCIAL INSTITUTIONS
SUPERVISORY A C T OF 1966
IX. DIRECTORS

60-65

A.

L iability of D ire cto rs

60-64

B.

Adequacy o f Laws with R esp ect to Certain P ra ctic e s

64

C.

P o litica l Contributions

64-65

X. DOUBLE C O LLA TE R A L

65-66

XI. CONFLICTS OF INTEREST INVOLVING BANK
EXAMINERS




57-60

ii -

66-68

L

INTRODUCTION
M r. Chairm an, I w elco m e the opportunity to te stify at these

oversigh t hearings w hich seek to determ in e whether additional statutory
o r regu latory safeguards a re needed to a ssu re appropriate agency resp on se
to a wide range o f abusive banking p r a c tic e s .

We at the FDIC appreciate

you r co n ce rn and the con cern o f the C om m ittee in this regard .

We view

these hearings as a con stru ctiv e p r o c e s s in w hich we can advise the C om ­
m ittee and the public on the steps w hich we a re taking to curb abusive co n ­
duct and in which we can seek to develop fu rth er to o ls to deal with such
conduct.
In y ou r le tte rs o f August 31, 1977, and Septem ber 20, 1977, you
requested that we fo cu s upon abuses in volvin g: bank stock loan s; loans to
fa v ored cu s to m e rs ; o v e rd ra fts ; fa ilu re to com p ly with banking laws o r regu ­
lation s; in surance co m m is s io n s and double u se o f c o lla te r a l.

In addition,

you sought our view s and in form ation regarding actions that the FDIC has
taken under the F inancial Institutions S u pervisory A ct o f 1966; our appraisal
of the re sp o n sib ilitie s and lia b ilitie s o f bank d ir e c to r s ; ou r view s as to the
appropriaten ess o f leg isla tion dealing with the tra n sfer o f co n tro l o f banks;
and fin ally, ou r view s as to c o n flicts o f in terest involving bank exam in ers.
We have sought in the d iscu s s io n that fo llo w s to be as resp on sive as p o ssib le
to these in q u iries.

N eed less to say, we a re anxious to w ork c lo s e ly with the

C om m ittee in the com ing m onths as it a d d re sse s these and related m a tters.
Y our inquiry la rg e ly fo c u s e s on abuses by bank in s id e r s .

In that

regard, I m ust em phasize in the stron gest p o s s ib le term s that the FDIC is




-

2

-

deeply con cern ed about and responds v ig o ro u sly to overrea ch in g and abusive
conduct on the part o f bank in s id e r s .

Our exp erien ce o v e r the y e a rs and our

cu rren t investigations indicate that seriou s abuse is not w idespread.

A t the

sam e tim e, we a re fu lly aw are that the potential fo r the abuse o f a bank is
great and that seriou s abuses do o c c u r .
The FDIC has a unique p e rsp e ctiv e among the banking agen cies in
viewing the subject o f abusive in sid e r banking p r a c tic e s .
resp on sib le fo r

Not only a re we

supervising and regulating the m o re than 9, 0 0 0 in sured

state nonm em ber banks, but we a lso se rv e as r e c e iv e r o r liquidator fo r
those institutions which fa il.

A s a resu lt, we a re acutely aw are o f the

ill effect o f abusive and unsound banking p r a c tic e s and we know all too
w ell the ways in which an in s id e r m ay abuse his o r h e r fin an cial in stitu­
tion.

M o reov er, becau se o f our re sp on sib ility to p ro te ct the in surance

fund, secu re con fiden ce in the banking system gen era lly and p ro te ct the
various segm ents o f the public which have a stake in the via bility o f a
bank, the FDIC has a fu rth er d ire ct institutional in terest in the prevention
of abusive conduct.
At the outset, I should state that I am absolutely confident o f the
toughness o f ou r exam in ers in dealing with abusive conduct.

It is essential

to rem em b er during the c o u r s e o f these d eliberation s that no system o f
human beings and laws is p e r fe c t.
a re dishonest.

P eop le w ill m ake m istakes and som e

Laws and tools o f public p o licy do evolve to keep up with

changes in technology and innovations in abuse, often at a pace which




i
- 3 -

fru stra tes us a ll.

S im ila rly , ou r view as to what a re appropriate tools

and p o lic ie s has evolved.
The ex p erien ce o f the FDIC in using its ce a s e and d e sist pow ers
is illu stra tiv e.

F o r severa l y e a rs a fter C on gress granted the agencies this

pow er in 1966 it was not used at all.

Even though banks w ere aware o f the

p o ssib ility that it m ight be used, the fir s t o r d e r was not issu ed until. June
1971.

F ro m June 1971 to M ay 1976 the pow er was used sparingly,!

This

la ck o f use was in terpreted by many as reflectin g laxity and in d ifferen ce.
My p ercep tion is that this was not the c a s e . R ather, su p e rv iso ry personn el
and the agency gen era lly sim ply did not use a tool which they found unfam iliar
and cu m b ersom e p o s s ib ly b eca u se they b eliev ed that existing to o ls w ere m o re
effectiv e.

Since May 1976 the agency has m ade in cre a sin g ly frequent use

o f this tool, and m any o f its m o st outspoken c r it ic s within the agency have
b ecom e its grea test su p p orters.
I m ust a lso u n d e rs co re that ju st as there a r e d iffe re n ce s among
the C om m ittee as to what constitutes abusive and unsound conduct and
p r e c is e ly what should be done about it, there a re also d iffe re n ce s among
those o f us at the FDIC who a re con cern ed about these is s u e s .

I shall in

the co u r s e o f m y d iscu s s io n attempt to illum inate rather than o b s c u r e these
d iffe re n ce s as I b e lie v e that it is ap propriate fo r the C on gress and the
public to focu s upon the gray a reas o f p o licy w here reason able m en m ay
d iffe r.

A t the sam e tim e, I shall a lso em phasize that there a re other

areas in which the abuses a re not gray but a re b la ck and white and in which
there is no disa greem en t at the FDIC.




- 4 -

In the d iscu ssio n that fo llo w s , I shall d e s c rib e ou r cu rren t
p ersp ectiv e as to the extent o f the p ra ctice s that you a re focu sin g upon
and spell out in som e detail the resp on se which the FDIC has m ade to these
p ra ctice s.

As this d iscu ssio n w ill m ake c le a r , we continue to seek new

p o licie s and techniques which w ill m in im ize abusive conduct. A s you know,
we are in the p r o c e s s o f developing m o re detailed in form ation as to the
scope o f activities in som e a re a s.
B efore turning to a d iscu s s io n o f the questions which you have
raised and our p ra ctice s and p o lic ie s in dealing with abusive conduct, I
shall outline fo r you surveys and studies which we have undertaken in
response to the C om m ittee's co n ce rn s .

Inform ation and data w ere c o l ­

lected fr o m three differen t so u rce s - - the ex p erien ces o f ou r 14 Regional
D ire cto rs , a sam ple o f 261 bank exam ination rep orts on file in the Wash­
ington o ffic e o f state nonm em ber insured co m m e r cia l banks having deposit
balances due to other banks and a survey o f 303 state nonm em ber insured
co m m e rcia l banks which w ere in the p r o c e s s o f being exam ined during the
p eriod fr o m Septem ber 6 to Septem ber 16, 1977.
Each o f our R egional D ir e c to r s was asked to com m ent on the types
o f abusive p r a c tic e s involving corresp on d en t bank balan ces and the financing
o f bank stock p u rch a ses, the p ro ce d u re s follow ed to detect such abusive
p ra ctices and the actions taken in c a s e s w here abusive p r a c tic e s a re found
to exist.

The R egional D ire cto rs w ere also asked to p rovid e in form ation on

overd ra fts.




- 5 -

Bank exam ination rep orts fo r state nonm em ber in su red banks
provided a second s ou rce o f in form ation and data.

We assum ed that banks

with p ositiv e "due to bank" balan ces would b e m o re lik e ly than oth er banks
to m ake bank stock loans and loans to in s id e r s o f oth er banks.

T here w ere

approxim ately 2 ,6 0 0 in su red non m em ber banks with such ba lan ces as o f
June 30, 1977, out o f a p o s s ib le total o f o v e r 8 ,7 0 0 in su red nonm em ber
banks.

F ro m the 2, 600 we selected a sam ple o f 261 banks con sistin g o f

31 banks with d ep osits o f $300 m illio n o r m o re (large banks), 105 with
deposits o f $50 to $300 m illio n (m e d iu m -size d banks) and 125 with deposits
o f $50 m illion o r le s s (sm all banks).

We used the la test available R eport

o f E xam ination o f each o f the 261 banks as a s o u rce o f in form a tion with
re sp e ct to bank stock loa n s, loans to o ffic e r s and d ir e c to r s o f other banks
and o v e rd ra fts.
F in a lly , detailed in form ation was c o lle c te d on loans secu red by bank
stock, loans to o ffic e r s and d ire c to rs of other banks, correspon d en t balances
and overd rafts to in sid ers in all nonm em ber insured c o m m e r cia l banks fo r
which an exam ination was in p r o g r e s s betw een Septem ber 6 and Septem ber 16,
1977.

U sable inform ation was supplied fo r 303 banks, including 250 sm all

banks, 45 m e d iu m -s iz e d banks and 8 la rg e banks.

(Inform ation pertaining

to overd rafts was c o lle c te d fr o m only 189 b a n k s .)
In addition, at the request of this C om m ittee, the FDIC is p re p a r­
ing, in conjunction with the C om p troller o f the C u rren cy and the F ed era l
R e s e rv e B oa rd , a survey which w ill be sent to all insured co m m e r cia l banks
in the next few days.

In this su rvey, banks w ill be asked to rep ort as o f

Septem ber 30, 1977, bank stock loa n s, loans to o ffic e r s , d ir e c to r s and m ajor



-

6

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shareh olders o f other banks, and loans to th eir own o ffic e r s , d ir e c to r s
and m a jo r sh areh olders and their b u sin ess in te re sts.

The banks w ill be

asked to supply data about amounts outstanding, in terest rates and c o r ­
respondent balance relation sh ips.

ROIC'S APPROACH TO INSIDER ABUSE, INCLUDING
PREFEREN TIAL LOANS TQ INSIDERS
____________
G enerally, the bulk o f the is su e s which you have fo cu se d upon
in volve the abuse by in sid e rs o f th eir relationship with th eir finan cial
institution.

H ow ever, in you r le tte r o f August 31, 1977, you seek in fo r ­

m ation with re sp e ct to loans to fa v o re d cu sto m e rs gen era lly and not
m e re ly in s id e r s .

B ecau se we trea t in sid e r transactions v e ry differen tly

fro m those not involving in s id e rs , I shall attempt to deal with the two
issu es separately.
It is im portant to note that the p rob lem is a gen era l one not
lim ited to ov erd ra fts o r com pensating balances o r extension o f c re d it on
p referen tia l te rm s.

F o r exam ple, o v e r the y e a rs the FDIC has un covered

and responded to in sid er overrea ch in g involving exorbitant m anagem ent
fe e s , e x ce s siv e lega l fe e s , p re fe re n tia l treatm ent in the pu rchase and
sale o f a s s e ts, fa v ora b le le a se arrangem en ts, m isu se o f bank a s s e ts, and
other d ev ices w hereby in sid e rs u se th eir institutions fo r their p erson a l
advantage.
A s I have indicated, the question o f what constitutes abuse, is
one which gen erates som e disagreem en t.

My own view , and the p re d o m i-

nant view at the FDIC, is that in s id e r conduct is abusive and constitutes




- 7 -

an unsafe and unsound banking p r a c tic e when an in sid e r obtains a benefit
which is not available to a non insider oth erw ise sim ila rly situated and when
the resu lt o f the in s id e r ’ s obtaining that ben efit is detrim ental to the bank.
While such a standard is easy to apply in many c a s e s , in oth er in stances
the question is a com p lex and d ifficu lt one.

My own view s in this regard

w ere set forth early in m y te rm as D ire cto r at the FDIC.

Speaking at

the 33rd Annual T exas Bankers C on feren ce on August 20, 1974, I stated:
A bank is n e c e s s a r ily a d v e rse ly affected when an in sid e r
exacts te rm s not available to m e m b e rs o f the pu blic. This
is tru e whether the deal r e fle c ts a co n scio u s intent to m ilk
the bank o r is m e r e ly the resu lt o f tainted judgm ent. In
either event, the bank is harm ed, sin ce the econ om ic ben efit
redounding to the in s id e r rep resen ts a c o s t o r lo s s o f earn ­
ings w hich is b orn e by non-benefiting sh a reh olders a n d /o r
in som e way p a sses through to the bank’ s cu s to m e rs .
F o r this reason , any tran saction betw een a bank and an
in sid er o r h is in terests that is sign ifican tly m o re fa v o ra b le
to the in sid e r than a com p a ra b le tra n saction with a non­
in s id e r is an unsound banking p r a c tic e and should not be
tolerated by a bank’ s b o a rd o f d ir e c t o r s . W here such
conduct is tolera ted by a bank’ s b oa rd , it should b e the
subject o f fir m su p erv iso ry action. To fo llo w any other
p o licy is to allow banks to su bsidize the non-banking
finan cial activity o f p r e fe r r e d in s id e rs at the ultim ate
expense o f m in ority o r n o n -in te re ste d sh a reh old ers,
and, in the ca s e o f bank fa ilu re , at the expense o f many
c r e d ito r s and d ep osito rs as w ell.
A s you know, the m o st glaring exam ple o f the abuse o f an
in sid e r relationship is the fa ilu re o f U. S. National Bank in San D iego, a
fa ilu re which was caused by what has been term ed ” a rio t o f s e lf-d e a lin g . "
This fa ilu re led the FDIC to r e a s s e s s the e ffe ctiv e n e ss o f its p o lic y and
p roced u res in dealing with in s id e r abuse.

The resu lt o f this ap praisal

was the adoption o f a regulation dealing with in sid e r tra n saction s which




-

becam e effectiv e on May 1, 1976.

8

-

The C orp ora tion 's reason s fo r adopting

this regulation are stated fu rth er in the pream ble to the regulation and in
the n otice published in the F ed era l R e g iste r which announced its adoption.
This n otice stated:
This action is based on the exp erien ce o f the C orporation
which in dicates that many banks have su ffered loan lo s s e s ,
lo s s o f revenue, e x c e s siv e co sts and oth er substantial
econ om ic detrim ent as a resu lt o f ill-c o n s id e r e d tra n s­
actions with in s id e r s . The need fo r m o re rigorou s su p er­
vision o f such transactions by boa rd s o f d ir e c to r s and bank
su p ervisory agen cies is indicated by the fa ct that abusive
self-d ea lin g has been the p rim a ry cau se o r a significant
contributing cau se in m o re than half o f a ll bank fa ilu re s
sin ce I960, including the fa ilu re o f 30 nonm em ber in sured
banks. The m ost dram atic exam ple o f the harm which can
resu lt fr o m abusive se lf-d e a lin g is the 1973 fa ilu re o f the
United States National Bank, San D iego, C alifornia, fo r
which the C orpora tion has had to establish a r e s e r v e o f
$150 m illion fo r lo s s to the dep osit in surance fund.
R eview o f existing and past "p r o b le m " bank c a s e s also
reveals in s id e r overrea ch in g as a significant so u rce o f
seriou s d ifficu lty . M o re o v e r, an in sid e r tran saction that
is not effected on an " a r m 's len gth " b a sis w ill lead to a
diminution o f earnings and an e ro sio n o f capital, even
w here the im m ediate resu lt is not the bank's fa ilu re o r
its designation as a "p r o b le m " institution. It fo llo w s ,
th erefore, that in sid e r transactions w hose te rm s and
conditions cannot be ju stified when view ed in light of
all the circu m sta n ce s surrounding the transaction,
in cr e a s e the risk o f lo s s to d e p o sito rs and ultim ately
to the deposit in surance fund. In addition, in sid e r
tran saction s w hose te rm s and conditions cannot be
ju stified constitute a d iv e rsio n to in s id e rs o f re s o u r ce s
that p ro p e rly belong to all shareh olders on a p ro rata
b a s is , as w ell as a m isa llo ca tio n o f a com m u n ity's
deposited funds.
I

am confident, h ow ever, that the view set forth in this statemen

is not a new one at the FDIC.

Our exam in ers have always given sp ecia l

scrutiny to in sid er transactions and have v ig o ro u sly sought to ach ieve c o r ­
rectiv e action when abuse is found.




Thus, instead o f establishing new

- 9 -

p o licy , the F D IC 's regulation sought instead to highlight and re e n fo rce
a longstanding p o licy .

H isto rica lly , this approach was en forced through

two v e h ic le s : (1) the su p erv isory and exam ination p r o c e s s , and (2) the
applications p r o c e s s .
Although not w ell understood by those un fam iliar with bank
supervision, the exam ination p r o c e s s is a potent to o l o f enforcem en t and
com p lia n ce.

F o r exam ple, in United States v. Philadelphia National Bank,

374 U. S. 321, 329 (1965), the Suprem e C ourt stated:
. . . [P ]erhaps the m o st e ffe ctiv e w eapon o f fe d e ra l regulation
o f banking is the broad v isita to ria l pow er o f fe d e ra l bank ex a m i­
n ers . . . . The FDIC has an even m o r e fo rm id a b le pow er. If
it finds "unsafe o r unsound p r a c t ic e s " in the conduct o f the
bu sin ess o f any insured bank, it m ay term inate the bank's
in sured status . . . . Such involuntary term in ation se v e rs the
bank's m em b ersh ip in the FRS, if it is a state bank, and
throw s it into re ce iv e rs h ip i f it is a national bank . . . . A s a
resu lt o f the ex isten ce o f the panoply o f sanctions, r e c o m ­
m endations by the ag en cies con cern in g banking p r a c tic e s tend
to b e follow ed by bankers without the n e c e s s ity o f fo rm a l
com p lia n ce p roceed in g s.
When abusive in s id e r tra n saction s o r in s id e r tran saction s involving v io ­
lations o f law o r regulation a re d is c o v e r e d b y exam ination, they a re
enum erated and c r itic iz e d in the exam ination re p o rt.

In fa ct, whether

abusive o r not, a ll significant in s id e r tra n saction s w ill be re fle cte d in
the rep ort.

C o rre ctio n o f abuses is sought by the bank exam iner o r his

su p e rio rs, either through d iscu ssio n s with m anagem ent o r through the
bank's boa rd o f d ir e c t o r s .

G reat em phasis i s p laced upon achieving

voluntary com p lia n ce, although fo r the la st few y e a rs the C orporation
has not hesitated to institute fo r m a l c o r r e c tiv e action if "m o ra l suasion"




-

o r "jaw boning" was not effe ctiv e .

10

-

Though not designed as such, the

application p r o c e s s h a s 'a ls o serv ed as an e ffectiv e tool o f bank su p er­
vision .

C o rre ctiv e action is often achieved through denial o r threat o f

denial o f va riou s actions f o r which a bank m ust seek p r io r FDIC approval.
F o r exam ple, the applicable statute p rovid es that a bank m ust obtain the
p r io r approval o f the FDIC in o r d e r to establish o r re lo ca te a branch
o ffic e and one o f the fa c to r s the C orporation m ust co n sid e r is the gen eral
ch a ra cter o f the bank 's m anagem ent.

An oth erw ise routine application

might be denied i f abusive in sid e r p r a c tic e s w ere existing and not being
c o r r e c te d .
The regulation dealing with in s id e r transactions which was
adopted in 1976 sought to add three elem ents to this approach.

F ir s t o f

all, the regulation esta blish es p ro ce d u re s which requ ire bank board s o f
d ire c to rs to su p ervise bank in sid e r tran saction s in a m eaningful m anner.
The board o f d ir e c to r s o f each in sured nonm em ber c o m m e r cia l bank is
required to review each in sid e r tra n saction involving a sse ts o r s e r v ic e s
grea ter than a sp ecified amount which v a rie s with the s iz e o f the bank.
In addition, certa in in form ation , including a r e c o r d o f dissenting votes
cast by m em b ers o f bank board s o f d ir e c to r s , m ust be kept available
in o r d e r to fo s t e r e ffectiv e internal co n tro ls o v e r such tran saction s by
the bank its e lf, and to fa cilita te exam in er review and an alysis.

W hile

the regulation im p o se s certa in recordk eepin g requ irem en ts, we have
not required the bank to keep new re co r d s o r to establish new file s .
It is ou r view that the m inutes o f board m eetings can serv e as an




-

11

-

appropriate listin g o f a ll in sid e r transactions and that the regu lar filin g
system o f the bank can b e the re p o sito ry o f in form ation requ ired by the
regulation so long as it is read ily a c c e s s ib le to FDIC exa m in ers.
M ost im portantly, the regulation it s e lf m akes c le a r that fo rm a l
com p lia n ce with the boa rd o f d ir e c to r review and approval requirem ents
does not re lie v e the bank o f its duty to conduct its operation s in a "sa fe
and sound" m anner.

N or does it prevent the C orpora tion fr o m taking

w hatever su p erv isory action is deem ed n e c e s s a r y and ap propriate.

And,

we have m ade it c le a r that the FDIC B oard view s any sign ificant in sid e r
ov errea ch in g as an unsafe o r unsound banking p r a c tic e , and, as such,
w ill not be tolerated.
That this is the c a s e is re fle cte d in the Agency* s r e c o r d in
bringing 51 c e a s e and d e sist o r d e r s sin ce January 1, 1976.

A s d is c u s ­

sion b elow r e fle c ts , 35 out o f the 51 c e a s e and d e s is t actions brought
during this p eriod w ere aim ed at le a st in part at co rr e c tin g som e in sid e r
abuse.
P a rticu la rly notable a re 8 (b) actions brought this sum m er against
fiv e related banks in which we ch arged fo r m e r and p resen t o ffic e r s and
d ire c to rs with abuse o f th eir authority by causing the banks to pay e x c e s s iv e
expenses to com panies owned by the in s id e r s .

These ca s e s rep resen t a

significant innovation in that we sought r e c o v e r y fr o m the individuals fo r
the fir s t tim e in the h isto ry o f ou r u se o f the Section 8 (b) pow er - - bringing
what is tantamount to a d eriva tive action .

By con sen t, the offending in sid e rs

agreed to reim b u rse the banks in an amount ag reea b le to the FDIC and the
state s u p erv isor.




-12-

As I have indicated, ou r in sid e r regulation b e ca m e effe ctiv e
May 1, 1976. Thus, it has been in p la ce fo r a little m o r e than a y e a r.
We a re now in the p r o c e s s o f engaging in a detailed review and evaluation
o f its effectiv en ess.

I anticipate that we w ill seek to e ffe ct certa in changes

in the regulation as a resu lt o f this review .

It is m y intention, as I w ill

indicate below , to p ro p o se to the B oard o f D ire cto rs that the regulation
be m odified so as to p rovid e us with the tools fo r dealing with abuse in
the bank stock loan area.
In addition, I am prepared to p rop ose to the B oard that we
amend the regulation to m ake m o re c le a r the standard which we expect
bank boards to apply in review ing in sid e r transactions and which we w ill
apply in determ ining whether to brin g su p erv isory action.

As the regu ­

lation now stands, Subsection (g) states:




(g) S upervisory A ction in R egard to C ertain Insider
T ra n saction s. Notwithstanding com p lia n ce with the review
and approval requirem ents o f paragraph (b) o f this section ,
the C orporation w ill take ap propriate su p ervisory action
against the bank, its o ffic e r s o r its d ir e c to r s o r tru stees
when the C orporation determ in es that an in sid e r transaction,
alone o r when aggregated with oth er in sid e r tra n saction s, is
in dicative o f unsafe o r unsound p r a c tic e s . Such su p e rv isory
action m ay in volve institution o f fo rm a l p roceed in gs under
section 8 o f the F e d e ra l D eposit Insurance A ct. Am ong the
fa cto r s which the C orporation w ill co n sid e r in determ ining
the p re se n ce o f unsafe o r unsound banking p r a c tic e s in v o lv ­
ing in sid er transactions a re :
(1)
W hether, b eca u se o f p referen tia l term s and
conditions, such in sid e r tran saction s a re lik ely to resu lt in
significant loan lo s s e s , e x c e s s iv e c o s t s , o r other significant
econ om ic detrim ent which would not o c c u r in a com p arable
a r m ’ s length transaction with a p erson o f com p arable c r e d it w orthiness o r oth erw ise s im ila rly situated;

- 13 -

(2) Whether tran saction s with an in sid e r and all
person s related to that in sid e r a re e x c e s siv e in amount,
either in relation to the bank's capital and r e s e r v e s o r in
relation to the total o f all tran saction s o f the sam e type; o r
(3) W hether, fr o m the nature and extent o f the
bank's in s id e r tra n saction s, it appears that certa in in sid e rs
a re abusing their position s with the bank.
It is m y b e lie f that this p rov isio n should b e m odified to rem ove any doubt
that a transaction which r e fle c ts a p r e fe r e n c e to an in s id e r o r h is in terest
and resu lts in a detrim en t to the bank is an unsafe o r unsound banking
p ra ctice which should not o c c u r and w ill be dealt with s e v e r e ly by the
FDIC.
F inally, we b e lie v e that additional re strictio n s o f the type contained
in S ections 103 and 107 o f S. 71 as it pa ssed the Senate would b e advisable.
These section s provid e that existing lim its under ap p lica ble fe d e ra l and state
law on loans to one b o r r o w e r would apply to loans any o ffic e r o r p erson
holding 10 p ercen t o r m o r e o f the bank's voting stock , including loans to
com panies con trolled by such o ff ic e r o r stock h old er.

T hese section s would

also req u ire that when aggregate loans to any o ffic e r , d ir e c to r o r h old er o f
10 percen t o r m o re o f stock exceed 25, 000, advance approval of tw o-th ird s
o f the bank's b oa rd o f d ir e c to r s would b e requ ired .

In addition, loans to

such in s id e rs on p referen tia l term s would b e prohibited.

IE.

BANK STOCK LOANS AND ABUSE OF THE
CORRESPONDENT RELATIONSHIP________
A s you know, among the m o st seriou s abuses a sso cia te d with bank

stock loans a re those involving the u se o f corresp on d en t balances by a banker
to com pen sate a corresp on d en t bank fo r p re fe re n tia l loans extended to him




- 14 -

his in terests.

This abuse has been m ost prevalent in states in which

there a re r e strictiv e branching p o lic ie s and the loans a re used to finance
the purchase o f con trol o f sm a lle r banks.

It should b e noted» o f course»

that abuses o f corresp on d en t balan ces a re not only a sso cia te d with bank
stock loans but m ay a lso in volve any extension o f c re d it to som eon e who
can exercise, con trol o v e r a corresp on d en t account.

M o re o v e r, there are

a va riety o f other abuses which m ay be a sso cia te d with bank stock loans
not involving a corresp on d en t relationship.

Often, f o r exam ple, these

o c c u r when a p rin cip al has overextended h im s e lf and m ust o v e r re a ch to
m eet his obligation s.
F req u en cy o f Bank Stock Loans and Loans A s so cia te d with
a C orrespondent Relationship and Extent o f P o s s ib le Abuse
Our R egional D ire cto rs rep ort that frequently loans a re m ade by
correspon den t banks to the o ffic e r s o f a depositing bank.
loans are secu red by stock o f the depositing bank.

Som e o f these

T hese banks typically

are c lo s e ly held institutions w here co n tro l is vested in one p erson , a sm all
group of individuals or a one-bank holding com pany and a re often located
in sm all com m un ities.
In com m enting on the extent to w hich correspon d en t balance
arrangem ents and other potential abuses relating to bank stock loans have
been problem s in insured nonm em ber banks, our R egional D ire cto rs indi­
cated that significant abuses existed in s e v e ra l region s during the late 1960's
and ea rly 1 9 70's.

They rep ort, h ow ever, that se rio u s abuse has dim inished

substantially sin ce that tim e.




Our R egional D ir e c to r s attribute the decline

- 15 -

to in cre a s e d su p erv isory p r e s s u r e , notification to banks that the Ju stice
Departm ent view ed such arrangem ents as p o s s ib le violations o f 18 U. S. C.
656, and r e fe r r a l o f s p e c ific c a s e s to Ju stice f o r in vestigation.
This d e c r e a s e in the num ber o f com pensating balan ce c a s e s is
re fle cte d by a d eclin e in the num ber o f r e fe r r a ls to the Ju stice D epartm ent.
This stron gly suggests that abuse has been cu rbed.

T here w e re 205 r e fe r ­

rals in 1971, 114 in 1972, 17 in 1973, 28 in 1974, 10 in 1975, and 43 in
1976.

T here have been only eleven thus fa r this y e a r.

(We a r e review ing

these ca s e s to determ in e what num ber in volved the financing o f bank stock;
it ils fa ir to assu m e that a substantial portion o f them d i d .)
Although the financing o f bank stock loans by oth er banks is
com m on, rela tiv ely few in sured state non m em ber banks engage in such
lending to any sign ificant d e g re e .

In o u r survey o f 261 bank exam ination

rep orts, we found that 10 o f the 31 la rg e banks, 23 o f the 105 m ediu m ­
sized banks and 8 o f the 125 sm a ll banks had bank stock loans outstanding.
Insured non m em ber corresp on d en t banks that extended loans secu red by
the stock o f their depositing banks in cluded 7 la rg e banks, 21 m ed iu m ­
sized banks and 4 sm all banks.

In te rm s o f p ercen ta g es, 16 p ercen t o f

the sam ple banks with "due t o " accounts had bank stock loans and 75 p e r ­
cent o f th ese, o r 12 p ercen t o f the total, had loans secu red by stock o f
th eir depositing banks.
Of the 303 in su red state non m em ber c o m m e r c ia l banks that
w ere being exam ined during the fir s t part o f Septem ber, 30 sm all banks,




- 16 -

15 m ed iu m -sized banks and 3 la rg e banks, o r 16 p ercen t of the total
sam ple, had m ade loans secu red by 5 percen t o r m o re o f the stock o f
other banks (See Table 1).

Only 14 o f the 303 banks, approxim ately

5 p ercen t, m ade loans secu red by stock o f banks fo r which they served
as correspon d en t.

These 14 included 5 sm all banks, 6 m e d iu m -size d

banks and 3 la rg e banks.
Again re fe rrin g to the survey o f 261 bank exam ination rep orts,
loans to o ffic e r s o f banks w ere a sso cia te d with corresp on d en t relation ­
ships in 30 percen t o f the sm all banks, 43 p ercen t o f the m e d iu m -size d
banks and 71 p ercen t o f the la rg e banks in the sam ple.

O verall, 54 p e r ­

cent o f the sam ple banks with "due t o " accounts had loans to o ffic e r s o f
other banks and 40 p ercen t had loans to o ffic e r s o f depositing banks.
H ow ever, only 39 o f the 303 banks in the exam ination survey, about 13
percent, extended c re d it to o ffic e r s o f depositing banks.

The 39 banks

included 24 sm all banks, 11 m e d iu m -s iz e d banks and 4 la rg e banks (See
Table 2).
The d ifferen ces in the percen tages reported fo r the survey of
examination reports and the survey o f exam inations in p r o g r e s s m ay be
related to the m o re lim ited scop e o f the bank exam ination rep ort survey
and d ifferen ces in the size distribution o f banks in each sam ple.

S p ecifi­

cally, the bank exam ination rep ort survey included a m uch g rea ter p e r ­
centage o f la rg e banks.

L arge banks a re m o re lik ely than sm all banks

to m ake bank stock loans and extend c r e d it to o ffic e r s o f depositing banks,
in any event, the p ercen tages indicate that loans secu red by bank stock




- 17 -

Table 1

LOANS SECURED BY 5 PERCEN T OR MORE
OF THE SHARES OF STOCK OUTSTANDING OF OTHER BANKS

Total D eposits in M illion s
$50-$300

$300+

Total
Number
o f Banks

250

45

8

303

30

15

3

48

Number o f Banks Making Stock
Loans with Apparent P r e fe r e n ­
tial Treatm ent

4

3

0

7

Number o f C orrespondent Banks
Making Loans S ecured byStock o f their Depositing
Banks

5

6

3

14

Number of C orrespon dent Banks
Making Loans with Apparent
P re fe re n tia l Treatm ent S e­
cu red by Stock o f their D e­
positing Banks

1

3

0

4

Number o f C orrespondent Banks
w h ere C orrespondent A ccou nts
w e re Opened o r In crea sed
A round the Tim e Stock Loan
was Made

1

2

2

5

Number o f C orrespondent Banks
Making Loans S ecu red by
Stock o f their D epositing
Banks w h ere C orrespondent
A ccou nts A ppeared L arge in
R elation to S erv ices P rov id ed

1

0

2

3

$0-$50
Number o f Banks in Sample
Number of Banks Making Stock
Loans




- 18 -

Table 2

LOANS TO OFFICERS OF OTHER BANKS

Total D eposits in M illion s
$0-$50

$50-$300

$300+

Total
Number
o f Banks

Number of Banks in Sample

250

45

8

303

Number o f Banks Making Loans
to O ffice rs o f Other Banks

154

40

7

201

Number o f Banks Making Loans
with Apparent P referen tia l
Treatm ent to O ffice rs o f
Other Banks

11

9

2

22

Number o f C orrespondent
Banks Making Loans to O ffi­
c e r s o f their Depositing
Banks

24

11

4

39

Number o f C orrespondent
Banks Making Loans with
Apparent P referen tia l T re a t­
m ent to O ffice rs o f D e­
positing Banks

3

2

1

6

Number o f C orrespondent
Banks Making Loans to O ffi­
c e r s o f Depositing Banks w here
the C orrespondent A ccou n t was
Opened or In creased at Tim e
Loan was Made

2

3

0

5

Number o f C orrespon dent
Banks Making Loans to O ffi­
c e r s o f Depositing Banks w h ere
the C orrespondent A ccou nts A p ­
peared L arge in R elation to S e r ­
v ice s P rovided

0

3

l

4




- 19 -

are not com m only m ade by insured state nonm em ber c o m m e r c ia l banks.
A corresp on d en t relationship with the sam e bank w hose stock se cu re s a
loan is even le s s com m on .

M o re o v e r, extension o f loans to o ffic e r s o f

depositing banks does not appear to be a w id espread p r a c tic e .
In ou r survey o f the 261 banks w hose exam ination rep orts w ere
review ed, we found that 40 percen t o f the banks m ade loans to o ffic e r s
o f th eir depositing banks and 12 p ercen t m ade loans secu red by stock of
depositing banks.

Since the abuse resulting fr o m a m is u s e o f corresp on d en t

balan ces depends upon the effe ct o f the depositing banks, review o f the c o r r e ­
spondent's exam ination rep ort alone did not enable us to evaluate the e ffe ct
o f the corresp on d en t relationship on the depositing banks.
The survey o f banks in the p r o c e s s o f being exam ined during e a rly
Septem ber revealed that 22 o f the 303 banks, o r 7 percen t, had extended
loans to o ffic e r s o f other banks that apparently involved p re fe re n tia l tre a t­
m ent.

Included in the 22 banks w e re 7 banks, o r 2 p ercen t o f the total

sam ple, that had m ade bank stock loa n s.

Six o f the 22 banks extending

c re d it to o ffic e r s of oth er banks, which had a corresp on d en t relationship
with the o f f ic e r 's bank, and 4 o f the 7 banks making stock loa n s, which had
a corresp on d en t relationship with the bank w hose stock secu red the loan,
a cco rd e d p referen tia l treatm ent to these loans.
Of the 39 banks that extended loans to the o ffic e r s o f d e p o sit­
ing banks, 5 in volved the opening o r in c r e a s e o f a corresp on d en t account
at the tim e the loan was m ade and 4 had corresp on d en t accounts that
appeared la rg e in relation to s e r v ic e s provid ed.




The 6 banks showing

-

20

-

evidence o f apparent p referen tia l treatm ent included 3 w h ere the c o r r e ­
spondent account had been opened o r in cre a se d at the tim e the loan was
m ade, 2 w here the corresp on d en t account appeared la rg e in relation to
s e rv ic e s provided and 2 w here the corresp on d en t account not only had
been opened o r in cre a se d at the tim e the loan was m ade but a lso appeared
to be large in relation to s e r v ic e s provided.
Out o f the 14 banks that had m ade loans secu red by stock o f
depositing banks, a corresp on d en t account was opened o r in cre a se d around
the tim e that the loan was origin ated in 5 and corresp on d en t accounts
appeared la rg e in relation to s e r v ic e s provided in 3.

The 4 banks showing

evidence o f apparent p referen tia l treatm ent included 2 w here the c o r r e ­
spondent account had been opened o r in cre a s e d around the date o f the loan
and 2 w here the corresp on d en t account not only had been opened o r in creased
but which a lso appeared to be la rg e in relation to the s e rv ic e s provid ed.
In sum m ary, apparent p referen tia l treatm ent o f loans to o ffic e r s
o f depositing banks was d isco v e re d in 6 banks.
loans secu red by stock o f depositing banks.

F ou r o f these had m ade

While these c a s e s m ay involve

abuse o f the depositing bank, fu rth er in vestigation would be required to
v e rify this.

These fig u res suggest that abusive p r a c tic e s involving c o r r e ­

spondent balances m ay be an isola ted phenom enon.

H ow ever, b eca u se o f

the sm all size o f the sam ple, it is p o s s ib le that these fig u re s a re not
represen tative o f all insured state non m em ber banks.

The survey o f all

in sured c o m m e r cia l banks, which w ill be conducted in the com ing w eeks,
should provid e b etter in form ation on the extent o f such p r a c tic e s .




-

21

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B. FDIC P o lic ie s and P r a c tic e s
1.

A buse o f corresp on d en t relationships

The C orp ora tion 's p ro ce d u re s fo r dealing with abusive p r a c tic e s
in connection with corresp on d en t balan ces has been evolving o v e r the last
sev era l y e a r s .

In the late 1960's in resp on se to potential abuses jin in te r­

bank lending and financing o f bank stock acq u isition s, the th ree fe d e ra l
bank su p erv isory agen cies developed rep orts on loans to o ffic e r s of
other banks and bank stock loa n s.

E xam in ers a re required to lis t a ll loans

to o ffic e r s o f other banks, except fo r loans o f in significan t am ounts, on
F o rm 6500/22 (Exhibit A ).

Loans secu red by stock o f other banks, which

in the aggregate amount to 5 p ercen t o r m o re o f each bank's outstanding
sh a res, a re listed on F o rm 6500/23 (Exhibit B).
In Septem ber 1970, after receivin g a le tte r fr o m the D epartm ent
of Ju stice, stating that certa in p r a c tic e s involving bank stock loans and
corresp on d en t accounts m ight constitute a b re a ch o f fid u cia ry duty owed
by borrow in g o ffic ia ls to their banks and that these p r a c tic e s m ight in
certa in circu m sta n ce s w arrant p rosecu tion , the C orpora tion sent a le tte r
on O ctober 26, 1970 (Exhibit C) to a ll in su red state non m em ber banks
calling attention to the Ju stice D epartm ent le tte r.

This was follow ed by

a m em orandum (Exhibit D) to a ll the FDIC R egional D ir e c to r s .




A t the

-

22

-

s^^me tim e the Ju stice D epartm ent's le tte r was in corp ora ted in the C o rp o ­
ration 's Manual o f Exam ination P o lic ie s .

The C orporation forw a rd s ca se s

involving the u se o f interbank dep osits as com pensating balan ces fo r loans
to individuals connected with the depositing bank to the ap propriate United
States A ttorney with cop ies to the C rim inal D ivision o f the Departm ent of
Justice in Washington, D. C.
Since D ecem ber 1971, co p ie s of the O ctober 26, 1970 Justice
Departm ent letter have a lso been furnished to applicants requesting
deposit insurance for a new bank.
In M arch 1972, fu rth er in stru ction s w ere issu e d to R egional
D ire cto rs requesting that certa in factual in form ation be included in the
irre g u la rity rep orts furnished to the Departm ent o f Ju stice (Exhibit E).
In 1974, guidelines (Exhibit F ) w e re developed to a s s is t exam iners in
focu sin g m o re c le a r ly on those c a s e s w h ere bank r e s o u r c e s a re used fo r
the p erson a l benefit o f bank o ffic ia ls .

The guidelines w ere developed by

the C orp ora tion 's L egal D ivision and w ere designed to fa cilita te in vestiga ­
tion of suspected abuses.
In addition to actions taken by the Washington O ffice with resp ect
to this p rob lem , su p erv iso ry fo llow -u p has o c cu rr e d in the C orp ora tion 's
Regional O ffice s.

F o r exam ple, in the southwest area o f the country where

this activity was m ost prevalent, the D ir e c to r o f the D allas R egional O ffice
was con cern ed about this p rob lem p r io r to 1970.

Inform ation exchanged

betw een the three fe d e ra l banking agen cies indicated that certa in stock
loans in that part of the country b o r e unreasonably low in te re st rates.




- 23 -

The D allas R egional D ire cto r a lso found that such loans w ere gen era lly
accom panied by e x c e s s iv e corresp on d en t balan ces m aintained at the
lending bank by the bank w h ose stock was being pledged and that this
p ra ctice was having an a d v erse e ffe ct on many o f the banks under his
su p ervision .

A cco rd in g ly , he instituted p ro ce d u re s to be used by ex a m i­

n ers in detecting abusive p r a c tic e s and in stru cted them to c r it ic iz e
m anagem ent fo r such p r a c tic e s and to seek c o r r e c tio n during the c o u r s e
o f exam ination.
Since January 1, 1971, the C orpora tion has r e fe r r e d 417 c a s e s
o f apparent ir r e g u la ritie s stem m ing fr o m the m isu se o f corresp on d en t
balances to the Departm ent o f Ju stice.
tions and one con viction .

The resu lt has been two p r o s e c u ­

We would be le s s than candid i f we did not point

out that a definitive determ in ation on the m isu se o f corresp on d en t balan ces
is often elu siv e.

Even w here cle a r cut, it is difficu lt to convin ce a jury

beyond a reason able doubt that the in sid er has w illfu lly m isapp lied bank
funds with intent to defraud the bank.

This m ay explain in part the d is ­

inclination to p rosecu te correspon d en t balance c a s e s .
Insured non m em ber banks keep balances on account with la r g e r
m em b er banks p r im a r ily to p rovid e ba lan ces n e c e s s a r y fo r ch eck cle a rin g .
These balan ces a lso count as r e s e r v e s under the laws of som e states.

In

exchange fo r these b a la n ces, corresp on d en t banks provid e a m u ltip licity
of s e r v ic e s including, but not lim ited to, check clea rin g , data p r o c e ss in g
safekeeping, pu rch ase and sale o f se cu ritie s and e x c e s s funds, investm ent
advice and auditing s e r v ic e s .




It is often e xtrem ely d ifficu lt to p la ce a

- 24 -

’’p r ic e ta g ” on such s e r v ic e s .

N everth eless, detailed investigations in

a ccord a n ce with the FDIC L egal D ivision guidelines a re , as a m atter o f
p o licy , c a r rie d out in c a s e s o f suspected corresp on d en t balances abuse.
In ou r opinion, the d e c r e a s e in abuse in this area is the resu lt
of in crea sed exam iner aw aren ess (m ade p o s s ib le by the issu a n ce o f sp ecific
guidelines with re sp e ct to bank stock loan s) and c lo s e r su p e rv iso ry su rv e il­
lance and c r itic is m o f the p r a c tic e s .

In addition, we fe e l the investigations

conducted by the F B I as a resu lt o f the r e fe r r a ls m ade to the Departm ent o f
Justice, the accom panying pu blicity, and the potential fo r crim in a l p r o s e cu ­
tion a lso have serv ed to deter these a ctiv itie s .

Although crim in a l p r o s e cu ­

tion m ay not have o c c u r r e d as often as m ight have been w arranted, we
b eliev e that this has not im peded o u r continued e ffo rts to stop im p ro p e r
p r a c tic e s .
In addition to r e fe r r a ls o f apparent ir r e g u la ritie s to the Justice
Departm ent, the C orp ora tio n 's R egional D ir e c to r s have used variou s
m ethods to effect c o r r e c tio n o f apparent abuses involving com pensating
balan ces.

F o r exam ple, m eetings with a bank’ s boa rd o f d ir e c to r s often

resu lts in c o r r e c tiv e action.

Som etim es a le tte r fr o m the Regional

D ire cto r requesting c o r r e c tiv e action is a ll that is n e c e s s a r y .

If c o r ­

rection is not forth com in g within a reason a ble p e rio d o f tim e, a c e a s e
and d e sist o r d e r w ill be prepa red .

Often this is sufficien t to gain c o m ­

pliance without the need to actually issu e such an o r d e r .

Our exam iners

a lso have spoken out pu blicly to educate bankers about the C o rp o ra tio n 's
intentions to deal v ig orou sly with any abuses of this sort.




- 25 -

2.

Other abuses a sso cia te d with bank stock loans

Our exp erien ce o v e r the y e a rs has shown that potential abuses
involving bank stock loans can take se v e ra l fo r m s in addition to m isu se
o f corresp on d en t accou n ts.

A bu ses o f corresp on d en t accounts can take

the follow in g fo r m s :
1.

E x c e s s iv e lending on bank stock in relation to the value o f

the underlying co lla te r a l;
2.

P re fe re n tia l in te re st rates;

3.

E x c e s s iv e b orrow in g s to finan ce stock a cqu ired by o rg a n iz e rs

o f new banks;
4.

R e c ip r o ca l loan arrangem ents betw een banks involving p r in c i­

pal o ffic e r s o f the banks;
5.

E x c e s s iv e lending to p rin cip al ow ners o f a bank holding c o m ­

pany and their in terests by banks owned o r con trolled by the holding com pany;
6.

Financing o f bank stock through voting tru st arrangem ents o r

syndication of shares to avoid lending lim itations to one b o r r o w e r; and
7.

E x c e s s iv e dividend payments o r rem uneration to key sh a re­

h old ers to fa cilita te paym ent o f sh areh older debt to oth er banks.
Bank stock loans which a r e unusually la rg e , inadequately c o l ­
la tera lized o r apparently p referen tia l a re given stringent c re d it an alysis.
N orm al exam ination p roced u re re q u ire s evaluation o f c re d it risk , as w ell
as obtaining bank m anagem en t's ju stifica tion fo r apparently p referen tia l
treatm ent.

When abuse is encountered, the loan is a d v e rse ly c la s s ifie d

o r oth erw ise strongly c r itic iz e d .




M anagem ent o f the lending bank is

- 26 -

directed to take n e c e s s a r y c o r r e c tiv e action to bring the loan up to bank­
able cre d it standards.'

This m ay involve obtaining additional co lla te ra l

o r docum entation o r seeking a reduction in the p rin cipal balan ce.

Of

co u rs e , any bank with a high le v e l o f a d v e rse ly c la s s ifie d loa n s, be they
bank stock loans o r oth erw ise, is a p rim e candidate fo r fo r m a l e n fo rc e ­
m ent action under Section 8 (b).
A s m entioned above, when a bank stock loan is d is c lo s e d , the
exam iner p rep a res a fo r m detailing the transaction w hich is forw arded
to his su p erior and then to the regional o ffic e o f the fe d e ra l bank su p er­
v is o ry agency which has ju risd ictio n o v e r that other bank.

At the FDIC

it is the p ra ctice fo r the fo r m s to b e review ed as soon as r e ce iv e d .

When

im m ediate attention is not required, the fo r m is placed in the file o f the
bank w hose stock has been pledged and is given c lo s e r attention at the next
regular exam ination.

This in form ation is valuable to the exam iner at that

tim e in review ing that bank's p o lic ie s regarding earnings and capital.

A

bank w hose stockholders have b o rro w e d heavily against their stock is likely
to have g rea ter p r e s s u re fo r high dividends and a relu ctan ce to se ll new
stock.

Knowing about the debt, the exam iner is alerted to potential p ro b ­

lem s and is given insight into m anagerial b eh avior.

S im ilar fo r m s a re

exchanged regarding loans to o ffic e r s o f oth er banks and a re review ed in
sim ila r fashion.
In addition to requiring a n otice o f a change o f co n tro l, Section
7(j) o f the FDI A ct requ ires an in sured bank which m akes a loan secu red
by 25 percen t o r m o r e o f the stock o f another bank, to notify the appropriate




- 27 -

fed era l agency u n less the b o r r o w e r has owned the stock fo r o v e r one y e a r.
The change o f co n tro l o r the rep o rt o f a bank stock loan under Section 7(j )
is review ed ca refu lly as soon as it is re ce iv e d .

If there is a change of

con trol rep ort without a loan rep o rt, in qu iries a re m ade as to how the
tra n sfer was financed.

If it is d is c lo s e d that the stock o f the bank is

h eavily financed, su p erv isory attention in the future is attuned to c lo s e
scrutiny o f earnings and p r e s s u re f o r dividends.

In the past this has

been done la rg e ly through the exam ination p r o c e s s .

H ow ever, o u r new

com p u terized m onitorin g system s and sem i-annual (quarterly fo r la rg e
banks) earnings statem ents w ill allow m o r e frequent evaluation.
E x c e s s iv e financing o f bank stock has som etim es been a p rob lem
in new bank situations.

An im portant part o f the analysis in any new bank

application is the co u rse of the initial capital.

It is axiom atic that the

capital cannot com e fr o m any sou rce w hich m ight tend to requ ire heavy
dividend payments fr o m the new bank in its ea rly form ative y e a r s .

The

FDIC has a fir m guideline regarding the amount of financing we w ill accep t
in a new bank's application fo r insurance and in m any ca s e s we have requ ired
the org a n iz ers to put up m o re o f their own funds and b o rro w le s s m oney.
It is our view that no one individual in a new bank should finance m o re than
75 percen t o f the pu rchase p r ic e of his shares and that no m o re than 50 p e r ­
cent of the bank's total capital should be b orrow ed .

V iolation o f the c o m ­

m itm ents m ade during the application p r o c e s s are grounds fo r S ection 8(b)
action.




- 28 -

C.

A dditional Safeguards

Although ou r >exp erien ce and the resu lts o f ou r surveys suggest
that abusive conduct a ssocia ted with the u se o f corresp on d en t balances to
obtain bank stock loans has dim inished g rea tly in recen t y e a rs and is not
now substantial, th ere a re actions which can be taken ad m in istratively by
the C orporation and b y the C on gress w hich would fa cilita te our dealing with
the abuses I have d iscu sse d .
1.

I would recom m en d fiv e .

M odification o f the F D IC 's In sider T ransaction Regulation
to ad dress s p e cifica lly bank stock loans____________________

I intend to p ro p o se to the B oard o f D ire cto rs o f the FDIC that
P art 337. 3 o f ou r Rules and R egulations be am ended to provid e that
'In s id e r s , " as defined in that regulation, be requ ired to re p o rt to the bank's
board o f d ire c to rs any loans obtained fr o m o r oth er bu sin ess transactions
with another bank with which the in s id e r 's bank m aintains a correspon d en t
balan ce, and that the term s and conditions o f such loans o r transactions
be reflected in the bank's m inutes o r oth er re co r d s readily available to
FDIC exam in ers.

In addition, the regulation as am ended would requ ire

that the boa rd o f d ir e c to r s p e rio d ica lly review the bank's va riou s c o r r e ­
spondent relationships in light o f these tran saction s to a ssu re that in siders
are not benefiting fr o m such relationships to the bank 's detrim ent.

The

details o f such a review should b e re fle cte d in the bank's m inutes.
This approach would in su re m eaningful analysis o f the bank's
corresp on d en t relationships by its boa rd o f d ir e c to r s and would thereby
significantly m in im ize the likelih ood o f abuse.




And m o r e im portantly,

- 29 -

it would p rovid e FDIC exam in ers with a b etter data ba se fo r u se in
detecting other abuses a ssocia te d with bank stock loan s.
2.

U se o f Section 8(b) C ease and D e sist P ow ers

H eretofore, the FDIC has responded v ig o ro u sly to com pensating
balance c a s e s .

It is ou r judgm ent that the u se o f su p e rv iso ry tools has

la rg e ly elim inated substantial abuse even in the absen ce o f a significant
num ber o f crim in a l p rosecu tion s.

H ow ever, as I have in dicated, the

FDIC has not m ade u se o f its ce a s e and d e s is t authority in dealing with
corresp on d en t balan ce c a s e s .

We m ay w ell find the u se o f this to o l

appropriate in the future.
»

P a ssa ge o f S. 71

We do not have c le a r and adequate authority to co n tro l
im p rop rieties as e ffe ctiv e ly as we should.

Our grea test su p erv isory

problem in trying to cu rb the abuse o f corresp on d en t accounts is that
Section 8(b) o f the F ed era l D eposit Insurance A c t is d ire cte d to the bank.
Although we have used the pow er to fo r c e the bank to seek restitution
fr o m self-d ea lin g in s id e r s , the pow er would be m o re e ffe ctiv e i f it could
be em ployed d ire c tly against the individual.

A ls o , under Section 8(e) o f

the FDI A ct, w hich p erm its the FDIC to re m o v e certa in individuals fr o m
insured state non m em ber banks, the FDIC m ust establish that the in d i­
vidual caused substantial finan cial dam age to a bank o r endangered the
safety of a bank's d ep osits, and that the in dividu al's act was one in v o lv ­
ing p erson a l dishonesty.

This burden o f p r o o f is not unlike the burden

required in a crim in a l p roceed in g and is a d ifficu lt burden to c a r r y .




- 30 -

S. 71, as recen tly passed by the Senate, would rem edy these
shortcom ings and gen era lly enhance ou r ability to deal with abuse.

F or

exam ple, prop osed am endments to Section 8(b) would enable the FDIC
to m ove d ire c tly against o ffic e r s , d ir e c to r s and person s in co n tro l of
the bank, who u se the bank's r e so u r ce s fo r th eir own gain.

The am end­

m ents would a lso provide a m onetary penalty fo r violation o f a final
cea se and d esist o r d e r .
as w ell as banks.

The penalties would be applicable to individuals

F inally, the FDIC could rem ove and prohibit o ffic e r s ,

d ire c to rs and other p erson s fr o m participating in a bank's a ffa irs w here
their acts involved w illfu l d isre g a rd to the safety and soundness o f the
bank.
4.

T ra n sfer o f Control

I b eliev e that p r io r scrutiny o f new ow nership by the regu la­
tory authorities would a s s is t in m inim izing abuse a sso cia te d with bank
stock loans.

A s you know, Title VI o f H. R. 9086, introduced by Con­

gressm an St G erm ain, would provide fo r such p r io r approval.

I w ill

testify in support of the thrust o f that legisla tion .
P resen tly, Section 7(j) o f the F ed eral D eposit Insurance A ct
(12 U. S. C. 1817(j )) req u ires notification o f fe d e ra l regulatory authorities
when there is a change in con trol of an in sured bank o r when there is a
loan secu red by 25 percen t o r m o re o f an insured bank's outstanding
stock.

R eports involving national banks are sent to the C om p troller of

the C urrency, those involving state m em b er banks to the F ed era l R eserve,
and those involving in sured state nonm em ber banks to the FDIC.




- 31

Title VI o f H. R. 9086 would m ake two m a jo r changes in presen t
p ro ce d u re s.

F ir s t, all rep orts would go d ire ctly to the FDIC as in su rer

of bank d ep osits.

Second, FDIC approval would be required b e fo re any

change in con trol of an in sured bank could o c c u r .

The FDIC could im p ose

a c iv il penalty o f up to $10, 000 p e r day on any p e rso n who w illfu lly
violates the T itle o r any regulation issu ed thereunder.

The b ill would

a lso requ ire rep orts by any p erson making a loan secu red by 25 percen t
o r m ore o f an in sured bank’ s stock and would requ ire certa in additional
types of in form ation to be submitted under Section 7 (j), including any
relevant in form ation required by the FDIC.
Among the grounds fo r disapproval of a change o f co n tro l under
Title VI o f H. R. 9086 a re findings by the agency that the finan cial condition
of an acquiring p erson m ight je o p a rd iz e the fin an cial stability of the bank
o r p reju d ice the in terests o f its d e p o sito rs , c re d ito r s o r sh a reh old ers;
the com p eten ce, exp erien ce o r in tegrity o f an acqu iring p erson in dicates
that it would not be in the in terests o f d e p o sito rs , cre d ito rs o r sh a re­
h old ers to perm it such p erson to acqu ire co n tro l; the prop osed acqu isition
is unfair, unjust o r inequitable to the bank o r to its d e p o sito rs , c re d ito r s
o r sh a reh olders; o r the applicant fa ils to fu rn ish all the requ ired in fo r m a ­
tion.
Although I intend to support the b a sic thrust of the change o f
con trol p rov ision s of T itle VI, I w ill recom m en d amending the b ill in
severa l re sp e cts .

F ir s t, I b e lie v e that instead of requiring advance

approval in each and every c a s e , the b i ll's pu rposes could b e achieved




- 32 -

equally w ell by requiring 60 days' p r io r n otice o f any change in con trol
o f an in su red bank and em pow ering the bank's p rim a ry fe d e ra l regulator
to step in within that tim e p eriod and disapprove the change in con trol on
the b a sis o f one o r m o r e o f the standards set forth in the b ill.

I believe

such a n otice approach would p rovid e g re a te r fle x ib ility in achieving the
b ill's goa ls.

I would retain the standards p resen tly em bodied in the bill

as a b a sis fo r such disapproval.
Second, I w ill recom m end that enforcem en t authority under this
b ill be vested in the th ree fe d e ra l bank regulatory agen cies rather than
being consolidated in the FDIC.

C ertainly, the C om p troller o f the C ur­

rency and the F ed era l R e s e rv e System a re b etter able than the FDIC to
recogn ize and deal with u n desirable changes in con trol o f the national
and state m em b er banks that those agen cies regu la rly exam ine.
5.

E lim ination o f the prohibition on the payment o f in terest
on demand deposits
_____________________________________

I have long fa v o re d the elim ination o f the prohibition on the
payment o f in terest on demand d ep osits, as w ell as the elim ination o f
in terest rate ceilin g s gen era lly.

This is based on m y b e lie f that the

pricin g m ech anism is a fa r m o re e fficien t m eans o f allocating r e so u rce s
than system s involving re strictio n s and co n tro ls.

M o re o v e r, alm ost

inevitably re strictio n s and co n tro ls lead to un desirable and often
unanticipated side e ffe cts .

A buses arisin g out o f the u se o f com p en ­

sating balances in connection with bank stock loans is an excellen t
illu stra tion o f this phenom enon.




The fa ct that in terest cannot be paid

- 33 -

on corresp on d en t balan ces leads to a m urkin ess in pricin g w hich resu lts
in great potential fo r abuse.

A llow ing the payment o f in terest on these

balan ces would help to m in im ize the potential fo r abuse in this a rea .
Having said this, I should hasten to add that the "unbundling o f
s e r v ic e s " would not totally elim inate the potential fo r abuse, b e ca u se many
o f the s e rv ic e s which a re provid ed by corresp on d en t banks a re intangible
and inherently difficu lt to p r ic e .
D. Advantages and Disadvantages o f Other M easu res fo r
M inim izing Abuse A sso cia te d with Bank Stock Loans
In y ou r letter o f August 31, 1977, you liste d a s e rie s o f p ro p o sa ls
and sought ou r view s as to the advantages o f each.
1.

R equire a m o re extensive d is c lo s u r e o f the details o f bank

stock loans to the d ir e c to r s o f the bank in volved , to the regu latory a g e n cie s,
and to the pu blic.

M ore extensive d is c lo s u r e o f bank stock loans to the

d ir e c to r s o f the banks in volved and to the regu la tory agen cies is , in m y
judgm ent, highly d e s ira b le .

H ow ever, absent a c le a r -c u t indication

that an approach w hich r e lie s on the su p e rv iso ry agen cies and bank boa rd s
o f d ir e c to r s is in e ffe ctiv e , I would have reserv a tion s about detailed public
d is c lo s u re o f bank stock loa n s.

My co n ce rn s h e re a r is e p rim a rily out of

m y view that there is a right to p riv a cy with re sp e ct to the details o f an
in dividual's finan cial a ffa irs w hich ought not to be ove rrid d e n except w here
there is a c le a r public in terest to b e serv ed .

In this in stan ce, I b e lie v e

that the public in terest can be serv ed through v ig orou s action on the part
of bank board s and the a g en cie s, thereby obviating the n e c e s s ity o f b r e a c h ­
ing the p riva cy o f individual b o r r o w e r s .




- 34 -

2.

P roh ibit bank stock loans to o ffic e r s o r d ir e c to r s o f c o r r e ­

spondent banks.

The argum ents fo r prohibition a re substantial.

F orcin g

the b o r r o w e r to deal with a bank other than his bank's corresp on d en t would
elim inate a m a jo r p os s ib ility fo r abusive conduct.

M o re o v e r, prohibitions

are e a s ie r to adm inister than a strategy which in volves exam iner scrutiny
o f transactions to determ in e whether they in volve overrea ch in g - - a highly
subjective p r o c e s s .
N everth eless, it m ust be recog n ized that there a re significant
disadvantages to such an approach.

F ir s t, it has gen era lly been m y

exp erien ce that lega l re strictio n s o r prohibitions a re ra re ly e ffe ctiv e in
elim inating the m ost significant abuse.

R arely a re agen cies o r le g is la ­

tures w illing to draft a prohibition su fficien tly broad that cannot be easily
avoided.

Second, a prohibition in this area would cut o ff a ready m eans

o f financing which has helped to broad en the ba se o f bank ow nership in
this country and has provided a s o u rce of capital in som e " d is t r e s s " bank
situations, without a dem onstration that abuses a re w idespread and without
any certainty that those abuses which do exist would be avoided.
3.

P roh ibit bank stock loans at p referen tia l rates com pared to

other com p arable loa n s.

I strongly fa v o r the approach which is suggested

by this p rop osa l; that is , that those involved in a c o n flic t o f in terest not
be a ccord ed a p r e fe r e n c e .

H ow ever, I b e lie v e that it would be a m istake

to focu s on in terest rates alone.

Rather, I would fa v o r a rule that required

that such transactions b e effected on te rm s and conditions no m o re fa v o r ­
able than would be afforded in a com p arable transaction not involving a




- 35 -

corresp on d en t relation sh ip.
the entire story .

This re co g n iz e s that in terest rates n ev er te ll

A loan extended at a rate w ell above the p rim e rate m ay

be abusive i f the c o lla te r a l is weak o r i f the b o r r o w e r 's cash flow cannot
support his obligation s.

C on v ersely , an apparently p re fe re n tia l in terest

rate m ay be ju stified by con sid eration s not re fle cte d on the fa c e o f the loan.
4.

R equire banks to pay in terest on corresp on d en t ba lan ces and

to levy exp licit ch arges fo r corresp on d en t s e r v ic e s .

As I have in dicated,

I b e lie v e that perm itting the paym ent o f in te re st on corresp on d en t balan ces
would rem ove m uch o f the potential fo r abuse in this a rea .

I do not b e lie v e ,

h ow ever, that ex p licit p ricin g should b e requ ired f o r two re a so n s.

B ecau se

o f the intangible nature o f many o f the s e r v ic e s provid ed, e x p licit p ricin g
of ev ery fa ce t o f the corresp on d en t relationship m ay b e d ifficu lt.
requirem ent, i f m eaningful, would b e d ifficu lt to ad m in ister.

Such a

In m y

judgm ent the grea t bulk o f the ben efits to be gained fr o m exp licit pricin g
w ill be gotten by allow ing in te re st to be paid on corresp on d en t dep osit
balan ces.
5.

Subject all bank stock loans to the m argin requirem ents set

by the F ed era l R e s e rv e B oard .

On the su rfa ce , the im p osition o f m argin

requirem ents on bank stock loans would appear to have m e rit fr o m a bank
su p ervisory standpoint.

H ow ever, the im p osition o f such requirem ents

would tend to r e s t r ic t the availability o f c re d it to la rg e in v e s to rs having
a c c e s s to capital funds and op era te to the detrim ent o f the sm all in v e sto r
who is a sound c re d it risk but who la ck s su fficien t funds o r alternative
sou rces o f funds.




In addition, determ ination o f m arket value f o r those

- 36 -

bank stocks which a re not a ctiv ely traded would p ose significant adm inis­
trative p rob lem s.
As has already been noted, the FDIC has a p o lic y that applies
to any newly organ ized bank applying fo r dep osit in su ran ce, prohibiting
a single individual fr o m financing m o re then 75 percen t o f his stock and
that no m o re than 50 percen t o f the total stock m ay be financed.

If the

agencies w ere given the pow er to d isa pprove changes o f co n tro l o f
operating banks, as d iscu sse d b e fo r e , it is lik e ly that s im ila r re q u ire ­
ments pertaining to the financing o f such pu rchases would b e im p osed
by the FDIC.
6.

P e rm it d ep ositors o r m in ority sh areh olders to r e c o v e r

treb le dam ages w henever an o ffic e r o r d ir e c to r o f the bank r e ce iv e s a
below m arket in terest rate bank stock loan.

F inally, we a re opp osed to

perm itting d ep ositors o r m in ority sh areh olders to r e c o v e r tre b le damages
whenever an o ffic e r o r d ir e c to r o f a bank r e ce iv e s a below m arket interest
rate bank stock loan.

O stensibly, such a p rov ision would encourage the

enforcem ent o f a prohibition against p referen tia l bank stock pu rchase loans
by providing sh areh olders with a finan cial in cen tive to m on itor these trans­
actions and to brin g actions against them .

At the sam e tim e, the potential

lo s s o f th re e -tim e s the putative gain (or in terest rate advantage) would
presum ably deter o ffic e r s and d ir e c to r s fr o m entering into such tra n s­
action s.

The con cept of tre b le dam ages is em bodied in antitrust law.

T reb le dam ages awarded to private litigants in jured in th eir "busin ess or
p ro p e rty " by virtu e o f antitrust law violations a re intended to fa cilita te




- 37 -

en forcem ent o f the laws as w ell as to give an injured party am ple recom p en se
fo r the w rong su ffered .

G overnm ent antiturst law e n fo rc e r s a re , by reason

o f lim ited r e s o u r c e s , able to bring only a selected num ber o f en forcem en t
actions and a re dependent in la rg e part upon in ju red m e m b e rs o f the bu sin ess
com m unity to rep ort tra n sg re ssio n s.
the ca s e o f banks.

The situation is 'entirely differen t in

Insured banks a re regu la rly examined..

Thus, the sam e

in cen tives a r e not needed and, indeed, m ight sim ply encourage unwarranted
suits.

IV.

LOANS TQ FAVO RED CUSTOMERS
T o the extent that the questions which you asked with re sp e ct to

fa v ored cu stom ers deal with p e rso n s who a re not in sid e rs o f the banks,
they ra is e potentially d ifficu lt questions o f p o licy - - questions which
neither C on gress n or the agen cies have a d d ressed fu lly.

A s I have in d i­

cated, the FDIC reg a rd s overrea ch in g in the context of a co n flict o f
in terest (e. g . , tra n saction s betw een a bank and an in sid e r o r h is related
in terest) as seriou s abuse and responds v ig o ro u sly when it is detected.
This is true both in the c a s e o f tran saction s betw een an in s id e r o r his
in terests and a bank and in the c a s e o f tran saction s betw een an in sid e r
and h is bank's corresp on d en t.

W here there is no c o n flic t o f in te re st,

what constitutes an abusive p re fe re n ce is an e s p e cia lly m urkey question
sin ce the granting o r dening o f c re d it in v olv es m aking distin ction s am ong
p erson s and entities based on judgm ents w hich a re highly su b jective.
Rather than attempting to a ssu re that all cu sto m e rs a r e treated
fa ir ly relative to a ll other cu s to m e rs , both the law and regu la tory p o licy




- 38 -

attempt to achieve two objectives#

F ir s t, as I have indicated, variou s

strategies a re em plbyed to a ssu re that in sid e rs do not abuse th eir finan­
cia l institutions by obtaining p referen tia l treatm ent.

And, secon dly, the

law, and hence the regulatory au th orities, seek to a ssu re that certain
ca teg ories o f person s a re not discrim in a ted against.

At present, neither

the law n or regulatory p o licy a d d re sse s the question whether non insiders,
who a re m em b ers o f certa in c la s s e s o r ca te g o rie s o f p e rso n s, a re privileged
o r whether such p riv ile g e is abusive.

B ecau se the FDIC exam ination p r o ­

c e s s does not d ire ctly ad d ress the m atter o f p r e fe re n ce s among sim ila rly
situated cu stom ers w h ere th ere is no c o n flic t o f in terest o r a question as
to the violation o f the c iv il rights law s, we do not have readily available
data fr o m w hich to draw m eaningful in feren ces as to the extent to which
such p re fe re n ce s exist, with the exception o f loans to certa in in s id e rs o f
other banks.
A s I have in dicated, exam in ers a re required to lis t all loans to
o ffic e r s o f other banks, except fo r loans o f in significan t am ounts, on
F o rm 6500/22.

Loans to o ffic e r s o f other banks a re com m on.

T his, o f

co u rs e , is to b e expected sin ce bank o ffic e r s a re often s e v e r e ly restricted
in th eir ability to obtain financing fr o m th eir own bank.

Our review o f 261

in sured non m em ber c o m m e r c ia l bank exam ination rep orts revealed that
38 p ercen t o f the 125 sm all banks, 66 p ercen t o f the 105 m e d iu m -s ize d
banks and 81 p ercen t o f the 31 la rg e banks had extended cre d it to o ffic e r s
o f other banks at the tim e o f the exam ination.

In the survey o f 303 insured

state nonm em ber c o m m e r cia l banks that w e re being exam ined during the




- 39 -

fir s t part o f Septem ber, we found 154 o f 250 sm all banks, 40 o f 45
m e d iu m -size d banks and 7 o f 8 la rg e banks, or 66 percen t o f the total
sam ple, that m ade loans to o ffic e r s o f oth er banks.

E xam in ers rep orted

apparent p referen tia l treatm ent o f o ffic e r s o f other banks in 22 o f the 201
banks extending such loan s, including 11 sm a ll banks, 9 m e d iu m -s iz e d
banks and 2 la rg e banks.
It should be noted that although the exam ination p r o c e s s does not
attempt to detect p r e fe r e n c e s which a re a cco rd e d nonbankers and non­
in s id e r s , a p a rticu la rly abusive p r e fe r e n c e is lik e ly to be d is c o v e r e d and
c r itic iz e d b eca u se it would probably violate a ccep ta b le c re d it standards.
Whether one fa v o rs additional regulatory o r statutory m ea su res to curb
p referen tia l loans not involving a bank's in s id e rs o r the in sid e rs o f another
bank depends in la rg e part upon whether it would b e fe a s ib le to d e v ise a
regu latory stru ctu re which could a s s e s s the fa irn e s s o f granting a c re d it
and the fa ir n e s s o f a c r e d it 's te rm s .
ficu lt to d evise such a sch em e.

I b e lie v e that it would be very d if­

M o re o v e r, w hile I strongly fa v o r g o v e rn ­

m ental intervention to elim inate se lf-d e a lin g o r to p ro te ct groups o f
p erson s lik ely to b e d iscrim in a ted against, I would be profoundly troubled
by a regu latory stru ctu re adequate to e n fo rce a prohibition against any
p re fe re n ce .

V.

OVERDRAFTS
A.

F req u en cy of the P r a c t ic e

Inform ation on o v e rd ra ft p r a c tic e s was c o lle c te d fo r 189 banks
that w ere being exam ined during the w eek beginning S eptem ber 12, 1977.




- 40 -

E xam iners w ere in stru cted to c o lle c t in form ation relating to ov erd ra fts of
o ffic e r s , d ir e c to r s and m a jo r shareh olders o f the bank being exam ined;
o ffic e r s , d ir e c to r s , and m a jo r sh areh olders o f corp ora tion s doing sub­
stantial bu siness with the bank being exam ined; and individuals doing
substantial amounts o f b u sin ess with the bank being exam ined - - s p e c ifi­
ca lly, public o ffic ia ls and attorn eys.

E xam iners w e re asked to lis t fo r

each o f these ca te g o rie s a ll ’’f r e e " o v e rd ra fts exceeding $100, 00 f o r the
previou s 90 days.
We have seriou s reserva tion s about the a ccu ra cy o f the statistical
data gathered f o r ov erd ra fts o f individuals a sso cia te d with corp ora tion s
which do a substantial bu sin ess with the bank.

Bank r e co r d s do not identify

d ir e c to r s , o ffic e r s , em ployees and 10 p ercen t sh areh olders o f these
corp ora tion s, and the ba n k ers' know ledge o f the identity o f such individuals
m ay w ell be lim ited .

H ow ever, we fe e l that the figu res related to in sid ers

o f the banks a re quite accu ra te.

The resu lts f o r corresp on d en t bankers and

other banks a re reasonably a ccu ra te.
Data on ov erd ra fts a re presented in Table 3.

The fig u re s indicate

that during the 90-day p eriod p recedin g the exam ination date, ov erd ra ft
activity by in s id e rs o c c u r r e d in 122 banks, o r approxim ately 64 p ercen t of
the 189 banks surveyed.

The d o lla r volum e o f fr e e o v e rd ra ft activity o f

in sid ers amounted to le s s than 1 p ercen t o f the total amount o f all fr e e
o v e rd ra fts.

F o r the 189 banks com bined, daily avera ge fr e e overd ra fts

to a ll d ep ositors amounted to $26. 7 m illio n o r 0 .4 p ercen t o f their total
d ep osits.




Of this amount, a daily average o f $209, 000 was accounted fo r

T a b le

3

FD IC EXAMINATION SURVEY OF FREE OVERDRAFTS
IN

189

INSURED

STATE NONMEMBER BANKS

A verage

D a ily

O v e r d r a fts
P er
N u m ber B a n k s
In c lu d e d

in

Survey

A g g re g a te
P ercen t

A verage D a ily

P ercen t

D iv id e d

of

O v e r d ra fts

of

C olu m n

T o ta l

(0 0 0
A g g re g a te

O v e r d r a fts

T o ta l

90 D ays

fo r

In s id e r s

of

S u b je c t

C orresp on d en t
O th e r

B anks

W ith

B an k

P u b lic

B an k

(2 )

1 0 0 .0 0

$ 2 6 ,6 8 7

122

6 4 .1 0

209

6

3 .2 0

9

6

3 .2 0

7

30

1 5 .9 0

15
24

(2 )

D o in g

(1 )

T o ta l

(3 )
by
(1 )

o m itte d )

189

(2 )

C o r p o r a tio n s
S u b sta n tia l

B anks

B an k

C olu m n

A verage
of
per

B an k

(0 0 0
1 0 0 .0 0

Amoun

D e p o s its

o m itte d )

$ 1 4 1 ,1 9 8

$ 3 8 ,6 0 0

0 .7 8

1 ,7 1 6

4 0 ,9 0 7

0 .0 3

1 ,4 6 7

6 3 ,4 4 3

0 .0 2

1 ,1 0 0

3 9 ,2 7 3

231

0 .8 6

7 ,6 9 3

3 9 ,5 2 2

7 .9 0

3

0 .0 1

227

6 6 ,9 0 9

1 2 .7 0

24

0 .0 9

1 ,0 0 8

6 3 ,2 5 4

B u s in e s s

(2 )

O ffic ia ls

A tto rn e y s

(1 )

A g g re g a te

(2 )

In c lu d e s




D a ily

A verage

O v e r d ra fts

of

based

on

D ir e c to r s ,

th e

9 0 -d a y

O ffic e r s ,

p e r io d

p r e c e d in g

E m p lo y e e s ,

10%

th e

sta rt

o r m ore

of

th e

e x a m in a tio n .

s h a r e h o ld e r s ,

and

th e ir

in te r e s ts .

- 42 by in sid e rs.

It should b e noted, h ow ever, that while the d o lla r amount of

in sid er fr e e ov erd ra fts is sm all in relation to the aggregate amount o f fre e
overd ra fts o f a ll bank cu stom ers fo r the 122 banks, there is con sid era b le
variation fr o m bank to bank.
The distribu tion o f in sid e r fr e e overd ra fts relative to a ll customers
fr e e ov erd ra fts is shown in Table 4.

Of the 189 banks surveyed, 67, o r

36 percen t, had no fr e e ov erd ra fts to in s id e r s .

In another 50 banks, fr e e

ov erd ra fts to in s id e rs amounted to le s s than 1 p ercen t o f all fr e e overdrafts.
O verdrafts to in s id e rs exceeded 5 p ercen t o f total fr e e o v e rd ra ft activity in
20 percen t o f the surveyed banks and was confined la rg e ly to sm all banks.
H ow ever, o f the 37 banks constituting this 20 p ercen t, the a vera ge daily
volum e o f in sid er fr e e o v e rd ra fts appeared to be abusive only in the three
banks w here in sid e rs accounted fo r m o re than 50 p ercen t o f the aggregate
ov erd ra ft volum e.
F r e e o v erd ra fts to d ir e c to r s , o ff ic e r s , em ployees and 10 percent
sh areh olders o f other banks w e re rep orted f o r only six corresp on d en t banks
and fo r six oth er banks not having a corresp on d en t relation sh ip.

During

the 9 0 -d ay survey p erio d , average daily ov erd ra fts in these two categories
totaled $16, 000, o r about . 05 p ercen t o f aggregate fr e e o v e rd ra ft volum e
to a ll bank cu s to m e rs .

R em em bering the caution that o v e rd ra ft data fo r

d ir e c to r s , o ffic e r s , em ployees and 10 p ercen t sh areh olders o f c o r p o r a ­
tions m ay not be re lia b le , such activity in 30 banks fo r which exam iners
w ere able to supply these data indicated that fr e e o v e rd ra fts f o r this class
of bank cu stom er amounted to le s s than 1 percen t o f total daily average
fr e e ov erd ra ft activity.




T a b le

4

F R E Q U E N C Y D IS T R IB U T IO N O F IN SID E R F R E E O V E R D R A F T S A S A P E R C E N T A G E
O F F R E E O V E R D R A F T S TO A L L C U S T O M E R S DU RIN G TH E 9 0 -D A Y S U R V E Y

In s id e r O v e r d r a ft s a s a P e r c e n t a g e o f A l l C u s t o m e r O v e r d r a ft s
le s s
than
1%

0%

50+%

2 5 -4 9 %

1 5 -2 4 %

5 -1 4 %

1 -4 %

N u m b e r o f B anks

3

8

7

19

35

50

67

189

P e r c e n t o f B anks

1 .6

4. 2

3. 7

10. 0

18. 5

26. 5

35. 5

100

A v e r a g e D e p o s it
S iz e B ank

$ 1 1 , 736M

$ 1 2 , 823M

$ 1 3 , 953M

¡$ 2 4 ,4 1 5 M

A v e r a g e DailyO v e r d r a ft s (a ll
bank c u s t o m e r s )

$ 2 3 ,7 4 4

$ 1 1 ,9 7 7

$ 1 2 ,9 0 0

$ 2 2 ,5 2 2

A v e r a g e DailyO v e r d r a ft s
(in s id e r s )

$20* 511

$ 3 ,9 3 3

$ 2 ,5 0 0

$ 2 ,3 6 7

A v e r a g e In s id e r
O v e r d r a ft s to
T o ta l O v e r d r a ft s




8 6 .4 %

32. 8%

1 9 .4 %

10. 5%

T o ta l

- 44 -

F r e e o v e rd ra fts to public o ffic ia ls w ere detected in 15 banks and to
attorneys in 24 banks.

F o r the 15 banks com bined, fr e e o v e rd ra fts to public

o ffic ia ls averaged $ 3 ,4 0 0 .

F o r the 24 banks com bined, fr e e ov e rd ra fts to

attorneys averaged about $24, 200.

A gain, fr e e o v e rd ra fts o f these cla sses

o f cu stom ers w ere n eg lig ib le in relation to the aggregate amount o f overdrafts,
We a lso review ed o v e rd ra ft p r a c tic e s in ou r survey o f 261 bank
exam ination re p o rts .

T hese re p o rts revea led that eight sm a ll banks, four

m e d iu m -size d banks and one la rg e bank w e re c r itic iz e d about in sid e r
o v erd ra ft abu ses.

B ased on these fig u r e s , ap proxim ately 3 p ercen t o f all

in su red state n on m em ber banks would b e cited fo r in s id e r o v e rd ra ft abuses.
Thus, w hile a high p ercen tage o f banks p erm it in s id e rs fr e e o v e rd ra fts
based on the 189 banks exam ined in a sin gle w eek, few a re actually cited
fo r ov e rd ra ft abuses by in sid e rs in the bank exam ination re p o rt based on
the findings o f our su rvey o f 261 bank exam ination re p o rts .

M ost in sider

ov erd ra fts a r e not c r itic iz e d b eca u se the in s id e r 's account is seldom o v e r ­
drawn fo r m o re than a few days, and o v e rd ra fts do not o c c u r v e ry often.
O verdrafts that w ere substantial o r p e rs is te d o v e r a lengthy p e rio d o f time
a re c r itic iz e d in the exam ination rep ort.
The resp on se s o f ou r R egional D ir e c to r s on the freq u en cy of
in sid er overd ra ft abuses w ere consistent with the findings in the two su r­
veys that th ere does not appear to be w id espread abuse by in sid e rs of
overd raft p r iv ile g e s .

C itations in our exam ination rep orts indicate that

c r it ic is m o f in sid er overd ra fts is gen era lly harsh.

Citations a lso indi­

cate that in ap proxim ately half the c a s e s , m anagem ent p ro m ise d to take




- 45 -

c o r r e c tiv e action at the tim e o f the exam ination. It is ou r p o licy to
take vig orou s action to c o r r e c t o v e rd ra ft abuses and it is our fir m
b e lie f that such action has been effe ctiv e .
B.

FDIC P ro ce d u re s and P r a c tic e s with R espect to O verdrafts

At this point, I would lik e to outline b r ie fly the exam ination te ch niqu.es that a re em ployed to review and analyze overd ra fts in state nonm em ­
b e r in sured banks.

At the outset, it should be em phasized that overd rafts

involving in sid ers a r e scru tin ized fa r m o re ca refu lly than overd ra fts in ­
volving non insiders and that significant overd rafts by in sid e rs should prom pt
im m ediate exam iner c r itic is m and v ig orou s su p erv isory action if they are
continued o r repeated.

B ecau se o f the vig orou s scrutiny to which in sid e r

overd rafts a re subjected, it is unlikely that in sid e rs in m o st banks have
p re fe rre d a c c e s s to o v e rd ra fts.
B ecause m o st insured state nonm em ber banks have com p u terized
accounting system s, exam iners a re usually furnished with a com puter listing
o f all o v e rd ra fts.

In those banks that still have manual system s, overd ra ft

fig u res a re developed fr o m exa m in ers' review and analysis o f the demand
deposit le d g e rs .

E xam iners a lso review cash item s and ch ecks drawn on

the bank which have been reje cte d during the posting p r o c e s s .

To fa cilita te

detection o f in sid er ov erd ra fts a lis t o f bank d ir e c to r s , o ffic e r s and
em ployees is obtained fr o m the bank o r it is developed independently by
exam iners o r by som e com bination o f the two precedin g m ethods.
fica tion o f in sid er relatives is a difficu lt p r o c e s s .

Identi­

H ow ever, an adequate

lis t usually can b e put together by review ing the stock le d g e r, in sid e r




- 46 -

transactions re co r d s and the m inutes o f m eetings o f the loan com m ittee
and the boa rd o f d ir e c t o r s .

Any ov e rd ra fts to in s id e rs a re flagged to

assu re fo llo w up action in a la te r point in the exam ination.
The ov erd ra ft listin g is com p ared with loans to individuals m ade
by other departm ents o f the bank to determ in e t ie -in relation sh ip s.

If

such relationships exist the ov erd ra fts a r e analyzed in co n c e rt with other
extensions o f c re d it.

L a rg e o v e rd ra fts a re ap praised with p a rticu la r

em phasis on the s iz e , duration, freq u en cy, ex isten ce o f other account
ba lan ces, c re d it ex p erie n ce with the b o r r o w e r , ch a rges le v ie d and the
bank's p o lic y in granting o v e rd ra fts .

S m aller o v e rd ra fts not tied to a

loan a re cu stom a rily d iscu sse d with the ap propriate o ffic e r o f the bank.
A fter applying the norm al cre d it judgm ent standards, an o v e rd ra ft m ay
be a cco rd e d an a d v erse cla s s ifica tio n in the rep ort o f exam ination.
The review and an alysis o f o v e rd ra fts a lso resu lts in the detection
of ov erd ra fts to o ffic e r s , d ir e c to r s and stock h old ers o f oth er banks.

Large

ov erd ra fts and frequent u se o f ov e rd ra fts a re autom atically flagged f o r an
appraisal o f repaym ent capacity.

F u rth e rm o re , it is standard p roced u re

to determ in e the o b lig o r 's p lace o f em ploym ent and position .

This procedure

p erm its detection o f ov erd ra fts to oth er ban k ers.
When ov erd ra ft abuses a re u n covered , the fie ld exam in er d is ­
cu sses the m atter thoroughly with the ch ie f executive o ffic e r o r the board
o f d ir e c to r s of the bank.

He em ph asizes the ob je ctio n a b le nature o f the

p ra ctice and attempts to obtain a com m itm en t fo r c o r r e c t iv e action .

He

then com m ents on the m atter in the e x a m in e r's "com m en ts and con clu sion s"




- 47 -

page o f the rep ort of exam ination.

If ap plicable, pertinent rem arks also

appear on the violations of law and a d v erse cla s s ifica tio n pages o f the
examination report.

The exa m in er's com m ents a re follow ed up and rein ­

fo r c e d in the letter that accom panies transm ittal o f the final rep ort of
exam ination to the bank.

In ca s e s w here the overd ra ft abuses a re e sp ecia lly

se v e re , the bank is requested to submit a p r o g r e s s rep ort detailing c o r r e c ­
tive action that has been taken.

If the exam iner is unable to obtain a c o m ­

m itm ent fo r c o r r e c tiv e action, o r i f a bank's com m itm ent is dish onored,
sen ior o ffic ia ls fr o m the FDIC regional o ffic e and state banking departm ent
■will m eet with bank m anagem ent.

Additional steps "that m ay be taken include

sending exam iners on sp ecial visits to the bank to check on the bank's
p ro g re s s in effecting c o r r e c tio n and in creasin g the frequ en cy o f exam ina­
tions.

If none of these actions is e ffe ctiv e , an enforcem ent action under

Section 8(b) of the FDI A ct is initiated.
C.

An A ssessm en t o f the Need fo r Additional Laws and
Regulations P ertaining to O verdrafts___________ _ _ _

As I have indicated, in sid e r ov erd ra fts a re subjected to e sp e cia lly
vigorou s su p erv isory resp on se.

In addition, sp ecial attention is paid to

ov erd ra fts b y oth er bankers to avoid the p o ssib ility o f r e c ip r o c a l rela tion ­
ships.

It is the view o f FDIC staff - - a view with which I con cu r - - that

we have adequate tools and techniques to respond effe ctiv e ly to abusive
o v e rd ra fts.

Of co u r s e , h ere again, the passage o f S. 71 would se rv e to

bu ttress existing to o ls .




- 48 -

VI.

FAILURE TO COM PLY WITH CERTAIN
BANKING LAWS OR REGULATIONS
Jh y ou r letter o f August 31, 1977, you asked:
"What is the d e g re e o f com p lia n ce with v a riou s p ro v isio n s
of the banking laws and regulations im p osed on bank
o ffic e r s and d ir e c to r s fo r which there a r e n o-crim in a l
penalties fo r n on -co m p lia n ce ? These p ro v isio n s include
lim itations on loans to executive o ffic e r s (12 USC 375a(l));
requirem ents fo r bank executive o ffic e r s to file rep orts
with th eir boa rd s o f d ir e c to r s on th eir loans fr o m oth er
banks (12 USC 375a (6)); and requ irem en ts fo r the p r in c i­
pal o ffic e r s and d ir e c to r s o f national banks to file rep orts
with th eir banks on th eir outside b u sin ess in te re sts
(12 USC C F R 2 3 .3 ). »
Although the laws and regulations you m ention apply only to

national banks, m any states do have sim ila r law s o r regu lation s.

Due to

variations in va riou s state statutes, it is difficu lt to g e n e ra liz e regarding
re strictio n s p laced on loans to n on m em ber bank d ir e c t o r s , o ffic e r s ,
em ployees o r th eir in tere st.

H ow ever, a survey w hich w e conducted

recen tly in dicates that 41 states re q u ire som e fo r m o f approval o f loans to
these individuals o r en tities.

A pp roval in w riting by the boa rd o f directors

o r a com m ittee o f the board is usually requ ired p r io r to origin a tion o f the
loan.

We a re aw are o f no state law im posing crim in a l penalties fo r

violation s.

The extent and scop e o f state laws requiring execu tive o ffice rs

to file rep orts with th eir boa rd s o f d ir e c to r s on th eir loans fr o m other
banks has not yet been determ in ed but is b e lie v e d to b e lim ite d .
In the c o u r s e o f o u r regu la rly scheduled exam inations, exa m i­
n ers routinely ch eck fo r com p lia n ce with the p ro v isio n s o f state law.
P a rticu la r scrutiny is a c c o rd e d th ose p ro v isio n s w hich deal with in sid ers.




- 49 -

In those instances in which apparent violations a re d isco v e re d , they are
docum ented in the R eport o f Exam ination and im m ediate c o r r e c tiv e action
sought.

When com p lia n ce is not obtained o r when the violations a re o f a

p a rticu larly seriou s nature m o re stringent su p ervisory m ea su res a re
taken.
We did not attempt a system atic survey to d is c o v e r the extent
o f com p lia n ce with such p rov ision s o f state law.

E xam iner personn el

indicate, how ever, that noncom pliance with these p rov ision s is o rd in a rily
inadvertent and tech nical in nature ant that, o v e ra ll, com p lia n ce is
gen erally sa tisfa ctory .
In you r le tte r, you also sought ou r view as to whether com p lia n ce
would be strengthened Mif v iola to rs w ere su b ject to adm in istratively im posed
c iv il penalties as contained in S. 71 o r to crim in a l pen alties. "

T here is

little doubt that fu rth er sanctions would a s s is t in achieving a somewhat
higher d eg ree o f com p lia n ce as a gen eral rule.

F o r this reason , we have

strongly urged enactm ent o f the c iv il penalties p ro v isio n s provided in S. 71.
We do not b eliev e, h ow ever, that the im p osition o f crim in a l sanctions is
appropriate in this a rea , e sp e cia lly in light o f the p o o r resu lts that have
been achieved in seeking p rosecu tion s and con viction s under 18 U. S. C.
§ 656.

VII.

INSURANCE COMMISSIONS
Y our letter o f Septem ber 20, 1977, asked us to s p e cifica lly

ad dress the subject o f in surance c o m m is s io n s.




A detailed study was

- 50 -

im p o ssib le in the tim e available; h ow ever, we have quickly surveyed our
R egional D ir e c to r s , asking them to d e s c r ib e cu rren t p r a c tic e s in their
regions and to each ad d ress the questions you ra ised .

Although we a re

not able to p resen t a detailed and com p reh en sive p ictu re o f p ra ctice s
in this area, we can speak with som e d e g re e o f authority ba sed upon
the resp on ses o f ou r R egional D ir e c to r s .
A.

P r a c tic e s with R esp ect to Insurance C om m ission s

In about half o f our re g io n s, in s id e rs com m on ly r e c e iv e insurance
c o m m is s io n s.

E lsew h ere, the p r a c tic e is infrequent due to proh ibitive

law s, area p r a c tic e a n d /o r su p e rv iso ry p r e s s u r e .

W here the p ra ctice is

com m on , the in su ran ce co m m is s io n s often constitute sign ificant portions
o f the r e cip ie n ts ’ in com e and a re an im portant part o f their ability to s e r ­
v ic e any outstanding debt, including debt in cu rre d to a cq u ire the stock o f
their bank.

C om m ission s a re m o re lik e ly to go to in s id e rs in banks with

concentrated ow nership.
Our R egional D ir e c to r s all in dicate that they find no relationship
betw een paym ent o f in su ran ce c o m m is s io n s to in s id e r s to s e r v ic e bank
stock loans and the placem en t o f corre sp o n d e n t balan ces with the lending
bank.

Although ou r R egional D ir e c to r s have found no c le a r connection

betw een the m aking o f p o o r loans and the re ce ip t o f in su ran ce com m ission s,
we cannot state that th ere is no such con n ection .

They note that frequently

the c o m m issio n s a re paid to a con trollin g ow ner o f the bank who is not an
active loan o ffic e r and th e re fo re does not d ire c tly co n tro l daily cre d it




- 51

d ecision s.

A ls o , they rep ort that in many instances the payment of

insurance co m issio n s to an in sid e r o c cu rs in banks w here other fo r m s
of in sid er abuse a re found.
Many of these observation s are based upon im p re ssio n s gained
fr o m the many y e a rs of experien ce o f our Regional D ir e c to r s .

H ow ever,

som e of ou r regions a re cu rren tly engaged in surveys to better quantify
these im p re s s io n s .
region s.

Table 5 su m m arizes survey results in one o f our

That study, cov erin g 108 banks, shows 61 ca s e s (56 percent)

w here none o f the c o m m issio n went to the bank; 14 ca se s (13 percen t)
where the bank receiv ed part; and 33 (31 percen t) w here the bank re ce iv e d
all.

Of the total com m ission s re ce iv e d $629,000 (35 percent) went to the

banks and $ 1 ,1 7 8 ,0 0 0 (65 p ercen t) went to in s id e rs .
Another region surveyed 160 banks and found that half kept all
cred it life c o m m is s io n s, 67 gave the in com e to in sid e rs and 11 split the
com m ission s in som e m anner.

In this survey, $ 2 ,5 7 3 ,0 0 0 was added to

bank earnings and $ 2 ,6 8 6 ,0 0 0 flow ed to the benefit o f in sid e rs.

These

surveys so fa r a re not con clu siv e , but suggest that the sm a ller the bank the
m ore lik ely it is that the amount o f co m m issio n s generated w here the funds
go to the bank is le s s than if they a re paid to oth ers.
B.

FDIC P o lic y and P r a c tic e s with R esp ect to Insurance
C om m i s sions_____________________ _______________________

The FDIC has sought to cu rb abusive conduct involving c re d it life
insurance sin ce the 1950s.

F o r a p eriod o f tim e, FDIC exam in ers w ere

in structed to file crim in a l irre g u la rity rep orts.




H ow ever, beca u se of the

52 -

Table 5

SURVEY ON INSURANCE PREMIUMS

Bank Size in M illion s
Under $25

$25 to $50

O ver $50

12

15

$1, 106, 000

$244,500

$4 56,800

Amount paid to bank
P ercen t o f total

$

268, 300
24, 3%

$100,900
41. 3%

$259, 700
56. 8%

Amount paid to in sid ers
P ercen t o f total

$

837,800
75. 5%

$143, 600
58. 7%

$197, 100
43. 2%

Number o f Banks W here
Bank R e ce iv e s $0
P e rce n t of Banks

52
64. 2%

7
58. 3%

2
13. 3%

Number o f Banks W here
Bank R e ce iv e s A ll
P e rce n t o f Banks

20
24. 7%

3
25. 0%

10
66. 7%

Number o f Banks W here
Bank R e c e iv e s P ortion
P e rce n t o f Banks

9
11. 1%

2
16. 7%

3
20. 0%

Number of Banks
Insurance In com e-T ota l

Total A s s e ts (A ll Banks)

81

$808, 100, 000 $ 3 9 9 ,9 0 0 ,0 0 0

$1, 245, 500, 000

Insurance Incom e Paid
to B an k s/T ota l A sse ts

. 03%

. 03%

. 02%

Insurance Incom e Paid
to I n s id e r s /T o ta l A s s e ts

. 10%

.0 4 %

. 02%

Total Insurance In com e/
Total A s se ts

. 14%

. 06%

. 04%




- 53 -

difficu lty in proving w illfu l m isapp lication o f bank funds with intent to
defraud the bank, in 1961 a determ ination was m ade that cre d it life
insurance in m ost ca s e s should b e dealt with as a su p ervisory m atter.
At that tim e the C orp roa tion 's cu rren t p o licy was put into effect.
This p o licy is fo r m a lly set forth in a m em orandum to a ll Regional
D ire cto rs issu ed in A p ril 1975 which p rovid es that if an in surance agency
bu siness is being conducted on the p re m ise s o f a state nonm em ber insured
bank, exam iners a r e to ch eck to see that the bank's boa rd o f d ir e c to r s and
shareh olders a re fu lly in form ed o f and approve the details o f the operation
o f the agency.

E xam in ers a re also in structed to determ in e that the plan to

operate the in surance agency and any m a teria l changes th ereto, as w ell as
any rem uneration which should be paid to the bank fo r the use o f the bank
person n el, p re m is e s o r equipment in connection with the operation o f the
insurance agency, have been approved by the board o f d ir e c to r s and the
shareh olders o f the bank.

F u rth erm ore, the in structions requ ire that the

bank b e reim bu rsed fo r the use o f bank spa ce, equipment and p erson n el.
While the guidelines do not p r e s c r ib e a form u la fo r ascertainin g the amount
o f such reim bursem en t, it m ust be reasonably related to the d o lla r value o f
the space, equipment and person n el em ployed.

A copy o f the guidelines is

attached as Exhibit G.
In a few in stan ces, the FDIC has found it n e ce ssa ry to en fo rce
this p o licy through the u se o f its ce a s e and desit pow er.

F o r exam ple,

this y e a r the FDIC issu ed a ce a s e and d esist o r d e r requiring one p a rticu lar




- 54 -

bank, am ong oth er things, do d is c lo s e to all sh areh olders fu ll and c o m ­
plete details regarding the expenses in cu rre d by the bank in connection
with an in surance b u sin ess operated by certa in d ir e c to r s and o ffic e r s o f
the bank and the m anner o f distribution o f in com e d erived fr o m the sale
o f such in surance on bank p r e m is e s during 1975 and 1976.

The o r d e r

a lso requ ired that the board o f d ir e c to r s adopt a resolu tion providing that,
if co m m issio n s derived fr o m the sale of cre d it life insurance and other
fo rm s of insurance w ritten by bank p erson n el or w ritten on bank prem ises
incidental to bank loans are not to be retained by the bank, then tw o-thirds
o f the outstanding shares o f voting stock o f the bank m ust ratify the arrange­
m ent after fu ll and com p lete d is c lo s u r e o f the details o f the sale o f such
in su ran ce.

That portion o f the c e a s e and d e sist o r d e r was a lso d is s e m i­

nated to all R egional O ffices fo r in stru ction al p u rp oses in July 1977.

A

copy o f the m em orandum forw ardin g the pertinent p ortion o f the ce a s e and
d esist o r d e r to the R egional O ffices is attached as Exhibit H.
C'

-C om Plete D is c lo s u r e and A pproval v s. P roh ibition

The F D IC 's guidelines on the op eration o f c re d it life in surance
agen cies by d ir e c to r s o r o ffic e r s o f state non m em ber in su red banks are
p rem ised on the notion that the b est m ethod f o r conducting an insurance
b u sin ess, including the distribu tion o f the in com e fr o m that activity, is
p ro p e rly left to the judgm ent o f m anagem ent and the sh a reh olders o f each
bank.

H ow ever, the C om p tro lle r o f the C u rren cy has issu ed a regulation

regardm g the distribu tion o f in com e fr o m the sale o f c re d it life , accident
and health in su ran ce.




W hile I have not studied this final regulation in

- 55 -

detail, I b eliev e that it w ill prohibit a national bank fr o m diverting in surance
com m ission s to any o f its em p loyees, d ir e c to r s , o ffic e r s o r prin cipal
shareh olders,

in states with in surance laws prohibiting the flow of such

in com e to a bank, the C o m p tro lle r's regulation suggests alternatives can be
found such as having the bank pu rchase in surance fo r all b o r r o w e rs on a
lo a n -b y -lo a n b a sis o r by m eans o f a group p o licy .
There a re sen ior staff m em b ers o f the FDIC, including sev era l
o f ou r Regional D ir e c to r s , who ag ree with the position taken by the
C om p troller.

T heir argum ents have m e rit.

F ir s t, they argue that the

C o m p tro lle r's m ethod is sim ple to adm inister and rem oves difficu lt questions
o f fa ct which need to be resolv e d under the FDIC' s guidelines.

Second,

they suggest that the in com e fr o m the sale o f in surance rightfully belongs
to the bank and all its shareh olders and that perm itting payment o f that
in com e to in sid ers condones an unsafe and unsound banking p r a c tic e , an
unlawful distribution o f the bank's in com e other than by the payment of
dividends, and a b rea ch o f the fid u cia ry obligation s o f o ffic e r s and d ir e c to r s
o f the bank.

F inally, they b e lie v e that the p ra ctice o f allowing bank

o ffic e r s and d ire c to rs to r e ce iv e in com e d ire ctly fr o m c re d it life insurance
sales in volves an inherent co n flict o f in terest which m ay affect the lending
o ff ic e r 's judgm ent in making a loan, and as a consequ ence induce him to
m ake a loan he m ight not oth erw ise co n s id e r sound.
I recog n ize the cogen cy and the appeal o f these argum ents.
H ow ever, other m em b ers o f the FDIC staff retort with pow erful argum ents
fo r the p roposition that this d e cisio n is p ro p e rly le ft to the bank ow n ers,




- 56 -

with ap propriate p rotectio n fo r m in ority in te r e s ts .

F ir s t, if th ere is

com p lete d is c lo s u r e o f the op eration o f the in su ran ce agency and approval
by the sh areh olders and d ir e c to r s o f a bank and the bank is reim bu rsed
fo r the u se o f its equipm ent, p erson n el o r sp a ce, it is d ifficu lt to sustain
the argum ent that the d ir e c to r s and o ffic e r s engaging in such a ctivity have
breach ed th eir fid u cia ry duties o r a re com m itting an unsafe and unsound
p r a c tic e .

Secondly, many banks in sm a ll com m un ities a r e unable to

o ffe r th eir o ffic e r s and em ployees s a la rie s com p etitiv e with those o f
sim ila rly -situ a ted institutions without the added rem uneration d erived
fr o m co m m is s io n s fr o m the sale o f c re d it life in su ran ce and thus could
not attract com petent m anagem ent.

T hird, in th ose c a s e s in w hich state

law proh ibits banks fr o m acting as agents f o r the sale o f c r e d it life
in su ran ce, the options to the bank as to how to m ake c re d it life insurance
available to its loan cu s to m e rs would b e lim ited .

P erh aps the only manner

in w hich such banks cou ld o ffe r cu sto m e rs such in su ran ce would b e through
the pu rch ase o f group p o lic ie s f o r th eir b o r r o w e r s .

The c o s t o f group

p o lic ie s would either redu ce p ro fits o r in c r e a s e in te re st rates on loans.
F in ally, som e argue that w e a re talking about the b a s ic pow ers o f a
bank and as such the d e cis io n rightfully should rem ain with the chartering
authority.
F o r m y own part, I b e lie v e that the essen tial thrust o f the FDIC's
p o licy is the p ro p e r one with re s p e ct to state non m em ber in sured banhs.
I do fa v o r , h ow ever, som e tightening o f o u r guidelines to fu rth er protect
the in terests o f m in ority sh a reh old ers.




F o r exam ple, w e m ight require

- 57 -

that, in a situation w here a con tro l group o r p erson dom inates a bank,
a m a jo rity o f the outside d ir e c to r s and m in ority shareh olders be required
to approve the in surance agency operation .
Although m y cu rren t view is to retain and bu ttress the presen t
FDIC approach in this a rea , I re sp e ct the view s o f the C om p troller and
many o f ou r staff and w ill in the com ing months ca refu lly study the r e s p e c ­
tive position s and the data provided by the studies and surveys underway
in sev era l o f the R egional O ffice s.

I shall be happy to rep ort to the

Com m ittee the resu lts of the surveys and any fu rth er m odifica tion o f
FDIC p olicy .

VIII.

ACTIONS UNDER THE FINANCIAL INSTITUTIONS
SUPERVISORY A C T OF 1966_______________________ ,
In a ccord a n ce with the C om m ittee's request, there is attached a

short d escrip tion o f each action taken by the C orporation under Section 8
of the FDI A ct since 1971 (Exhibit I).

Sum m aries fo r the p eriod 1971

through 1976 repeat those p rev iou sly provided to the C on gress and the
general public in our 1976 Annual R eport and through previou s com m un i­
cations to this C om m ittee.

The data fo r 1977 to date is new but w ill be

repeated in this y e a r 's Annual R eport.

The follow ing sum m ary lists the

num ber o f actions pursuant to Section 8 during this p eriod :




- 58 -

Section 8(a)
Term inate
Insurance
1971
1972
1973
1974
1975
1976
1977
TOTAL

Section 8(b)
C ease and D e sist

Section 8 (c)
Form*
T em p ora ry
Writte
C ease and D esist Agreei

5
5
1
3
5
8
2

7
10
8
4
8
24
27

5
8

29

88

13

Of the 88 ce a s e and d e sist actions which have gone to a fin al o r d e r , only one
(C ase #29) was issu ed after a hearin g.

The rest w e re consented to by the ba

We have a lso had one instance (C ase #63) in which the bank was not complying!
substantially with a c e a s e and d e s is t o r d e r and we obtained cou rt enforcement,!
C ease and d e s is t actions a re taken fo r a w ide v a riety o f reasons
and m o st ca s e s in volve a com bination o f p rob lem s requiring attention.

How­

e v er, o f in terest to these h ea rin gs, 35 o f the 51 Section 8(b) o r d e r s issued
in 1976 and 1977 to date deal at le a st in part with c o r r e c tio n o f problem s
caused by in sid e r loans and o v e rd ra fts , e x c e s s iv e o r unjustified com pen ­
sation to in s id e rs , unwarranted loan participation s with related banks, o r
im p ro p e r payment o f c re d it in su ran ce co m m is s io n s .

In addition to the

in sid er p rob lem s, these action s, in gen eral, deal with the need fo r
im proved m anagem ent, reduction o f c la s s ific a tio n s , elim ination o f lo s s e s ,
sale o f new capital, new o r im p rov ed c re d it, investm ent and audit policies
and c o r r e c tio n o f violations o f law and regulation, including va riou s co n ­
sum er p rotection statutes.




- 59 -

You have asked us to set forth the standards in effect fo r
instituting, m onitoring and rescin din g ou r en forcem ent action s.

The b a sic

c rite ria a re included in the statute, nam ely, the bank is engaging o r has
engaged in unsafe o r unsound p r a c tic e s , the bank is violating o r has v io ­
lated a law, rule, o r regulation, o r any condition im p osed in w riting by
the C orporation o r a w ritten agreem ent entered into with the C orporation,
o r there is reason able cau se to b e lie v e the bank is about to do these things.
We have attempted to avoid spelling out any fo r m a l, rigid standards beyond
those so that we a re fr e e to co n sid e r the fa cts and circu m sta n ces of each
individual bank.

The nature o f the p rob lem and the best p o ssib le c o r r e c ­

tive action v a ries fr o m bank to bank.
Our staff is provided gen eral guidelines upon which to ba se
recom m endations and in structions fo r preparation o f such action s.

We

refer you to the attached co p ie s o f ou r D ivision o f Bank S u pervision 's
General M em orandum Number 8 and Section V o f the Manual o f E xam i­
nation P o lic ie s (Exhibits J and K).
In p ra ctice , Section 8 action is taken when th ere is reasonable
cause to b eliev e that a pa rticu lar bank's p ro b le m s, w hich fa ll within the
guidelines set forth in the statute, w ill not be c o r r e c te d by routine su p er­
v iso ry m ethods and that, in fa ct, such le s s fo r m a l m ethods have proven
un su ccessfu l.
Once the o r d e r of c o r r e c tio n is issu ed , m onitoring o f a bank's
com pliance with the fo rm a l action is accom p lish ed through a stepped-up
program of p r o g r e s s reports submitted by the bank, exam iner visitations




- 60 -

and fu ll exam inations o f the bank at appropriate in terv a ls.

If it is d e te r­

m ined through these efforts that a bank is not substantially in com pliance
with p rov ision s o f the o r d e r o r is not m aking a good faith e ffo rt to comply,
we take fu rth er action to e n fo rce the o r d e r b y m eans o f cou rt action.
F orm a l en forcem ent actions a re usually term inated o nly when
the bank is in substantial com p la in ce with the p ro v isio n s o f the o r d e r ,
as evidenced by an exam ination, o r when the pu rpose o f the o r d e r has
oth erw ise been serv ed .

Since m o st c o r r e c tiv e o r d e r s would n orm ally

include requirem ents that appropriate p o lic ie s and internal co n tro ls be
adopted by the bank so as to avoid future repetition o f the p ro b le m s, the
o r d e r is not lifted until we a re assu red that such p o lic ie s and co n tro ls
have been adopted and a re being follow ed .
F inally, you have inquired about the public a vaila bility o f
final actions under the FISA o f 1966.

Pursuant to the gen eral p o licy

o f the FDIC and the p ro v isio n s o f the F re e d o m o f Inform ation A ct, all
final o r d e r s against banks a re available upon s p e c ific request.

Tn

providing such o r d e r s , finan cial data d erived fr o m rep orts o f exam ina­
tion and the nam es o f individual bank c u sto m e rs which m ight be named
in the o r d e r a r e deleted.

DC.

DIRECTORS
A.

L ia b ility o f D ir e c to r s

The National Bank A c t and m o st state banking co d e s do not
s p e c ifica lly set forth the b a sis f o r holding bank d ir e c to r s p erson a lly




- 61 -

liable fo r loan lo s s e s ; hen ce, statutory p rov ision s relating to the duties,
resp on sib ilities and lia b ilitie s o f bank d ire c to rs have ra re ly been the
b a sis fo r holding them person a lly resp o n sib le fo r such lo s s e s .

F o r the

m ost part, their leg a l liability fo r loan lo s s e s is predicated upon com m on
law p rin cip les established by num erous rep orted cou rt d e cis io n s .

Of

co u rse , the National Bank A ct does place lim itation s on the amount o f
loans which can be m ade to any b o r r o w e r (12 U. S. C. § 84) and, in ou r
opinion, d ire c to rs o f a national bank can be held person a lly lia b le fo r
lo s s e s resulting fr o m loans they approve which exceed such lim itations
(12 U. S. C. § 93).

S im ilar loan lim itation p rov ision s a re a lso contained

in m any state banking co d e s.
The FDIC, as r e c e iv e r o r liquidator o f a c lo s e d bank, has
im portant resp on sib ilities which have served to illum inate the seriou sn ess
of the duties one undertakes upon election to a bank's b oa rd .

In this

capacity, the agency always conducts a ca re fu l and com p reh en sive in ­
vestigation in o r d e r to determ in e if a c lo s e d bank's fo r m e r d ire c to rs
w ere d e re lict in their duties.

We have frequently found that they w ere and,

in those c a s e s , we either instituted suit or m ade a cla im which resu lted in
a sa tisfa ctory settlem ent.

F o r the p eriod January 1, I960, to the present

there have been 101 bank c lo s in g s.

In 58 o f these c a s e s , the p rin cipal

cause o f closin g was abusive s e lf-d e a lin g .
liability status o f these 101 c a s e s .

Table 6 shows the d ir e c t o r s '

In 40 ca s e s we have either instituted

suit against the fo r m e r d ire c to rs o f the clo s e d bank o r achieved a se ttle ­
ment p r io r to filin g suit.




In 29 c a s e s ou r investigation has not yet been

-

62

-

Table 6

DIRECTORS' LIA B ILITY STATUS AS OF SEPTEM BER 23, 1977
IN 101 BANKS THAT CLOSED FROM JANUARY I960 TO PRESENT*

Number o f
Banks with
S elf-S ervin g
P ra ctic e s

Number o f
F ailed
Banks

F iled suit o r m ade cla im

24

40

Still investigating

16

29

No b a sis fo r cla im

L8

32

58

101




TO TAL

*D oes not include the two C orporation pu rchases - W ilm ington
and P uerto R ico

- 63 -

com pleted.

H ow ever, p relim in ary investigation indicates that a cau se of

action against d ire c to rs exists in many o f these c a s e s .
anticipate that quite a few o f these w ill also b e litigated.

A cco rd in g ly , we
F inally, in 32

o f the 101 closin g s we concluded that the d ir e c to r s either w ere not d e r e lict
in th eir duties in som e re sp e ct and th e re fo re not person a lly lia b le o r they
had in sufficient finan cial r e so u r ce s to ju stify the expense o f litigation.
A ll suits that we file seek substantial r e c o v e r ie s fr o m the fo r m e r
d ire c to rs o f the clo s e d bank on the gen eral b a sis that they n eglected to e x e r ­
c is e due ca r e and diligen ce in the p erform a n ce o f their fid u cia ry duties.
Tn addition to such gen eral allegations o f n egligen ce, h ow ever, the com plaints
also set forth s p e c ific acts o f co m m issio n o r o m issio n on th eir part.
W hile each com plaint d iffe rs in many im portant r e sp e cts , the
allegations we have frequently m ade in our d ire cto r liability cla im s include,
among others (i) making of s e lf-s e r v in g , im provident a n d /o r e c e s s s iv e loa n s,
(ii) failing to c o r r e c t conditions and p ra ctice s c ritic iz e d by the appropriate
regulatory authority, (iii) failing to p ro p e rly su p ervise o ffic e r s and em p loy ees,
(iv) failing to m ake p eriod ic audits, (v) failing to establish and im plem ent
adequate internal p roced u res and c o n tro ls, (vi) approving payment o f im proper
dividends, (vii) failing to maintain adequate liquidity, (viii) failing to regu la rly
attend d ir e c t o r s ’ m eetin gs, (ix) concentrating too m uch of a bank's r e s o u r ce s
in a lim ited number of investm ents, and (x) failing to e x e r c is e independent
judgm ent, i. e . , perm itting th em selves to be dom inated by the bank's p rin cipal
shareh older.




- 64 -

In m y judgm ent, the im pa ct o f the law suits w hich we have file d
in m a jo r bank fa ilu re s in recen t y e a rs has had an in ca lcu la b le e ffe ct in
raising the sen sitivities o f bank d ir e c to r s with re s p e ct to th eir re sp o n ­
sib ilitie s .
B.

A dequacy o f Laws with R esp ect to C ertain P r a c tic e s

E xisting c a s e law in the va riou s states re q u ire s bank d ire c to rs
to e x e r c is e due c a r e , prudence and d ilig en ce with r e sp e ct to the m anage­
m ent o f a ban k 's a ffa irs and in the u se o f p re se rv a tio n o f its p rop erty
and a s s e ts .

Bank d ir e c to r s who approve exorbitant sa la rie s fo r bank

o ffic e r s , approve paym ent o f exorbitant o r im p ro p e r stock dividends,
o r knowingly p erm it the u se o f bank a sse ts fo r nonbusiness p u rp oses
violate the com m on law duties im posed upon them .

Under existing

ca s e law , they should incur p erson a l liability fo r such im p rop er
a ctiv itie s .
At the sam e tim e, it should b e re co g n ize d that there have been
significant variation s in state co u rt application o f com m on law standards.
M o re o v e r, suits by m in o rity sh a reh old ers against open banks have been
rela tively r a r e .

F o r this rea son , the expansion o f the F D IC 's Section 8

pow ers to allow the agency to p r o c e e d d ir e c tly against individuals would
significantly enhance the lik elih ood o f r e c o v e r y v is - a - v i s d ir e c t o r s who
abuse banks which do not fa il.
C.

P o litic a l Contributions

P ro v is io n s o f fe d e ra l law prohibit national banks fr o m making a
contribution o r expenditure in con n ection with any e le ctio n to p o litica l office




- 65 -

o r in con nection with any p rim a ry election o r p o litica l convention o r caucus
held to se le ct candidates f o r any p o litica l o ffic e .

The statute prohibits state

banks fr o m making a contribution o r expenditure in connection with any
election at which presid en tial o r v ic e p residen tial e le c to rs o r a Senator o r
R epresentative in, o r a D elegate o r R esident C o m m issio n e r to, C on gress
a re to be voted fo r , o r in connection with any p rim ary e lection o r p o litica l
convention o r caucus held to s e le c t candidates fo r any o f the foreg oin g
o ffic e s .
O ffice rs and d ire c to rs o f banks (both state and national) a re p r o hibited by this sam e law fr o m consenting to any contribution o r expenditure
by the bank.

Although the penalty f o r this violation is crim in a l in nature,

knowing violation o f this statute could, in ou r opinion, resu lt in the im p o s i­
tion o f c iv il lia b ility under the com m on law.

H ow ever, a loan m ade by a

bank in a ccord a n ce with applicable banking laws and regulations and in the
ordin ary c o u r s e o f bu sin ess is not a "contribution o r expenditure. "

X.

DOUBLE C O LLA TE R A L
You have asked us to com m ent on the extent to which the posting

o f the sam e c o lla te r a l at two d ifferen t banks is co v e re d by existing law.
Existing laws dealing with con tra cts, negotiable instrum ents, and sev era l
transactions adequately c o v e r the subject.

This is e sp e cia lly true if the

lending institution cou ples adherence to the law with p ro p e r internal c o n ­
tr o ls , lending p o lic ie s and audit p r a c tic e s .
As part o f the training each bank exam in er r e c e iv e s in c re d it
a n a ly sis, he is taught what lega l docum entation and p ro ce d u re s a re




-

66

-

n e c e s s a r y to p e r fe c t a lien on the va riou s types o f c o lla te r a l w hich m ay
be o ffe re d .

This training c o v e r s both p erson a l and rea l p ro p e rty .

As

part o f Ihe ap praisal o f the loan p o r tfo lio , the exam in er w ill v e r ify that
the bank's s e cu rity in te re st is p ro p e rly p e rfe cte d .

If the c o lla te r a l is of

a type which should b e in the p h y sica l p o s s e s s io n o f the bank, p o s s e s s io n
w ill b e v e r ifie d on a s p o t-ch e ck b a s is .

The bank's audit p ro g ra m should

in clude p ro ce d u re s f o r verify in g that the n e c e s s a r y docum entation a n d /o r
c o lla te r a l a re in the bank's p o s s e s s io n .

A s to negotiable co lla te r a l,

such as stock s, bonds o r c e r tific a te s o f dep osit, sound banking p ra ctice
req u ires that the loan p ro ce e d s not b e d isb u rsed until the c o lla te r a l is
in the p o s s e s s io n o f the bank o r the bank has a re co g n iz e d , valid due b ill
o r oth er evidence that it has a le g a l c la im on that se cu rity .
In sum m ary, a b o r r o w e r 's rea l o r p erson a l p rop erty is not
and ought not to be c o n sid e re d as c o lla te r a l u n less a statutory o r
p o s s e s s o r y lien has been p e rfe cte d in a cco rd a n ce with ap p lica ble law,

XL

CONFLICTS OF INTEREST INVOLVING BANK EXAMINERS
Although bank exam in ers often le a v e the C orp ora tion to enter

the em ploy o f banks and bank holding com p a n ies, and although this
suggests the potential fo r abuse, the C orp ora tion has taken great ca r e
o v e r the y e a rs to detect any signs o f abuse a risin g out o f this potential
co n flict o f in terest.

We b e lie v e that the r e c o r d o f the C orp ora tion is

tru ly rem ark able in this rega rd .

N e v e rth e le ss, w e a r e aw are that co n ­

flic ts o f in terest m ay be a so u rce o f potential abuse.




T h e re fo re , we

- 67 -

support the approach em bodied in S. 555, the "P u blic O fficia ls Integrity
A ct o f 1977. P T itle V o f that b ill which was recen tly passed by the
Senate would r e v is e 18 U. S. C. 207: (a) to perm anently b a r any fo r m e r
fed era l em ployee fr o m becom in g in volved in any s p e cific c a s e in which
he was p erson a lly and substantially involved in any tim e during his
governm ent s e r v ic e ; (b) to prohibit such an em p loyee, f o r a p e rio d o f
two y e a rs after leaving fe d e ra l s e r v ic e , fr o m represen ting anyone oth er
than the United States in any s p e c ific c a s e which was under his o ffic ia l
resp on sib ility during his la st 12 months o f governm ent s e r v ic e ; and (c)
to prohibit any fo r m e r to p -le v e l fe d e ra l o ffic ia l, f o r a p e riod o f one y ea r
after leaving fe d e ra l s e r v ic e , fr o m initiating any contact with his fo r m e r
departm ent o r agency relating to m atters actually pending b e fo r e such
departm ent o f agency.
We b e lie v e that lo g ic d ictates dealing with th ese co n flict o f
in terest questions in the b ro a d e r, govern m en t-w ide context, rather than
singling out the finan cial regu latory agen cies fo r sp ecia l leg isla tion o f
this nature.

To the extent that they exist, these p roblem s a re certa in ly

not lim ited to the regu lators o f finan cial institutions.
F inally, it should be noted that the FDIC has responded to
c r itic is m s and recom m endations outlined in the GAO rep ort to the Con­
g ress o f June 1, 1977 dealing with standards f o r ethics fo r C orporation
o ffic e r s and em p loyees.

P ro p o se d am endments to FDIC regulations

governing em ployee resp on sib ilitie s and conduct in co rp o ra te with m in or
exceptions and som e im provem ents G A O 's recom m endation s.




B a sica lly ,

-

68

the p rop osed am endm ents to P a rt 336 o f F D IC 's regu la tion s: (a) include
s p e c ific c r ite r ia f o r em p loyees in bank exam in er p osition s (GS-13 and
above) and ce rta in oth er em p loyees (GS-9 and above w h ose d e cisio n s
o r actions cou ld have an eco n o m ic im p a ct on the in te re sts o f nonfederal
en terp rises) to file fin an cial d is c lo s u r e statem ents;
lin es f o r determ ining c o n flicts o f in te re s t;

(b) im p ro v e guide­

(c) p rov id e f o r the u se o f

a g rea tly expanded d is c lo s u r e and reporting fo r m to e n fo rce statutory
prohibitions and C orp ora tion regulations; and (d) im p ro v e p ro ce d u re s
fo r co lle ctin g and review ing statem ents.




#

#

#

#

#

EXHIBIT A

FEDERAL

DEPOSIT

INSURANCE

CORPORATION

BANK ST O CK LO A N S

Dear Sir:
An examination of
disclosed the bank held, as collateral,

as of the close of business
stock of

Respectfully,

Regional Director

Stockholder

PDIC 6500/22 (8-71) Formerly D E -24




Borrower

Number
of
s h a re s

C e r t if ­
ica te
number

O rig in al
date of
loan

B alan ce
of
loan

Inter­
e st
rate

EXHIBIT B

FEDERAL

DEPOSIT

INSURANCE

CORPORATION

O F F IC E R LO A N S
r

e

g

i

o

n

a

l

d

i

r

e

c

t

o

r

Dear Sir:
An examination of..................................................................................................................................................................................................................
as of the close of business........................................................................................................................... disclosed the following direct and indirect
liabilities of officers of........| ........................... .............................................. .................................. ...........................................................................................
Respectfully,

Regional Director

Name and T itle of O ffice r

O rigin al
Amount

Cu rren t
B alan ce

D e scrip tio n and Purpose*

' I n c l u d e o r ig in a t io n and m aturit y d a t e * , e n d o r s e r s , g u a r a n t o r s and s e c u r i t y , if a n y ; if i n d i r e c t , s o n ote.
F O I C 6500/23 (8-71) F O R M E R L Y OE-2 5




EXHIBIT C

FEDERAL DEPOSIT INSURANCE CORPORATION. Washington. D C 20429

OFFICE

OF

THE

C H A I R M A N

October 26, 1970

TO THE EXECUTIVE OFFICER OF THE
INSURED STATE NONMEMBER BANK ADDRESSED
Subject:

Use of Interbank Deposits as Compensating Balances fo r
Loans to Individuals Connected with Depositing Bank

The Assistant Attorney General in charge o f the Criminal D ivision o f the
Department o f Ju stice has suggested that his views on the above subject
be communicated to a l l insured banks. The follow in g quotation from his
le t t e r to the Comptroller o f the Currency should receive the close at­
tention o f a l l bankers to whom i t might apply. A sim ilar le t t e r is being
sent to a l l National banks by the Comptroller o f the Currency and to a l l
State member banks by the Board o f Governors o f the Federal Reserve System.
"Reference is made to the conversations which representatives o f the
Criminal D ivision have had with you and members o f your s t a ff concerning
the p ra ctice o f bank o f f i c i a l s u t iliz in g the correspondent accounts o f
th eir banks fo r the purpose o f compensating lending banks fo r loans granted
to these o f f i c i a l s . By using these n on -in terest bearing correspondent ac­
counts in th is manner, some borrowing o f f i c i a l s have been able to obtain
loans at p referen tia l rates and to circumvent other statutes and administra­
tiv e regulations promulgated fo r the protection o f Federally regulated.or
insured banks. Since the borrower maintains these balances as a condition
o f the loan, he is able to u t il iz e the funds and cre d its o f his bank for
his own personal benefit*
in v e s t ig a t io n in to this area d isclosed that th is p ra ctice is fa ir ly wide­
spread, p a rticu la rly in certain areas o f the country, both in the in it ia l
acq u isition o f a bank and at subsequent times* There are no cases, at the
present time, construing th is p ra ctice as a m isapplication under the
criminal sta tu tes. We b e lie v e , however, that where the fa cts demonstrate
a clear detriment to the bank and a concomitant b en efit to it s o ffic e r s
this a c t iv it y would, at a minimum, con stitu te a breach o f the fidu ciary
duty owed by the o f f i c i a l s to the bank and might in certain situ ation s
warrant prosecutive a ction .
"In lig h t o f the foregoin g, your o f f i c e . . . . may wish to consider advis­
ing the banking industry o f our view that the above p ra ctice might con stitu te
a v io la tio n o f Federal criminal s ta tu te s .”




y/cOjL.
Frank W ille
Chairman

COPY

September 18, 1970

Honorable William B. Camp
Comptroller o f the Currency
Department o f the Treasury
Washington, D.C.
Dear Mr. Camp:
Reference is made to the conversations which representatives
o f the Criminal D ivision have had with you and members o f your a t a f f
concerning the p ra ctice o f bank o f f i c i a l s u t iliz in g the correspondent
accounts o f th eir banks fo r the purpose o f compensating lending banks
fo r loans granted to these o f f i c i a l s * By using these non -in terest
bearing correspondent accounts in th is manner, some borroxring o f f i ­
c ia ls have been able to obtain loans at p re fe re n tia l rates and to
circumvent other statu tes and adm inistrative regulations promulgated
fo r the p rotection o f Federally regulated or insured banks. Since
the borrower maintains these balances as a con dition o f the loan, he
is able to u t il iz e the funds and c re d its o f h is bank fo r his own
personal b e n e fit.
In vestigation in to th is area d isclo se d that th is p ra ctice
i s f a ir ly widespread, p a rtic u la r ly in certa in areas o f the country,
both in the i n i t i a l a cq u is itio n o f a bank and at subsequent times!
There are no cases, at the present time, construing th is practice as
a m isapplication under the crim inal sta tu te s. We b e lie v e , however,
that where the fa cts demonstrate a cle a r detriment to the bank and a
concomitant b en efit to it£ o f f ic e r s th is a c t iv it y would, at a minimum,
co n stitu te a breach o f the fid u cia ry duty owed by the o f f i c i a l s to
the bank and might in certa in situ a tion s warrant prosecutive a ctio n .
In lig h t o f the foregoin g, your o f f i c e , together with the
Federal Deposit Insurance Corporation, the Federal Reserve Board,
and the Federal Home Loan Bank Board, may wish to consider advising
the banking industry o f our view that the above p ra ctice might con­
s titu te a v io la tio n o f Federal crim inal sta tu tes.
We are forwarding a copy o f th is le t t e r to the Chairmen
o f the Federal Reserve System, the Federal Deposit Insurance Corpora­
tio n , and the Federal Home Loan Bank Board.
S in cerely,

WILL WILSON
A ssistant Attorney General
Federal




D ep o sit

In su ran ce

C o rp o ra tio n

EXHIBIT D

FED ERAL D EPO SIT IN SURANCE CORPORATION. Washington. D C. 20429

OF DIRECTOR -DIVISION OF BANK SUPERVISION
r

/D -3 6 -7 1

(4 -2 2 -7 1 )

MEMORANDUM TO:

Regional Directors

SUBJECT:

Use of Inter-bank Deposits as Compensating Balances
for Loans to Individuals Connected with Depositing
Bank

R e fe re n c e

is

su red S t a t e

made t o

1970,

r e g a r d in g

fr o m a l e t t e r

th e c a p tio n e d

th e

e x e c u tiv e

o ffic e r *

s u b je c t.

o f a ll

The l e t t e r

c o n ta in e d

q u o ta ­

of

t h e D e p a r tm e n t o f J u s t i c e .

a c le a r

d e tr im e n t t o

o f th is

le tte r ,

a num ber o f

n a tu re have b een

E s­

t h a t vtfiere t h e

th e bank and a c o n c o m ita n t

i t s o f f i c e r s , th e s u b j e c t a c t i v i t y m ig h t m c e r t a i n
w arrant p r o s e c u tiv e a c t i o n .
F o llo w in g d i s t r i b u t i o n

C h a irm a n W i l l e ' s

in

d a ted O cto b e r 2 6 ,

s ig n e d b y th e A s s i s t a n t A tto r n e y G e n e ra l m

th e A s s is t a n t A tto rn e y G en eral s t a t e d

d e m o n stra te

b e n e fit to
s itu a tio n s
tio n s

to

fr o m C h a ir m a n W i l l e ,

th e C r im in a l D i v is i o n

s e n tia lly ,
fa c ts

a le tte r

nonmember b a n k s

tio n s

ch arge o f

’ ------------- .
-------------- --- ----------

le tte r -r e p o r ts

fo r w a r d e d t o

th is

c itin g

o

v io la ­

o ffic e .

Recently there has been an informal communication by the Department
of Justice to the Corporation indicating that the policy of that
agency will be to consider prosecution if the transactions of this
type occurred after October 2 2 , 1 9 7 0 and to decline to consider
prosecution if the activities occurred prior to that date. Conse­
quently, it is the opinion of our Legal Division that matters of
S i s type occurring prior to October 2 2 , 1 9 7 0 need not be brought
to the attention of the Department of Justice.
Please be guided accordingly




EXHIBIT E

FEDERAL DEPOSIT INSURANCE CORPORATION,

R /D -2 0 -7 2

Washington, D C. 20429

(3 -1 -7 2 )

OFFICE OF DIRECTOR-DIVISION OF BANK SUPERVISION

MEMORANDUM T O s

Regional Directors

SUBJECT*

Use of Interbank Deposits as Compensating Balances
for Doans to Individuals Connected with Depositing
Bank------------- -------- -- --------------- — ------

This is with further reference to the letter dated October 26, 1970,
S o m Chairman will. to Executive Officers of InsUredStateNonmember
Banks, and our memorandum to Regional Directors dated April 22, 1971,
both on this subject and noting the interest of the Department of
Justice therein.
Reports of activities of this kind made to this office should contain
along with any other relevant information, the following:




1)

The d a te, amount, m aturity, and in te r e s t rate o f
and c o lla t e r a l fo r the loan by the d ep ository bank;

2)

The name o f the borrower and h is r e la tio n s h ip t o
the d ep ositin g bank;

3)

Whether the in t e r e s t ra te charged appears preferen­
t i a l when compared with other loans made by the
d e p o sito ry bank a t th a t tim e;

4)

Whether the loan has been renewed, and, i f s o , when
and on what terms and c o n d itio n s ;

5)

The amount o f the compensating balance and the date
i t was made;

6)

Whether the balance is dormant;

7)

W h eth er th e

8)

d e p o s itin g

re tu rn

fo r

C o p ie s

o f any w r itte n

c e r n in e

th e

th e

c o m p e n s a tin g

bank r e c e iv e s

d e p o s it;

in

and

a g r e e m e n t o r u n d e r s ta n d in g

re? e t io r s h i?
b a la n c e

any s e r v ic e s

b e tv e in

and o f

any

th e
o th e r

lo a n

r e le v a n t

d o c u m e n ts,

E dw ard J .

Director

and

R oddy

th e

con­

EXHIBIT

f

P

X
FEDERAL D EPO SIT INSURANCE CORPORATION. Washington. D C. 20429

OFFICE OF DIRECTOR-DIVISION OF BANK SUPERVISION
R /D -6 -7 4

MEMORANDUM TO:

R egional D ir e c to r s

FROM :

E dward J. Roddy
D ir e c to r

SUBJECT:

C om pensating B alan ce G uidelines

(1 -2 5 -7 4 )

<l/L

A ttached are guidelines p rep a red by the L egal D iv ision to a s s is t exa m in ers
in investigating certa in com pensating balan ce a rra n g em en ts. A p p rop ria te
distribu tion m ay be m ade to you r e x a m in e rs.
In determ ining whether a, lette r re p o rt to the United States A ttorn ey is in
o r d e r , a few caution ary com m en ts should be kept in m ind. C o r r e s p o n ­
dent bank accounts are essen tia l to the conduct o f banking as we know it.
They in evitably grow as the s iz e o f banks and the sco p e o f th eir operation s
grow . It is both p ro p e r and sou n d .for co rre sp o n d e n t bankers to pursue
enduring and p rofita b le relation sh ips with "re sp o n d e n t" banks b y any
leg a l m eans a v a ila b le. In review in g co rre sp o n d e n t balan ce /lo a n a r r a n g e ­
m en ts, the em phasis should be on detrim en t to the "c a p tiv e " respondent
bank, and it is this fact that should be thoroughly in vestigated and sup­
p o r te d in any allegation s o f c rim in a l abuse. P r e fe r e n tia l treatm ent of
" in s id e r s " is only a secon d a ry o r a n cilla ry co n s id e ra tio n , albeit, an
e sse n tia l one in supporting any ch a rg e s o f c rim in a l ir r e g u la r itie s .
You w ill notice one change in p r o c e d u r e . • E xam in ers a re cu rre n tly e x ­
p ected not only to brin g a lleg e d c rim in a l ir r e g u la r itie s p erp etrated by
bank p erson n el to the attention o f the ban k 's B oard o f D ir e c to r s , but
a ls o to requ est (and in som e in stan ces in s is t) that the B oard prom p tly
notify the bonding com pany o f all fa cts rela ted to the a lle g e d ir r e g u la rity
and to obtain a ffirm a tiv e evid en ce o f the continued co v e ra g e o f the fid elity
bond with r e s p e ct to those re sp o n sib le fo r the alleged ir r e g u la r itie s .
B eca u se the s p e c ific standards fo r evaluating the p r o p r ie ty of a co m p e n ­
sating balan ce arrangem en t have not yet been w ell esta blish ed , the usual
p r o c e d u r e o f having the bonding com pany notified w ill not be follow ed
u n less s p e c ific recom m en d a tion to do so in that p a rticu la r ca s e is r e ­
ce iv e d fr o m the L egal D iv ision .

E n clo su re :
G uidelines




Guidelines for Examiners Investigating Arrangements where
Ban k ’s Correspondent Deposits may serve as Compensating
Balances for Loans. 'Do Bank Officials and their Associates

m

GENERAL

The maintenance by one bank ("depositing bank") of an appropriate deposit
account (the "correspondent account") with another bank (the "correspondent
bank") is essential to the conduct of banking business. 1 / However, an
officer, director or other person influential in the affairs of the deposit­
ing bank may abuse his position of influence by causing an amount in excess
of the bank's reasonable correspondent needs to be maintained in such a
correspondent account and then trading off its economic power for his own
financial benefit in his relations with the correspondent bank. 2/ Such an
arrangement may, depending on the circumstances, constitute a breach o f •a
bank official's fiduciary obligations to the depositing bank and, deriva­
tively, to its depositors, creditors and shareholders; in some cases, the
arrangement may also involve a criminal offense.
Accordingly, if a bank you are examining maintains a correspondent account
with another bank which has extended credit to a person influential in the
management of the depositing bank, or anyone associated with him (or if you
discover that the examined bank has a deposit from another bank and has
outstanding extensions of credit to an influential person in the other bank
or his associates) and where there is evidence that the depositing bank may
have suffered a detriment because of the loan/deposit arrangement, the
situation should be thoroughly investigated.
If, after the investigation, it appears that (l) the consideration received by
the depositing bank for its deposit is inadequate and (2) preferential treat­
ment has been accorded by the correspondent bank to the influential person or

1/ The most essential type of correspondent service is item clearing. Other
types of correspondent services may include investment advice, trust informa­
tion, payment of cashier's checks, data processing services, and assistance
with securities transactions.
2j
Improper compensating balance arrangements, of course, are not the only
method whereby funds of a bank may be misapplied to obtain preferential treat­
ment for a person influential in a bank's affairs in his personal financial
relations with another bank. There are numerous other types of reciprocal
"tie-in" arrangements whereby funds of one bank can be used improperly to
compensate another bank for preferential treatment accorded by the second bank
to persons influential in the first bank. Among such arrangements could be
inappropriate purchases of or participations in poor loans; investment in
poor quality securities contained in the second bank's investment portfolio;
and exorbitant fees. For simplicity, however, we have restricted our discus­
sion to the more traditional deposit-loan arrangements.




-

2-

his a sso cia te , the matter should be made the basis o f a le t t e r report
o f ir r e g u la rity . The report should be transmitted through the Regional
D irector to the Legal D ivision which w ill review the re su lts o f your
in vestiga tion and, with your a ssista n ce, w il l coordinate any further
preparation which may be necessary fo r enforcement purposes in cluding,
where the fa cts so warrant, r e fe r r a l to the Department o f Ju stice fo r
crim inal prosecution. Because the s p e c ific standards fo r evaluating
the propriety o f a compensating balance arrangement have not yet been
w ell esta blish ed, the usual procedure o f having the bonding company
n o t ifie d w ill not be follow ed unless s p e c ific recommendation to do so
in that p a rticu lar case is received from the' Legal D iv ision .
We recognize that the i n i t i a l general determination whether the compen­
sating balance arrangement is irregu la r and th erefore merits further
consideration as a p ote n tia l enforcement matter is by i t s nature not
susceptible to simple s p e c ific g u id elin es; i t depends upon ca refu l
consideration and balancing o f a l l pertinent fa c t s . However, while
your ultimate conclusion in th is regard must draw upon your o v e r a ll
experience, the follow in g matters should be s p e c ific a lly considered in
analyzing the arrangement and should be discussed in any le t t e r report
which you determine to transmit in th is regard. I t should be noted
that each o f these items is merely an in d ica tion o f whether there may
be an irregu la r compensating balance arrangement. The existence or
nonexistence o f any o f these items does hot n e cessa rily show whether
the arrangement is or is not irre g u la r.
II.
A.

SPECIFIC MATTERS TO BE CONSIDERED IN ANALYZING SUSPECT COMPENSATING
BALANCE ARRANGEMENTS.
Deposit Account

A deposit account may be considered detrim ental to the depositing bank
where i t exceeds the bank's normal .correspondent needs. In making th is
determination, the account should be analyzed in the follow ing respects
fo r the period coin cid in g with the relevant extensions o f c r e d it.




1.

Amount o f deposit balance
(a)

Compare deposit amount with ap plica ble reserve
requirements (d escribe the p a rticu la r requirements
and the altern a tive methods, i f any, fo r th e ir
s a t is fa c t io n );

(b)

describe h is t o r ic a l le v e l o f correspondent balances
(considering the growth pattern o f the bank);

(c )

id e n tify changes in le v e l o f correspondent balances.
I f sudden increases have occurred, can these be
correla ted with increases in correspondent business
a c t iv it y ? ; and

-3 -

(d )

2.

discuss establishment o f correspondent r e la tio n sh ip .
Is i t one o f long standing? I f re ce n t, what was the
b a sis fo r i t s establishment?

A c tiv ity in dep osit account
(a)

State whether the account is dormant or a ctive ( i f
a c t iv e , generally describe the volume o f d a ily
a c t i v i t y ) ; and

(b)

s p e cify the terms o f the account agreement (and
note any actual variances from these term s).

3. D epositing bank's borrowing p o s itio n — Is the depositin g bank,
during the maintenance o f the d e p o sit, in a borrowing p o s itio n with resp ect
t o any bank? S pecify any such borrowings and ca lcu la te th e ir expense.
r
U. S ervices performed by correspondent bank — Assess the value o f
serv ices performed by the correspondent bank fo r the depositing bank:

B.

(a)

What, i f any, serv ices are performed ( se e , e . g . ,
n . l , supra) ;

(b)

describe any other arrangements which the depositing
bank may have with any other in s tit u t io n or person
covering the type o f se rv ice s described in response
to (a ) ;

(c )

have the depositin g and correspondent banks attempted
to esta b lish the value o f such s e rv ic e s ? ; and

(d)

state your own estim a te .o f the value o f such services
and the ba sis fo r your-estim ate. Where fe a s ib le , compare
the value o f such se rv ice s with that o f sim ilar services
provided by other in s titu tio n s or persons in the same
market area.

Extensions o f Credit

In analyzing p r e fe r e n tia l aspects o f a loan to o f f i c i a l s o f the dep ositin g
bank or th e ir a s s o cia te s , a l l s ig n ific a n t terms o f the loan should be considered.
These terms should be s p e c ific a lly id e n t ifie d and compared with ordinary terms
fo r loans o f sim ilar types, re ly in g on your general knowledge o f customary
banking p ra ctices and any a d d ition a l information which you may be able to




-4 -

d5Vfu °P . thr0U?h s<?urces in the depositing bank. (At the i n i t i a l stage
o f the in v estig a tion , i t would probably be imprudent to approach the
correspondent bank fo r inform ation r e la tin g t o i t s lending p r a c tic e s .)'
|
Ordinary s ig n if i c ant terms - - S ig n ifica n t loan terms, o f course
include amount; in te re st rate and whether the rate w i l l be adjusted upon
a change in general in te re s t rate le v e ls ; m aturity; repayment terms; and
c o n a t e r a i required as se cu rity . 3 / A lso note, i f you are able to develop
the information through sources in the depositing bank, whether the loan
terms (which may appear quite ordinary on the surface) are being complied
j S j _ ? i e -in — adjustment p rovision — Is there any in d ica tio n that the
deposit funds are necessary to finance the loan ( U e . , that the correspondent
bank would not be in a p o s itio n to make the loan except fo r the d ep osit)?
A lso , describe any provision fo r adjusting terms o f the loan (u su ally the
in te re st rate) bas^d upon changes in the correspondent balance. I t i s
an ticipated that discovery o f such an express p rov ision w il l be ra re . However
s p e cia l atten tion should -be accorded t o any c o rre la tio n between a change in ’
the terms o f the loan and the amount o f the correspondent balance.
III.

GENERAL INITIAL EVALUATION'OF INTERRELATIONSHIP BETWEEN LOAN AND
DEPOSIT.

D efin ite conclusions regarding the actual in te rre la tio n sh ip between the
deposit and loan may be d i f f i c u l t t o e sta b lish at th is i n i t i a l stage o f
in v estig a tion . Nevertheless, any observations which you have in th is regard
can be valuable.
B
The follow in g matters should b e.con sidered:
1 . Describe any agreement or understanding r e la tin g to the compensating
balance arrangement. In th is regard*you should, during the course o f your
o f a bankj where a suspect lo a n /d e p o sit e x is t s , d ir e c t ly incu^re
o f o f f i c i a l s o f the depositing bank — and p a r tic u la r ly the persons having
loans from the correspondent bank — whether there is any such agreement or
understanding. 4 / I f the agreement or understanding has been reduced to written
form, a copy o f i t and any other relevant papers should be submitted with your
i n i t i a l w ritten rep ort.

3/ Where a loan is collateralized by securities, state the method used for
valuation
If the securities are stock of the depositing bank, also show botl
the market price (if any) and the book value.
—/

aPProPriate circumstances, intentional falsehoods made to a Corporation

dur^ng jSÉ course
a bank examination may be su bject to crim inal
p en a lties unaer 18 U.S.C. § 1001.




2. Consider whether the borrower i s s u ff ic ie n t ly in flu e n t ia l in the
a ffa ir s o f the depositing bank to cause placement o f an excessive dep osit
in the correspondent bank. State the ba sis fo r your con clu sion . You should
attempt to trace r e s p o n s ib ility fo r the d e cis io n to make the d e p o sit. In
cases where the borrower*s in flu en ce i s in d ir e c t in nature, describe the
decision-making process and the borrower’ s r o le in i t .
3. A ttention should a lso be refocu sed on coincidences (dates and
amounts) between the dep osit account and the correspondent loan .
If. Has the correspondent loan been brought to the a tten tion o f the
Board o f D irectors o f the dep ositin g bank? I f representations are made
that the matter has been considered by the Board, v e r ify these representa­
tio n s . Copies o f any Board minutes r e fle c t in g meetings at about the time
when the loan and/or deposit was made should be attached t o your re p o rt.




EXHIBIT G

FEDERAL DEPO SIT INSURANCE CORPORATION, Waihington. D.C. 20429

hFFlCEOFDIRECTOR-DIVISION OF BANK SUPERVISION

R/D-47-75 (4-17-75)

MEMORANDUM TO:

Regional Directors

SUBJECT:

Operation of Insurance Agencies in Conjunction
With State Nonmember Insured B a n k s _________ _

This memorandum is concerned with the operation of an insurance agency
on the premises of a State nonmember insured bank under circumstances
where the agency is not owned by the bank, and profits from the opera­
tion of the agency inure to its owners' benefit and not to the bank,
in addition, the operation of the separate insurance agency on the
bank's premises usually occasions the utilization of bank space,
equipment, and personnel. This memorandum is intended to provide
guidance din evaluating such an arrangement.
While each case should be analyzed on its own fact situation and in
accordance with applicable laws and regulations of the State in which
the bank is located, utilization of bank space, equipment and personnel
in connection with the operation of an insurance agency which is not
an integral part of the bank would normally require reimbursement to
the bank. The amount of reimbursement should be reasonably related to
the dollar value of the bank space, equipment or personnel employed,
directly or indirectly, in the conduct of the insurance business.
Accordingly, there is no fixed formula or "rule of thumb" for ascer­
taining the precise amount of such reimbursement and that determination
is largely a matter for the bank's board of directors. However, the
Division of Bank Supervision is concerned when a bank is inadequately
compensated for any expenses it incurs in furnishing personnel, equip­
ment, space, etc., to this nonbanking activity. In reviewing the
adequacy of reimbursement, it is recognized that certain benefits may
accrue to the bank incidental to the operation of an insurance agency;
nevertheless, only those benefits (tangible or intangible) that have
a measurable value should be given consideration.
In all cases, the bank's directors and shareholders should be fully
informed regarding the details of the operation of a separate insurance
agency on the premises of the bank. The plan and any material changes
thereto should be approved by the bank's shareholders. Expenses incur
red by the bank in connection with such activity and related compensa­
tion therefor (or lack thereof) are expected to be approved formally




Regional Directors

-

2-

R/D-47-75 (4-17-75)

by the board of directors at least on an annual basis. Exceptions to
this practice should be discussed with bank management by the Examine]
and appropriately commented upon in reports of examination. In
addition, attempts to circumvent reasonable compensation to the bank,
through the payment of bonuses, etc., should also be discussed with
management and commented on.
It is recommended that bank management disclose completely to its
bonding company any such nonbanking activity, if this be the case,
conducted by its personnel (or others) on its premises. Management
would be well advised to obtain acknowledgement from the bonding
company that such activities do not impair coverage under the bank's
blanket bond. Examiners should discuss and comment upon exceptions
to this recommendation as appropriate.
Finally, in those instances where the Examiner believes, based on the
known facts, that a violation of applicable statutes or regulations
has occurred, or where there is no question that a criminal violation
has been committed, the matter should be handled in the usual manner
as prescribed in the Manual of Examination Policies.




Edward J. Roddy
Director

EXHIBIT II

FEDERAL D EPO SIT INSURANCE CORPORATION. Washington. D C. 20429

DFFICEOF DIRECTOR -DIVISION OF BANK SUPERVISION

July 27, 1977

MEMORANDUM TO:

Regional D irectors

FROM:

John J. Early
D irector

SUBJECT:

'Jr&jÆÉï,
,

Insider Abuse o f Credit L ife Insurance A c tiv itie s

Attached is a copy o f a c o rre ctiv e Order adopted by our Board o f D irectors
in a recent set o f actions under Section 8(b) o f the FDI A ct. The banks
against which the Orders have been fin a lly adopted in one case and are being
negotiated in three others are in a sta te where i t is le g a l fo r a bank to
s e ll cred it l i f e insurance on i t s own. I t is the C orporation's opinion
that the premiums in these cases had been diverted to an in sider in an abusive
manner.
The attached example co rre ctiv e Order i s not meant in any way to change
existing in stru ction s, p o lic ie s or p ra ctice s in our supervision o f cre d it
l i f e insurance a c t iv it ie s in insured Nonmetaber banks. However, should abuses
or undesirable p ra ctices be d isclo s e d , the attached might serve as an example
o f correctiv e action which you can consider.




(a)

13.

Within 60 days from the date o f th is ORDER, the bank sh a ll d is c lo s e

in writing to a l l shareholders o f the Bank fu ll and complete d e ta ils concerning
the expenses incurred by the Bank in connection with the insurance business undertaken
|by the

fc, and the manner o f d istrib u tio n o f income

and

derived

from the sale of such insurance sold on Bank premises during

1975

and

1976.

As part o f the disclosu re required hereunder, these p a rtie s, to the extent o f
their knowledge, shall provide to a l l the Bank's shareholders the information set
forth in Paragraph 1 3 (c)( 1 ) (a )-(g ) below for the years 1975 and 1976.
(b)

Following the date o f th is ORDER, the Bank sh a ll not permit the

sale o f cred it l i f e insurance or any other type o f insurance w ritten by the Bank
personnel or w ritten on Bank premises in ciden tal to Bank loans unless the board o f
directors o f the Bank s h a ll, at lea st annually (but not more than 30 days p rio r to
the regular annual meeting o f the Bank's sto ck h o ld e rs), review and determine by
appropriate resolu tion whether the Bank w ill I t s e l f engage in the insurance agency
business or otherwise retain or not re ta in , as the case may be, a l l commissions
received on such credit life insurance or other forms of insurance, written by Bank
personnel or written on Bank premises incidental to Bank loans.

(c )
may a d o p t

ORDER,

the board o f directors o f the Bank

a resolu tion in accordance with the provisions o f Paragraph 13(b) o f

th is ORDER
o th e r

Following the date o f th is

not to retain a l l commissions received on cre d it l i f e insurance and

forms o f insurance w ritten by Bank personnel or w ritten on Bank premises

in c id e n ta l

to Bank loans,

are s a tis fie d :




p r o v id e d

that both the follow in g conditions and lim itation s




(1 )

Form al

ra tific a tio n

stan d in g
next

shares

re g u la r

d isc lo su re

of

a vote

v o tin g

annual

of

(a )

th e
are

number o f

Bank p e r s o n n e l

em p lo y e d

p o lic ie s,

the

u tiliz e d
tota l
such

(d )
in

th e

a m o un t

of

re ce iv e

such

a b le

th e

th e

to

the

th e

incom e

year

v a lu e

v o lv e d ,

(a)
and

th ereon ),
th e

th at

is

th e
(b )

conduct

of

such

number o f
such

equ ipm en t
b u sin e ss,

re ce iv e d

(e )

in d iv id u a ls

(g )

corp orate

th e
to

The

and

amount

Bank
of

u tilitie s
in su ra n ce

th e

reim bu rse
to

th e

personnel

Bank
and

space

in
be

t h e "Bank

and

th e

p o lic ie s
th e

are

Bank

aggregate

(in clu d in g
u tiliz e d

in

d o lla r

and m anhours

su p p lie s

b u sin e ss.

a v a il­

sh a ll

by

B an k

in su ran ce

re la te d

that

m e e tin g .

betw een

to

to

(o r

engagem ent

ob tain ed

sto c k h o ld e rs*

agrees

owner

d isc lo su re s

fig u res

such

the

o p p o rtu n ity

Bank’ s

fo reg o in g

w h ich

agency

th e

o th er

the

in c id e n ta l

or

number o f

eq u ip m en t,

and

the

in d ire ctly )

agency,

rea son a b ly

the

a n d /o r

p ro cessin g

space

(b )

of

agreem ent

th e

such

id en tity

respect

th rou gh

co m p le te

w h ich

a p p ro x im a te
and

ou t­

p e rso n n e l,

(d ire ctly

the

a w ritte n

w h erein

of

and

in

in su ra n ce

th e

agency

B an k

the

p rece d in g

in su ran ce

amount

by

such

in fo rm a tio n

of

an

and manner

(com m issio n s)

b u sin e ss.

E x e cu tio n

w ritte n

of

in su ra n ce

u pon

and

Bank

(f)

Bank w i t h

fu ll

w ritin g

b u sin e ss,

incom e,

in su ran ce

made b a s e d
fo r

of

in su ra n ce

ow ners)

conduct

th e ir

b a s e d -upon

(c )

of

th e

at

engaged

in

amount

of

of

Bank

w ritte n

p o lic ie s,

Bank m an h ou rs

tw o *-th ird s
th e

d e ta ils

p o lic ie s

such

of

stock

m e e tin g

in su ra n ce

in w r it in g

(2 )

by

in ­

taxes
in

EXHIBIT

FEDERAL DEPOSIT
Federal

D e p o sit
(C ea se

^

INSURANCE CORPORATION

Insurance
and

Act

D esist

-

S ectio n

8(b )

A ctio n s)

Attached i s a c a s e - b y - c a s e sum m ary o f 3 9 C e a s e a n d D e s i s t a c t i o n s i s s u e d
by t h e C o r p o r a t i o n s i n c e J a n u a r y 1 9 7 1 . I t s h o u l d b e n o t e d t h a t s e v e r a l
such a c t i o n s a r e now i n v a r i o u s s t a g e s o f p r o c e s s i n g .
In a d d i t i o n t o t h e l i s t i n g , i t s h o u l d a l s o b e n o t e d a n u m ber o f o t h e r
Cease and D e s i s t a c t i o n s h a v e b e e n a u t h o r i z e d b y t h e C o r p o r a t i o n ' s B o a r d
of D i r e c t o r s w h i c h w e r e n e v e r s t i p u l a t e d t o b y b a n k s o r a d o p t e d i n f i n a l
form by o u r B o a r d b e c a u s e o f f a v o r a b l e i n t e r i m a f f i r m a t i v e a c t i o n s on t h e
part of e i t h e r t h e b a n k s o r m a n a g e m e n t - s h a r e h o l d e r s . I n e f f e c t , t h e t h r e a t
of a C e a s e a n d D e s i s t a c t i o n h a s c a u s e d many f a v o r a b l e a f f i r m a t i v e a c t i o n
programs o n t h e p a r t o f b a n k s w h i c h n e g a t e d t h e n e e d f o r f i n a l i z i n g t h e
authorized

Cease

and

D esist

a c tio n s.

Also a t t a c h e d i s a summary o f e a c h o f t h e t h r e e f o r m a l w r i t t e n a g r e e m e n t s
between b a n k s a n d t h e C o r p o r a t i o n w h i c h w e r e r a t i f i e d b y o u r B o a r d o f
Directors. I n t h e c a s e o f f o r m a l w r i t t e n a g r e e m e n t s , n o n c o m p l i a n c e t h e r e o f
can be e n f o r c e d b y a s u b s e q u e n t C e a s e a n d D e s i s t a c t i o n .
Section 8 ( m ) o f t h e F e d e r a l D e p o s i t I n s u r a n c e A c t p r o v i d e s t h e S t a t e
supervisory a u t h o r i t i e s w i t h t h e o p p o r t u n i t y t o i n i t i a t e i n d e p e n d e n t c o r r e c t i v e
action a f t e r t h e C o r p o r a t i o n h a s s e r v e d n o t i c e o f i n t e n t t o t a k e f o r m a l a c t i o n .
While i n m o s t c a s e s t h e S t a t e s u p e r v i s o r y a u t h o r i t i e s c h o o s e t o j o i n t h e
Corporation i n a n y s u c h a c t i o n , so m e S t a t e b a n k i n g l a w s d o p r o v i d e f o r i n ­
dependent c e a s e a nd d e s i s t a c t i o n s w h i c h h a v e b e e n u t i l i z e d i n a n u m ber o f
instances — e i t h e r p r i o r t o n o t i c e o f i n t e n t o n t h e p a r t o f t h e C o r p o r a t i o n
or s u b s e q u e n t t h e r e t o .
A co m p ila tio n o f th e se S ta te s u p e r v is o r y a u t h o r it y c e a se
is n o t m a i n t a i n e d b y t h e F D I C , b u t t h e c o r r e c t i v e o r d e r s
checked

involved

fo r

co m p lia n c e

banks.




on a

c a se -b y -c a se

b a sis

at

each

and

d e sist

are

a n a ly zed

ex a m in a tio n

a ctio n s
of

and
the

FEDERAL DEPOSIT INSURANCE CORPORATION
F e d e r a l D e p o s it In su ra n ce A c t - S e c tio n 8 (b )
(C e a s e and D e s i s t A c t i o n s )

Summary
D e p o s it s — $ 6 4 ,5 5 6 ,0 0 0
C e a se and D e s i s t
fro m u n s a f e

ord er en tered

on 6 - 1 7 - 7 1 .

and u nsou nd p r a c t i c e s

Bank o r d e r e d

and t a k e a f f i r m a t i v e

to

cease

and d e s is t

a c t i o n w it h respect:

t. r ,

r e d u c t i o n i n v o lu m e o f m u n i c i p a l b o n d s , o t h e r a s s e t s r e a lig n m e n t t o i m p r o v e
l i q u i d i t y , c u r t a i l m e n t o f d i r e c t and i n d i r e c t lo a n s t o i n s i d e r s , a c c e p t a b l e
m an agem en t,

and i n j e c t i o n

O rd e r t e r m i n a t e d
u n s a tis fa c to r y
w it h t h e

o f new c a p i t a l

1 2 -1 0 -7 1

fo llo w in g

m an a g em en t,

C e a s e and D e s i s t

th e

fu n d s .
s a le

of

c o n tr o llin g

s a le

o f new c a p i t a l f u n d s ,

order,

and t h e d e s i g n a t i o n

in te r e s t

s u b s ta n tia l

by t h e

co m p lian ce *

o f new m an agem en t.

D e p o s it s — $ 4 6 ,1 0 7 ,0 0 0
C e a s e and D e s i s t o r d e r e n t e r e d on 7 - 1 2 - 7 1 .
fro m u n s a f e and u n so u n d p r a c t i c e s and t a k e
to

e lim in a tio n

o f t r a n s a c t i o n s w ith

O rd e r t e r m i n a t e d
th e b oard

1 -1 2 -7 3

fo llo w in g

Bank o r d e r e d t o c e a s e and d e s i s t
a f f ir m a t i v e a c t io n w ith r e s p e c t

s e lf-s e r v in g
ch a n g e o f

o w n e r s h ip .

sto ck

c o n t r o l and a r e v a m p in g

of

o f d ir e c to r s .

D e p o s its — $ 7 ,3 2 8 ,0 0 0
C e a s e and D e s i s t

o rd er en tered

on 7 - 1 2 - 7 1 .

fro m u n s a f e

and unsou nd p r a c t i c e s

e lim in a tio n

o f t r a n s a c t i o n s w ith

O rd er t e r m i n a t e d
s a tis fa c to r y
b le

5 -1 -7 2

and t a k e

Bank o r d e r e d t o
a ffir m a tiv e

s e lf-s e r v in g

fo llo w in g

th e

s a le

m anagem ent and r e s t o r a t i o n

of

o f th e

cease

a c tio n

and d e s i s t

w it h r e s p e c t

to

o w n e r s h ip .
c o n tr o llin g
c a p ita l

in te r e s t

by t h e

a cco u n ts t o

un­

an a c c e p t a ­

le v e l.

D e p o s it s — $ 1 ,0 2 5 ,0 0 0
C e a se and D e s i s t

ord er e n tered

on 7 - 1 2 - 7 1 .

fro m u n s a f e and u n so u n d p r a c t i c e s
e lim in a tio n

o f t r a n s a c t i o n s w ith

O rd er t e r m i n a t e d
s a tis fa c to r y
b le

le v e l.




4 -1 7 -7 2

and t a k e

Bank o r d e r e d t o
a ffir m a tiv e

s e lf-s e r v in g

fo llo w in g

th e

m anagem ent and r e s t o r a t i o n

s a le

of

o f th e

cease

and d e s i s t

a c t i o n w it h

resp ect

to

o w n e r s h ip .
c o n tr o llin g
c a p ita l

in te r e s t

a cco u n ts t o

by t h e

un­

an a c c e p t a ­

2

FEDERAL DEPOSIT INSURANCE CORPORATION
F e d e r a l D e p o s it In su ra n ce A c t - S e c tio n
(Q e a se and D e s i s t A c t i o n s )

Bank N o .

5

8 (b )

Summary

D e p o s it s — $ 2 0 ,2 3 8 ,0 0 0
C e a s e and D e s i s t

ord er e n tered

on 7 - 1 2 - 7 1 .

Bank o r d e r e d

to

c e a s e and d e s i s t

u n s a f e and u n sou n d p r a c t i c e s and t a k e a f f i r m a t i v e a c t i o n w it h
e l i m i n a t i o n o f t r a n s a c t i o n s w i t h s e l f - s e r v i n g o w n e r s h ip .
O rd e r t e r m in a t e d
u n s a tis fa c to r y

6

1 2 -1 0 -7 1

fo llo w in g

th e

s a le

m anagem ent and r e s t o r a t i o n

of

o f th e

c o n tr o llin g

re sp e c t to

in te r e s t

c a p it a l to

by th e

an a c c e p t a b l e

leve

D e p o s it s — $ 5 ,0 9 6 ,0 0 0
C e a s e and D e s i s t

o rd er en tered

on 7 - 1 2 - 7 1 .

Bank o r d e r e d t o

c e a s e and d e s i s t

fro m u n s a f e and u nsou nd p r a c t i c e s and t a k e a f f i r m a t i v e a c t i o n w it h r e s p e c t t o
c o r r e c t i o n o f v i o l a t i o n s o f la w s and r e g u l a t i o n s , c o r r e c t i o n o f o p e r a t in g
d e fic its ,

and r e s t o r a t i o n

O rd e r t e r m in a t e d
d ers,

7

fa v o r a b le

7 -8 -7 4
tre n d s,

o f th e

c a p i t a l a cco u n ts t o

fo llo w in g

an a c c e p t a b l e

s u b s t a n t i a l c o m p lia n c e w i t h

im p r o v e d p r o s p e c t s

le v e l.

c o r r e c tiv e

or­

and augm en ted c a p i t a l .

D e p o s it s — $ 4 ,6 4 9 ,0 0 0
C e a s e and D e s i s t

order

e n tered

on 1 1 - 1 9 - 7 1 .

Bank o r d e r e d t o

fro m u n s a f e

and u n sou n d p r a c t i c e s

e lim in a tio n

o f t r a n s a c t i o n s w ith a s e l f - s e r v i n g

O rd e r t e r m in a t e d

5 -2 -7 4

fo llo w in g

and t a k e a f f i r m a t i v e

c e a s e and d e s i s t

a c t i o n w i t h r e s p e c t to

o w n e r s h ip and m anagem ent.

c h an g e o f c o n t r o l ,

m anagem ent and a s s e t

im­

p ro v e m e n t .

8

D e p o s it s — $ 6 ,5 1 3 ,0 0 0
C e a s e and D e s i s t
fro m u n s a f e

ord er e n tered

on 1 - 6 - 7 2 .

and unsou nd p r a c t i c e s

p r o v i d i n g i t s s h a r e h o l d e r s w i t h a d e q u a te
t i o n s and a c t i v i t i e s o f t h e ban k i n f u l l
o f S e c tio n s
335 o f

12,

S u b s ta n tia l

o u ts ta n d in g .

a ffir m a tiv e

a c t i o n w ith r e s p e c t to

i n f o r m a t i o n p e r t a i n i n g t o t h e con di­
c o m p lia n c e w it h v a r i o u s r e q u ire m e n ts

and 14 o f t h e S e c u r i t i e s

E x ch an g e A c t o f

1 9 3 4 and S ectio n

I n s u r a n c e C o r p o r a t i o n 's R u les and R e g u la t io n s .

c o m p lia n c e w i t h t h e

o r d e r r e m a in s




13

th e F e d e ra l D e p o s it

c e a s e and d e s i s t

Bank o r d e r e d t o

and t a k e

o r d e r was a c c o m p lis h e d

in

1972

a lt h o u g h th e

FEDERAL DEPOSIT INSURANCE CORPORATION
F e d e r a l D e p o s it In su ra n c e A c t - S e c tio n 8 (b )
(C e a s e and D e s i s t A c t i o n s )

Summary
D e p o s its — $ 5 ,1 2 8 ,0 0 0
C e a s e and D e s i s t

o rd er e n tered

on 2 - 1 5 - 7 2 .

Bank o r d e r e d

to

cease

and d e s i s t

fr o m u n s a f e and u n so u n d p r a c t i c e s and t a k e a f f i r m a t i v e a c t i o n w i t h r e s p e c t
m is u s e o f c r e d i t f a c i l i t i e s b y c o n t r o l l i n g s t o c k h o l d e r s .
O rd e r t e r m i n a t e d

5 -2 9 -7 4

when c o m p lia n c e w it h

a ll

to

c o n d i t i o n s was a c c o m p l i s h e d .

D e p o s it s — $ 1 8 ,8 6 6 ,0 0 0
C e a s e and D e s i s t

o rd er e n tered

on 3 - 3 1 - 7 2 .

Bank o r d e r e d t o

cease

and d e s i s t

fro m u n s a f e and u n sou n d p r a c t i c e s and t a k e a f f i r m a t i v e a c t i o n w i t h r e s p e c t t o
h a z a r d o u s le n d i n g p o l i c i e s and in a d e q u a t e c a p i t a l c a u s e d b y in c o m p e te n t a c t i v e
m anagem ent and a c o m p la c e n t d i r e c t o r a t e .
O rd e r t e r m i n a t e d 8 - 2 8 - 7 3
had b e e n a c c o m p l i s h e d .

when s u b s t a n t i a l

c o m p lia n c e w i t h

a lm o s t a l l

c o n d itio n s

D e p o s it s — $ 1 ,7 9 5 ,0 0 0
C e a se and D e s i s t
fro m u n s a f e

order

e n tered

on 5 - 5 - 7 2 ,

and u n so u n d p r a c t i c e s

and t a k e

Bank o r d e r e d t o
a ffir m a tiv e

s h a r p l y d e c l i n i n g a s s e t c o n d i t i o n and c a p i t a l
s u c c e s s i v e i n e p t m a n a g e m e n t/o w n e r s h ip g r o i n s .
O rd er t e r m i n a t e d
asset

c o n d itio n

6 -2 5 -7 3

fo llo w in g

and s u b s t a n t i a l

cease

and d e s i s t

a c t io n w ith r e s p e c t

in a d e q u a c y r e s u l t i n g

c h a n g e o f m a n a g e m e n t/o w n e r s h ip ,

c o m p lia n c e w i t h

o th e r p a r ts

o f th e

to

fr o m tw o

im p ro v ed
ord er.

D e p o s it s — $ 3 ,6 1 4 ,0 0 0
C e a se and D e s i s t

ord er en tered

on 5 - 5 - 7 2 .

Bank o r d e r e d

to

cease

and d e s i s t

fro m u n s a f e and unsou nd p r a c t i c e s and t a k e a f f i r m a t i v e a c t i o n w i t h r e s p e c t t o
an e x c e s s i v e v o lu m e o f h i g h - r i s k l o a n s , s i z e a b l e lo a n l o s s e s , and in a d e q u a t e
c a p i t a l w h ic h r e s u l t e d fr o m p o l i c i e s o f a l i b e r a l , s e l f - s e r v i n g
in g c o n t r o l l i n g ow ner and w e a k , i n e f f e c t i v e m a n a g em en t.
O n ly p a r t i a l c o m p lia n c e h a s b e e n
m ain s o u t s t a n d i n g .




and d o m in e e r ­

a c c o m p lis h e d — new m anagem ent— >and o r d e r

re­

4
FEDERAL DEPOSIT INSURANCE CORPORATION
F e d e r a i D e p o s i t I n s u r a n c e A c t - S e c t i o n 8 (b )
(C e a s e and D e s i s t A c t i o n s )

Bank N o.
13

Summary
D e p o s it s — $ 5 9 ,9 7 5 ,0 0 0
C e a s e and D e s i s t

ord er

en tered

on 8 - 1 8 - 7 2 .

Bank o r d e r e d t o

cease

and d e s i s t

fr o m u n s a f e and u n so u n d p r a c t i c e s and t a k e a f f i r m a t i v e a c t i o n w i t h r e s p e c t to
f a i l u r e t o c o r r e c t r e p e a t e d and f l a g r a n t v i o l a t i o n s o f a p p l i c a b l e la w s and
r e g u la tio n s .
O rd e r t e r m i n a t e d

14

upon c o m p lia n c e w i t h r e q u ir e m e n t s

c o n t a in e d

t h e r e iIB

D e p o s it s — $ 3 ,7 4 2 ,0 0 0
C e a s e and D e s i s t
fr o m u n s a f e
e x c e ssiv e
r e s u ltin g

ord er en tered

on 1 1 - 2 1 - 7 2 .

and u n so u n d p r a c t i c e s

r is k

v io la tio n s

in

th e

lo a n

o f a p p lic a b le
fr o m

lib e r a l

O rder te r m in a te d
r e q u ir e m e n ts .

15

5 -1 4 -7 3

and t a k e

a c c o u n t,

sta tu te s,

in a d e q u a t e

fo llo w in g

of

and d e s is t

w it h

r e s p e c t to

u n s a tis fa c to r y

s e lf-s e r v in g

s u b s ta n tia l

cease

a c tio n

c a p ita l, w illfu l

and g e n e r a l l y

le n d in g p o l i c i e s

6 -1 9 -7 4

Bank o r d e r e d t o
a ffir m a tiv e

and continued
o p e r a t io n s

c o n tr o llin g

c o m p lia n c e w it h

th e

in te re sts.
c o r r e c t iv e

D e p o s it s — $ 4 ,7 0 3 ,0 0 0
C e a s e and D e s i s t
fro m u n s a f e
e x c e s s iv e

ord er

e n tered

on 1 1 - 2 1 - 7 2 .

and u n so u n d p r a c t i c e s

exp osu re

in

th e

and t a k e

lo a n a c c o u n t ,

Bank o r d e r e d
a ffir m a tiv e

in c r e a s in g

to

c e a s e and d e s is t

a c tio n

lo a n

w it h r e s p e c t to

lo s s e s ,

an inadequate

and d i m i n i s h i n g l e v e l o f c a p i t a l , and u n s a t i s f a c t o r y o p e r a t i o n s u n d e r th e
s e l f - s e r v i n g d o m in a t io n o f t h e c o n t r o l l i n g i n t e r e s t s .
O r d e r t e r m in a t e d 2 - 8 - 7 4 a f t e r s u b s t a n t i a l im p r o v e m e n ts in t h e b a n k 's a s s e t c a p i t a l c o n d i t i o n and o p e r a t i o n s w i t h i n t h e c o n s t r a i n t s o f t h e C e a s e and
D e s is t o rd e r.

16




D e p o s it s — $ 1 ,9 5 3 ,0 0 0
C ease

and D e s i s t

ord er en tered

on 1 2 - 4 - 7 2 .

Bank o r d e r e d

to

c e a s e and d e s i s t

fr o m u n s a f e and unsqu nd p r a c t i c e s and t a k e a f f i r m a t i v e a c t i o n w it h r e s p e c t to
e x c e s s i v e r i s k in t h e lo a n a c c o u n t , i n c r e a s i n g l o s s e s and a s h r i n k i n g l e v e l o:
c a p i t a l w h ic h r e s u l t e d
m a n a g e m e n t/o w n e r s h ip .
O rd e r t e r m i n a t e d
and

fu ll

2 -8 -7 4

or s u b s ta n tia l

fr o m

lib e r a l

fo llo w in g

le n d in g p o l i c i e s

fo s te r e d

e x a m i n a t io n s w h ic h d i s c l o s e d

c o m p lia n c e w i t h

a ll

c o r r e c tiv e

by t h e b a n k 's

improvements,

p r o v is io n s .

5
FEDERAL DEPOSIT INSURANCE CORPORATION
F e d e r a l D e p o s it

In su ra n ce A c t

-

S e c tio n

8 (b )

(C e a s e and D e s i s t A c t i o n s )

Summary
D e p o s its — $ 1 ,3 0 9 ,0 0 0
C e a s e and D e s i s t

o rd er e n tered

on 1 2 - 1 8 - 7 2 .

fro m u n s a f e and u n sou n d p r a c t i c e s
an e x c e s s i v e v o lu m e o f c l a s s i f i e d

Bank o r d e r e d

to

cease

and

desist

and t a k e a f f i r m a t i v e a c t i o n w it h r e s p e c t t o
l o a n s , in a d e q u a t e c a p i t a l and p o o r l i q u i d i t y

r e s u l t i n g fr o m e x p a n s io n a r y and l i b e r a l p o l i c i e s
o w n e r s h ip .
The b an k was in s u b s t a n t i a l c o m p lia n c e w it h
t i o n b u t t h e o r d e r r e m a in s o u t s t a n d i n g .

th e

of

in e x p e r i e n c e d

order a t

th e

management/

la te s t

e x a m in a ­

D e p o s its — $ 2 ,5 2 8 ,0 0 0
C e a s e and D e s i s t
fro m u n s a f e
e x c e ssiv e

ord er e n tered

on 2 - 1 2 - 7 3 .

and u n sou n d p r a c t i c e s

a d v e r s e ly

w h ich d e v e l o p e d
m ent a b i l i t y

c la s s ifie d

as a r e s u lt

and t a k e

lo a n s ,

of

O rd e r t e r m i n a t e d 2 - 1 1 - 7 5
c a p it a l c o n d itio n .

le n d i n g

s u b s e r v ie n t

fo llo w in g

to

cease

a c t i o n w it h

and an in a d e q u a t e

lib e r a l

o f o w n e r s h ip and i t s

Bank o r d e r e d
a ffir m a tiv e
p o lic ie s

c a p ita l

and d e s i s t
resp ect

to

stru c tu re

and t h e weak m anage­

sta ff.

s u b s ta n tia l

im p rovem en t in

t h e b a n k 's

a sse t-

D e p o s it s — $ 2 8 ,0 2 5 ,0 0 0
C e a se and D e s i s t

ord er e n tered

4 -2 3 -7 3 .

Bank o r d e r e d

to

cease

and d e s i s t

fro m

u n s a f e and u n sou n d p r a c t i c e s and t a k e a f f i r m a t i v e a c t i o n w it h r e s p e c t t o h ea v y
and s e v e r e a d v e r s e c l a s s i f i c a t i o n s o f lo a n s e x te n d e d t o a g r o u p o f r e l a t e d c o n ­
s tr u c tio n
tio n

f i r m s w h ic h r e s u l t e d

o f o th e r

s e g m e n ts

O rd e r t e r m i n a t e d
c o n c e n tr a tio n s

o f th e

1 2 -2 3 -7 4

of

c r e d it

in v i o l a t i o n s
lo a n p o r t f o l i o ,

fo llo w in g
and t h e

th e

of

la w ,

e lim in a tio n

in je c tio n

h eavy

and c a p i t a l
o f th e

o f new c a p i t a l

lo s s e s ,

d e te r io r a ­

in a d e q u a c y .
a d v e r s e ly

c la s s ifie d

fu n d s.

D e p o s its — $ 3 ,8 2 9 ,0 0 0
C e a se and D e s i s t
u n s a fe
s iv e

ord er en tered

and u nsou nd p r a c t i c e s

r is k

e a r n in g s

in

th e

lo a n

r e s u ltin g

managem ent d i s p u t e
fo r m e r e x e c u t i v e

5 -2 1 -7 3 .

and t a k e

a c c o u n t,

fr o m h e a v y
r e s u ltin g

o ffic e r .

Bank o r d e r e d

a ffir m a tiv e

a d e c lin in g
lo a n

in

lo s s e s

le v e l

of

cease

cease

and d e s i s t

w it h r e s p e c t t o

c a p ita l p r o te c tio n ,

and o t h e r p r o b le m s

th e r e s ig n a t io n

The o r d e r t o

to

a c tio n

d e fic it

stem m in g from a

o f th re e d ir e c to r s

and d e s i s t

from
exces­

in c lu d e d

in c lu d in g

th e

r e q u ir e m e n t s

f o r m anagem ent im p r o v e m e n ts , r e h a b i l i t a t i o n o f a s s e t c o n d i t i o n ,
p ro v e m e n t p r o g r a m , and a d o p t io n o f w r i t t e n le n d i n g and i n t e r n a l

a c a p ita l
o p e r a tin g

R ecom m endation
ord er.

c o m p lia n c e w it h




fo r

te r m in a tio n

in

p rocess,

b ased

on s u b s t a n t i a l

im­
p o lic ie s .

6
FEDERAL DEPOSIT INSURANCE CORPORATION
F e d e r a l D e p o s it In su ra n ce A c t - S e c tio n 8 (b )
(C e a s e and D e s i s t A c t i o n s )

Bank N o .

21

Summary
D e p o s its — $ 3 ,0 5 7 ,0 0 0
C e a s e and D e s i s t

o rd er e n tered

u n s a f e and u n so u n d p r a c t i c e s
s iv e

a d v e r s e ly

s e r v in g lo a n s ,
p r o te c tio n .

c la s s ifie d
p o te n tia l

O rd er te r m in a te d 8 - 1 1 - 7 5
o f new e q u i t y c a p i t a l .

22

6 -2 5 -7 3 .

and t a k e

c r e d its
lo s s e s

as

Bank o r d e r e d t o

a ffir m a tiv e

in v o lv in g

fr o m

resp ect

s e v e r a l o u t -o f-a r e a

ir r e g u la r itie s ,

c o n d i t i o n s w e re f u l f i l l e d

desist from
to exces­
a n d /o r s e lf-

c e a s e and

a c t i o n w it h

and in a d e q u a t e

in c lu d in g th e

c a p ita l

injection

D e p o s it s — $ 2 ,9 1 3 ,0 0 0
C e a s e and D e s i s t o r d e r e n t e r e d
u n s a fe

and u n sou n d p r a c t i c e s

so u n d s e c u r i t i e s

7 —3 1 —7 3 .

and t a k e

tra n sa c tio n s

Bank o r d e r e d t o

a ffir m a tiv e

cease

a c t i o n w it h

and d e s i s t

and e x c e s s i v e m u n i c i p a l bond h o l d i n g s w h ich threai

en ed t h e s o l v e n c y o f t h e b an k th r o u g h t h e r e s u l t i n g m a r k e t d e p r e c i a t i o n ,
l i q u i d p o s i t i o n and t r a d i n g l o s s e s i n c u r r e d .
Bank w as fo u n d i n s u b s t a n t i a l c o m p lia n c e w it h t h e
t i o n s b u t t h e o r d e r r e m a in s o u t s t a n d i n g .

23

order a t

il­

s u b s e q u e n t examina­

D e p o s it s — $ 5 ,4 6 6 ,0 0 0
C e a s e and D e s i s t

24

from j

r e s p e c t t o un­

ord er e n tered

7 -3 1 -7 3 .

Bank o r d e r e d

to

u n s a f e and u n so u n d p r a c t i c e s and t a k e a f f i r m a t i v e
f a i l u r e t o c o m p ly w i t h F e d e r a l R e s e r v e R e g u l a t i o n

a c tio n
Z.

O rd e r t e r m i n a t e d
order.

be

1 1 -2 6 -7 5

a fte r

b an k was fo u n d t o

in

c e a s e and d e s i s t from
w it h r e s p e c t t o th e

c o m p lia n c e w it h th e

D e p o s it s — $ 5 1 ,5 7 3 ,0 0 0
C e a s e and D e s i s t
u n sa fe
v id in g

ord er e n tered

9 -2 4 -7 3 .

Bank o r d e r e d t o

c e a s e and d e s i s t

from

and u n sou n d p r a c t i c e s and t a k e a f f i r m a t i v e a c t i o n w it h r e s p e c t t o p ro­
a c c e p t a b l e m a n a g em en t, im p le m e n tin g and m a i n t a i n i n g l e n d i n g , in v e stm e n t,!

and o p e r a t i n g p o l i c i e s
a p p lic a b le

la w s ,

r u le s ,

in

a c c o r d w it h

r e g u la tio n s ,

sou n d b a n k in g p r a c t i c e s ,
and r e d u c in g t h e

e x c e s s iv e

c o n fo r m in g to a l l
volum e o f weak I

c r e d its .
O rd e r t e r m i n a t e d
ord er.




1 1 - 2 6 - 7 5 when t h e b an k w as fo u n d t o

be

in

c o m p lia n c e w ith the

L

7
FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Act - Section 8(b)
(Cease and Desist Actions)

Summary
Deposits— $ 4,136,000
Cease and Desist order entered 10-15-73. Bank ordered, to cease and d e s i s t from
unsafe and unsound practices and take affirmative action with respect to high
volume of adversely classified loans, an excessive delinquency ratio, c o n t in u e d
violations of laws and,regulations, and deteriorated capital adequacy w h ic h r e ­
sulted from the increasingly liberal lending policies of the controlling s t o c k ­
holder and executive officer, coupled with a complacent directorate and in co m p e ­
tent staff.
Order terminated 9-2-75 following improvements in asset quality, substantial com­
pliance with requirements included in the order to cease and desist, and the re­
vitalization of sincere concern to effect improvements by the staff and direc­
torate.

Deposits— $13,887,000
Cease and Desist order entered 1-29-74. Bank ordered to cease and desist
from unsafe and unsound practices and take affirmative action with respect to
excessive loan classifications, inept and self-serving management, violations
of law, concentrations of credit, and uncontrolled expenses.
Order terminated 7-24-74 following the sale of control of the bank to a new
group and injection of capital funds.

Deposits— $3,911,000
Cease and Desist order entered 4-11-74. Bank ordered to cease and desist from
unsafe and unsound practices and take affirmative action with respect to seri­
ous asset problems which developed as total loan volume was rapidly expanded,
capital inadequacy developed as the loan portfolio deteriorated in credit
quality, hazardous lending and collection policies, and violations of laws and
regulations.
Termination was recommended on 1-8-76 when the bank was found to be in substan­
tial compliance? however, due to the illness of the bank's chief executive offi­
cer the termination recommendation has been held in abeyance.

Deposits--$2,857,000
Cease and Desist order entered on 6-7-74. Bank ordered to cease and desist
from unsafe and unsound practices and take affirmative action with respect to
the heavy volume of adverse classifications, speculative land contracts to
out-of-territory borrowers, lack of sound lending, investment and operating
policies, and an inadequate capital structure.
Bank subsequently closed.



8

FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Act - Section 8(b)
(Cease and Desist Actions)

Bank No.
29

Deposits— $49,542,000
Cease and Desist order entered 6-11-75. Bank ordered to*cease and d e s i s t froj
unsafe and unsound practices and take affirmative action with respect to the
large volume of adversely classified loans which far exceeded capital and re­
serves, and centered in two massive concentrations of credit. Other w e a k n e s s e I
consisted of an overloaned and illiquid position, inadequate capital p r o t e c t i j
and numerous, frequent and flagrant violations.
The order has been substantially complied with although the injection of new
capital funds remains to be accomplished. Management officials and their at­
torneys continue to contest the order. The order remains outstanding.

30

Deposits— $15,114,000
Cease and Desist order entered 10-15-74. Bank ordered to cease and desist from I
unsafe and unsound practices and take affirmative action with respect to the m
ai I
sive volume of weak loans, and loan losses taken in recent years, an inadequate
margin of capital protection, an overloaned and illiquid position, poor earnings
and a pattern of numerous and repeated violations.
The bank is in substantial compliance with the order and a recommendation to
terminate the action is in process.

31

Deposits— $18,380,000
Cease and Desist order entered 3-26-75. Bank ordered to cease and desist from '
unsafe and unsound practices and take affirmative action with respect to unau­
thorized and unlawful acts by its officers, directors or employees, in c lu d in g
the exceeding of lending limits and the acceptance of securities collateral
without observing prudent banking practices to prepare for the lawful and order­
ly disposition of such securities in the event such disposition became necessar
Order outstanding.

Deposits— $9,924,000
Cease and Desist order entered 5-9-75. Bank ordered to cease and desist from
unsafe and unsound practices and take affirmative action with respect to accept
ble management, reduction of adversely classified assets and loan volume, adher
ence to loan policy, compliance with laws, rules and regulations, loan documen­
tation, internal routine and controls, injection of new capital funds, and dis­
continuance of cash dividends.
Order outstanding.



I

9

FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Act - Section 8(b)
(Cease and Desist Actions)

Summary
Deposits— $7,202,000
Cease and Desist order entered on 5-9-75. Bank ordered to cease and d e s i s t from
unsafe and unsound practices and take affirmative action with respect t o a c c e p t a ­
ble management, reduction of adversely classified assets, curtailment o f lo a n s
to insiders, injection of new capital, reduction of borrowings and lo a n v o lu m e ,
compliance with laws, rules and regulations and loan policy, and d i s c o n t i n u a n c e
of cash dividends.
Order outstanding.

Deposits— $6,501,000
Cease and Desist order entered on 6-19-75. Bank ordered to cease and d e s i s t from
unsafe and unsound practices and take affirmative action with respect t o a c c e p t a ­
ble management, reduction of adversely classified assets, injection o f new c a p i ­
tal, compliance with laws, rules and regulations and loan policy, p r o v i s i o n s f o r
adequate liquidity, borrowings, and discontinuance of cash d i v i d e n d s .
Order outstanding.

Deposits— $1,833,000
Cease and Desist order entered 8-11-75. Bank ordered to cease and d e s i s t fro m
unsafe and unsound practices and take affirmative action w it h r e s p e c t t o a c c e p t a ­
ble management and management policies, reduction of adversely c l a s s i f i e d a s s e t s ,
provisions for adequate capital and liquidity, and cctnpliance w it h l a w s , r u l e s
and regulations and loan policy.
Order outstanding.

Deposits— $6,046,000
Cease and Desist order entered 8 —2 8 —7 5 .
Bank ordered to cease and d e s i s t fro m
unsafe and unsound practices and take affirmative action with respect t o accepta­
ble management, reduction of adversely classified assets, injection o f new capi­
tal, and compliance with laws, rules and regulations and loan policy.
Order outstanding.




10
FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Act - Section 8(b)
(Cease and Desist Actions)

Bank No.
37

Summary
Deposits— $5,305,000

L
1

Cease and Desist order entered 1 0 - 1 7 - 7 5 . Bank ordered to cease and desist ,r ,
unsafe and unsound practices and take affirmative action with respect tl | J L
.°n of adversely classified assets and compliance with laws, rules a n d r o u 'u l
tions and loan policy.
Order outstanding.

38

Deposits— $7,742,000
Cease and Desist order entered 1 - 2 9 - 7 6 .
Bank ordered to cease and d e s i s t fro m
unsafe and unsound practices and take affirmative action with respect t o a c c e p t
ble management, reduction of adversely classified assets, injection o f new c a p i­
tal, limitations on advances of credit to borrowers, compliance with la w s , r u le s
and regulations, retention of credit life and accident insurance c o m m issio n s,
discontinuance of cash dividends, and elimination of a concentration o f c r e d i t .
Order outstanding.

39

Deposits— $ 9,129,000
Cease and Desist order entered 2-18-76. Bank ordered to cease and desist from
unsafe and unsound practices and take affirmative action with respect t o r e d u c ­
tion of adversely classified assets, refraining from participating in any new
loans and in any extension, renewal, refinancing, or additional extension o f
loans ac<piired from closely related banks, compliance with laws, rules and r e g u ­
lations including Financial Recordkeeping Regulations and the Fair Credit R e p o r t­
ing Act, injection of new capital, and discontinuance of dividends.
Order outstanding.




L

FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Act - Section 8(b)
(Formal Written Agreements)

Summary

No.

1

Deposits— $12,251,000
Written agreement entered into on 10-27-71. Bank agreed for p u rp o se s o f e f f e c t ­
ing correction of unsafe and unsound practices to take affirmative a c t i o n w ith
respect to providing acceptable management, eliminating and reducing a d v e r s e ly
classified assets, correction of internal control deficiencies, a d o p tio n o f and
compliance with an internal audit program, correction of and future com p lia n ce
with all applicable laws, rules and regulations, and adoption of and com p lia n ce
with a written loan policy.
The most recent examinations of January 1974 and November 1975 indicate s u b s ta n ­
tial compliance with the agreement. The most recent report of examination i s
being reviewed in the Review Section and consideration is being given t o recom ­
mending that the agreement be terminated.

2

Deposits— $13,957,000
Written agreement entered into on 3-2-72. Bank agreed for purposes of effecting
correction of unsafe and unsound practices to take affirmative action with re­
spect to providing acceptable management, eliminating and reducing adversely
classified assets, adoption of and compliance with a written loan policy, injec­
tion of new capital, establishment of an unearned income account, adoption of
and compliance with an internal audit program, correction of internal control
deficiencies, and correction of and future compliance with all applicable laws,
rules and regulations.
The agreement is outstanding; however, the 7-14-75 FDIC examination report indi­
cates the bank appears to be in substantial compliance with the agreement.

3

Deposits— $1,958,000
Written agreement entered into on 2-14-73. Bank agreed for purposes of effect­
ing correction of unsafe and unsound practices to take affirmative action with
respect to the controlling shareholder purchasing for a period of three years
from date and within 60 days after the completion of any FDIC examination of
the bank, any loan which was classified Loss or Doubtful in subject bank that
originated in the controlling shareholder's chain of banks, other than subject
bank, and any loam held by and originating outside subject bank's regular trade
area, and subject bank was to divest itself of any loan originated in any of
the controlling shareholder's banks which were held in subject bank that had
been classified Substandard at another of the affiliated banks and purchased by
subject bank.
The agreement is outstanding, however, stock control has changed and the most
recent examination as of 2—27—76 is being processed in the Regional Office and
indicates substantial compliance. Consideration is being given by the Regional
Office to recommend termination of the agreement.




FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Act - Section 8(a)
(Action to Terminate Insured Status)

Attached is a case-by-case summary of 19 Termination of Insurance actions
issued by the Corporation since January 1971.

It should be noted that

several such actions are now in various stages of processing.

In addition to the listing, it should also be noted a number of other Ter­
mination of Insurance actions have been recommended but were withdrawn prior
to action by our Board because of favorable interim affirmative actions on
the part of either the banks or management-shareholders.

As in the case of

Cease and Desist actions, the threat of Termination of Insurance^ has caused
many favorable affirmative action programs on the part of banks which negated
the need for finalizing the actions.




FEDERAL DEPOS IT INSURANCE CORPORATION
Federai Deposlt Ineurance Act - Sectlon 8 (a)
(Action to Terminate Insured Statua)

KNo.
l

Summary
Deposits— $11,143,000
Notice of Intention to Terminate Insured Status issued 1-22-71. Bank was found
in an unsafe and unsound condition and ordered to provide an active and capable
management, eliminate by charge-off or otherwise certain classified assets,
correct all violations of law listed in the report of examination, and to adopt
and strictly follow written loan policies if continued insured status was desired.
The action was terminated 6-30-71 when subject was merged with another bank.

!2

Deposits— $13,419,000
Notice of Intention to Terminate Insured Status issued 3-12-71. Bank was found
in an unsafe and unsound condition and ordered to provide an active and capable
management, eliminate from its books certain assets, by charge-off or otherwise,
correct all violations of law listed in the examination report, adopt and strictly
follow written loan policies, pay no cash dividends without the prior consent of
the Banking Commissioner and the FDIC, reduce the loan-to-deposit ratio, not
accept or acquire, directly or indirectly, brokered deposits, eliminate from its
capital accounts all Income collected but not earned, and to provide adequate
capital and reserves if continued Insured status was desired.
The action was terminated 12-17-71 based upon substantial compliance with the
corrective orders.

3

Deposits— $3,827,000
Notice of Intention to Terminate Insured Status issued 6-30-71. Bank was found
in an unsafe and unsound condition and ordered to provide an active and capable
management, eliminate from its books certain assets, by charge-off or otherwise,
reduce the remaining classified assets, correct all violations of law listed in
the report of examination, adopt and strictly follow satisfactory written loan
policies, pay no cash dividends without the prior consent of the Commissioner of
Banking and the FDIC, and put the assets of the bank in such form and condition
ng to be acceptable to the Commissioner of Banking and the FDIC If continued
insured status was desired.
The action was terminated 4—6—73 based upon substantial compliance with the
corrective orders.




2
FEDERAL DEPOSIT INSURANCE CORPORATION
F e d e r a l D e p o s it In su ra n ce A c t - S e c tio n 8 (a )
( A c t i o n t o T e r m in a te I n s u r e d

ank N o .

4

S ta tu s)

Summary

Deposits— $5,925,000
Notice of Intention to Terminate Insured Status issued 11-19-71. Bank was found
in an unsafe and unsound condition and ordered to provide an active and capable
management, eliminate from its books certain assets, by charge-off or otherwise
refrain from extending credit, directly or indirectly for the benefit of a
director, reduce the remaining classified assets, adopt and strictly fo l l o w sati
factory written loan policies, pay no cash dividends without the prior consent m
the Commissioner of Banking and the FDIC, and the assets of the bank were to be
put in such form and condition as to be acceptable to the Commissioner o f Banking
and the FDIC if continued insured status was desired.
The action was terminated 7-7-72 based upon substantial compliance with the
corrective orders.

Depos its— $12,609,000
Notice of Intention to Terminate Insured Status issued 12-17-71. Bank was found
in an unsafe and unsound condition and ordered to eliminate from its book assets
by charge-off or otherwise, certain classified assets, and other assets o f the
ban«c were to be put in a satisfactory form and condition if continued insured
status was desired.
The action was terminated 7-14-72 based upon substantial compliance with the
corrective orders.

6

Deposits— $8,202,000
Notice of Intention to Terminate Insured Status issued 1-27-72. Bank was found
in an unsafe and unsound condition and ordered to provide acceptable management,
eliminate or reduce adversely classified assets, adopt acceptable loan policies,
correct violations of law, and provide acceptable capital funds if continued
insured status was desired.
The action was terminated 5-14-73 based upon substantial compliance with the
corrective order.

7

Deposits— $4,079,000
Notice of Intention of Terminate Insured Status issued 3-17-72.
Bank was found
in an unsafe and unsound condition and ordered to provide acceptable management,
eliminate or reduce adversely classified assets, adopt acceptable loan policies,
correct violations of law, and provide acceptable capital funds if continued
insured status was desired.
The action was terminated 12-4-72 based upon substantial compliance with the
corrective order.




3
FEDERAI, DEPOSIT INSURANCE CORPORATION
Federai Deposit Insurance Aet - Section 8
(Action to Terminate Insured Status)

(a)

Summary
Deposits— $1,857,000
Notice of Intention to Terminate Insured Status issued 5 - 1 - 7 2 .
B an k w a s f o u n d
in an unsafe and unsound condition and ordered to provide acceptable m a n a g e m e n t ,
eliminate or reduce advereely classified assets, adopt acceptable l o a n p o l i c i e s ,
and provide acceptable capital funds if continued insured Status w a s d e s i r e d .
The action was terminated 6-11-73 based upon substantial compliance
corrective order.

w ith

the

Deposits— $12,649,000
Notice of Intention to Terminate Insured Status issued 10-30-72. Bank was found
in an unsafe and unsound condition and ordered to eliminate or reduce adversely
classified assets, obtain supporting documents prior to extending credits, adopt
acceptable loan policies, and provide acceptable capital funds if continued in­
sured status was desired.
The action was terminated 3-1-74 based upon substantial compliance with the
corrective order.

Deposits— $5,540,000
Notice of Intention to Terminate Insured Status issued 11-21-72. Bank was found
in an unsafe and unsound condition and ordered to provide acceptable management,
eliminate or reduce adversely classified assets, obtain supporting documents
prior to extending credits, strictly adhere to its written loan policies, correct
violations of laws and provide acceptable capital funds if continued insured
status was desired.
The action was terminated 5-29-74 based upon substantial compliance with the
corrective order.

Deposits— $3,913,000
Notice of Intention to Terminate Insured Status issued 5 - 1 4 - 7 3 .
Bank
in an unsafe and unsound condition and ordered to eliminate or reduce
classified assets, adopt acceptable loan policies, correct violations
provide acceptable capital if continued Insured status was desired.

was

fo u n d

a d v e rse ly
of

law ,

The action was terminated 8-11-75 based upon substantial compliance with the
corrective orders and the termination of affiliation with the bank by the
control ownership.




and

FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Act - Section 8(a)
(Action to Terminate Insured Status)
Bank No.

12

Summary
Deposits— $ 18,555,000
Notice of Intention to Terminate Insured Status issued 6-28-74. Bank was foui
in an unsafe and unsound condition and ordered to provide acceptable managemei
eliminate or reduce adversely classified assets, adopt acceptable loan p o lic ic
and correct violations of law if continued insured status is desired.
The action to terminate Insured status is in the hearing stage.

13

Deposits— $13,765,000
Notice of Intention of Terminate Insured Status issued 8-12-74. Bank was foud
in an unsafe and unsound condition and ordered to provide acceptable manageme
eliminate or reduce adversely classified assets, adopt acceptable loan p o l i c i
pay no cash dividends without prior written consent, provide acceptable capita
and correct violations of law if continued Insured status was desired.
The action was terminated 8-11-75 because of temporary compliance; however, duj
to further deterioration and the length of time since the issuance of the in it j
order, a new order was simultaneously issued.

14

Deposits— $6,557,000
Notice of Intention to Terminate Insured Status issued 8-12-74. Bank was found
in an unsafe and unsound condition and ordered to provide acceptable management
eliminate or reduce adversely classified assets, adopt acceptable loan policiei
limit Investment in securities to U. S. Government and/or Agency obligations
within five years, cease paying preferential rates of interest on cer-j
^ ^ ca^®8
deposit or other obligations to ownership Interests, and correct
violations of law if continued Insured status was desired.
The Commissioner of Banking closed the bank on 5-30-75.

15

Deposits— $4,174,000
Notice of Intention to Terminate Insured Status issued 6-19-75. Bank was found
in an unsafe and unsound condition and ordered to provide acceptable management
eliminate or reduce adversely classified assets, reduce its loan volume, adop^
and comply with a loan policy, discontinue cash dividends, and obtain a certain
level of capital if continued insured status was desired.
Bank closed on 1-12-76.




No.

5
FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Act - Section 8(a)
(Action to Terminate Insured Status)

Summary
Deposits— *$821,000
Notice of Intention to Terminate Insured Status Issued 7-25-75. Bank was found
In an unsafe and unsound condition and ordered to provide-acceptable management,
eliminate or reduce adversely classified assets, define an acceptable trade a r e a ,
curtail direct and Indirect loans to Insiders, restrict Its loan volume, c o m p l y
with certain Investment restrictions, comply with all applicable laws, rules, and
regulations, discontinue cash dividends, and obtain a certain level of c a p i t a l jP
continued Insured status is desired.
An examination to determine the extent of correction was made on 1 1 - 2 5 - 7 5 a nd t h e
bank was found not to be in compliance with the order. A recommendation to c o n ­
tinue the action is in process.

Deposits— $13,849,000
Notice of Intention to Terminate Insured Status Issued 8-11-75. Bank was found
in an unsafe and unsound condition and ordered to provide acceptable management,
eliminate or reduce adversely classified assets, reduce and maintain loan volume
at a certain level, eliminate all adversely classified insider loans and reduce
and maintain all such loans at a certain level, adopt and comply with a loan
policy, discontinue cash dividends, obtain a certain level of capital, comply
with all applicable laws, rules, and regulations, and refrain from participating
in any transactions with a certain affiliate if continued Insured status is
desired.
An examination to determine the extent of correction was made on 10-31-75 and the
bank was found not to be in compliance with the order. The action Is now in the
hearing stage.

Deposits— $16,089,000
Notice of Intention to Terminate Insured Status issued 9-16-75. Bank was found
In an unsafe and unsound condition and ordered to provide acceptable management,
eliminate or reduce adversely classified assets, adopt and comply with a loan
policy, provide for an orderly liquidation of certain stock holdings, comply
with applicable laws, rules, and regulations, appoint a committee to approve
and control expenses, discontinue cash dividends, and obtain a certain level
of capital if continued insured status is desired.
An examination to determine the extent of correction has just been completed and
a determination will be made as to whether the action should be continued-




6

FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Act - Section 8(a)
(Action to Terminate Insured Status)
Bank No.
19

Suitmary
Deposits— $15,883,000
Notice of Intention to Terminate Insured Status issued 10-9-75. Bank was found
in an unsafe and unsound condition and ordered to provide acceptable management
eliminate or reduce adversely classified assets, reduce and maintain loa n volume
at a certain level, reduce its overdue loans not to exceed a certain percentage
of outstanding loans, maintain a primary and secondary reserve position equal ti
a certain percentage of total resources, adopt and comply with loan and invest­
ment policies, and obtain a certain level of capital if continued in su re d status
was desired.
Bank closed on 10-24-75.




Formal Actions

A listing and description of each termination of insurance action initiated
under Section 8(a) of the FDI Act and cease and desist orders issued under
Section 8(b) or 8(c) of the Act may be found in the following schedules.
Removal proceedings, against an officer or director of an insured state
nonmember bank who violates a law, rule, regulation, or final cease and
desist order, or who engages in an unsafe and unsound practice that constitutes a breach of his fiduciary duty, may be initiated by the Corporation
under Section 8(e) of the Federal Deposit Insurance Act. The Corporation is
authorized to take such action i#f it determines that the conduct will cause
substantial financial losses or other damages to the bank or will seriously
prejudice the interests of the bank*s depositors, and that the conduct in­
volves personal dishonesty. During 1976, one such order was issued against
the chairman of the board and president of an insured state nonmember bank
who was charged by the Corporation with misapplication of bank funds by
diverting bank assets to his own personal use and with selling property to
the bank at a price greater than its market value.
Section 8(g) of the FDI Act provides that when an officer, director, or other
person who participates in the management of an insured nonraember bank is
charged, in an information, indictment, or complaint authorized by a U. S.
Attorney, with the commission of, or participation in, a felony involving
dishonesty or a breach of trust, the Corporation may suspend or prohibit the
person from participating in the affairs of the bank. Suspension^proceedings
are initiated by the issuance of a Notice and Order of Suspension and
Prohibition, served on the individual involved, that specifies the charges
and further orders the individual to be suspended from his position and pro­
hibited from participating in the affairs of the bank. The suspension and/or
prohibition remains in effect until the matter is disposed of or terminated
by the FDIC.
If convicted of the offense, a removal order may be issued.
The FDIC issued one such order in 1976 against a bank officer who was rein­
stated after acquittal.
In light of a court decision in which Section 8(g) was held to be unconsti­
tutional, the provisions of this section are no longer used; however, con­
sideration is being given to requesting an amendment to this section of our
Act.




FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Act - Section 8(a)
(Action to Terminate Insured Status)

Summary

Deposits - $18,920,000

Assets - $20,006,000

Notice of Intention to Terminate Insured Status issued 4-8-76. Bank was
found to be in an unsafe and unsound condition and ordered to provide
acceptable management, eliminate or reduce adversely classified assets,
reduce overdue loans to a specified level, reduce the book value of
other real estate in accordance with statutory provisions, comply with
applicable laws, rules and regulations, discontinue cash dividends and
obtain a certain level of capital if continued insured status was desired.
Bank closed on June 3, 1976.

Deposits - $33,134,000

Assets - $36,289,000

Notice of Intention to Terminate Insured Status issued 6-16-76. Bank
was found to be in an unsafe and unsound condition and ordered to provide
acceptable management, eliminate or reduce adversely classified assets,
eliminate adversely classified loans to insiders and certain share­
holders of the bank and holding company, eliminate concentrations of
credit, discontinue cash dividends and management fees, comply with ap­
plicable laws, rules and regulations, adopt and follow acceptable loan
policies, and obtain a certain level of capital if continued insured
status was desired.
An examination to determine the extent of correction was made on 10-18-76
and the bank was found not to be in compliance with the order. The action
is in the hearing stage.

Deposits — $2,865,000

Assets — $3,032,000

Notice of Intention to Terminate Insured Status issued 7-6-76. Bank was
found to be in an unsafe and unsound condition and ordered to provide
acceptable management, eliminate or reduce adversely classified assets,
reduce loan volume to a specific level, limit investments in securities
to U. S. Treasury and/or Agency obligations, eliminate adversely classi­
fied loans to insiders, provide adequate liquidity, comply with appli­
cable laws, rules and regulations, adopt and follow acceptable loan
policies, discontinue cash dividends, and obtain a certain level of cap
ital if continued insured status was desired.
An examination to determine the extent of correotion was ^recently com
pleted and a determination will be made as to whether the action should
be continued.




Summary

Deposits - $68,015,000

Assets - $73,100,000

Notice of Intention to Terminate Insured Status issued 7-22-76.
Bank was
found to be in an unsafe and unsound condition and ordered to provide ac­
ceptable management, comply with applicable laws, rules and regulations,
eliminate or reduce adversely classified assets, reduce overdue loans to
a specific level, adopt and follow acceptable loan policies, discontinue
cash dividends, refrain from the purchase or sale of loan participations
or extending credit to insiders of closely related banks, refrain from
extending credit to or secured by stock of the holding company, and ob­
tain a certain level of capital if continued insured status was desired.
An e x a m i n a t i o n

to

d eterm in e

and a d e t e r m i n a t i o n
co n tin u e d .

w ill

Deposits - $11,354,000

the

b e made

exten t
as

to

of

co rrectio n

w h eth er

th e

was

a ctio n

re c e n tly
sh o u ld

co m p le te d
be

Assets - $12,173,000

Notice of Intention to Terminate Insured Status issued 9-7-76. Bank was
found to be in an unsafe and unsound condition and ordered to provide
acceptable management, eliminate or reduce adversely classified assets
reduce overdue loans to a specific level, comply with applicable l a w s /
rules and regulations, adopt and follow acceptable loan policies, dis­
continue cash dividends, adopt and follow acceptable internal control
and audit procedures, refrain from preferential treatment of insiders,
and obtain a certain level of capital if continued insured status was
desired.
An examination to determine the extent of correction is currently in
process.

Deposit - $4,185,000

Assets - $4,726,000

Notice of Intention to Terminate Insured Status issued 9-7-76.
Bank was
found to be in an unsafe and unsound condition and ordered to provide
acceptable management, eliminate or reduce adversely classified assets,
reduce overdue loans to a specific level, eliminate adversely classified
loans to insiders, reduce the volume of extensions of credit to insiders
to a specific level, comply with applicable laws, rules and regulations,
reduce the book value of other real estate in accordance with statutory
requirements, and obtain a certain level of capital if continued insured
status was desired.
An examination to determine the extent of correction is to be scheduled
m the near future.




Summary

Deposits - $7,946,000

Assets - $9,033,000

Notice of Intention to Terminate Insured Status issued 10-19-76. Bank was
found to be in an unsafe and unsound condition and ordered to provide
acceptable management, eliminate or reduce adversely classified assets,
reduce overdue loans to a specific level, comply with applicable laws,
rules and regulations, discontinue cash dividends, adopt and follow
acceptable loan policies, actively seek fidelity insurance coverage, and
obtain a certain capital level if continued insured status was desired.
The bank is being closely monitored until the expiration of the corrective
period when an examination will be conducted to determine the extent of
correction.

Deposits - $163,479,000

Assets - $176,828,000

Notice of Intention to Terminate Insured Status issued 11-19-76. Bank
was found to be in an unsafe and unsound condition and ordered to provide
acceptable management, eliminate or reduce adversely classified assets,
adopt a plan to control expenses, eliminate concentrations of credit,
comply with applicable laws, rules and regulations, reduce overdue loans
to a specific level, adopt and follow acceptable loan policies, discontinue
cash dividends, and obtain a certain level of capital if continued insured
status was desired.

Bank closed on 12-3-76.




FEDERAL D E P O SIT
Federai

D e p o sit

INSURANCE CORPORATION

Insurance

(C ea se

and

Act

D esist

-

S ectio n

8(b )

A ctio n s)

Summary

D ep o sits
Cease

-

$ 7 ,7 4 2 ,0 0 0

and

D e sist

from u n s a f e
spect

to

and

in je c tio n
a ccid en t

of

-

of

and

to

red u ctio n

in

a n y n ew

and

on

of

advances

of

of

of

D e p o sits

-

and

lo a n s

in

2 -1 8 -7 6 .
a nd

c la ssifie d

any

a cq u ired

re g u la tio n s

C re d it

of

of

cash

d e sist

to

re­
a ssets,

borrow ers,

cred it

life

d ivid en d s,

and

and

$ 9 ,8 2 2 ,0 0 0
to

from

F in an cia l

banks,

or

d esist
respect

a d d itio n a l

co m p lia n c e

R ec o rd k e ep in g

of

and
w ith

p a rticip a tin g

refin a n cin g ,

re la te d

in je c tio n

cease

a ctio n

r e fra in in g

ren ew a l,

c lo se ly

A ct,

-

a ffirm a tiv e

a ssets,

in clu d in g

R e p o rtin g

c la ssifie d

cred it

Bank o r d e r e d

tak e

e x te n sio n ,
fro m

and
w ith

cre d it.

p ra ctic e s

a d v e rse ly

and

F a ir

tin u a n c e

en tered

of

cease

a ctio n

re te n tio n

A ssets

order

to

a d v e rse ly

d isco n tin u a n ce
of

$ 8 ,7 2 3 ,0 0 0

a ffirm a tiv e

r e g u la tio n s,

c o m m issio n s,

unsound

lo a n s

r u le s

th e

red u ctio n

and

-

Bank o r d e r e d

tak e

lim ita tio n s

r u le s

a co n cen tration

and D e s i s t

law s,

and

$ 9 ,1 2 9 ,0 0 0

from u n s a f e

e x te n sio n

1 -2 9 -7 6 .

p ra ctic e s

m an agem en t,

la w s,

in su ra n ce

D e p o sits

en tered

new c a p i t a l ,

w ith

e lim in a tio n

Cease

order
unsound

a c c e p ta b le

co m p lia n c e

A ssets

new c a p i t a l ,

w ith

R e g u la tio n s
and

d isco n ­

d iv id en d s.

f

C ease

and

d esist

$ 5 ,9 2 7 ,0 0 0
D esist

fro m

respect

to

ca p ita l,

C ease

-

sets,

to

Cease

-

and

in je c tio n
loa n

and




c la ssifie d

r u le s

and

en tered

on

unsound

p ra ctic e s

m an agem en t,

and

of

assets,

-

cease

lo a n

a nd

a c tio n

in je c tio n

of

w ith

new

p o lic y ,

a nd

en tered

red u ction

c o m p lia n c e

on

of

tak e
of

m an agem en t,

red u ctio n

law s,

c o m p lia n c e

p o lic ie s ,

and

w ith

-

tak e
of

cease

a nd

a c tio n

c la ssifie d

r u le s

a nd

w ith
as­

re g u la ­

d iv id en d s.

$ 7 ,1 7 8 ,0 0 0

Bank o r d e r e d

and

to

a ffirm a tiv e

a d v e rse ly

w ith
cash

7 -2 2 -7 6 .

p ra c tic e s

$ 3 ,4 7 1 ,0 0 0

Bank o r d e r e d
and

A ssets

n ew c a p i t a l ,

in v estm en t

to

a ffirm a tiv e

re g u la tio n s,

6 -3 -7 6 .

d isco n tin u a n ce

a n d ^ u nsound

a cce p ta b le

tak e

A ssets

new c a p i t a l ' ,

order

u n safe

$ 7 ,6 6 2 ,0 0 0

Bank o r d e r e d

and

$ 6 ,4 4 7 ,0 0 0
D esist

to

of

p o lic y ,

from

respect

la w s,

3 -3 0 -7 6 .

-

d iv id en d s.

and

a cce p ta b le

lo a n

d e sist

a d v ersely

w ith

order

u n safe

in je c tio n

D ep o sits

on

p ra ctic e s

$ 3 ,1 0 4 ,0 0 0

from

tio n s,

en tered
unsound

of

o f-c a sh

and D e s i s t

respect

and

red u ctio n

c o m p lia n c e

D ep o sits

d e sist

order

u n safe

d isco n tin u a n ce

A ssets

a d v ersely

la w s,

d isco n tin u a n ce

to

cease

a ffirm a tiv e

r u le s
of

and

a c tio n

c la ssifie d

w ith
a ssets,

and* r e g u l a t i o n s ,

cash

d ivid en d s.




Summary

Deposits - $4,246,000

Assets - $4,647,000

Cease and Desist order entered on 9-7-76.
Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with
respect to acceptable management, reduction of adversely classified assets
injection of new capital, compliance with laws, rules and regulations,
loan policy, and discontinuance of cash dividends.

Deposits - $44,591,000

Assets - $48,704,000

Cease and Desist order entered on 9-7-76.
Bank ordered to cease and de­
sist from unsafe and uAsound practices and take affirmative action with
respect to acceptable management, reduction of adversely classified as­
sets, injection of new capital, elimination of transactions with affiliates, compliance with laws, rules and regulations, loan and investment
policies, and discontinuance of cash dividends.

Deposits - $35,744,000

Assets - $38,493,000

Cease and Desist order entered on 9-7-76.
Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action
with respect to acceptable management, reduction of adversely classified
assets and overdue loans, discontinuance of cash dividends, injection of
new capital, compliance with laws, rules and regulations, loan policy,
and elimination of loan transactions with affiliates.

Deposits - $4,817,000

Assets - $5,164,000

Cease and Desist order entered on 9-22-76. Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with
respect to elimination of loans to an insider, reduction of adversely
classified assets,
acceptable management, compliance with laws, rules and
regulations, loan policy, audit program and fidelity coverage.

Deposits - $13,041,000

Assets - $14,194,000

Cease and Desist order entered on 9-22-76.
Bank ordered to cease and de­
sist from unsafe and unsound practices and take affirmative action with
respect to acceptable management, reduction of adversely classified as­
sets and overdue loans, discontinuance of cash dividends, injection of
new capital, compliance with laws, rules and regulations, loan policy,
and elimination of loan transactions with affiliates.

Deposits - $87,936,000

Assets - $106,193,000

Cease and Desist order entered on 10-6— 76. Bank ordered to cease and de­
sist from unsafe and unsound practices and take affirmative action with

- 3 -

Summary

respect to elimination, collection, and/or establishment of repayment
programs for overdrafts and loans to insiders, and compliance with laws,
rules and regulations.

Deposits - $24,684,000

Assets - $27,926,000

Cease and Desist order entered on 10-6-76. Bank ordered to cease and de­
sist from unsafe and unsound practices and take affirmative action with
respect to elimination, collection, and/or establishment of repayment
programs for overdrafts artd loans to insiders, and compliance with laws,
rules and regulations.

Deposits - $21,623,000

Assets - $25,242,000

Cease and Desist order entered on 10-6-76. Bank ordered to cease and de­
sist from unsafe and unsound practices and take affirmative action with
respect to acceptable management, reduction of adversely classified as­
sets, injection of new capital, collateral for loans to certain insiders
and related interests, limitations on total credit extended to an individ­
ual or concern and reduction to such limitations, compliance with laws,
rules and regulations, loan and investment policies, and discontinuance
of cash dividends.

Deposits - $17,334,000

Assets - $18,546,000

Permanent Cease and Desist order entered on 10-6-76 following issuance of
a Temporary Cease and Desist order.
Bank ordered to cease and desist
from an unsafe and unsound practice and take affirmative action to prohib
it payment of checks against uncollected funds for deposit accounts of an
insider and a foreign bank.

Deposits - $138,906,000

Assets - $153,816,000

Cease and Desist order entered on 10-19-76.
Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with
respect to acceptable management, reduction of adversely classified assets
and overdue loans, limitations on payment of cash dividends, injection of
new capital, compliance with laws, rules and regulations, and loan policy.

Deposits - $28,055,000

Assets - $30,394,000

Cease and Desist order entered on 10-19-76.
Bank ordered to cease and de­
sist from unsafe and uhsound practices and take affirmative action with
respect to acceptable management, reduction of adversely-classified as­
sets and overdue loans, discontinuance of cash dividends, injection of
new capital, compliance with laws, rules and regulations, loan policy,




Summary

and discontinuance of overdrafts and preferential rates of interest to
insiders.

Deposits - $30,758,000

Assets - $33,743,000

Cease and Desist order entered on 11-16-76.
Bank ordered to cease and de­
sist from unsafe and unsound practices and take affirmative action with
respect to acceptable management, reduction of adversely classified assets,
injection of new capital, discontinuance of cash dividends, compliance with
laws, rules and regulations, loan policy, and implementation of internal
controls and an audit program for electronic data processing operations.

Deposits - $88,291,000

Assets - $98,248,000

Cease and Desist order entered on 12-16-76.
Bank ordered to cease and de­
sist from unsafe and unsound practices and take affirmative action with
respect to injection of new capital in compliance with conditions included
in an order issued in 1974 in connection with Corporation consent to estab­
lish a branch.

Deposits $13,383,000

Assets - $14,846,000

Cease and Desist order entered on 12-16-76.
Bank ordered tó cease and
desist from unsafe and unsound practices and take affirmative action with
respect to acceptable management, reduction of adversely classified as­
sets, injection of new capital, limitations on new extensions of credit
to insiders and related interests and concentrations of credit, reduction
of loan volume, compliance with laws, rules and regulations, loan and in­
vestment policies, and discontinuance of cash dividends.

Deposits - $20,205,000

Assets $22,872,000

Cease and desist order entered on 12-16-76.
Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with
respect to collection and/or elimination of adversely classified loans to
certain insiders and their related interests, reduction of adversely clas­
sified assets, acceptable management, injection of new capital, compliance
with laws, rules and regulations, and loan policy.

Deposits - $2,158,000

Assets - $2,376,000

Cease and Desist order entered on 12-16-76.
Bank ordered to cease and
desist from unsafe and .Unsound practices and take affirmative action with
respect to acceptable Management, reduction of adversely. classified as­
sets, limitation on extensions of credit to any one borrower and related
entities, discontinuance of participating in loans with certain related
banks, elimination of loans to persons located outside the bank’s normal




- 5 -

Summary

trade area, reduction of remuneration of certain officers and directors,
compliance with laws, rules and regulations, loan policy, and discontin­
uance of cash dividends.

Deposits - $7,266,000

Assets - $8,055,000

Cease and Desist order entered on 12-16-76. Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with
respect to acceptable management, reduction of adversely classified as­
sets, discontinuance of participating in loans with certain related banks,
elimination of adversely classified loans to insiders, reduction of con­
centrations of credit, elimination of loans to persons located outside
the ban k ’s normal trade area, compliance with laws, rules and regulations,
loan policy, and discontinuance of cash dividends.

Deposits - $3,605,000

Assets - $4,012,000

Cease and Desist order entered on 12-16-76.
Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with
respect to acceptable management, reduction of adversely classified as­
sets, discontinuance of participating in loans with certain related banks,
elimination of adversely classified loans to insiders and loans to persons
located outside the bank's normal trade area, reduction of remuneration to
certain officers and directors, compliance with laws, rules"and regulations,
loan policy, and discontinuance of cash dividends.

Deposits - $3,227,000

Assets - $3,579,000

Cease and Desist order entered on 12-16-76. Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with
respect to acceptable management, reduction of adversely classified as­
sets, overdue loans, and concentrations of credit, elimination of adverse­
ly classified loans to insiders, discontinuance of participating in loans
with certain related banks, compliance with laws, rules and regulations,
loan policy, and discontinuance of cash dividends.




FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Act - Section 8(c)
(Temporary Cease and Desist Actions)

Summary

Deposits - $17,334,000

Assets - $18,546,000

Temporary Cease and Desist order issued 7-22-76.
Bank ordered to cease
and desist from an unsafe and unsound practice and takh affirmative ac­
tion to prohibit payment of checks against uncollected funds for deposit
accounts of an insider and a foreign bank.
0

A permanent cease and desist order was issued on 10-6-76.

Deposits - $16,697,000

Assets - $18,885,000

Temporary Cease and Desist order issued 7-22-76.
Bank ordered to cease and
desist from an unsafe and unsound practice and take affirmative action with
respect to discontinuance of paying cash dividends pending resolution of
charges against the bank concerning nonpayment of fair value of stock neld
by shareholders dissenting to conversion from National to State charter.
Temporary order terminated 12-3-76 following resolution of the matter.

Deposits - $15,726,000

Assets - $17,532,000

Temporary Cease and Desist order issued 10-6-76. Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action to pro­
hibit insider transactions involving extensions of credit to or for the ben­
efit of directors, officers or the principal shareholder or purchase or sale
of assets to or for the benefit of the principal shareholder, additional
credit to borrowers whose loans are classified doubtful or loss, and payment
of cash dividends.
Bank closed 11-19-76.

Deposits - $6,328,000

Assets - $8,531,000

Temporary Cease and Desist order issued 10-19—76. Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action to
discontinue declaration or payment of cash dividends.

Deposits - $3,819,000

Assets - $4,301,000

Temporary Cease and Desist order issued 12-23—76. Bank ordered to cease
and desist from unsafe/ and unsound practices and take affirmative action to
discontinue extending credit, directly or indirectly, over a specified amount
to any insider or entering into any business transaction with an insider.
The bank's directors stipulated to the issuance of a permanent Cease and
Desist order during January 1977.




FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Act - Section 8(a)
(Action to Terminate Insured Status)
1977

Summary
Deposits - $12,586,000

Assets - $13,432,000

Notice of Intention to Terminate Insured Status issued 4-19-77. Bank was
found to be in an unsafe and unsound condition and ordered to provide ac­
ceptable management, eliminate or reduce adversely classified assets, reduce
overdue loans to a specific level, eliminate concentrations of credit, correct
violations of laws and regulations, increase capital, provide a plan for con­
trolling expenses, eliminate loan documentation deficiencies, limit its loan
volume to a specific relationship to deposits, adopt and follow an acceptable
written loan policy, discontinue cash dividends, adopt acceptable internal
control and audit procedures, adopt a policy prohibiting preferential treat­
ment to insiders, and obtain a certain level of capital if continued insured
status was desired.
An examination to determine the extent of correction is in progress.

Deposits - $27,558,000

Assets - $33,583,000

Notice of Intention to Terminate Insured Status issued 9-19-77.
Bank was
found to be in an unsafe and unsound condition and ordered to provide ac­
ceptable management, not to extend credit directly or indirectly to or for
the benefit of the controlling shareholder, his relatives or related in­
terests, eliminate or reduce adversely classified assets, eliminate con­
centrations of credit, correct violations of laws and regulations, adopt
and follow acceptable loan and investment policies, discontinue cash dividends,
adopt an investment policy to provide adequate liquidity, eliminate loan docu­
mentation deficiencies, provide additional capital, and obtain a certain level
of capital if continued insured status was desired.
An examination to determine the extent of correction is to be made at the end
of the corrective period.




FEDERAL DEPOSIT INSURANCE CORPORATION
F e d e r a l D e p o s it

In su ra n ce A ct -

S e c tio n

8 (b )

( C e a s e and D e s i s t A c t i o n s )

1977

Summary

Deposits - $8,503,000

Assets - $9,303,000

Consent Cease and Desist Order entered 1-5-77. Bank ordered to cease and de­
sist from unsafe and unsound banking practices and take affirmative action with
respect to reduction of adversely classified assets and delinquent loans, adop­
tion of an appropriate written loan policy, prohibition of overdrafts to the
bank’s official family and, compliance with laws, rules and regulations.

Deposits - $6,839,000

Assets - $7,148,000

Consent Cease and Desist Order entered 2-1-77, following the issuance of a
Temporary Cease and Desist Order. Bank ordered to cease and desist from ex­
tending credit of any kind, direct or indirect, in any amount in excess of
$5,000, to any insider of the bank or person related to an insider; and from
entering into any business transaction in any amount in excess of $5,000 with
any insider or person related to an insider of the bank.

Deposits - $18,746,000

Assets - $20,709,000

Consent Cease and Desist Order entered 2— 1—77. Bank ordered to cease and de­
sist from unsafe and unsound practices and take affirmative action with re­
spect to reduction of adversely classified assets; preparation of a list of
and elimination of overdrafts to insiders; injection of new capital; provi­
sions for adequate internal controls, outside audit and loan policy; and com­
pliance with laws, rules, and regulations, including consumer protection laws.

Deposits - $6,150,000

Assets - $6,783,000

Consent Cease and Desist Order entered on 2-1-77. Bank ordered to cease and
desist from unsafe and unsound banking practices and take affirmative action
with regard to a comprehensive audit, the development and implementation of
adequate internal controls, the full and complete compliance with consumer
protection statutes, and the correction of all other violations of laws, rules,
and regulations.




Summary

Deposits - $7,662,000

Assets - $8,846,000

Consent Cease and Desist Order entered 2-1-77. Bank ordered to cease and
desist from unsound and unsafe banking practices and take affirmative action
with respect to acceptable management, reduction of classified assets, adop­
tion of an appropriate written loan policy, compliance with laws, rules and
regulations, elimination of adversely classified loans to insiders and loans
to persons residing outside the bank's normal trade area, reduction of the
volume of loans to the bank's official family and delinquent loans, main­
tenance of adequate cash reserves, reduction of salaries, bonuses, expense
allowances and management fees to the president and one director, and dis­
continuance of cash dividends.

Deposits - $16,587,000

Assets - $17,983,000

Consent Cease and Desist Order entered 2-1-77. Bank ordered to cease and
desist from unsafe and unsound practices and to take affirmative action with
respect to acceptable management, reduction of adversely classified assets,
injection of capital, compliance with laws, adopt and follow acceptable loan
and investment policies, reduction of credit extended to insiders, reduction
of total overdue loans, and discontinuance of cash dividends.

Deposits - $18,912,000

Assets - $20,687,000

Consent Cease and Desist Order entered 3-15-77. Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with
respect to acceptable management, independent and realistic appraisals of
real estate maintained as collateral, elimination of assets classified Loss
and Doubtful, discontinuance of loans to certain insiders, limitation of lines
of credit to and reduction of concentrations of credit to a specific relation­
ship to capital and reserves, an injection of capital, elimination of loan
documentation deficiencies, prohibition from repurchase of asset participations
sold without recourse, restrict participations sold to a nonrecourse basis,
compliance with laws, and discontinuance of cash dividends.

Deposits - $9,286,000

Assets - $10,484,000

Consent Cease and Desist Order entered 6—27—77. Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with
respect to elimination of losses and 50 percent of Doubtful classifications,
prohibition from extensions of credit to certain insiders, limitation of lines
of credit to a specific relationship to capital and reserves, reduction of
concentrations of credit, an injection of capital, elimination of loan docu­
mentation exceptions, prohibition from repurchase of asset participations sold
without recourse, restriction of participations sold to a nonrecourse basis,
compliance with laws, discontinuance of cash dividends.




Summary

D e p o s its

-

$ 9 ,5 3 8 ,0 0 0

A sse ts

C o n se n t C e a s e and D e s i s t
d e s is t

fro m u n s a f e

O rder e n te r e d

2 -1 5 -7 7 .

and u n so u n d p r a c t i c e s

-

$ 9 ,7 5 1 ,0 0 0

Bank o r d e r e d t o

and t a k e

a ffir m a tiv e

c e a s e and

a c t io n w ith

r e s p e c t t o a c c e p t a b l e m a n a g e m e n t, r e d u c t i o n o f a d v e r s e l y c l a s s i f i e d a s s e t s ,
e s t a b l i s h re p a y m e n t s c h e d u l e s f o r l o a n s , e l i m i n a t i o n o f lo a n d o c u m e n t a t io n
e x c e p tio n s ,
d r a fts

to

w r itte n

r e d u c tio n

lo a n

a d e q u a te

of

c o n c e n tr a tio n s

in s id e r s , r e d u c tio n

of to ta l

and i n v e s t m e n t p o l i c i e s ,

liq u id ity ,

a u d it p rogram ,

an i n j e c t i o n

c o m p lia n c e w i t h

of

c r e d it,

o u ts ta n d in g
a d o p t io n

o f c a p ita l,

of

d is c o n tin u a n c e o f
lo a n v o lu m e ,
a p rograin t o

a d o p t io n

la w s and r e g u l a t i o n s ,

over­

a d o p tio n

of

p r o v id e

o f a w r itte n

in te r n a l

and d i s c o n t i n u a n c e

of

cash d iv id e n d s .

D e p o s its

-

$ 1 1 ,9 8 2 ,0 0 0

A sse ts

-

$ 1 3 ,5 1 3 ,0 0 0

C o n se n t C e a s e and D e s i s t O r d e r e n t e r e d 3 - 1 5 - 7 7 .
Bank o r d e r e d t o c e a s e and
d e s i s t fr o m u n s a f e and u n so u n d p r a c t i c e s and t a k e a f f i r m a t i v e a c t i o n w it h
resp ect to
lo a n s ,

a c c e p t a b l e m a n a g e m e n t,

a d o p tio n

o f w r itte n

r e d u c tio n

le n d in g ,

of

c la s s ifie d

c o lle c tio n

a sse ts

and o v e r d u e

and in v e s t m e n t p o l i c i e s ,

d i s c o n t i n u a n c e o f p a r t i c i p a t i o n t r a n s a c t i o n s w i t h and r e d u c t i o n i n d e p o s i t
b a la n c e s w ith r e l a t e d b a n k s , e li m i n a t i o n o f a d v e r s e ly c l a s s i f i e d lo a n s t o
in s id e r s ,

r e d u c tio n

of

ex p en se a llo w a n c e s t o
re c to rs,

o ffic e r s

tin u a tio n

D e p o s its

of

-

lo a n v o lu m e ,

and e m p lo y e e s ,

cash d iv id e n d s ,

fr o m u n s a f e

w ith r e s p e c t

to

O rder e n te r e d

o r ig in a tin g

je c t io n

of

b o n u s e s and

p e r fo r m e d b y d i ­
of

la w , d i s c o n ­

c a p ita l.

-

$ 1 6 ,9 2 6 ,0 0 0

Bank w as o r d e r e d t o

and t a k e

re d u c tio n

a ffir m a tiv e

o f a d v e r s e ly

cease

a c tio n

c la s s ifie d

as­

l e n d i n g , c o l l e c t i o n and in v e s t m e n t p o l i c i e s r r e d u c t i o n o f
t o t h e b a n k 's p r e s i d e n t , d i s c o n t i n u a n c e o f p a r t i c i p a t i o n

and r e d u c t i o n

o f a d v e r s e ly

of

3 -1 5 -7 7 .

and u n so u n d p r a c t i c e s

tio n

lo a n s

fe e s,

o f v io la tio n s

A sse ts

tr a n sa c tio n s,
of

c o r r e c tio n

a c c e p t a b l e m a n a g e m e n t,

s e t s , a d o p tio n o f
r e m u n e r a tio n p a i d

s a la r ie s ,

and an i n j e c t i o n

$ 1 4 ,5 7 0 ,0 0 0

C o n se n t C e a s e and D e s i s t
and d e s i s t

r e s tr ic t

am ou n ts c o m m en su ra te w i t h s e r v i c e s

c la s s ifie d

c a p ita l,

o f d e p o s i t b a l a n c e s w it h

r e la te d

o u t s i d e t h e b a n k 's n o r m a l t r a d i n g

lo a n s t o

c o r r e c tio n

in s id e r s ,

re d u c tio n

o f v io la tio n s

of

la w ,

of

ban k s,
area,

e lim in a ­

e lim in a t io n

lo a n v o lu m e , an i n ­

and d i s c o n t i n u a n c e

of

cash d iv id e n d s .

D e p o s its

-

$ 1 5 ,1 5 9 ,0 0 0

C o n se n t C e a s e
d e s is t

A sse ts

and D e s i s t

fr o m u n s a f e

O rd er e n t e r e d

4 -5 -7 7 .

and u n so u n d p r a c t i c e s

a c c e p t a b l e m a n a g e m e n t, r e d u c t i o n

a d o p t io n

of

a c c e p ta b le

in c o n c e n t r a t i o n s

of

le n d in g ,

c r e d it,

lo a n d o c u m e n t a t io n d e f i c i e n c i e s ,
m e th o d s ,
era te d

d is c lo s u r e

c r e d it

life

to

c o lle c tio n

c o r r e c tio n

agency

a ffir m a tiv e

o f a d v e r s e ly

of a ll

a c tio n

c la s s ifie d
of

la w ,

w it h r e ­
r e d u c tio n

c o r r e c tio n

of

o f p r o p e r a c c r u a l a c c o u n tin g

d e ta ils

on t h e b a n k 's

c o n c e r n in g an i n s i d e r

op­

p r e m is e s and a d e q u a te r e im ­

b u rse m e n t t o t h e b an k f o r u s e o f p r e m i s e s , p e r s o n n e l and e q u ip m e n t ,
h i b i t i o n o f e x te n d in g c r e d i t t o a c e r t a in i n s i d e r .




c e a s e and

a sse ts,

and i n v e s t m e n t p o l i c i e s ,

o f v io la tio n s

im p le m e n t a t io n

s h a r e h o ld e r s

in s u r a n c e

$ 1 6 ,7 1 0 ,0 0 0

Bank w as o r d e r e d t o

and t a k e

sp ect t o

-

and p r o ­

Bank No.

74

Summary

Deposits - $10,520,000

Assets - $11,518,000

Consent Cease and Desist Order entered 6-13-77 after a preliminary hearing.
Bank ordered to cease and desist from unsafe and unsound practices and take
affirmative action with respect to reduction of adversely classified assets,
extensions of credit in the form of overdrafts to employees, trade area
limitations, provisions for adequate collateral and credit file documentation,
internal controls and outside audit, injection of new capital, acceptable
management, and compliance with laws, rules and regulations.

75

Deposits - $9,119,000

Assets - $10,596,000

Consent Cease and Desist Order entered 4-19-77. Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with
respect to compliance with insider regulations, reduction of adversely clas­
sified assets, injection of new capital, provision for adequate liquidity,
compliance with laws, rules and regulations, loan policy, and discontinuance
of cash dividends.

76

Deposits - $24,733,000

Assets - $26,489,000

Consent Cease and Desist Order entered 4-19-77. Bank ordered to cease and
desist from violations of consumer protection laws and to take affirmative
action to correct these violations and develop procedures to assure future
compliance.

77

Deposits - $3,012,000

Assets - $3,204,000

Consent Cease and Desist Order entered 5—3—77 to assure additional correction
following simultaneous discontinuance of a Section 8(a) citation. Bank
ordered to cease and desist from unsafe and unsound practices and take
affirmative action with respect to acceptable management, reduction of ad­
versely classified assets, restrictions on loan volume and type of securities
investments, limitations on and elimination of adversely classified insider loans,
provision for adequate liquidity, injection of new capital, compliance with
laws, rules and regulations, loan policy, and discontinuance of cash dividends.

78

Deposits - $6,765,000

Assets - $7,753,000

Consent Cease and Desist Order entered 5—23— 77. Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with
respect to acceptable management, reduction of adversely classified assets,
adoption of written lending, collection and investment policies, injection of
new capital, correction of violations, reduction of loan volume and discontinuant
cash dividends.




Summary

Deposits - $7,337,000

Assets - $8,114,000

Consent Cease and Desist Order entered 5-23-77. Bank ordered to cease and
desist from and take affirmative action with respect to violations of the
Truth-in-Lending Act and future compliance.

Deposits - $21,774,000

Assets - $23,956,000

Consent Cease and Desist Order entered 6-13-77. Bank ordered to cease and de­
sist from unsafe and unsound practices and take affirmative action with re­
spect to acceptable management; loan policy; reduction of adversely classified
assets and concentrations of credit; restrictions on insider loans; use of
methods to avoid recognition of past due loans; compliance with laws, rules,
and regulations; administration of the trust department; and discontinuance
of cash dividends.

Deposits - $19,971,000

Assets - $21,587,000

Consent Cease and Desist Order entered 6-13-77.
Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with re­
spect to acceptable management, reduction of adversely classified assets,
loan policy, reduction of loan volume, and discontinuance of cash dividends.

Deposits - $29,792,000

Assets - $32,832,000

Consent Cease and Desist Order entered 6-13-77. Bank ordered to cease and
desist from unsafe and unsound practices and take affirmative action with re­
spect to reduction of adversely classified assets, reduction of overdue loans,
elimination of loan documentation deficiencies, and loan policy.

Deposits - $12,627,000

Assets - $13,757,000

Consent Cease and Desist Order entered 6-13-77 to replace a temporary cease
and desist order. Bank ordered to cease and desist from unsafe and unsound
practices and take affirmative action with respect to reduction of loans to
the chairman and his interests, prohibition of additional credit to the
chairman until his loans were reduced below that level, restrict opening an
approved but unopened branch office until changes in the plans for the branch
were approved, acceptable management, reduction in classified assets, increase
capital to a certain level, adoption of loan and investment policies, com­
pliance with laws and regulations, and discontinuance of cash dividends.




Summary

D e p o s its

-

$ 1 0 ,4 5 2 ,0 0 0

A sse ts

C o n s e n t C e a s e and D e s i s t O r d e r e n t e r e d
d e s is t

fro m u n s a f e

-

on 6 - 1 3 - 7 7 .

and u nsou nd p r a c t i c e s

and

$ 1 1 ,1 6 5 ,0 0 0
Bank o r d e r e d

ta k e a f f i r m a t i v e

to

c e a s e and

a c tio n

w it h

r e s p e c t t o a c c e p t a b l e m a n a g em en t, p r o v i d i n g a d d i t i o n a l d i r e c t o r s r e d u c t i o n
o f a d v e r s e l y c l a s s i f i e d a s s e t s and o v e r d u e l o a n s , lo a n p o l i c y , and d i s c o n ­
t in u a n c e o f c a s h d i v i d e n d s .

D e p o s its

-

$ 9 ,3 6 0 ,0 0 0

A sse ts

-

$ 1 0 ,2 0 4 ,0 0 0

C o n s e n t C e a s e and D e s i s t O r d e r e n t e r e d 6 - 2 7 - 7 7 t o r e p l a c e a te m p o r a r y o r d e r to
c e a s e and d e s i s t .
Bank o r d e r e d t o c e a s e and d e s i s t fro m u n s a f e and unsound
p r a c tic e s

and

ta k e a f f i r m a t i v e

c l a s s i f i c a t i o n s ; a d o p t io n
and l i m i t a t i o n s on f u t u r e
th e b e n e f i t
p r o h ib itio n

of
of

one b o rr o w e r,
rep u rch ase o f

on t h e b o o k s a n y l i a b i l i t y
°f

v io la tio n s

of

a c t i o n w it h r e s p e c t

to

r e d u c tio n

o f a d verse

o f w r i t t e n le n d i n g p o l i c i e s ; c o l l e c t i o n o f outstanding
o u t - o f - a r e a l o a n s ; l i m i t a t i o n s on c r e d i t s t o o r fo r
e lim in a tio n o f
p a r tic ip a tio n s

fo r

lo a n d o c u m e n ta t io n d e f i c i e n c i e s ,
s o l d w i t h o u t r e c o u r s e , r e c o r d in g

r e p u r c h a s e a g r e e m e n ts o u t s t a n d i n g ;

la w s and r e g u l a t i o n s ,

in c lu d in g

c o r r e c tio n

con su m er la w v i o l a t i o n s ;

i n j e c t i o n o f new c a p i t a l ; r e v ie w o f a l l c o m p e n s a tio n t o b an k o f f i c e r s ;
t i o n s on b o n u s e s and e x p e n s e
a llo w a n c e s t o o r f o r o f f i c e r s ; r e v ie w o f
and e x p e n s e s t a t e m e n t s m o n t h ly ;
on an i n s i d e r
o f tw o -t h ir d s

d is c lo s u r e

to

th e

s h a r e h o ld e r s

of

a ll

lim ita ­
income
d e ta ils

c r e d i t l i f e in s u r a n c e a g e n c y o p e r a t e d on t h e p r e m i s e s , a p p ro v a l
o f a n y d e c i s i o n n o t t o r e t a i n s u c h in co m e f o r t h e b an k b u t in

any e v e n t r e a s o n a b le

r e im b u r s e m e n t t o

t h e ban k f o r

u se o f p r e m is e s ,

p erson n el

and e q u ip m e n t; d i s c o n t i n u a n c e o f c a s h d i v i d e n d s ; c o m p lia n c e w it h a s e p a r a t e
l e t t e r a g r e e m e n t b e tw e e n t h e b an k and t h e c h a r t e r i n g a u t h o r i t y ; reim b u rsem en t
fo r

n on ban k r e l a t e d

r e q u ir e s

th e

e x p e n se s p a id

fo r m e r c o n t r o l ow n ers

to

th e

to

fo r m e r c o n t r o l l i n g

repay

su ch e x p e n s e s ;

s h a r e h o ld e r and
e ffo r ts

to

c o lle c t

l o a n s made t o
new c r e d i t t o

o r r e l a t e d t o t h e fo r m e r c o n t r o l ow n ers and p r o h i b i t i o n o f any
t h e s e i n d i v i d u a l s ; and r e v ie w and a p o s s i b l e r e v i s i o n o f th e

in te r e s t ra te
t r o l o w n ers.

b e in g

D e p o s its

-

p a id

on a c e r t i f i c a t e

$ 1 3 ,2 8 0 ,0 0 0

fro m u n s a f e

d e p o s it

A sse ts

C o n s e n t C e a s e and D e s i s t O r d e r e n t e r e d
d e s is t

of

7 —1 4 —7 7 .

and u nsound p r a c t i c e s

resp ect

to

a c c e p t a b l e m a n a g em en t,

herence

to

a c c e p ta b le w r itte n

b y t h e p r e s e n t con­

$ 1 4 ,3 3 7 ,0 0 0

Bank o r d e r e d

and t a k e a f f i r m a t i v e

in je c tio n

le n d in g

-

h e ld

o f new c a p i t a l ,

to

cease

and

a c t i o n s w ith

a d o p t io n

and i n v e s t m e n t p o l i c i e s ,

and ad­

re d u c tio n o f

a d v e r s e c l a s s i f i c a t i o n s , e lim i n a t io n o f o v e r d r a ft s to i n s i d e r s , e lim in a tio n
o f c e r t a i n i n s i d e r l o a n s , and c o m p lia n c e w it h l a w s , r u l e s , and r e g u l a t i o n s .

D e p o s its

-

$ 7 ,2 4 4 ,0 0 0

A sse ts

-

$ 8 ,1 9 2 ,0 0 0

C o n s e n t C e a s e and D e s i s t O r d e r e n t e r e d 7 - 2 8 - 7 7 , r e p l a c i n g a te m p o r a r y c e a s e
and d e s i s t o r d e r .
Bank o r d e r e d t o c e a s e and d e s i s t fro m u n s a f e and unsound
p r a c tic e s
tio n s

of

and t a k e a f f i r m a t i v e
la w ,

a r e v ie w

of

th e

a c tio n

w it h

resp ect

c o m p e n s a tio n p a i d

to

to
th e

c o r r e c tio n

and h i s i n t e r e s t s , r e d u c t i o n s i n c l a s s i f i e d a s s e t s , c o n t in u e d
t a i n f i d e l i t y c o v e r a g e , and d i s c o n t i n u a n c e o f d i v i d e n d s .




o f v io la ­

ch a irm a n o f

th e board

e ffo r ts

to

ob­

Sum m ary

Deposits - $51,009,000

Assets - $57,061,000

Consent Cease and Desist Order entered 9-9-77. Bank ordered to cease and
desist from and take affirmative action with respect to violations of con­
sumer protection laws and future compliance.




FEDERAL DEPOSIT INSURANCE CORPORATION
F e d e r a l D e p o s it In su ra n ce A ct - S e c tio n 8 ( c )
(T e m p o ra ry C e a s e and D e s i s t A c t i o n s )
1977

Summary
D e p o s its

-

$ 1 2 ,6 2 7 ,0 0 0

A sse ts

T em porary C e a s e and D e s i s t O rd e r i s s u e d

3 -1 7 -7 7 .

-

$ 1 3 ,7 5 7 ,0 0 0

Bank w as o r d e r e d

to

cease

and d e s i s t fro m e x t e n d i n g any c r e d i t t o o r f o r t h e b e n e f i t o f t h e b a n k 's
ch airm an o f t h e b o a r d o r t o any i n d i v i d u a l o r e n t i t y w h ereb y th e p r o c e e d s
o f su ch c r e d i t w o u ld a c c r u e , d i r e c t l y o r i n d i r e c t l y ,
ch airm an o f t h e b o a r d .
The b an k w as a l s o o r d e r e d t o
o p e n in g a p r e v i o u s l y
of

th e se

a p p r o v e d b u t u nop ened b r a n c h o f f i c e

a d m in is tr a tiv e

A perm an en t c e a s e

and d e s i s t

o r d e r was i s s u e d

A sse ts

T em porary C e a s e and D e s i s t O r d e r

is s u e d

fro m o f f e r i n g ,

s a le

and

tr a n s fe r r in g

c o m p le t io n

on 6 - 1 3 - 7 7 .

were o r d e r e d

cease

p e n d in g

p r o c e e d in g s .

D e p o s its — $ 6 ,9 8 1 ,0 0 0

to

t o t h e b e n e f i t o f th e
c e a s e and d e s i s t fro m

and d e s i s t

4 —1 —7 7 .

-

$ 7 ,5 7 5 ,0 0 0

The ban k and i t s
s e llin g

on t h e b a n k 's b o o k s any s t o c k

of

o ffic ia ls

and o f f e r i n g

fo r

s u b j e c t b an k owned

d i r e c t l y , i n d i r e c t l y o r b e n e f i c i a l l y b y any o f t h e d i r e c t o r s ; m aking any
f u r t h e r p a y m e n ts o f any k in d u n d e r a l e a s e b e tw e e n t h e ban k and a p a r t n e r ­
s h ip com posed o f t h e d i r e c t o r s ; a n d , e n t e r i n g i n t o any b u s i n e s s t r a n s a c t i o n s
or e x t e n s i o n

of

c r e d i t w it h

any b an k i n s i d e r

or p erson

r e la te d

to

a bank

in s id e r .
The te m p o r a r y o r d e r was t e r m in a t e d

D e p o s it s

-

on 6 - 1 3 - 7 7 .

$ 1 1 ,2 2 4 ,0 0 0

A sse ts

Tem porary C e a s e and D e s i s t
c e a s e and d e s i s t
from e x t e n d in g

O rd e r i s s u e d

fro m e n t e r i n g

d ir e c t

form er ch a irm a n o f

or

in to

in d ir e c t

th e b o a r d ,

5 —1 1 —7 7 .

any b u s i n e s s

c r e d it

h is w ife ,

to

or

-

$ 1 2 ,1 2 2 ,0 0 0

The bank was o r d e r e d
t r a n s a c t i o n w it h

fo r

th e b e n e f i t

o r any p e r s o n s

r e la te d

to

a n d /o r

of

th e bank s

to

th em .

The te m p o r a r y o r d e r r e m a in s o u t s t a n d i n g .

D e p o s its -

$ 5 ,6 4 8 ,0 0 0

A sse ts

Tem porary C e a s e and D e s i s t
c e a s e and d e s i s t
from e x t e n d in g

O rd e r i s s u e d

fr o m e n t e r i n g

d ir e c t

fo rm er ch a irm a n o f

or

in to

in d ir e c t

th e b o a r d ,

c r e d it

h is w ife ,

The te m p o r a r y o r d e r r e m a in s o u t s t a n d i n g .




5 -1 1 -7 7 .

any b u s i n e s s
to

or

-

$ 6 ,5 0 8 ,0 0 0

The ban k was o r d e r e d
t r a n s a c t i o n w it h

fo r

th e b e n e f i t

o r any p e r s o n

r e la te d

of
to

to

a n d /o r
th e bank s
th em .

Summary
Deposits - $3,370,000

Assets - $3,672,000

Temporary Cease and Desist Order issued 5-11—77. The bank was ordered to
cease and desist from entering into any business transaction with and/or
from extending direct or indirect credit to or for the benefit of the bank's
executive vice president, his wife, or any person related to them.
The temporary order remains outstanding.

Deposits - $9,360,000

Assets - $10,204,000

Temporary Cease and Desist Order issued 5-11-77. Bank was ordered to cease
and desist from entering into any business transaction with and/or from
extending any direct or indirect credit to or for the benefit of the former
chairman of the board, his wife, or any person related to them.
A permanent cease and desist order was issued on 6-27-77.

Deposits - $7,333,000

Assets - $8,638,000

Temporary Cease and Desist Ordjer issued 5-11-77.
Bank was ordered to cease
and desist from entering into any business transaction with and/or extending
any direct or indirect credit to or for the benefit of the former chairman
of the board, his wife, or any person related to them.
The temporary order remains outstanding.

Deposits - $102,558,000

Assets - $115,319,000

Temporary Cease and Desist Order issued 9-19-77. The bank was ordered to
cease and desist from entering into any business transactions which exceed
$10,000 in the aggregate with the chairman of the board, his interests, or
any person related to him.
The order remains outstanding.




EXHIBIT J
FEDERAL DEPOSIT INSURANCE CORPORATION
DIVISION OF BANK SUPERVISION
WASHINGTON

G e n e r a l M e m o r a n d u m No.

6
Revised August

SUBJE C T :

SUPERVISORY P REPARATION FOR POSSIBLE
SECTION 8 PROCEEDINGS

S e c t i o n s 8(a)

1975

__________•

a nd 8(b)

S e c t i o n V of the M a n u a l of E x a m i n a t i o n P o l i c i e s c o n t a i n s a c o m p r e ­
h e n s i v e t r e a t m e n t of t h e s e r e m e d i a l p r o v i s i o n s of o ur Act, t h e i r u n d e r l y i n g
p h i l o s o p h i e s , g u i d e l i n e s u p o n w h i c h to b a s e r e c o m m e n d a t i o n s , and i n s t r u c t i o n s
for r e p o r t p r e p a r a t i o n a n d p r o c e s s i n g .
It is the intent of this m e m o r a n d u m
to a u g m e n t that i n f o r m a t i o n a nd to r e i t e r a t e the i m p o r t a n c e of t i m e l i n e s s and
a c c u r a c y in the p r e p a r a t i o n and p r o c e s s i n g of e x a m i n a t i o n r e p o r t s and o t h e r
supporting documentation.
Recommendations

f r o m the R e g i o n a l D i r e c t o r

for i n i t i a t i o n of S e c t i o n

8(a) or 8(b) a c t i o n s h o u l d b e d e f i n i t i v e , u n q u a l i f i e d , a n d u n c o n d i t i o n a l and
c o n t a i n e d in a s e p a r a t e l e t t e r o r m e m o r a n d u m (n ot a P r o b l e m M e m o r a n d u m ) a d ­
d r e s s e d to this o f fice.
T h e r e c o m m e n d a t i o n s h o u l d I n c l u d e a l i s t i n g of the
c h a r g e s (unsafe or u n s o u n d p r a c t i c e s , c o n d i t i o n , or v i o l a t i o n s ) a n d the d e s i r e d
corrective measures.
In o r d e r to s p e e d p r o c e s s i n g w i t h i n t h i s D i v i s i o n as
w e l l as t he L e g a l D i v i s i o n , it is p r e f e r r e d that the r e c o m m e n d e d c h a r g e s and
c o r r e c t i v e o r d e r s be a r r a n g e d in a s i m p l e list, l e a v i n g the l e g a l p h r a s e o l o g y
to the L e g a l D i v i s i o n .




Some examples

follow:

Charges
Unsatisfactory management
Inadequate capital
Hazardous

lending and collection

policies and practices

E x c e s s i v e v o l u m e of a d v e r s e l y c l a s s i f i e d a s s e t s
Corrective orders
Provide acceptable management
P r o v i d e a d j u s t e d c a p i t a l a n d r e s e r v e s of n o less than
$ 1 , 2 5 0 , 0 0 0 [8(a)] or take a l l s t e p s n e c e s s a r y to
i n c r e a s e total c a p i t a l a nd r e s e r v e s b y $ 7 5 0 , 0 0 0
[8(b)]
A d o p t an d

follow acceptable

( o p e r ating)

(lending)

(inve s t m e n t )

policies

Eliminate Loss and

50% of D o u b t f u l

R e d u c e the r e m a i n i n g 50% of D o u b t f u l a n d S u b s t a n d a r d
to n o m o r e than $ 3 5 0 , 0 0 0 [8(a)] w i t h i n 120 d a y s
a n d to $ 2 0 0 , 0 0 0 w i t h i n 240 d a y s [8(b)].
(NOTE:

Th e c o r r e c t i v e

p e r i o d in a S e c t i o n 8(a)

c ase

is

by s t a t u t e not m o r e than 120 days.
H o w e v e r , the time
p e r i o d s d e e m e d a p p r o p r i a t e in a n 8(b) O r d e r for e a c h i t e m
of c o r r e c t i o n m a y v a r y an d s h o u l d be set w i t h p r a c t i c a l
considerations

of

fulfillment

in mind . )

Revised August

1975

G e n e r a l M e m o r a n d u m No.
Page

8
2

A 1 1 r e c o m m e n d a t i o n s for S e c t i o n 8(a) or 8(b) a c t i o n s h o u l d i n c l u d e
the a t t i t u d e of the state a u t h o r i t y w i t h r e s p e c t to the p r o p o s e d a c tion.
C o n t a c t w i t h the sta t e a u t h o r i t y m a y b e v i a t e l e p h o n e ; h o w e v e r , a w r i t t e n
s u b m i s s i o n of h i s v i e w s
be r e q u e s t e d .

relative

to t h e c o n t e m p l a t e d

Section 8 action should

R e p o r t s of E x a m i n a t i o n c o n t a i n i n g S e c t i o n 8(a) or 8(b) r e c o m m e n d a ­
tions, c o n c u r r e d in b y t he R e g i o n a l D i r e c t o r , s h o u l d n o t b e d i s t r i b u t e d
u n t i l c l e a r a n c e h a s b e e n g i v e n b y this D i v i s i o n a n d the L e g a l D i v i s i o n .
A c c o r d i n g l y , a l l r e c o m m e n d a t i o n s for S e c t i o n 8 a c t i o n s h o u l d c o n t a i n a s t a t e ­
m e n t s i m i l a r to the f o l l o w i n g :
N o r m a l d i s t r i b u t i o n of the e x a m i n a t i o n r e ­
p o r t w i l l b e w i t h h e l d u n t i l a d v i c e is r e c e i v e d f r o m the W a s h i n g t o n O f f i c e . "
C l e a r a n c e to r e l e a s e the r e p o r t w i l l b e t e l e p h o n e d b y the P r o b l e m B a n k S e c t i o n
to the R e g i o n a l O f f i c e a n d c o n f i r m e d b y a b r i e f m e m o r a n d u m .
At a r e e x a m i n a t i o n of a b a n k w h i c h h a s b e e n s e r v e d a C e a s e a n d
D e s i s t Order, p a r t i c u l a r a t t e n t i o n s h o u l d b e g i v e n to m e a s u r i n g m a n a g e m e n t ' s
a d h e r e n c e to loan, i n v e s t m e n t , o r o p e r a t i n g p o l i c i e s to w h i c h t he b a n k m a y
h a v e b e e n r e q u i r e d b y t he O r d e r to a d o p t a n d s t r i c t l y adh e r e .
P r e s u m a b l y , if
p o l i c i e s a c c e p t a b l e to the C o r p o r a t i o n a n d the s t a t e a u t h o r i t y a r e fo l l o w e d ,
a l o n g w i t h the o t h e r r e m e d i a l m e a s u r e s c o n t a i n e d in th e O r d e r , the b a n k w i l l
be r e h a b i l i t a t e d .
C o n v e r s e l y , if the a c c e p t a b l e p o l i c i e s a r e v i o l a t e d , s u c h
v i o l a t i o n s m a y c a u s e a d d i t i o n a l d e t e r i o r a t i o n in the b a n k ' s c o n d i t i o n a n d
s e r v e as a b a s i s for f u r t h e r a c t i o n a g a i n s t the b a n k a n d / o r its d i r e c t o r s or
o f f i c e r s b y the C o r p o r a t i o n .
To i n s u r e that f e d e r a l s e c u r i t i e s l a w s a r e c o m p l i e d w i t h in c a p i t a l
o f f e r i n g s to o t h e r t h a n i n s i d e r s b y s t a t e n o n m e m b e r b a n k s , a n y O r d e r i s s u e d
u n d e r S e c t i o n s 8(a) a n d 8(b) r e q u i r i n g a c a p i t a l i n c r e a s e w i l l c o n t a i n a p r o ­
v i s o that a l l m a t e r i a l s to b e u s e d in t h e s a l e o f the c a p i t a l r e c e i v e the
C o r p o r a t i o n ' s r e v i e w p r i o r to sale.

S e c t i o n 8(e)

I n v o c a t i o n of S e c t i o n 8(e) r e q u i r e s that the a c t s g i v i n g r i s e to the
p r o p o s e d a c t i o n m u s t i n c l u d e , a m o n g o t h e r thi n g s , p e r s o n a l d i s h o n e s t y a nd
a c t u a l or p r o b a b l e s u b s t a n t i a l f i n a n c i a l loss or o t h e r d a m a g e to t he bank.
T he
a m o u n t of a n y s u c h loss or o t h e r d a m a g e s h o u l d b e w e i g h e d in r e l a t i o n to the
s i ze of t he bank.
T h e a t t i t u d e of t he s t a t e a u t h o r i t y s h o u l d b e i n c l u d e d w i t h
a l l r e c o m m e n d a t i o n s f r o m t he R e g i o n a l O f f i c e f or S e c t i o n 8(e) act i o n .

S e c t i o n 8(g)

T h e p r o p r i e t y of v o l u n t a r y s u s p e n s i o n , r e s i g n a t i o n , o r i s s u a n c e of a
f o r m a l N o t i c e a n d O r d e r o f S u s p e n s i o n in e a c h c a s e f a l l i n g w i t h i n t he p u r v i e w
of S e c t i o n 8(g) is d e t e r m i n e d o n a n a d h o c b a s i s .
In the c a s e o f a d i r ector,
o u r L e g a l D i v i s i o n a d v i s e s t hat v o l u n t a r y s u s p e n s i o n is p r e f e r a b l e to r e s i g n a ­
t i o n s i n c e s u s p e n s i o n d o e s n o t c r e a t e a v a c a n c y o n t h e b o a r d o f d i r e c t o r s and,
t h e r e f o r e , d o e s n o t a f f o r d a n o p p o r t u n i t y f or s u c h v a c a n c y to b e f i l l e d b y a
d e s i g n e e w h o m a y m e r e l y a ct o n b e h a l f o f a n d a t t he d i r e c t i o n o f t he i n d i c t e d
resignee.
A d d i t i o n a l l y , it is i m p o r t a n t t h a t a l l v o l u n t a r y s u s p e n s i o n l e t t e r s
i n d i c a t e n o t o n l y s u s p e n s i o n f r o m o f f i c e b u t that t h e i n d i v i d u a l w i l l n o t
p a r t i c i p a t e in a n y m a n n e r in t he c o n d u c t o f the a f f a i r s of the b a n k p e n d i n g
f i n a l d i s p o s i t i o n o f the i n d i c t m e n t .

t i ously,




In o r d e r that f u t u r e c a s e s m a y b e h a n d l e d b o t h u n i f o r m l y a n d e x p e d i ­
t he f o l l o w i n g p r o c e d u r e s h o u l d b e u t i l i z e d :

G e n e r a l M e m o r a n d u m No. 8
Page 3

Revised A u g u s t 1975

1.

U p o n l e a r n i n g of a p o s s i b l e S e c t i o n 8(g) case, i m m e d i a t e l y a t t e m p t
to o b t a i n a c o p y o f t he i n d i c t m e n t f r o m t he a p p r o p r i a t e p r o s e c u t i n g
authority.
D o n o t c o n t a c t t he bank.
If a c o p y of the i n d i c t m e n t
c a n n o t b e o b t a i n e d , n o t i f y the P r o b l e m B a n k S e c t i o n b y t e l e p h o n e ,
a n d e f f o r t s w i l l b e m a d e to get a c o p y t h r o u g h o u r L e g a l D i v i s i o n .

2.

F o l l o w w i t h a l e t t e r to t he D i v i s i o n D i r e c t o r , b r i e f l y s e t t i n g
f o r t h the c i r c u m s t a n c e s , a n d i n d i c a t e y o u r r e c o m m e n d a t i o n .
If a
c o p y o f t he i n d i c t m e n t w a s o b t a i n e d ,

3.

it s h o u l d a c c o m p a n y the l e t t e r

A c o n c u r r e n t r e v i e w of th e m a t t e r w i l l b e m a d e b y t his o f f i c e
a n d t he L e g a l D i v i s i o n .

4.

T h i s o f f i c e w i l l t e l e p h o n i c a l l y a d v i s e the f o r m of a c t i o n to b e
taken.
U n t i l s u c h n o t i c e is given, r e f r a i n f r o m d i s c u s s i n g the
c a s e w i t h t he b a n k o r i n d i v i d u a l inv o l v e d .
In c a s e s w h e r e v o l u n ­
t a r y a c t i o n h a s b e e n d e c i d e d as a p p r o p r i a t e , t he t e l e p h o n i c a d v i c e
w i l l b e c o n f i r m e d b y l e t t e r i n c l u d i n g ai




J o h n J. M c C a r t h y
Deputy Director

EXHIBIT
S E C T I O N 8(a) —

I.

T E R M I N A T I O N O F I N S URANCE

Introduction

S e c t i o n 8(a) p r o v i d e s a n e f f e c t i v e method' b y w h i c h our Board c a n compel
Insured b a n k s to cease u n s a f e and u n s o u n d p r a c t i c e s and v i o l a t i o n s and to r estore
the b a n k to a safe and sound condition, or to suffer the c o n s e q u e n c e of n o n c o m ­
pliance, n a m e l y t e r m i n a t i o n of Insured status.
T he p r i n c i p a l o b j e c t i v e of s e c ­
tion 8(a) is to secu r e the n e c e s s a r y c o r r e c t i o n s and n ot to te r m i n a t e a b a n k ' s
insured status.
T h e statute, therefore, is p r i m a r i l y r e m e d i a l in nature.
T h e a u t h o r i t y to ter m i n a t e a b a n k ' s insured status under sec t i o n 8(a)
c a rries w i t h it grave r e s p o n sibility.
D e p o s i t i n s u rance m e m b e r s h i p is a V a l u a b l e
status and i ts loss w o u l d h a v e s e rious adv e r s e e f f e c t s o n the b a n k concerned.
Equity as w e l l as logic manda t e , therefore, that in any case sec t i o n 8(a) be
applied j u d i c i o usly, w i t h fairness, w i t h o u t h a s t e or prej u d i c e , and o n l y after
all o t h e r m e a n s for a c c o m p l i s h i n g c o r r e c t i o n have b e e n e x h a u s t e d .
O b v i o u s l y , the use of this p r o v i s i o n of our Act for p u n i t i v e or r e t a l i ­
atory p u r p o s e s is u n w a r r a n t e d , and threats, o ral or w r i t t e n , to r e sort to section
8(a) for the p u r p o s e of e f f e c t i n g c o r r e ction, m u s t be avoided.
T h e Corp o r a t i o n , a w a r e b o t h of its r e s p o n s i b i l i t i e s to insured banks
and the d e p o s i t i n g p u b l i c g e n e r a l l y and of the seriou s n e s s of sec t i o n 8(a)
action in terms of an i n d i v i d u a l bank, h as de v e l o p e d p r o c e d u r e s for its a p p l i c a ­
tion w h i c h s hould p r e c l u d e bias and abuse.

II. Outline of Section 8(a) and Corporation Procedure
In o rder that e a c h E x a m i n e r m a y h a v e a cle a r u n d e r s t a n d i n g of his part
in ca s e s i n v o l v i n g s e c t i o n 8(a), the a p p l i c a b l e p r o v i s i o n s of o u r A c t and an
o utline of the C o r p o r a t i o n ' s p r o c e d u r e a re d i s c u s s e d b e l o w .U

A.

Initiation of Proceedings
S e c t i o n 8(a) p r o v i d e s in part that:
1.

W h e n the Board of D i r e c t o r s finds that:
a.

A n i nsured b a n k or its d i r e c t o r s or t rustees
(1)

have eng a g e d or are e n g a g i n g in u n s a f e or u n s o u n d p r a c ­
tices, or

(2)

v i o l a t e d (a) a n a p p l i c a b l e law, rule, r e g u l a t i o n or order,
or (b) a n y c o n d i t i o n imposed in w r i t i n g b y the C o r p o r a t i o n
in c o n n e c t i o n w i t h the g r a n t i n g of a n y req u e s t b y the
bank, or (c) an y w r i t t e n a g r e e m e n t ent e r e d into w i t h the
C o r p oration, or

b.

T h e b a n k is in an u n s a f e or u n s o u n d c o n d i t i o n to continue
o p e r a t i o n s as a n ins u r e d bank,

the Board of D i r e c t o r s gives a statement r e g a r d i n g such practices,
c o n d i t i o n or v i o l a t i o n s to the C o m p t r o l l e r of the C u r r e n c y in the
case of a N a t i o n a l b a n k or a D i s t r i c t bank, to the a p p r o p r i a t e
State a u t h o r i t y h a v i n g s u p e r v i s i o n o ver the b a n k s in the c ase of

1/

W i t h c e r t a i n e x c e p t i o n s m o r e p a r t i c u l a r l y set fo r t h in the s e c t i o n of this
M a n u a l d e a l i n g w i t h " S e c t i o n 8(b) and 8(c) - Ce a s e and D e s i s t P r o c eedings",
the p r o c e d u r e s set' forth h e r e i n are g e n e r a l l y a p p l i c a b l e to p r o c e e d i n g s
i n s t i t u t e d under o ur cea s e and d e sist powers.

S ectio n V




1

S e c tio n 8(a) — T erm ination o f
In su ra n ce (R ev ised 2-9-73)

K.

a State bank, and to the Board of Governors of the Federal Reserve
System in the case of a State member bank.2/
The "statement" (hereafter referred to as "Findings and Order") is in
the nature of an initial pleading or a complaint and the furnishing of copies of
it to the proper Supervisory Authority and the bank initiates proceedings to
terminate a bank's insured status under section 8(a). The Findings and Order
specify the violations, the unsafe or unsound practices and condition complained
of in the form of findings together with appropriate corrective measures and, in
virtually every case, refer to the report or reports of examination upon which
the action is in large measure based. These reports of examination together with
the testimony of the Examiners concerned constitute the bulk of the evidence upon
which the Corporation must rely to sustain the validity of the findings or
charges made. Consequently, it is of the utmost importance that the facts in the
examination reports be set out in detail and in clear and unambiguous form.
The preparation of an examination report in which recommendations are
made for action under section 8(a) is described hereafter in greater detail.
Upon receipt in a Regional Office of an examination report containing
section 8(a) charges, the Regional Director, after giving consideration to the
surrounding circumstances and the merits of the Examiner's contentions, forwards
the report of examination to Washington together with a separate letter or memo­
randum containing his recommendations. In many instances the Regional Director
will still be able to obtain correction through means other than the procedure
outlined herein. In such instances, further action may be forestalled, and his
communication will so recommend.
Upon receipt of the examination report in Washington, if the Division
of Bank Supervision and the Legal Division agree that action under section 8(a)
is warranted, appropriate recommendations are made to the Board of Directors for
final decision. Should the Board of Directors decide to proceed, a copy of the
Findings and Order is transmitted to the appropriate Supervisory Authority and to
the bank. A copy of the Findings and Order is also furnished to the appropriate
Regional Director.
B.

The Corrective Period
Section 8(a) further provides in part that:

2/

1.

The bank has not more than 120 days from the date of service of the
Findings and Order in which to correct the violations or unsafe or
unsound practices or condition described therein.

2.

The 120-day corrective period may be shortened to not less than 20
days,
a.

by the Board of Directors if it determines in its discretion
that the insurance risk to the Corporation is unduly jeopard­
ized, or

b.

by the Supervisory Authority.

3.

If, at the end of the corrective period, the Board of Directors1
decides to proceed further, the Board of Directors gives the bank
not less than 30 days written notice of intention to terminate the
bank's insured status and fixes a time and place for a hearing.

4.

Evidence may be produced at the hearing and, based upon such evi­
dence, the Board of Directors makes findings which are conclusive.

5.

Failure of the bank to appear at the hearing shall be deemed as
consent to the termination of its insured status.

Hereafter the Comptroxler of the Currency, the State supervisory authorities
and the Board of Governors of the Federal Reserve System will be collectively
referred to as the "Supervisory Authority".

S e ctio n V



2

S e ctio n 8(a) — T erm ination o f
In su ra n ce (R evised 2-8-73)

Generally, the Findings and Order provide that the bank has 120 days
from the date of receipt to make the required corrections unless the Supervisory
Authority fixes a shorter time of not less than 20 days. It is, therefore, nec­
essary for the Board of Directors to ascertain what corrections have been made
during the corrective period so as to be able to determine whether to discontinue
the proceedings or to proceed further. Accordingly, a reexamination of the bank
is made at the conclusion of the corrective period.
C.

Reexamination and Final Decision

The report of the reexamination, which is hereafter discussed in great­
er detail, must be thorough in all respects and must include a detailed record
of all corrections made and the manner in which improvements, if any, were accom­
plished. Furthermore, the report must show the extent to which the violations
and the unsafe or unsound practices have been discontinued and the bank has been
restored to a safe and sound condition. After consideration of the reexamination
report by the Regional Director, he shall forward the report to the Washington
Office with his recommendation relative to the advisability of proceeding to ter­
minate the bank's insured status.
After considering the factual data contained in the reexamination re­
port and the recommendations of the Regional Director, the Division of Bank Super­
vision and the Legal Division, the Board of Directors will determine whether the
bank has fully or substantially complied with the requirements of the Findings
and Order. If the Board of Directors finds that there has been full or substan­
tial compliance, it will issue an order discontinuing the section 8(a) proceedings
against the bank, or, if the circumstances preclude such finding, it will give
written notice of the time and place for a hearing. In either case, copies of
the Order or the written notice are transmitted to the Supervisory Authority, the
bank, and the Regional Director.
D . Hearing
Any hearing under section 8(a) is a formal adversary proceeding and is
held pursuant to the applicable provisions of the Administrative Procedure Act.
The hearing is presided over by an Administrative Law Judge and is analogous to
a trial without a jury in Federal District Court. Unless the bank chooses not to
litigate the matter, the Corporation has the burden of proving the allegations
made in the Findings and Order through the production of evidence at the hearing.
The Corporation's evidence generally consists of the reports of examination men­
tioned previously and the testimony of Examiner personnel. However, any and all
relevant evidence, such as pertinent bank records and admissions made by direc­
tors, officers and other personnel of the bank, may be used as appropriate. The
bank may be represented by counsel, who has the right to cross-examine Corporation
witnesses and present evidence in rebuttal or in mitigation of the Corporation's
allegations. From the evidence adduced, the Administrative Law Judge makes recom­
mended findings and a recommended decision to the Board of Directors. Based upon
the entire record of the evidence produced at the hearing, the Board of Directors
will make its final written findings and order of disposition.

Ill. Bases for Section 8(a) Action
A.

General

In 1966, section 8(a) was amended in several important respects. Under
the former section 8(a) the only grounds for terminating a bank's insured status
were the commission by a bank, its directors or trustees of unsafe or unsound
practices or the violation of a law or regulation to which the bank was subject.
Under the 1966 amendments, in addition to these grounds, the following were added:
the violation of an applicable order, or written condition imposed by the Corpo­
ration in connection with the granting of any application or other request of the
bank, or any written agreement entered into with the Corporation; or the bank is
in an unsafe or unsound condition to continue operations as an insured bank. In
addition, the former section 8(a) required, as a matter of law, that the Corpora­
tion prove that the unsafe or unsound practices were continuing over some period
of time. The 1966 amendment deleted the words "have continued" so that now it is
only necessary to prove that the bank, its directors or trustees have engaged or
are engaging in such practices. The distinction could be significant because

S e ctio n V



3

S e c tio n 8(a) — T erm ination o f
In su ra n ce (R ev ised 2-9-73)

u nder the present s e ction 8(a) the single commi s s i o n of several but separate
un s a f e or unsound practices, or e v e n the c o m m i s s i o n of o n l y one u n s a f e or unsound
pra c t i c e could b e a le g a l l y sufficient basis for instit u t i n g a c t i o n to terminate
the insured status of a bank.
However, from a p r a c t i c a l standpoint, a c tion under
s e c t i o n 8(a) would not n o r m a l l y b e taken unless the b a n k is in an unsa f e or u n ­
sound condition.
Only under e x c e p t i o n a l circum s t a n c e s w o u l d such acti o n b e taken
w h e r e there has not also b e e n at reco r d of p e r s i s t e n t failure on the part of the
b a n k ’s m a n a g e m e n t to heed the rec o m m e n d a t i o n s and w a r n i n g s of the C o r p o r a t i o n and
the S u p e r v i s o r y Authority.
L i m i t i n g the use of section 8(a) p o w e r s as indicated
is e s p e c i a l l y app r o p r i a t e in light of the C o r p o r a t i o n ’s i n t e r m e d i a r y enforcement
pow e r s n o w ava i l a b l e und e r its cease and desist a u t h o r i t y c o n t ained in sections
8(b) and 8(c) of the Act.
B.

U n s a f e or Uns o u n d P r a c tices

The concept of u n s a f e or u nsound pra c t i c e s is one of g eneral a p p l i c a ­
tion w h i c h touches upon the enti r e field of the o p e rations of a b a n k i n g i n s t i t u ­
tion.
It would, therefore, be v i r t u a l l y impos s i b l e to attempt to cat a l o g w i t h i n
a s ingle all - i n c l u s i v e or rigid d e f i n i t i o n the broad s p e c t r u m of activ i t i e s w h i c h
are i n cluded b y the term.
Thus, a p a r t i c u l a r a c t i v i t y not n e c e s s a r i l y unsa f e or
uns o u n d in ev e r y instance m a y be so w h e n cons i d e r e d in light of all relevant
facts.
M

#
-Llke roany other generic terms w i d e l y used in the law, such as "fraud",
n e g l i g e n c e , prob a b l e cause", or "good faith", the t e r m "unsafe or u nsound
p r a c t i c es
has a c entral m e a n i n g w h i c h can and m ust be a pplied to const a n t l y
c h a n g i n g factual circumstances.
G e n e r a l l y speaking, an unsafe or uns o u n d p r a c ­
tice e m br a c e s a ny action, or l a c k of action, w h i c h is c o n t r a r y to g e n e r a l l y a c ­
cepted standards of prudent operation, the p o s s i b l e conse q u e n c e s of which, if
continued, wo u l d be abno r m a l r i s k or loss or dama g e to an institution, its s h a r e ­
holders, or the insurance fund admi n i s t e r e d b y the Corporation.
E v e r y o b j e c t i o n a b l e practice, however, is not a u t o m a t i c a l l y to be c o n ­
strued as u n s a f e or unsound.
The q u e s t i o n of h o w serious the p r a c t i c e is, and
w h a t its l i k e l y r esults w i l l be, form important considerations.
Obviously oper­
at i n g the b a n k in an insolvent c o n d i t i o n or w i t h impaired ca p i t a l is not o n l y an
u n s a f e or u n sound pract i c e but also cle a r l y e v i d ences that the b a n k is in an
u n s a f e or u nsound condition.
Our Ac t d o e s not d e f i n e the term "unsafe or uns o u n d p r a c t i c e s " but our
Board of D i r e c t o r s in p r e v i o u s s e ction 8(a) p r o c e e d i n g s has est a b l i s h e d examples
of such practices.
Thus, the following, amo n g others, h a v e b e e n found to be
u n s a f e or uns o u n d p r a c tices b y our Board of Directors:

S e ctio n V



1.

O p e r a t i n g w i t h m a n a g e m e n t w h o s e polic i e s and p r a c t i c e s are d e t r i ­
mental to the b a n k and j e o p a r d i z e the s a f e t y of its deposits.

2.

O p e r a t i n g w i t h a total adjusted c a pital and reser v e s w h i c h is
i n a dequate in r e l a t i o n to the kind and q u a l i t y of the bank's
assets.

3.

O p e r a t i n g in such a w a y as to e l i m i n a t e u n d i v i d e d p r o f i t s and a
p o r t i o n of surplus as e v i d enced b y the b a nk's total adjus t e d
capital and reserves.

4.

Ope r a t i n g the b a n k in such a m a n n e r as to result in a d e ficit net
ope r a t i n g income.

5.

O p e r a t i n g the b a n k w i t h a serious l a c k of liquidity,
v i e w of the b a nk's asset and dep o s i t structure.

6.

E ngaging in spe c u l a t i v e and haz a r d o u s inves t m e n t p o l i c i e s in d i s ­
regard of a b a l a n c e d secur i t y a ccount as to m a t u r i t y and other
factors.

7.

Paying e x c e s s i v e cash dividends.

8.

E n g a g i n g in h a z a r d o u s len d i n g and c o l l e c t i o n p o l i c i e s and p r a c tices
as e v i denced by, amo n g other things, the following:

- 4 -

e s p e c i a l l y in

S e ctio n 8(a) - - T erm ination o f
In su ra n ce (R ev ised 2-9-73)

a.

An excessive volume of loans subject to adverse classification;

b.

A n e x c e s s i v e v o l u m e of loans w i t h o u t a d e q u a t e d o c u m e n t a t i o n ,
i n c l u d i n g b u t n o t limited to, credit information;

c.

Excessive net loan losses;

d.

A n e x c e s s i v e v o l u m e of loans in r e l a t i o n to the b a n k ' s total
a s s e t s and total deposits;

e.

A n e x c e s s i v e v o l u m e of w e a k and s e l f - s e r v i n g e x t e n s i o n s of
c r edit to c o n t r o l l i n g shareholders, directors, officers, their
a s s o c i a t e s and rel a t e d interests, a si g n i f i c a n t p o r t i o n of
w h i c h is a d v e r s e l y classified;

f.

Excessive concentrations of credit, a substantial (significant)
portion of which is adversely classified (or otherwise criticized)

g.

Indiscriminate participation in weak and undocumented loans
originated by related banks;

h.

Th e u n w a r r a n t e d p r a c t i c e of e x t e n d i n g credit in the f o r m of
o v e r d r a f t s to dire c t o r s , officers, their a s s o c i a t e s and rel a t e d
interests;

9,

i.

Failing to adopt formal written loan policies;

j.

A n e x c e s s i v e v o l u m e of o v e r d u e loans;

k.

F a i l i n g to d i v e r s i f y the b a n k ' s l o a n portfolio.

F a i l i n g to h e e d the a d m o n i t i o n s and f o l l o w the r e c o m m e n d a t i o n s

of the Corporation and the Supervisory Authority.
W i t h r e f e r e n c e to u n s a f e or u n s o u n d p r a c t i c e n u m b e r 2. " i n a d e q u a t e
a d j u s t e d c a p i t a l and r e s e r v e s " etc., this c h a r g e is u s u a l l y pr e s e n t in m o s t s e c ­
tion 8(a) citations.
W h a t c o n s t i t u t e s such i n a d e q u a c y d e p e n d s u p o n the parti c u l a r
facts a nd c i r c u m s t a n c e s of e a c h case.
Th*. a d e q u a c y of a djusted c a p i t a l and
r e s e r v e s m u s t b e w e i g h e d in r e l a t i o n to the o v e r a l l asset c o n d i t i o n of the bank.
W h e t h e r or not a n a d d i t i o n a l c h a r g e of impai r m e n t of cap i t a l should be m a d e
d e p e n d s u p o n the p r o v i s i o n s of g o v e r n i n g s t a t u t o r y law.
However, it should be
n o t e d that a b a n k m a y h a v e the m i n i m u m c a p i t a l r e q u i r e d b y a p p l i c a b l e sta t u t o r y
law, b ut n e v e r t h e l e s s our Board of D i r e c t o r s m a y find that its a d j u s t e d c apital
is i n a d e q u a t e in v i e w of its asset c o n dition, and that the o p e r a t i o n w i t h such
i n a d e q u a t e a d j u s t e d c a p i t a l is an u n s a f e or u n s o u n d practice.

Another unsafe or unsound practice usually present in a section 8(a)
citation is number E
This charge is premised upon evidence of facts which, in
themselves, constitute grounds for more specific charges. This charge sh°uld n0Jj
be made against a bank unless there is evidence, for example, that total adjusted
capital and reserves is inadequate or that hazardous policies and practices have
been engaged in which are cited as unsafe or unsound.
C.

Unsafe or Unsound Condition

Although the statutory language of section 8(a) does not require it,
prudence and equity mandate that an absolutely essential element of every section
8(a) action is that the bank be in an unsafe or unsound condition to continue
operations as an insured bank. It does not necessarily follow, however, that
action under section 8(a) is automatically triggered when a bank is in an unsafe
or unsound condition. Proceeding under our cease and desist authority contained
in section 8(b) or 8(c) may offer a feasible alternative.
As in the c a s e of u n s a f e or u n s o u n d p r actices, it is i m p o s s i b l e to
d e f i n e p r e c i s e l y w h a t c o n s t i t u t e s a n u n s a f e or u n s o u n d c o n d i t i o n b e c a u s e the c o n ­
d i t i o n of a b a n k is d e p e n d e n t o n an a n a l y s i s of v i r t u a l l y e v e r y a s p e c t of the
^
b a n k ' s o p e r a t i o n and p o s i t i o n w i t h i n a giv e n time frame.
As a m inimum, the b a n k s
asset co n d ition, l i a b i l i t y p o s ition, i n v e s t m e n t portfolio, ca p i t a l position, e a r n ­
ings post u re, l i q u i d i t y position, and the ca l i b r e of m a n a g e m e n t m u s t b e c a r e f u l l y

S e ctio n V



5

S e ctio n 8(a) — T erm ination o f
In su ra n ce (R ev ised 2-9-73)

evaluated. While precise definition of unsafe or unsound condition is not possi­
ble» it is certain that a bank'scondition need not deteriorate to a point where
it is on the brink of insolvency or ripe for receivership before its condition
may be found to be unsafe or unsound.
D • Violations of Law, Regulation, Condition, Order, or Written Agreement
Charges arising from violations of law, regulation, a written condition
imposed by the Corporation in connection with a request by the bank, applicable
order, or a written agreement between the bank and the Corporation are as a rule
definite and ascertainable and, therefore, are generally more readily proven than
charges based on unsafe or unsound practices.
If the Examiner is not sure of his position but believes a violation
has occurred, he may list the same in the Open Section of the report of examina­
tion provided he qualifies his finding by the use of the term "apparent violation"
and clearly states his reason for believing that a violation exists.
Regardless of whether the report of examination is intended for use in
section 8(a) proceedings, great care should be exercised by the examiner in
listing a violation and this is especially true where a possible violation of a
rule or regulation is involved. The erroneous designation of conduct as a viola­
tion tends to discredit the report of examination and detract from its value as
evidence. Where the Examiner is not reasonably sure that a violation exists, he
should promptly report the facts to the Regional Director and be guided by the
Regional Director's advice thereon in the preparation of his report of examination.

IV.

Reports of Examination Containing Section 8(a) Charges

Because of the seriousness of making section 8(a) charges against a
bank, it is desirable that an Examiner consult with his Regional Director before
submitting a report of examination containing section 8(a) charges.' In some cases,
such consultation may occur prior to the commencement of an examination, in which
event it may be agreed to include recommendations for citation in the Confidential
Section of the report of examination if the facts so warrant.
Where charges under section 8(a) are to be made in a report of examina­
tion, the following should be observed:
a)

Only the Corporation's Board of Directors is authorized to make a
finding of unsafe or unsound". Therefore, Examiners should avoid the
use of the statutory words "unsafe and unsound" in the Open Section of
the examination report. Synonyms and other descriptive terms such as
"undesirable, unacceptable, and objectionable practices" are, however,
permissible and desirable.

*v

1R the Examiner's Comments and Conclusions on page 1 of the report,
under the general heading "Undesirable and Objectionable Practices",
each specific practice regarded as unsafe or unsound and the facts upon
which such conclusion is based should be listed and discussed in the
order of importance under appropriately descriptive sub-headings and
captions. Where violations of law or regulations are also present,
normally they should be listed under a separate sub—heading in summary
fashion. These discussions should include all relevant facts, should
make reference to other schedules in the Open section of the report
where full details are presented, and should substantiate the conclu­
sion that the bank is in an unsafe or unsound condition. In addition,
the Examiner s comments should include any statement made by the bank's
officers or directors either supporting any charge made by the Examiner
or showing any corrective action. It is also important that the Exami­
ner quote facts and criticisms from previous examination reports, from
letters of the Supervisory Authority to the bank, from letters of
inquiry regarding correction of criticisms from the Regional Director,
and that the Examiner call attention forcibly to incomplete corrective
promises of the management. Other comments and conclusions not germane
to the "Undesirable and Objectionable Practices" should be reported on
a separate page or pages under a general heading, "Other Comments and
Conclusions".

S e ctio n V



6

S e ctio n 8(a) — T erm ination o f
In su ra n ce (R evised 2-9-75)

c)

The order in which the violations and unsafe or unsound practices and
facts evidencing the unsafe or unsound condition of the bank are listed
and discussed in the Open Section must conform with the order and dis­
cussion of these matters in the Supervisory Section. The Supervisory
Section will, however, contain the Examiner's recommendation for cita­
tion, using the term "unsafe or unsound" where appropriate. The discussion in the Supervisory Section will ordinarily be brief, but should
include reference to those schedules in the Open Section where suppor
ing facts are presented. The discussion in the Supervisory Section
should also include any other facts which for practical reasons it
would be inadvisable to incorporate in the Open Section. For examp e,
in many instances it is alleged that the bank is extending self-serving
credit to a director or an officer, his associates and his related
interests. In such a case, the facts warranting the conclusion that
certain individuals are his associates or that he has dn interest in
certain business entities should be spelled out in detail in the Super­
visory Section of the report of examination. Furthermore, the operative
facts showing in what manner such individual, his associates, or re a e
interests are receiving a preference over other similarly situate
orrowers should be shown in the Supervisory Section. Where such informa­
tion cannot be obtained through customary examination techniques, the
Regional Director should be apprised of the situation so he may consider
the possible use of the more formal investigative method under section
10(c) of our Act. The Examiner should frankly express his opinion on
the facts and the possible consequences of the recommended procedures,
avoiding, however, confused statements of combined facts and opinions.
Violations, which in the Examiner's opinion, support action under
section 8(a) should be specifically noted in the Supervisory Section
and accompanied by a statement identifying such violations as consti­
tuting section 8(a) charges. Since the full information on violations
is ordinarily set forth in the Open Section, reference may be made to
those pages or schedules where the detailed facts are included. With
regard to violations of law or regulation, the statute or regulation
violated should be cited.

d)

In addition to setting forth the unsafe or unsound practices and viola­
tions as indicated above, the Examiner should also detail in the Super­
visory Section the measures necessary to correct such practices and
violations and to restore the bank to a safe and sound condition.
e
following are examples of corrective measures imposed by our Board of
Directors in an actual case and are shown here only for illustrative
purposes:
1.

The bank shall provide an active and capable management satisfactory
to and to be approved by the Commissioner of Banks of the State of
(the "Commissioner") and the Director of the
Division of Bank Supervision of the Federal Deposit Insurance Cor­
poration (the "Director"). This management shall include an
experienced executive officer who shall be given stated authority
by the board of directors of the bank. This authority, as estab­
lished by the board of directors of the bank shall include the
responsibility for implementing and maintaining lending, investment,
and operating policies in accord with sound banking practices.

2.

The bank shall eliminate from its book assets, by charge-off or
otherwise, the following:

3.

S e c tio n V




(a)

All assets or portions of assets classified "Loss" in the
Report of Examination of the Federal Deposit Insurance Corpo­
ration (hereinafter referred to as the "Corporation ) of

(b)

Not less than 50% of the aggregate of the remaining assets
classified "Doubtful" in the Report of Examination of the
Corporation of ________ _________•

The bank shall not extend credit, directly or indirectly, to or
for the benefit of the controlling shareholder(s). The bank shall

7

S e c tio n 8(a) — T erm ination o f
In su ra n ce (R ev ised 2-9-73)

not e x tend credit, d i r e c t l y or indirectly, to, or for, the be n e f i t
of a ny corporation, p a r t n ership, or o r g a n i z a t i o n of a n y kind w h a t ­
soever in w h i c h the said c o n t r o l l i n g shareholder(s) h as (or have)
a n y own e r s h i p or b e n e f i c i a l interest of 25% or more.
4.

The bank, a f t e r e l i m i n a t i n g the a d v e r s e l y c l a s s i f i e d assets des c r i b e d
in p a r a g r a p h two a^ove, shall r e d u c e the r e m a i n i n g a s s e t s clas s i f i e d
Doubtful
and
Substandard", as set- fnrt-h in «-Ko
__ j___
tion of the F e deral De p o s i t Insurance C o r p o r a t i o n of
as foliows;
the r e m a i n i n g "Doubtful" to n ot m o r e than-------------- *
and the "Substa n d a r d " to not m o r e than

5.

A f t e r the b a n k has recei v e d n o t i c e thr o u g h r e ceipt of e i ther a
Report of E x a m i n a t i o n of the C o r p o r a t i o n or a Report of E x a m i n a t i o n
of the State of _______________ Ban k i n g D i v i s i o n that a n y b o r r o w e r
has a n e x t e n s i o n or e x t e n s i o n s of credit w h i c h have b e e n c l assified
Doubtful
or "Loss", the b a n k shall not extend, d i r e c t l y or indi­
rectly, a d d i t i o n a l credit to a n y such b o r r o w e r
or b o r r o w e r s so
long as the e x t e n s i o n or e x t e n s i o n s of credit so c l a s s i f i e d r e m a i n
outstanding.
This r e q u i r e m e n t does not p r e c l u d e the b a n k from
r e n e w i n g a ny e x t e n s i o n or e x t e n s i o n s of credit so classi f i e d , p r o ­
v i d e d that, in the event of a n y such renewal, the b a n k shall not
incr e a s e such e x t e n s i o n or e x t e n s i o n s of credit.

6.

The b a n k shall adopt and s t r i c t l y f o l l o w w r i t t e n l oan p o l i c i e s
s a t i s f a c t o r y to the Commi s s i o n e r and the Director.
Such loan
p o l i c i e s shall provide, a m o n g other things, that the b a n k ' s loan
v o l u m e shall not exceed a r e a s o n a b l e level in r e l a t i o n to either
total d e p o s i t s or total assets.

7.

The b a n k shall p a y n o c ash d i v i d e n d s w i t h o u t
the C o m m i s s i o n e r and the Director.

8.

In a d d i t i o n to the above r e q u irements, the a s sets of the b a n k shall
be put in such f o r m and c o n d i t i o n as to b e a c c e p t a b l e to the C o m ­
m i s s i o n e r and the Director, or his designee, and the b a n k shall
p r o v i d e total a d j u s t e d ca p i t a l and r e s e r v e s of not less than
The total adju s t e d c a pital and reser v e s shall take into c o n s i d e r a t i o n
c l a s s i f i c a t i o n of asse t s m ade b v the C o r o o r n M n n in «-v»*» f-irof ^

the pri o r c o nsent of

ina t i o n of the b a n k f o l l o w i n g the ter m i n a t i o n of the fixed c o r r e c t i o n
period, and the c l a s s i f i c a t i o n shall be in a c cord w i t h the Corp o r a stated s t a ndards of c l a s s i fication, and shall in c l u d e assets
w h i c h are a d v e r s e l y c l a s s i f i e d as a r e sult of the said examination.
A d j u s t e d cap i t a l and reser v e s is to be d e t e r m i n e d b y the m e t h o d and
w i t h the c a l c u l a t i o n set forth in the A n a l y s i s of Cap i t a l and
Res e r v e on page two of the Report of E x a m i n a t i o n of the Corporation.

— ■
----- -- --- » A u u i u u i n g tne nam e s or I n d ividual
a mounts, and the e f fect of each transaction.

s respo n s i b l e ,

dates,

R e e x a m i n a t i o n R e ports

S e c tio n V



8

-

S e c tio n 8 (a) — T erm ination o f
In su ra n ce (R ev ised 2-9-73)

Depending on the substance of the particular charge or corrective order,
the corrections reported in the Supervisory Section should be shown either in
terms of the situation existing at the time of the examination which was used as
a basis for making the initial charge ("initial examination") or as of the reex­
amination date. For example, if the corrective order requires the elimination of
all those assets classified "Loss" and 50% of those classified "Doubtful” as of
the date of the initial examination, only the current status of those assets may
be considered. No additional "Loss" or 'Doubtful classifications which might
have occurred during the corrective period should be considered in analyzing this
particular corrective order. On the other hand, if the corrective order also
requires that the bank’s assets be put in an acceptable form and condition, the
assets of the bank must be viewed in light of all of the facts, circumstances and
changes which took place during the corrective period, including any new or addi­
tional adverse classifications of assets which may have been made.
In the S u p e r v i s o r y S e c t i o n , the E x a m i n e r should state h is o p i n i o n on
the a b i l i t y and i n t e n t i o n of b a n k m a n a g e m e n t to ope r a t e the b a n k s u c c essfully,
to d i s c o n t i n u e the unsa f e and u n s o u n d pra c t i c e s or vio l a t i o n s , and to m a k e any
ot h e r r e m a i n i n g corrections.
H is r e c o m m e n d a t i o n s w i t h res p e c t to the p e n d i n g
p r o c e e d i n g s should also b e stated.
T he O p e n S e ction o f the r e e x a m i n a t i o n r e port should n o t diff e r in any
m a t e r i a l r es p e c t f r o m a n e x a m i n a t i o n m a d e in the r e g u l a r course.
A c c u r a c y of
c l a s s i f i c a t i o n s , sch e d u l e s and c o m m e n t s is e s s e n t i a l since the r e p o r t w e i g h s
h e a v i l y in the Board of Directors' d e c i s i o n w h e t h e r to c o n t i n u e the se c t i o n 8(a)
p r o c e e d i n g and m a y be u s e d as d o c u m e n t a r y e v i d e n c e in a hearing.
The e x a m i n a t i o n
r e p o r t should b e c o m p l e t e d w i t h a ll p e r t i n e n t facts included in the O p e n Section.
T he E x a m i n e r should not, h owever, set forth in the O p e n S ection a n y of h is c o n ­
c l u s i o n s as to w h e t h e r the p r a c t i c e s or v i o l a t i o n s c o m p l a i n e d of h a v e b e e n c o r ­
rected, n o r should h e ref e r in a n y m a n n e r to the p e n d i n g sec t i o n 8(a) proceedings.
C o m m e n t s of this type should b e s t r i c t l y c o n f i n e d to the S u p e r v i s o r y Section.

S e c tio n V



-I -

S e c tio n 8(a) — T erm ination o f
In su ra n ce (R ev ised 2-9-73)

SECTIONS 8(b) AND (c) — CEASE AND DESIST PROCEEDINGS

I.

Introduction

As stated in that part of the manual pertaining to section 8(a) actions,
commencement of a proceeding to terminate the insured status of a bank under
section 8(a) of the Federal Deposit Insurance Act should be used only after all
other efforts to compel an insured bank to discontinue unsafe or unsound practices
or violations of law or regulations and to restore the bank to a safe and sound
condition have been tried and have failed. Moreover, although actions taken under
section 8(a) have generally been effective in successfully resolving serious pro­
blem situations, the severity of the ultimate penalty implicit in any 8(a) action
limits its use as a remedial supervisory instrument.
In 1966, the Congress gave to the Corporation and to the other Federal
banking supervisory agencies additional and intermediary powers with respect to
banks engaging in or about to engage in, among other things, unsafe or unsound
practices or violations of law or regulations. The new authority permits the
use of "cease and desist" powers in situations where the available facts and
evidence reasonably support the conclusion that a bank is engaging in or is
about to engage in an unsafe or unsound practice or violation of law. By
ordering it to cease and desist from such practices and/or to take affirmative
action to remedy the effect thereof, a bank's condition may be prevented from
reaching such serious proportions as to require the more severe measures im­
posed by section 8(a). The Corporation's "cease and desist" powers are con­
tained in section 8(b) and 8(c) of the Federal Deposit Insurance Act.

II, Section 8 (b) —
A.

Cease and Desist Proceedings

General
Section 8(b) provides that:
1.

The Corporation may issue and serve a Notice of Charges
upon a State nonmember insured bank
a.

If the bank is engaging or has engaged in unsafe or
unsound practices;

b.

If the bank is violating or has violated a law, rule,
or regulation, or any condition imposed in writing by
the Corporation with regard to approval of a request
or application, or a written agreement entered into
with the Corporation;

c.

If there is reasonable cause to believe the bank is
about to do either or the above.

2.

The notice shall contain a statement of facts relating to
the practices or violations and fix the time and place for
a hearing to determine whether a cease and desist order
shall be issued.

3.

A cease and desist order becomes effective 30 days after
it is served upon the bank, or at the time indicated if
issued upon the consent of the bank.

4.

The order remains in effect as issued until modified or
terminated by the Corporation, or set aside by a re­
viewing court.
(Refer to section 8(b) of the Federal Deposit Insurance Act.)

I

S e ctio n V




1

S e c tio n s 8(b) and (c) —
Cease and D esist P ro ceed in g s
(R ev ised 3-6-73)

Section 8 (b) permits the Corporation to order an insured bank and its
directors, officers, employees, and agents (1) to cease and desist from certain
practices and violations, and (2) to take affirmative action to correct the
conditions resulting therefrom. The practices may be affirmative in nature,
such as hazardous lending practices or negative in nature, such as the failure
of management to take specific action when needed. The failure of a bank to
comply with any cease and desist order which has become final can be the basis
for a subsequent section 8 (a) teirmination of insurance action or can be the
basis for the taking of legal action by the Corporation in a Federal District
Court to enforce the order.
Prior to the initiation of section 8(b) or section 8(c) proceedings,
the State supervisor is required to be notified as to (1) the Corporation's in­
tention to institute cease and desist proceedings; (2) the grounds for such
action; and (3) depending on the circumstances of each case, the time in which
the Corporation will defer further action pending the taking of satisfactory
corrective action by the State authority. However, failure to so advise the
State supervisor does not affect the legality of action taken under either
section 8(b) or section 8(c).
B.

Evidence Required

Section 8 (b) provides that our Board of Directors need only be of
the "opinion" that an insured bank is engaging in or has engaged in any of the
aforementioned grounds or have reasonable cause to believe that the bank is
about to engage in such violation or practice. Mere suspicion, however, is
not sufficient grounds to institute such enforcement proceedings. Any such
action must rationally be based upon facts and evidence, as the Corporation has
the burden of proving any formal charges set out in a notice of charges. Con­
sequently, documentation in the files of requests made of management, of
promises by bank officials, and of conferences with bank directors and/or
officers is of a primary necessity. Furthermore, if portions of the bank's
records are needed to establish any of the charges, copies of those records
should be made and retained as part of the necessary documentation in the case.
If to be used at all in connection with any section 8(b) proceeding, the report
of examination should, of course, set forth all pertinent facts, i.e., names
dates, amounts, and the effect of transactions, rather than rely on generali­
ties. Thus the Examiner and Regional Director contemplating a recommendation
for action under section 8(b) should ask the question: What facts do we have
to support each of the charges and conclusions reached? If there are gaps in
the evidence, an effort should be made to fill them.
C.

Actual Commission of Unsafe Act Not Required

An important aspect of the use of section 8 (b) proceedings is that it
permits the Corporation to prevent the commission of an unsafe or unsound prac­
tice or violation. The section may thus be used to prevent a developing situa­
tion from reaching serious proportions. Assume, for example, that four banks are
all owned or controlled by the same group of individuals and that the owners have,
through various self-dealing transactions, misused three of these banks but have
not yet similarly abused the fourth bank. The Corporation in this situation could,
through a cease and desist order, ban all loans and fees to the ownership or con­
trolling interest — not only as to the three abused banks, but also as to the
fourth bank even though no self-dealing had as yet transpired with regard to that
bank. The basis for the order against the fourth bank would be that the Corpora­
tion had reasonable cause to believe, because of the abusive self-dealing trans­
actions committed by the owners with regard to the other related banks, that
similar unsafe or unsound practices would occur at the remaining bank.
D . Enforcement of Affirmative Corrective Acts
Under section 8 (b) the Corporation may both prohibit unsafe or unsound
practices or violations of law and may also require that affirmative steps be
taken to undo the harm resulting from previous violations or unsafe or unsound
practices. For example, if the bank is being operated with an excessive amount of
substandard loans, a cease and desist order issued pursuant to a section 8(b)
action could require the bank to take affirmative action to reduce the dollar
volume of such loans to an amount specified in the order.

S e ctio n V




2

S e c tio n s 8 (b) and (c) —
C ease and D esist P ro ceed in g s
(R evised 3-6-73)

E . Consent Cease and Desist Orders
In nearly every instance, the Corporation attempts to use a procedure
under section 8(b) known as the consent cease-and-desist order in an effort to
eliminate the need for time-consuming administrative hearings. The consent cease
and desist procedure is premised upon the agreement to a stipulation between rep­
resentatives of the Corporation and the bank's board of directors whereby the bank
agrees to the issuance of a proposed cease-and-desist order. The effect of follow­
ing this procedure is to reduce considerably the time period between initial review
of the case and the date on which an enforceable and binding cease-and-desist order
is issued. Under this approach, copies of the proposed Stipulation, Notice of
Charges, and Order to Cease and Desist are furnished to the Regional Director who
in turn is advised to send a copy of each document to the State supervisor and
to the bank's board of directors. A meeting is first arranged with the State super­
visor and he is asked to join in the enforcement action with the Corporation or to
execute a waiver stating in essence that he has no objection to the action proposed.
Thereafter, a meeting with the bank's board of directors is scheduled. If agree­
ment is reached at the meeting, the Stipulation is executed by the bank's board of
directors, Corporation representatives, and the State supervisor, unless a waiver
has been signed. Among other things, the Stipulation usually will provide for
waiver by the bank of its right to a hearing and its consent to the immediate
issuance of an agreed upon cease-and-desist order. If the Stipulation is agreed
upon by all parties, it is submitted to the Corporation's Board of Directors for
final approval and for the issuance of the agreed upon cease-and-desist order.
If either the State supervisor or the bank's board of directors refuses to agree
to a Stipulation and if satisfactory alternative procedures cannot eventually be
agreed upon (such as a written agreement), then formal action under section 8(b),
or if warranted section 8(c), generally will be recommended to the Corporation's
Board of Directors.

F.

Recommendation of Action

The recommendation for section 8(b) action is not necessarily dependent
upon an examination of the bank or, where a bank has been or is being examined,
upon completing of a report of examination. If sufficient evidence is otherwise
available, there is little or no reason to await an examination of the bank or
completion of a report of examination before recommending cease and desist action.
Under such circumstances, the matter may be fully covered in a letter, prepared
or transmitted by the Regional Director, containing appropriate charges, proposed
corrective measures, the recommendation for such action, and copies of the appro­
priate documents substantiating the charges.
In those instances where there is a report of examination, the report
normally would be prepared in the same manner as discussed under section 8(a)
action. While this form is preferable, the charges and proposed corrective
measures alternatively may be included in a letter from the Regional Director
provided they are adequately discussed and documented in the report of examination.
In either case, it is important to include as many detailed facts pertaining to
the alleged practice or violation as is reasonably possible.
G.

Determination of Compliance

The periods for compliance with the various segments of the cease and
desist order are determined individually and, for example, may include four or
five different periods ranging from 30 days to ten or twelve months from the date
of issuance of the order. Virtually every order to cease and desist will require
the bank to submit progress reports to the Regional Director at specified intervals
setting forth the form and manner of compliance with the substantive requirements
of the order. While these progress reports should be useful, interim visitations
of the bank should be made as a cross check on the accuracy of the bank's progress
reports and its degree of compliance. Of course, examinations of the bank will
serve to determine compliance with the order and such examinations may be scheduled
to coincide with one of the specified corrective periods. A memorandum reporting
the results of the visitation should suffice to police the extent of compliance
with the order. In the case of an examination, the report of examination should
be handled as discussed under section 8(a) re-examinations. Any time the bank
fails to comply substantially with any of the requirements of the order within the
time specified, that matter should immediately be brought to the attention of the
Regional Office together with recommendations for appropriate action to be taken
under the circumstances.

S e ctio n V




- 3 -

S e c tio n s 8(b) and (c) —
C ease and D esist P ro ceed in g s
(R evised 3-6-73)

III.

Section 8(c) —

Temporary Cease and Desist Proceedings

Ordinarily, when cease and desist proceedings require an administra­
tive hearing, anywhere from three to eight months could elapse before a final
cease and desist order is issued. Section 8(c) of the Federal Deposit Insurance
Act, however, provides the Corporation with the power to act with the utmost
speed when the facts so dictate. Paragraph (1) of section 8(c) permits the
Corporation to issue a temporary cease and desist order, which is immediately
effective, whenever the violation(s) or threatened violation(s) or the unsafe
or unsound practice(s) specified in the notice of charges served upon the bank,
or their continuation, is (are) likely to cause insolvency or substantial diss­
ipation of its assets or earnings, or is likely to otherwise seriously prejudice
the interests of its depositors. The temporary cease and desist order remains
in effect pending completion of the administrative proceedings, unless within
ten days after the bank has been served with such order, the bank obtains relief
in Federal District Court.
Because of the nature of this action, recommendation probably would
be forthcoming from the Regional Office without the benefit of a completed report
of examination. For the same reason, consent procedures will not apply in this
instance.
(Refer to section 8(c) of the Federal Deposit Insurance Act.)

IV. The Written Agreement
In appropriate cases the Corporation will enter into a written agree­
ment with a bank, and the written agreement, like the consent cease-and-desist
order, is based on a voluntary acceptance by the bank. Although the Corporation
is not required to coordinate a written agreement with the State supervisory
authority, an opportunity to join in the enforcement procedure should be extended.
Written agreements have taken three forms to date. First, those which
are expressly approved and authorized by the Board of Directors of the Corporation
pursuant to Board resolution in advance of any meeting with the bank boards of
directors. It then becomes a written agreement between the Corporation and the
bank on the date on which it is executed by the bank's board and by the designee
of the Corporation's Board of Directors. This type is seldom used.
Second, those which originate as consent cease-and-desist orders but
which as a result of negotiations with the bank's board of directors, are subse­
quently changed to a written agreement. After agreement is reached at the meeting
between the bank's board of directors and representatives of the Corporation, the
Board of Directors of the Corporation will expressly ratify the agreement, pursuant
to Board resolution, or reject it. If ratified, it then becomes a written agree­
ment between the Corporation and the bank.
Third, those which are termed a letter agreement. This type never receives
the authorization or express approval of the Board of Directors of the Corporation.
The letter agreement is an effective enforcement tool that is designed to
be utilized quickly at the Regional level. In discharging their supervisory res­
ponsibilities, Regional Directors or their representatives historically have met
with bank managements in an effort to obtain correction of undesirable conditions
or practices. The letter agreement provides a means to confirm in writing any
understanding reached or commitment obtained from the bank's directors at such a
meeting. It is not to be used as a form of written ultimatum or as the proposed
order is used in the consent cease and desist procedure. Although its contents
would read much like an order issued under a section 8(a) or 8(b) action, the
letter agreement is not by itself enforceable under the provisions of the Federal
Deposit Insurance Act. Failure to comply with its provisions, however, would be
a basis for more formal procedures under section 8.

S e ctio n V




4

S e c tio n s 8(b) and ( c ) —
C ease and D esist P r o ceed in g s
(R evised 3-6-73)

The letter agreement is not a substitute for more formal proceedings
under sections 8(a) or 8(b). Generally the use of letter agreements is confined
to corrective measures agreed to by a bank's board of directors when first a bank
shows problem characteristics. If previous corrective suggestions have not been
followed, or if previous commitments to undertake corrective steps have not in
fact been met, then more formal proceedings under section 8 should be considered.
The letter agreement is to be drawn after the meeting, and signed by
each bank director present, the Regional Director and State supervisor, if he chose
to participate.

V.

Examples of Corrections Ordered by the Corporation's Board of Directors
Under Section 8(b) and/or Included in Written Agreements.

The following are examples of the type of corrective measures taken by
the Corporation's Board of Directors under its cease and desist authority:
a.

Where insider loans and self-serving
element existed, an absolute ban was
or fees to the ownership element, or
partnership or other entity in which
had actual or working control;

fees to the ownership
imposed on any loans
to any corporation,'
the ownership element

b.

Where the bank suffered from inadequate capital and selfserving transactions by the ownership element, a ban was
imposed on the payment of cash dividends without the prior
written consent of the Corporation and the State supervisor;

c.

Where a bank's investment portfolio was overloaded in long­
term municipal securities, it was ordered that the bank's
investments should be limited to U.S. Treasuries or agency
obligations with maturities of not more than seven years,
or high grade corporate securities with maturities of not
more than two years, or high grade corporate notes with
maturities of not more than one year;

d.

Where a bank was in an extended borrowing position because
of a lack of liquidity and forward loan commitments, a ban
on borrowings was imposed except on those borrowings needed
to meet depositor withdrawals or irrevocable forward loan
commitments outstanding as of the date of the Stipulation;

e.

Where written loan policies were nonexistent or inadequate,
the Corporation ordered adoption and strict adherence to
acceptable written loan policies;

f.

Correction of violations of laws and regulations was ordered;

g.

Elimination of all loans classified "Loss" and 50 percent of
loans classified "Doubtful" in the latest FDIC report of
examination was ordered;

h.

Where self-dealing through management service contracts with
the ownership element existed, a ban was imposed on manage­
ment service contracts except with the express prior written
approval of the Corporation and the State supervisor;

i.

A prohibition was ordered against the extensions of additional
credit to any bank borrower with existing extensions of credit
classified "Doubtful" or "Loss";

j . Where a lack of liquidity was a problem and no State reserve
requirements existed, the maintenance of "cash and due from
banks" was ordered maintained at a certain level in order to
alleviate the illiquidity;

S e ctio n V



5

S e c tio n s 8(b) and (c) —
C ease and D esist P ro ceed in g s
(R ev ised 3-S-73)

S e ctio n V



k.

W h e r e o u t - o f - t e r r i t o r y loans p r e s e n t e d a problem, the bank
w a s r e q u i r e d to d e f i n e its trade a rea and, w i t h r are e x c e p ­
tion, c onfine its lending to such area;

l.

W h e r e a d d i t i o n a l c a p i t a l w as needed, a p r o g r a m w as o r d e r e d
for the r a i s i n g o f a d d i t i o n a l capital; a n d

m.

W h e r e s e l f - d e a l i n g t r a n s a c t i o n s o c c u r r e d inv o l v i n g r e lated
ban k s a nd the o w n e r s h i p element, a b a n w as imposed o n the
b u y i n g an d s e lling o f a ll a s s e t s b e t w e e n r e l a t e d banks.

~6 ”

S e c tio n s 8 (b y and (c ) —
Cease and D esist P ro ceed in g s
(R evised 3-6-7Z)

SECTIONS 8(e) AND (g) —

SUSPENSION AND REMOVAL PROCEDURES

I . Section 8 (e)
Section 8(e) gives the Corporation the power to order the removal of any
director or officer of an insured State nonmember bank when it is determined, after
notice and hearing, thati
a.

The director or officer has committed any violation of
law, rule, or regulation, or of a cease and desist order
which has become final, or has engaged or participated
in any unsafe or unsound practice in connection with
the bank, or has committed or engaged in any act or
omission or practice which constitutes a breach of his
fiduciary duty; and

b.

The bank has suffered or will probably suffer sub­
stantial financial loss or other damage or that the in­
terests of its depositors could be seriously prejudiced
by reason of his actions; and

c.

The violation, practice, or breach is one involving
personal dishonesty on the part of the director or
officer.

It further permits removal of a director or officer for his conduct or
practices with respect to "another insured bank or other business institution
which resulted in substantial financial loss or other damage and which evidences
his personal dishonesty and unfitness to continue as a director or officer.
In addition, a director or officer can be immediately suspended or pro­
hibited from participation in any manner in the conduct and affairs of the ba
pending completion of proceedings regarding his removal if the Corporation deems
it necessary for the protection of the bank or the interests of its depositors.
Similar to proceedings under section 8(c), an emergency suspension or order of
prohibition remains effective pending completion of the proceedings unless the
person affected applies within ten days for a stay of such suspensionor pro­
hibition. As in the case of action proceedings under section 8(b), the State
supervisor is required to be notified and given an opportunity, depending on the
circumstances of case, to take satisfactory corrective measures. Failure to
notify the State supervisor, however, does not affect the legality of the action
taken under section 8 (e).

II. Section 8 (g)
Section 8(g) permits suspension of any director, officer, or other person
from participation in the bank's affairs by written notice and without a hearing,
if t h L person is charged in any information,indictment, or complaint authorized by
a U.S. Attorney, with the commission of any felony involving any dishonesty or
breach of trust. Our Legal Division has concluded that the provisions of this
section also encompass State grand jury indictments and informations. Notice also
shall be served on the bank. Suspension shall remain m effect until either li
or made permanent through issuance of a removal order by the Corporation after re
solution of the criminal case.

S ectio n V



- 1 -

S e c tio n s 8(e) and (g) —
S u spen sion and Removal P ro ceed in g s
(R evised 3-6-73)