Findings Of Fact Primary Service Area (PSA) The proposed association will be located in the Paddock Plaza adjacent to the Paddock Mall Regional Shopping Center, both of which are currently under construction. The site is in the vicinity of the intersection of Southwest 27th Avenue and State Road 200 in the southwest portion of Marion County. The PSA encompasses the southwestern portion of Marion County, including a part of Ocala which is a concentrated residential community. Beyond the city limits, there are schools, recreational areas, an airport, horse farms, a community college, and light industrial type firms in the surburban area. The proposed site is located in the northeastern part of the PSA. The PSA is in a developmental stage with current plans of residential and commercial development which should make the area the fastest growing sector in Marion County. The home offices of Fidelity Federal Savings and Loan Association and Midstate Federal Savings and Loan Association, and a satellite office of the latter association are located near the northeast boundary of the PSA some three miles from the proposed site. The northern and eastern boundaries of the PSA follow well-defined highways. The southern boundary follows the Marion County line, and the western boundary is drawn due north from the intersection of State Road 200 and the Marion County line. (Testimony of Starke, Exhibit 1) Standards (a) Public convenience and advantage. One commercial banking facility, the main office of Citizens First Bank of Ocala, is located in the northeast corner of the PSA approximately two and one-half miles from the proposed site. It provides full banking services to its customers. Two savings and loan associations have received approval to operate in the PSA. One will be a branch of Midstate Federal Savings and Loan Association which will be located at the Paddock Mall adjacent to the proposed site. The other will be a limited facility of the First Federal Savings and Loan Association of Mid-Florida (Volusia County) which will he situated approximately 11.3 miles south of the proposed site in a residential community. Neither of these approved institutions have commenced operations. The proposed site is readily accessible from all sectors of the market area. State Road 200 is a primary artery for northeast/southwest travel. Southwest 27th Avenue is a primary north/south thoroughfare. There are numerous other feeder streets which connect with those two roads to bring traffic to the new mall and plaza area. In addition, Interstate Highway 75 intersects State Road 200 approximately one mile southwest of the proposed site. An extension to Southwest 17th Street is currently proposed which would provide direct access from the northeast to the proposed site. The location of the proposed association at a large regional shopping center will provide an opportunity for residents of the PSA to combine shopping and financial business. This will be facilitated through the utilization of a drive-in facility at the site. Ample parking will be provided in the plaza area, and the network of roads in and around the shopping center will facilitate use of the applicant's services. It will provide a convenient location to conduct savings and loan business for residents and businessmen in the southwestern portion of the county without the necessity of traveling to the more congested downtown area of Ocala. The fact that the proposed association will be a home office rather than a branch office will tend to attract a greater number of individuals within the PSA than a satellite office, and undoubtedly will induce persons outside the PSA to use the institution's services. In 1960, the City of Ocala had a population of 13,598. It increased 66.1 percent to 22,583 by 1970. The 1978 city population was estimated to be 32,652, a 44.6 percent increase over 1970. An April 1, 1979 estimate placed the population at 34,034. In 1960, Marion County had a population of 51,616. It increased 33.7 percent to 69,030 in 1970 and was estimated at 102,722 in 1978, an increase of 48.8 percent over 1970. The population was estimated to be 106,852 in April 1979 and is scheduled to reach 164,400 by 1990. It is estimated that the population of the PSA was about 7,700 in 1960 and increased to 10,500 or 36.4 percent by 1970. It is now estimated to be some 17,000 and projected to reach over 19,000 by 1982. This projection is based on the area's recent growth history, current housing developments in the area, and projected growth within Marion County. The 45 to 64 year group of the population of Marion County has shown a modest increase since 1960 from 21 percent to 22.6 percent in 1978. At that time, the state percentage was 22 percent. Those 65 years of age and over in Marion County increased from 10.6 percent in 1960 to 15.7 percent in 1978. This was lower than the statewide average of 17.5 percent in that category. It is anticipated that those 45 years and older will continue to show a steady increase in the future due to the fact that most of the county increase in population has been due to continuing in-migration of retirees. These individuals normally bring cash assets which are available for deposit in savings and loan associations, and they ordinarily would have no prior connection with other banks or savings and loan associations in the immediate area. The per capita personal income in Marion County in 1969 was $2,646 and increased to $5,157 in 1977. Per capita personal income in Florida in 1977 was $6,697. In 1969 the mean family income of residents of Ocala was $9,775, as compared with $8,062 in Marion County and $10,120 throughout the State of Florida. It is estimated that the current mean family income in Ocala is approximately $17,506, as compared to $14,438 in the county and $18,123 in the state. The unemployment rate in Marion County in January 1980 was 6 percent whereas the rate in the State of Florida was 5.2 percent. Residential building permits issued in the City of Ocala in 1975 rose from 156 units for a total of 3.5 million dollars to 511 permits in 1979 for a total of 10.7 million dollars. For Marion County, 872 permits were issued in 1975 for a total of 14.3 million dollars and 1,706 in 1979 for a total of 44.5 million dollars. It is currently estimated that the median value of owner occupied housing units in Ocala is $32,775 and $26,173 in Marion County. Local Conditions There are seven commercial banks with approval to operate a total of 18 offices in Marion County. In June 1975, the commercial banks headquartered in Marion County held combined time and savings deposits of some 104 million dollars and by mid-1979, such deposits totaled over 176 million dollars, an increase of about 69.5 percent. From December 1978 to December 1979, time and savings deposits in those banks rose from 161.4 million dollars to 199.8 million dollars, an increase of 23.8 percent. Total deposits in all Marion County Banks increased from 204.8 million dollars in 1975 to 304.9 million in 1979, a 48.9 percent increase. There are currently 16 savings and loan association offices approved for operation in Marion County. Three of the associations have their home office in Ocala. These are Fidelity Federal, Mid-State, and United Federal of Ocala. Fidelity Federal operates a total of five offices within the county, one of which is not yet open. Mid-State Federal has seven offices approved within the county and its office in the PSA is not as yet open. United Federal, an association which opened in January 1979, has its only office within the county. Both First Family Federal (Lake County) and First Florida Federal Savings and Loan Association (Alachua County) have recently received approval to operate branch offices within Marion County. First Federal of Mid-Florida (Volusia County) has received approval to operate an office in the southern part of the PSA but has not yet opened. In 1975, savings and loan associations headquartered in Marion County reported combined savings of $162,177,000. By the end of June 1979, their combined savings totaled $312,508,000, an increase of 92.7 percent. The combined savings accounts of the three Marion County associations totaled $312,508,000 in midyear 1979, as compared to June, 1975 savings of $162,177,000, representing an increase of $150,331,000 or 92.7 percent, during the subject four-year interval. Mid-State Federal, with an office approved at the Paddock Mall, held June, 1979 savings of $207,770,000, and those accounts represented an increase of $96,475,000, or 86.7 percent, over its savings reported June, 1975. First Federal of Mid-Florida, a Volusia County association with an office approved in the PSA, had June, 1975 savings of $199,843,000, and those savings increased by $150,637,000, or 75.4 percent, to reach a total of $350,480,000 in June, 1979. The smallest savings and loan association in Marion County is United Federal, which opened in 1975. In June, 1975, it reported savings of $6,881,000, and its midyear 1979 statement showed savings of $27,830,000. United Federal, operating only one office in Ocala, had growth in savings of $20,949,000, or 304.5 percent, during the stated interval. In the opinion of the applicant's economic consultant, approval of the applicant's application would not have an adverse effect on the other financial institutions in the area due to the steady growth of the community and anticipated growth in the future. He further is of the opinion that the proposed savings and loan association will be able to successfully operate in the PSA in view of the presence of the Paddock Mall and the general growth of population and business establishments in the area. He feels that the current national economic situation will not have a great impact on a new institution which will be able to obtain variable interest rates. He further sees an advantage to the fact that the proposed association will be the first state chartered capital stock form of organization in Marion County, and that it will provide an opportunity for public purchase of shares in the association. During the first three years of operations, the applicant projects its net profits at $75,648 for the first year, $88,335 for the second, and $103,340 for the third. These amounts were arrived at by including known cost items and estimating various income and expense amounts. The applicant anticipates acquiring accounts from new residents of the PSA and those current residents who may wish to transfer savings accounts from commercial banks in the Ocala area due to convenience and the higher rate of interest paid by savings and loan associations. The applicant does not anticipate the acquisition of a significant number of customers from existing savings and loan associations in the area. It also will look to employees at the new shopping mall who may utilize the conveniently located new institution for savings transactions. The applicant intends to compete vigorously for new business with these individuals and from those who presently do not have accounts in any existing associations. The applicant estimates that the institution will attain savings of five million dollars at the end of the first year, $9,500,000 at the end of the second year, and $14,500,000 at the end of the third year of operation. In arriving at those estimates, consideration was given to past experience of existing association offices in the Ocala area, and that of established associations in similar competitive situations. The eight organizers of the proposed association will also serve as the directors. They represent a diversity of occupations, including businessmen, attorneys, real estate broker, a physician, and a dentist. All but three reside in the Ocala area. All have been residents of Florida for over a year and none has been adjudicated a bankrupt or convicted of a criminal offense involving dishonesty or breach of trust. Their employment and business histories show responsibility in the handling of financial affairs. One of the proposed directors has served as an attorney to a large savings and loan association in Miami Beach, and is a member of the board of directors of Barnett Bank of Miami. Another serves as legal counsel for a local bank in Ocala. The proposed officers of the association have not been named as yet. The proposed association will be capitalized at $2,000,000. This capital will be divided into common capital of $1,000,000 in surplus and reserves of $1,000,000. The association intends to issue 200,000 shares of stock with a par value of $5.00 and the selling price of $10.25, plus a $.25 share organizational expense fund contribution. The proposed directors of the association have subscribed to 25,000 shares each. This is a preliminary stockholder list and it is the intention of those individuals to redistribute the stock to a minimum of 400 persons in accordance with FSLIC requirements. It is the organizers' intention to acquire pledges from 700 persons for the deposit of $1,000,000 in withdrawable savings accounts. It is intended that the majority of the stock will be sold to persons residing in Marion County, and the organizers anticipate no difficulty in this respect. (Testimony of Starke, Hastings, Bitzer, Berman, Casse, Hicks, Williams (Deposition - Exhibit 5), Broad (Deposition - Exhibit 6), Carter, Exhibits 1-3) Name As heretofore found above, the applicant amended its application to change the proposed name to Allstate Savings and Loan Association. Although the descriptive word "Allstate" is not used in the corporate name of any other savings and loan association in this state, the Office of the Comptroller received a letter, dated February 22, 1980, from Allstate Savings and Loan Association, Glendale, California, an affiliate of Sears Roebuck and Company, objecting to the use of the word "Allstate" in that the public may be misled to believe that the proposed association is in some way affiliated with Sears Roebuck and Company. (Testimony of Starke, Exhibit 1) Site and Quarters. As heretofore found, it is the organizers intention to locate the proposed association in the Paddock Plaza, adjacent to the Paddock Mall, a new shopping center to be constructed in Ocala. The applicant has an option to lease 5,000 square feet of space for a period of fifteen years for a rental price of $12.00 per square foot for 2,000 square feet and $10.00 per square foot for 3,000 square feet, plus common area maintenance. The option provides that on the fifth year of tenancy, the total annual rental will be increased by the cost of living as determined by the consumer price index. The leased area will include a two-car drive-in facility. There will be adequate parking at the site. The applicant plans to sublease 2,000 square feet of the leased premises on a short-term basis to reduce operating costs in the initial years of operation. An appraisal of the proposed association quarters establishes that the proposed leased premises are suitable for a savings and loan association and that the lease price compares favorable to current leasing arrangements for similar business property. (Testimony of Starke, Exhibit 1) Proposed Findings of Fact filed by the parties have been fully considered and those findings which have not been adopted herein are considered to be either unnecessary, or unsupported in fact and are specifically rejected. Some of the proposed findings state conclusions which properly should be considered by the Comptroller. Pursuant to Section 120.57(1)(b)(12), Florida Statutes, this REPORT does not include conclusions of law and recommendations. DONE and ENTERED this 25 day of April, 1980, in Tallahassee, Florida. THOMAS C. OLDHAM Hearing Officer Division of Administrative Hearings 101 Collins Building Tallahassee, Florida 32301 (904) 488-9675 COPIES FURNISHED: Honorable Gerald A. Lewis Comptroller, State of Florida The Capitol Tallahassee, Florida 32301 William L. Lyman, Esquire Assistant General Counsel The Capitol Tallahassee, Florida 32301 Daniel Hicks and Randolph Tucker, Esquires Post Office Drawer 1969 Ocala, Florida 32670 Merritt C. Fore, Esquire Post Office Box 1507 Ocala, Florida 32670
Findings Of Fact Introduction Petitioners, Herman R. Staudt and L. Justin Jackman, are the owners of 1,900 and 5,600 shares of capital stock, respectively, in Intervenor-Respondent, Bank of Central Florida (Bank). This represents 9.1 percent of the outstanding shares of the Bank. The Bank is a state chartered commercial bank which began business in 1975. Its principal offices are located at 1401 Lee Road, Orlando, Florida. Petitioners were founders and original members of the board of directors of the Bank when it began operating in 1975. On September 9, 1981, the President of the Bank issued a notice of special meeting of shareholders to be held on September 21, 1981, for the purpose of "considering and determining by vote whether an agreement to merge said Bank with and into Second Bank of Central Florida...shall be approved, ratified and confirmed." Under the terms of the merger agreement, each shareholder was entitled to receive substitute shares of stock in the successor bank, or if that was unacceptable, he would receive $25 per share for each share of stock held by him, or he could dissent from the merger. The agreement was ultimately approved by a majority of the shareholders and applications were then filed with Respondent, Department of Banking and Finance, Division of Banking (Department), seeking formal state approval. The applications were approved by the Department on October 7, 1981, and the merger was actually consummated effective January 4, 1982. The Bank continues to operate under the corporate title "Bank of Central Florida". Petitioners initially objected to the plan of merger and requested that the Department conduct a hearing on the merger applications. The request was denied. Petitioners then availed themselves of their rights under Subsection 658.44(5), Florida Statutes, which provides that whenever a bank and its dissenting shareholders cannot agree on a value to be assigned the stock held by the dissenting shareholders, the Comptroller shall select an appraiser to make an "appraisal of such dissenting shares" which shall be final and binding on all parties. On September 7, 1982, the Comptroller selected Blackstock & Company, Inc., a Jacksonville, Florida registered broker-dealer and registered investment adviser, to appraise the value of the dissenting shares. In its letter selecting Blackstock, the director of the Division of Banking gave the following relevant instructions to Blackstock: Your appraisal should include the Bank of Central Florida's earnings history and the history of its stock sale prices. Characteristics of the Bank of Central Florida to be considered in your appraisal are, the stock is not widely traded, and the interest of the shareholders for whom this appraisal has been commissioned constitute a minority interest in Bank of Central Florida. Your appraisal shall include a determination expressed in dollars and cents per share of the-fair compensation to be paid for all outstanding minority shares. That final dollar and cent figure shall be based upon information readily available through public records and records of the bank, but shall not be based upon any con fidential records of the Department of Banking and Finance. According to the letter of engagement, Blackstock was to receive a maximum $2,000 fee for its services to be paid by the Bank. On September 9, 1982, Petitioners filed a complaint in circuit court for Leon County seeking a declaratory judgment concerning the constitutionality of the Department's actions. On November 2, 1982, the circuit court entered its order holding that, if any party was dissatisfied with the independent appraisal, it was entitled to a de novo hearing before the Division of Administrative Hearings pursuant to Subsection 120.57(1), Florida Statutes. On November 11, 1982, Blackstock submitted a report of appraisal to the Comptroller in which it expressed the opinion that the dissenters' stock should be valued at $27.63 per share. After certain communications with the Department, a revised report was prepared by Blackstock and forwarded to the Comptroller on December 30, 1982. On January 5, 1983, the Comptroller issued its notice of intent to adopt the report. That notice prompted the instant proceeding. The Bank's stock has not been traded publicly at any time. All stock exchanges prior to December 31, 1981, were between existing shareholders. Most involved the Bank's present majority shareholder and chairman of the board. The Bank is a closely held family corporation and its stock is not readily marketable. This was openly acknowledged in the plan of merger itself. The Bank paid no dividends from its inception through December 31, 1981. The Bank is considered to be well managed. It has produced excellent financial results, and is considered to be a "high-performing" bank. As of December 31, 1981, its return on equity and return on assets were 19.4 percent and 1.73 percent, respectively, which were higher than any publicly traded bank in the State of Florida. The Blackstock Report William C. Norton, vice-president of Blackstock and a registered securities dealer, assumed the initial responsibility for preparing the report on behalf of Blackstock. Without advising the Department, Norton contacted Terry A. Rodgers, a former co-worker in Orlando and a chartered financial analyst, and requested that Rodgers prepare the report. They agreed to split the $2,000 fee. Neither Norton or Rodgers had previously prepared an appraisal of dissenting shareholders' stock. Norton instructed Rodgers to "gather the financial information", prepare an "analysis" of that data, and then forward his results to Blackstock. Norton also "suggested the types of comparisons (he) felt would be appropriate in looking at it", the financial information Norton believed to be relevant, and "some of the valuation techniques (he) felt would be appropriate." However, it was not disclosed which of the four techniques used by Rodgers was recommended by Norton. Rodgers forwarded his report to Norton on October 18, 1982. After receiving Rodger's report, Norton reviewed the data, proofed the financial information, and rechecked Rodgers' calculations. The two also communicated by telephone on several occasions and once met briefly in Orlando. In all, Norton estimated he spent approximately six or seven days reviewing the data. He also requested that his partner review the data. Norton ultimately accepted the report almost verbatim, signed it, and sent it to the Department on November 11, 1982. After consultation with the Department, Norton made very slight revisions to the report and resubmitted it on December 30, 1982. Rodgers did not appear or testify at the final hearing in this cause. The report has been received in evidence as Respondent's Exhibit 1 and Intervenor's Exhibit 5. Data apparently relied upon by Rodgers, and in turn reviewed by Norton, included (a) all sales of stock of the Bank from its inception through December 31, 1981, (b) all purchases of bank stock by Donald Rogers (its current president) from 1975 through 1979, (c) the Bank's statement of condition as of December 31, 1981, (d) the Bank's Call Reports for the years 1977 through 1981, (e) the notice of special meeting of shareholders given on September 9, 1981, and (f) comparative data from the First Bankers' Corporation of Florida, Jefferson Bancorporation, Atlantic Bancorporation, and Great American Banks, Inc. The latter four banks are publicly traded Florida banks and were considered by Norton to be representative for comparative purposes because, like the Bank, two did not pay dividends one was controlled by a single family, and the remaining bank had undefined operating "characteristics" similar to that of Bank of Central Florida. However, because of the Bank's extremely small size in relation to the four, and the limited marketability of its shares, none were comparable in terms of size, market type or performance. Further, Norton conceded that a part of the 1901 earnings of one of the four (Jefferson) would normally be factored out for comparative purposes because they included extraordinary income. This in turn caused the composite price-earnings ratio to be substantially understated. By a subjective process, four valuation techniques were incorporated into the Blackstock report and were based upon data derived from a five year study period (1977-1981). These included (a) historical stock sale transactions, (b) industry price-earning ratio comparison, (c) industry price to book value ratio comparison, and (d) capitalization of expected future earnings. The four approaches produced the following valuations: $26.49, $30.38, $25.21 and 28.42. The sums were then divided by four to reach the recommended value of the stock, or $27.63 per share. Norton (and presumably Rodgers) did not attempt to assign a relative weight to each technique because such a process would require the use of subjective judgment, the four valuations arrived at were within a relatively narrow range ($25.21 to $30.38), and no single approach yielded a result substantially out of line with the others. Had the weighted average approach been used, Norton would have assigned a greater or lesser value or weight to the results of the various appraisal valuation techniques employed according to relevance. Despite his rejection of this methodology, Norton conceded that the weighted average method is the most applicable and best suited approach for valuing capital stock not having an active and continuous market, and that it is used by the U.S. Comptroller of the Currency in determining the value of dissenters' shares in federal bank merger cases. In this regard, he agreed that had the Bank been federally chartered, he would have used the same approach in valuing its stock. As noted earlier, Norton's industry price-earning ratio comparison was distorted because of the inclusion of a bank with extraordinary income due to the sale of a subsidiary and property. Had this non-recurring income been factored out, the value of the stock under this methodology would have exceeded $50 rather than the $30.38 reflected in the report. The historical sales approach, to which Norton gave equal weight, was also subject to criticism. This approach, which analyzed stock sales between 1977 and 1981, had the inherent weakness of failing to reflect the Bank as a going concern. The Goff Report A second valuation study was performed on behalf of Intervenor by Ronald W. Goff, a research analyst for Allen C. Ewing & Company, an investment banking firm in Tampa, Florida. That report has been received in evidence as Intervenor's Exhibit 9. Although Goff reviewed the Blackstock report and certain other financial information, he relied primarily upon previous stock exchanges as a basis for determining fair market value. In this regard, he used a major stock transaction between a former vice-chairman of the board (J.F. Cooper) and its present chairman of the board (J.E. Muroski) as the primary basis for arriving at his recommended valuation. The sale involved 12,525 shares, was negotiated in the fall of 1980 and consummated on January 6, 1981, and resulted in increasing Muroski's total stock outstanding in the Bank from 45.3 percent to 59.7 percent. The agreed upon price was $27.86 per share, and after "massaging" that number, Goff arrived at a recommended valuation of $27.34 per share. The circumstances underlying the sale included a falling out between Cooper and Muroski in the spring of 1980 and a request by Muroski that Cooper resign his position with the Bank in May of that year. Shortly afterwards, they began negotiations for Muroski to buy the stock, The deal was agreed upon in 1980 but was not consummated until January, 1981 for tax purposes. Although Goff did not consider the exchange to be an insider transaction, nonetheless it is found that it was because (a) no dividends had been paid from the inception of the Bank through 1981, and Cooper was accordingly receiving no return on his stock, (b) Cooper had terminated all involvement in the Bank's operations, (c) the exchange took place between current and former principal officers of the Bank, and (d) Muroski was an insider by definition of the Securities and Exchange Commission. Therefore, the transaction was not a reasonable basis to determine the fair market value of the stock. Goff himself acknowledged that it was an unusual valuation practice in preparing an appraisal of bank stock to determine market value on the basis of one or a very few transactions. The Perkins Report Marc I. Perkins, an investment banker with Raymond, James and Associates in St. Petersburg, Florida, prepared a valuation report for Petitioners. That report has been received in evidence as Petitioners' Exhibit Perkins had previously been engaged on a number of occasions to value bank stock where a dispute over its value had arisen in a proposed merger. Perkins utilized the weighted average methodology which generally employs, where applicable, five categories of analyses, and then requires that the appraiser assign a weight to each category. This method is identical to that used by the U.S. Comptroller of the Currency in valuing dissenting shareholders' stock and is endorsed in an authoritative text entitled "Security Analysis" by Graham and Dodd. The five approaches include (a) book value, (b) adjusted book value, (c) imputed market value, (d) market value, and (e) investment value. However, in the case at bar imputed market value was inapplicable since that method is used only where a subsidiary is merged into a larger holding company. By the same token, the market value criterion was excluded by Perkins since no stock exchanges occurred during the last eleven months of 1981 and those occurring prior to that date were more akin to insider exchanges. Accordingly, Perkins used the three remaining approaches, to wit, book value, adjusted book value and investment value from which he derived valuations of $35.51, $35.44 and $50.30, respectively. After assigning the appropriate relative weights to each sum, he arrived at a recommended valuation of $46.59 per share. Unlike the authors of the Blackstock report, Perkins found no publicly traded Florida banking companies to be comparable to the Bank, and because of this, used as broad a peer group as possible for comparative purposes in order to take in the maximum number of investor decisions. The comparative data was extracted from the Jerry Williams, Inc. report which is a compilation of financial data for twenty-one publicly traded banking institutions in Florida. The use of a broader base is more appropriate than the Blackstock peer group since it is virtually impossible to find other banking companies of the same size, market type and performance as the Bank of Central Florida. Perkins assigned the greatest weight (75 percent) to the results of the investment value approach since that approach is appropriate where market value does not exist or where the market is thin. Moreover, it provides an easy to understand and reasonable estimate of the value to investors of a share in the future earnings of the Bank. Then, too, that approach includes an analysis of price earnings ratios for the average publicly traded Florida bank, and takes into account a number of key factors that go into investors' perceptions about risk and estimated returns. The approach also considers historical earnings per share as a guide to earnings prospects. Perkins assigned only 25 percent weight to the results of the adjusted book value approach since it had less relevance than investment value. He gave no weight to book value since that approach is dependent on historical cost and fails to reflect the investors' perceptions of the value of the bank as a going concern. Perkins' study produces a more reliable and accurate result than the other suggested methodologies because of its well-accepted approaches, the use of relative weights, a broader and more representative peer group and its rejection of irrelevant and improper data. Miscellaneous From December 31, 1981 through July, 1983 the value of money left on deposit in commercial banks in 30-day certificates of deposit and reinvested was 18 percent. The Bank's average prime rate was 16 during 1982 and the average interest rate charged customers by the Bank was 12 percent.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that Petitioners L. Justin Jackman and Herman R. Staudt be paid $46.59 per share for each share of stock held in the Bank of Central Florida, said amount representing the fair market value of such stock as of December 31, 1981. It is further RECOMMENDED that Petitioners' request to receive interest from December 31, 1981 through July, 1983, post order interest, and costs incurred in this proceeding be DENIED. DONE and ENTERED this 23rd day of September, 1983, in Tallahassee, Florida. DONALD R. ALEXANDER Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 23rd day of September, 1983.
Findings Of Fact On July 6, 1981, the Applicant submitted to the Department of Banking and Finance (Department) an application pursuant to Section 658.19, Florida Statutes (Supp. 1980), for authority to organize a corporation for the purpose of conducting a general banking business to be located at 1000 Massey Boulevard, unincorporated Palm City, Martin County, Florida. Notice of receipt of the application was published in the Florida Administrative Weekly on December 11, 1981. Protests and requests for hearing were filed by American Bank of Martin County (American), Central Savings and Loan Association (Central), Florida National Bank of Martin County (Florida National), and First National Bank and Trust Company of Stuart (First National) on or before December 30, 1981. On September 27, 1982, Florida National withdrew its protest. Publication of the Notice of Hearing in this cause appeared in The Stuart News on October 1, 1982. A hearing was held in this cause on October 19 through 20, 1982, in Stuart, Martin County, Florida. The pronosed bank will occupy 3,300 square feet of an existing single- story structure located at the west end of the Villa Plaza Shopping Center fronting on Massey Boulevard, also known as Martin Downs Building. The proposed bank will have visibility and access to Massey Boulevard and also to First Street along the rear (south side) of the Villa Plaza Shopping Center, through use of the ingress and egress facilities of the shopping center. (View by Hearing Officer) The site has facilities for three drive-in lanes. The plan of the proposed bank will include a teller line, lobby area, private offices, teller work area, coupon booth area, vault, restrooms and an employee lounge. Adequate parking facilities already exist and there is room for expansion. (T. 48-50; View by Hearing Officer) The facility is adequate to handle the projected business of the bank for a reasonable period of time and is of such a nature to warrant customer confidence in the security, stability and permanence of the bank. The Applicant intends to lease the facilities from R&S Equities, a Florida partnership whose partners are John C. Robinson and Woodrow J. Smoak. The lease terms include a five year term with annual rent of $36,000 payable in monthly installments of $3,000. The lease also provides for renewal options every five years for a maximum of thirty (30) years with specified annual rental payments to be used during each of the five year terms. Applicant anticipates an investment of $174,500 in fixed assets, including $49,500 for leasehold improvements and $125,000 for furniture, fixtures and bank machinery. Temporary quarters for the bank are not anticipated as the existing structure is ready and the planned improvements can be completed quickly. Applicant has no plans to purchase or lease any land, buildings, improvements to be made thereon, or equipment, furniture, or fixtures to be installed therein, from a director, officer or stockholder who owns 5 percent or more of the capital stock of the Applicant or any controlled company of any officer, director or stockholder. The Applicant's primary service area incorporates portions of the City of Stuart, unincorporated Martin County and a portion of unincorporated Martin County known as Palm City. The PSA is a "bedroom community" with shopping, recreational and public school facilities. Included within the PSA are U.S. Census Enumeration Districts 11, 12, 32, 33, 61, 65, 66, 67 and a portion of 10. The PSA's northern, eastern, southern and western boundaries are the St. Lucie County/Martin County Line (along with the St. Lucie River and Frazier Creek), Colorado Avenue (State Road 76), Indian Street, extended to Florida's Turnpike, and Florida's Turnpike respectively, and are located 2.4 road miles, 0.9 miles, 1.8 miles and 2.5 miles respectively from the proposed site. The south fork of the St. Lucie River runs north and south through the eastern protion of the PSA. The Palm City Bridge, a modern fixed span bridge, crosses the river and connects the larger portion of the PSA west of the river with the eastern portion and the City of Stuart. The bridge's western end is approximately 0.2 miles from the Applicant's proposed site. The delineation of the boundaries of the PSA took into consideration the locations of the offices of existing financial institutions, along with the other economic and demographic factors. The ability of PSA residents to reach the proposed site in a convenient and timely manner was likewise a factor considered in delineating the boundaries of the PSA. The northern boundary of the PSA, consisting primarily of the St. Lucie County/Martin County Line, presents a logical and political northern boundary. The eastern boundary, Colorado Avenue, is a major north/south thoroughfare chosen primarily because of its proximity to existing financial institutions. The southern boundary, Indian Street, extended to the Florida Turnpike and the western boundary, the Florida Turnpike, were chosen because they are areas beyond which population concentrations are limited. Also, Florida's Turnpike is a significant man-made barrier. There are no other significant natural or man-made barriers which would restrict the flow of traffic within the PSA. The PSA's major north/south arteries are 18th Avenue, Mapp Road, Palm City Avenue and Colorado Avenue. The PSA's primary east/west arteries are Highway 714, Massey Boulevard, a/k/a Martin Downs Boulevard and Murphy Road. The 1970-1980 population trends for the City of Stuart, Martin County, the State of Florida, and the Applicant's designated PSA were considered. This data was provided by the Applicant and the Department from census data and from data published by the University of Florida's Bureau of Economic and Business Research (BEBR). The PSA population grew from 3,300 in 1970 to 6,350 in 1980 for an average annual increase of 9.2 percent. The City of Stuart grew from 4,820 in 1970 to 9,467 in 1980 for an average annual increase of 9.6 percent. The population of Martin County went from 28,035 in 1970 to 64,014 in 1980 for an average annual increase of 12.8 percent. Over the same ten year period, Florida's population increased an average of 4.4 percent annually from 6,791,418 to 9,746,324. The BEBR projected 1983 Martin County population at 70,600 by its low projection, at 74,600 by its medium projection and at 75,300 by its high projection. For Florida's 1983 population, the BEBR estimated 10,352,200 as its low projection, 10,595,100 as its medium projection and 10,757,200 as its high projection. The average annual 1980-1983 population growth rate projections for Martin County are 3.43 percent, 5.20 percent and 5.88 percent as calculated from the low, medium and high 1983 projections respectively. For Florida, tide average annual 1980-1983 population growth rate projections are 2.07 percent, 2.90 percent and 3.46 percent as calculated for the low, medium and high projections respectively. See "Data Source Packet" of Department's Official File (DSP). One hundred percent of the County's 1970-1980 population growth resulted from immigration, a proportion above the state's 91.97 percent. (DPS) Over the 1970-1979 period, the Martin County population aged somewhat, with the population proportion below age 15 having decreased from 23.8 percent to 18.6 percent; the population proportion within the working age group (15 to 64) increased from 54.9 percent to 56.3 percent; and the population aged 65 years and above increased from 21.3 percent to 25.1 percent. Florida population during the same period decreased from 25.8 percent to 20.4 percent for the group below age 15; increased from 59.6 percent to 61.9 percent in the working age group and increased from 14.6 percent to 17.7 percent for those 65 and over. (DPS) In April, 1980, the Martin County population was older than the Florida population. Martin County's population under age 15 was 16.4 percent; with 59.1 percent in the working age group; and 24.5 percent over age 65. In April, 1980, 19.3 percent of Florida's population was below age 15; 63.4 percent were in the working age group; and 17.3 percent were aged 65 or over. With a higher percentage of people over age 15, there is a relatively higher number of people in Martin County of an age to utilize banking services than exists on the average statewide. The rate of growth in the number of households in Martin County exceeded the rate of growth in the State of Florida during the 1970-1980 period. The BEBR estimated the number of Martin County households in 1980 at 25,863, having reflected at 155.5 percent increase above the 1970 level of 10,122 households. The number of state households increased 63.8 percent during the same period from 2,284,786 to 3,841,356. County and state average household sizes declined 11.8 percent and 12.1 percent, respectively, over the 1970-1980 period with the Martin County average household size having declined from 2.72 to 2.40 persons, and the state average declined from 2.90 to 2.55 persons. Statewide unemployment rates have significantly exceeded those of Martin County for all periods since 1974. During 1975, Florida's 10.7 percent unemployed rate exceeded Martin County's 8.7 percent rate. In 1976, Florida's 9 percent unemployment rate exceeded the 7.7 percent rate in Martin County. Florida's 8.2 percent unemployment rate exceeded the Martin County 6.9 percent rate in 1977. In 1978, Florida's unemployment rate was 6.6 percent which was also well above the 5.5 percent rate in Martin County. In 1979, the margin was even larger with Florida's unemployment rate at 6 percent and Martin County's unemployment rate at 4.8 percent. The margin continued to grow in 1980 with the Florida unemployment rate still at 6 percent but the Martin County unemployment rate having dropped to 4.4 percent. In 1981, Florida and Martin County's unemployment rates were 6.8 percent and 5.6 percent respectively. In 1981, the Florida unemployment rate remained well above the unemployment rate in Martin County. (T. 181) Between 1979 and 1981, average household effective buying income (HEBI) in Martin County grew from $16,339 to $20,119. In 1979, Florida HEBI was $18,613 and in 1981, was $21,301. The increase between 1979 and 1981 was much more significant in Martin County than in the State of Florida overall. HEBI increased 23.1 percent or $3,780 in Martin County while increasing only 14.4 percent or $2,688 in Florida between 1979 and 1981. Net income figures show an even more significant increase in Martin County. Between 1979 and 1981, net income in Martin County increased 73.3 percent from $336,574,000 to $583,448,00. During the same period, net income in Florida increased by only 34.2 percent from $63,889,652,000 to $85,768,756,000. Per capita personal income data (PPI) formulated for the state and county by the United States Department of Commerce, and reprinted by the University of Florida, was in evidence and considered. This data appears in the following table: YEAR 1970 1971 1972 1973 1974 Martin Co. 3861 4258 4773 5246 5363 Florida 3693 4007 4461 4988 5341 YEAR 1975 1976 1977 1978 1979 Martin Co. 5834 6437 7215 8094 9178 Florida 5634 6094 6733 7591 8521 PPI level in Martin County exceeded Florida PPI levels throughout the 1970-1979 period. Between 1975 and 1979, PPI in Martin County increased by $3,344 or 57.3 percent while per capita income in the State of Florida increased by only $2,887 or 51.2 percent. In addition, PPI in Martin County in 1979 exceeded the statewide figure by 7.7 percent. The Applicant submitted data on estimated retail sales in Martin County and Florida for 1975 through 1981. At the time the application was filed, the latest available figures were for 1979. Between 1979 and 1981, estimated retail sales increased 32.3 percent in Martin County while the State of Florida increased by only 28 percent. Five operating commercial bank offices are located in or within one mile of the PSA. Florida National operates a branch office 0.8 miles northeast of the proposed opened 0.2 miles west of the proposed site. The two branches are the only bank offices in the PSA. The following three bank offices are located within one mile of the PSA: Florida National's main office, operating 2.7 miles northeast of the proposed site; First National's main office, operating 2.1 miles northeast of the proposed site; and First National's branch office, operating 1.8 miles northeast of the proposed site. These five bank offices are operated by only two bank institutions, neither of which is a state chartered institution nor has its main office in the PSA. Florida National, the only bank operating in the PSA, withdrew its protest to this application. Seven savings and loan association (association) facilities were cited as operating in or within one mile of the PSA. These seven association facilities include two main offices in operation and five association branch offices. Two offices operate within the PSA: Harbor Federal Savings and Loan Association (formerly First Federal Savings and Loan Association of Ft. Pierce) operates a branch office 0.9 miles northeast of the proposed site. First Federal Savings and Loan Association of Martin County operates a branch office 0.9 miles northeast of the pronosed site.. The following facilities are within one mile of the PSA: Citizens Federal Savings and Loan Association operates a branch office 2.2 miles northeast of the proposed site; Community Federal Savings and Loan Association operates a branch office 2.7 miles northeast of the proposed site; First Federal Savings and Loan Association of Martin County has its home office 2.2 miles northeast of the proposed site; Home Federal Savings and Loan Association has a branch office 2.1 miles northeast of the proposed site; and the recently opened main office of Central Savings and Loan Association is one mile northeast of the proposed site. A period's inflation is most commonly estimated by the period's corresponding change in the consumer price index, which is the only method of record in this proceeding. Each month, changes in the consumer price index from the previous month and for the previous 12 months are published by the United States Department of Labor, Bureau of Labor Statistics. For the year ending September 30, 1981, the rate of inflation was 11.0 percent. For the year ending December 31, 1981, the rate of inflation was 8.9 percent. For the year ending March 31, 1982, the rate of inflation was 6.8 percent. (DSP) Only one bank office (a branch office) was in operation within the PSA in March, 1982. During the year ending March 31, 1982, the Florida National Bank of Martin County branch office within the PSA increased its total deposits from $12,638,000 to $16,307,000 or an increase of 29 percent, a rate more than four times that of the 6.8 percent rate of inflation that existed during the year ending March, 1982. Data is also available for the bank offices operating within one mile of the PSA. The main office of First National increased its total deposits during the period of March, 1981, to March, 1982, from $149,296,000 to $153,845,000 for a yearly increase of 3.0 percent. The branch office of First National close to the PSA increased deposits during the same period from $3,144,000 to $3,587,000 or an increase of 14.1 percent. The Florida National main office had a decrease in deposits from $89,806,000 to $3,587,000 or a loss of 2.0 percent during the year ending March 31, 1982. Total Martin County deposits for the period increased from $402,666,000 to $423,762,000 or a 5.2 percent increase. During the period from March 31, 1981, to March 31, 1982, bank deposits within the State of Florida increased from $41,478,327,000 to $43,933,129,000 or an increase of approximately 5.9 percent. In summation, the rate of growth in deposits within the PSA exceeded the rate of growth in deposits in Martin County and the rate of deposit growth was bore than four times greater than the rate of inflation for the same period. For the period between September 30, 1980, and September 30, 1981, the savings and loan association offices operating in the PSA showed increases in the volume of savings accounts as follows: Harbor Federal increased from $12,287,000 to $14,997,000 or a yearly increase of 22.1 percent; First Federal of Martin County (opened in March, 1980) increased from $2,194,000 to $6,033,000 or a total increase of 175.0 percent in one year. Thus, the increase in the two savings and loan offices in the PSA showed a combined one year gain of $6,549,000 or 45.2 percent. In Martin County as a whole, savings increased from September 30, 1980, to September 30, 1981, from $352,735,000 to $381,625,000 or a yearly increase of 8.2 percent. In the State of Florida as a whole, savings during the same period went from $42,560,303,000 to $45,332,969,000 or a yearly increase of only 6.5 percent. In summary, association deposits at offices in the PSA increased at a rate far in excess of those in Martin County as a whole, and in the State of Florida. In addition, the 45.2 percent increase of association deposits in the PSA during the reporting period was more than four times the 11 percent rate of inflation for the year ending September 30, 1981. The Applicant proposes to offer the full range of banking service offered by full-service commercial banks. No deficiencies in the proposed services were established by any Protestant. However, it should also be noted that there are, at present, only two branches of one multi-bank holding company (Florida National) located within the PSA. No other bank is presently represented in the PSA. No bank is headquartered in the PSA, nor is there a facility of a state chartered bank in the PSA. Also, only Florida National Bank and one other banking organization maintain bank offices in or within one mile of the PSA. Consequently, alternative or competitive choices are limited in the PSA and within one mile of its boundaries at the present time. Applicant projected total deposits of $5,000,000, $9,000,000 and $13,000,000 at the end of the proposed banks' first three years of operation respectively. It also projected a $22,381 net operating loss during the proposed bank's first operating year, and pre-tax net operating income levels of $257,715 and $466,208 during the bank's second and third operating years respectively. These deposit and increase projections were formulated under the assumption that the proposed bank would have: $2,750,000 in total time and savings deposits and $2,250,000 in total demand deposits at the end of the first operating year; $5,400,000 in total time and savings deposits and $3,600,000 in total demand deposits at the end of the second operating year; and $8,450,000 in total time and savings deposits and $4,550,000 in total demand deposits at the end of the third operating year. Applicant's projections are conservative, were unrefuted by the Protestants and are likely achievable. The Applicant's testimony and evidence established that there are nine active residential subdivisions in the PSA totaling 6,576 units of which 416 or 6.3 percent were cited as completed. Home prices range from between $65,500 and $580,000. Five areas are planned for single family units accounting for 95 percent of the total units planned. Prices for the single family units range between $75,000 and $580,000, while prices for condominium units range between $65,500 and $87,900. The single family subdivisions are Canoe Creek, Martin Downs, Mid-Rivers, Pipers Landing and Westgate. Utilities are being installed for 70 new lots in the PSA and there are 15 new rental units recently opened and under construction. Extensive testimony was presented about the Martin Downs project located within the PSA. Martin Downs is a 2,400 acre planned residential development which will contain 5,500 residential units. It will also contain two golf courses, racquet club, resort center, retail shopping center, office park, industrial park, government service center, schools, yacht club, parks and a utility plant. Road improvements have already been made in and around Martin Downs. Further, during 1983, major improvements will be made to Martin Downs Boulevard, the major east/west artery through the PSA. These improvements include widening that portion of Martin Downs Boulevard that runs past the proposed site of the Applicant bank. (T. 23-26) Martin Downs will be built in phases with a final population of 12,000 to 13,000 people. (T. 23) The builders of Martin Downs already have approximately $20 million invested in the project. The Crane Creek area of Martin Downs is one of the most exclusive residential sections in the PSA. (View by Hearing Officer) It consists of 346 lots of which approximately 300 are sold and approximately 150 lots are occupied or have homes under construction. The lots sell for $35,000 to $60,000. Homes sell from around $150,000 to $400,000. Crane Creek also contains a championship golf course, clubhouse and racquet club with thirteen tennis courts. (T. 15) Four condominium projects are presently under construction: Country Meadows, Mapletree Villas, The Crossings, and The Townhomes at Poppleton Creek. Prices range between $49,900 and $87,900. These four projects have 306 total units planned of which 60 were completed in October, 1982, and another 72 under construction. Residents living in all of the single family subdivisions cited and at Mapletree Villas and the Crossings must, as a practical matter, pass the Applicant's proposed site on their way to and from the City of Stuart. In addition to the developments cited, there are a large number of existing residences within the PSA. Many of these are located west of the South Fork of the St. Lucie River and these residents must also pass the Applicant's proposed site when going to and from Stuart. (View by Hearing Officer) Commercial activity in the PSA is primarily centered along Massey Boulevard and Mapo Road in close proximity to the subject site. Downtown Stuart lies approximately 2.5 miles northeast of the proposed site. As of May, 1981, 35 businesses were established within one-half mile of the proposed site. In addition, the Monterey Plaza, a large, modern shopping center within one mile of the proposed site, contained 44 businesses in August, 1981. There are 43 businesses within one-half mile of the site. Manufacturing is limited in Martin County. However, the county's largest manufacturer, Grumman Aerospace Corporation, is located at Witham Field, approximately 2.7 miles east of the proposed site. In addition, there are two areas established for industrial development in the PSA itself. One is a planned industrial park to be located in Martin Downs. The other is a ten acre industrial park known as Heritage Square, located at Palm City School Road and State Road 714, approximately 1.7 miles southwest of the proposed site. There are approximately three acres currently developed in the park which opened in 1978. At the time the application was filed, it had 12 tenants, 11 of which are small manufacturing firms. The proposed bank will be capitalized with a total of $1,500,000. The capital will be divided into common capital of $1,000,000, surplus of $300,000, and undivided profits of $200,000. The bank will issue 100,000 shares of stock, with a par value of $10 and a selling price of $15 plus $.50 per share assessed for the Organizational Expense Fund. All 100,000 shares have been subscribed to. The proposed directors have personally subscribed to 30,000 shares as follows: Herbert-Biggs, 5,000 shares; Stephen Frasier, 5,000 shares; Richard Jemison, 5,000 shares; Charles Pope, 5,000 shares; Donald Ricci, 5,000 shares; and Roy Talmo, 5,000 shares. The proposed Board of Directors is composed of six members with diverse business backgrounds, some of whom have had prior banking experience. Herbert Biggs is an 11 year Florida resident living in Jupiter, Florida. Mr. Biggs has a B.S. degree from Mississippi State University and a J.D. from the University of Mississippi. After a short period as a professional basketball player, Mr. Biggs came to Martin County to practice law. He has since left the practice of law to pursue a career as a general contractor and developer. He is currently the president of Suncastle Homes, Inc., a construction and development corporation. Mr. Biggs holds professional licenses as a realtor, general contractor and attorney. Mr. Biggs is a U.S. citizen. Mr. Biggs has a reputation evidencing honesty and integrity and has an employment and business history demonstrating his responsibility in financial affairs. Stephen Frasier is a 12 year resident of Martin County. He holds a B.S. degree from Florida State University and J.D. from the University of Florida. Mr. Frasier served in the Navy as a Flight Officer and is presently a Lieutenant in the Naval Reserve. He served as the Assistant City and County Attorney in Martin County and is presently engaged in the private practice of law in Martin County as a partner in the firm of Frasier and Bateman, P.A. Mr. Frasier is a member of the Civitan Club, the Masonic Temple, the Elks Club, Martin County Bar Association, on the Board of Directors of the Visiting Nurses Association, Florida Bar, on the Board of Directors for the Paradise Ranch for Boys, and is the Chairman of the Board for the Sailfish District of the Boy Scouts of America. (T. 122) Mr. Frasier is a U.S. citizen. (T. 121) Mr. Frasier has a reputation evidencing honesty demonstrating his responsibility in financial affairs. (T. 80, 113; Exs. 1, 5) Richard Jemison has been a Florida resident since 1939, and presently lives in Stuart, Florida. (T. 102; Ex. 1) He has a B.S. degree in Civil Engineering from the University of Florida. (T. 103) Mr. Jemison was in the printing business in St. Petersburg, Florida, for 13 years and is now the president of Seabridge Associates, Inc. (T. 104) He holds licenses as a real estate broker, mortgage broker, and contractor. (T. 103) Mr. Jemison is a member of the Palm City Chamber of Commerce, Stuart Chamber of Commerce and Kiwanis Club. Mr. Jemison has substantial banking experience in that he served on the Board of Directors of the First State Charter Bank in St. Petersburg from 1968 through 1974. (T. 106; Ex. 1) He is a U.S. Citizen. (T. 102) Mr. Jemison has a reputation evidencing honesty and integrity and has an employment and business history demonstrating his responsibility in financial affairs. (T. 83, 115-116; Exs. 1, 4) Charles Pope has lived in Florida since 1951 and presently lives within the PSA of the proposed bank. He received a B.S. degree from the University of Florida and has completed all of the course work for an M.B.A at the Florida Institute of Technology. Mr. Pope has direct banking experience from his past employment with First National Bank and Trust Company of Stuart, Atlantic Bank Corporation, and First American Bank and Trust Company (formerly First American Bank of Palm Beach) Mr. Pope is the president of Charles Pope & Associates, Inc., an investment banking firm. He holds a mortgage brokers license from the State of Florida, is a Certified Commercial Lender and a Certified Review Appraiser. He is a member of the American Bankers Association, American Institute of Banking and the Chamber of Commerce. Mr. Pope is a citizen of the United States. He has a reputation evidencing honesty and integrity and has an employment and business history demonstrating his responsibility in financial affairs. Donald Ricci has lived in Florida since 1975, and in Martin County for the past five years. After being honorably discharged from the U.S. Air Force, Mr. Ricci was a part owner and general manager of an automobile dealership. Mr. Ricci became interested in the real estate business and worked as the Marketing Director for First Southern Holding Company, the developers of Martin Downs. As Marketing Director, he was in charge of sales and marketing for Martin Downs. Mr. Ricci is a 50 percent partner and manager of Seabridge Associates, Inc., a real estate development firm whose offices are located in the PSA and close to the proposed site of the Applicant bank. Mr. Ricci is a licensed real estate broker and a member of the Palm City Chamber of Commerce and the Stuart/Martin County Chamber of Commerce. Mr. Ricci is a U.S. citizen. He has a reputation evidencing honesty and integrity and has an employment and business history demonstrating his responsibility in financial affairs. Roy W. Talmo has lived in Palm Beach County, Florida, since 1964. He received a B.B.A. and M.B.A from the University of Minnesota. Mr. Talmo has extensive direct banking experience, having been employed as a banker since 1959. Mr. Talmo has been employed by the Continental Bank in Chicago and the First National Bank of St. Petersburg, and is the past Chairman of the Board of Miami National Bank. Mr. Talmo is presently Chairman of the Board of First National Bank and Trust Company in Palm Beach, and has directed its growth from an $11 million bank to its present size of just under $500 million. Mr. Talmo also serves as a Director of First American Bank of Broward County, First City Bank of Dade County, and First State Bank of Broward County. He is a member of the Palm Beach Junior College Foundation, the Palm Beach Festival, and the Tourist Development Committee for Palm Beach County. Mr. Talmo is a U.S. citizen. The Applicant adduced evidence which was not refuted, and which established that Mr. Talmo has a reputation evidencing honesty and integrity and an employment and business history demonstrating his responsibility in financial affairs. As of the date of the final hearing, the Applicant had not selected a President or Chief Executive Officer, nor a Cashier or Operations Officer. The Applicant has selected the name First American Bank of Martin County. There are no Florida financial institutions with a name so similar as to cause confusion with the proposed name. Parenthetically, it should be noted that a cogent discussion and resolution of the issue of "name confusion" is extant in First Bank of Hollywood Beach and Office of the Comptroller vs. American Bank of Hollywood, DOAH Case No. 80-1581, opinion filed May 13, 1981. The Applicant has proven that public convenience and advantage will be served by the approval of the application. The Applicant has proven that local conditions indicate a reasonable promise of successful operation for the new bank. DONE and ENTERED this 4th day of April, 1983, in Tallahassee, Florida. P. MICHAEL RUFF, Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 4th day of March, 1983. COPIES FURNISHED: C. Gary Williams, Esquire Michael J. Glazer, Esquire Post Office Box 391 Tallahassee, Florida 32302 Noel Bobko, Esquire Post Office Drawer 2315 Stuart, Florida 33495 James L. S. Bowdish, Esquire Post Office Drawer 24 Stuart, Florida 33494 Walter W. Wood, Esquire Office of the Comptroller The Capitol, Room 1302 Tallahassee, Florida 32301 The Honorable Gerald Lewis Comptroller The Capitol Tallahassee, Florida 32301 ================================================================= AGENCY FINAL ORDER ================================================================= STATE OF FLORIDA DEPARTMENT OF BANKING AND FINANCE DIVISION OF BANKING IN RE: Application of First Administrative Proceeding American Bank of No. 83-5-DOB Martin County DOAH No. 82-034 / FINDINGS OF FACT, CONCLUSIONS OF LAW, AND FINAL ORDER Pursuant to Notice, an Administrative Hearing was held before P. Michael Ruff, Hearing Officer, with the Division of Administrative Hearings on October 19 and 20, 1982, in Stuart, Martin County, Florida. The purpose of the hearing was to receive evidence concerning the application of First American Bank of Martin County for authority to open a new bank in Stuart, Martin County, Florida. At the hearing, the parties were represented by counsel: For Applicant, C. Gary Williams, Esquire First American Bank Michael J. Glazer, Esquire of Martin County: Post Office Box 391 Tallahassee, Florida 32302 For Protestant, Noel Bobko, Esquire American Bank of Post Office Drawer 2315 Martin County: Stuart, Florida 33495 For Protestant, James L. S. Bowdish, Esquire First National Bank & Post Office Drawer 24 Trust Co. of Stuart: Stuart, Florida 33494 For the Department of Walter W. Wood, Esquire Banking and Finance: Office of the Comptroller The Capitol, Suite 1302 Tallahassee, Florida 32301 Having fully considered the facts and information contained in the record relating to the application of First American Bank of Martin County for authority to organize a corporation for the purpose of conducting banking business in Stuart, Florida, the Comptroller of the State of Florida, as Head of the Department of Banking and Finance, hereby renders the following FINDINGS OF FACT, CONCLUSIONS OF LAW AND FINAL ORDER in the above-styled case.
Conclusions The statutory criteria set forth in Chapter 658, Florida Statutes, which were in effect at the time the application was filed, are the standards which govern this application. Chapter 3C-10, Florida Administrative Code, which was in effect at the time the application was filed, contains the rules under which this application was considered. As set forth in Rule 3C-10.051, Florida Administrative Code, when an application for authority to organize and operate a new state bank is filed, it is the applicant's responsibility to prove that the statutory criteria warranting the grant of authority are met. The Department shall conduct an investigation pursuant to Section 658.20, Florida Statutes, which was done in this case, and then approve or deny the application in its discretion. This discretion is neither absolute nor unqualified, but is instead conditioned by a consideration of the criteria listed in Section 658.21, Florida Statutes, wherein it is provided that: The Department shall approve the application if it finds that: Public convenience and advantage will be promoted by the establishment of the proposed state bank or trust company. In determining whether an applicant meets the requirements of this subsection, the department shall consider all materially relevant factors, including: The location and services offered by existing banks, trust companies, trust departments, and trust service offices in the community. The general economic and demographic characteristics of the area. Local conditions indicate reasonable promise of successful operation for the proposed state bank or trust company and those banks, trust companies, trust departments, and trust service offices already established in the primary service area. In determining whether an applicant meets the requirements of this subsection, the department shall consider all materially relevant factors, including: Current economic conditions and the growth potential of the area in which the proposed state bank or trust company intends to locate. The growth rate, size, financial strength, and operating characteristics of banks, trust companies, trust departments, and trust service offices in the service area of the proposed bank. The proposed capital structure is in such amount as the department shall deem adequate, but in no case shall the paid-in capital stock be less than $800,000. In addition to the capital required, every state bank or trust company hereafter organized shall establish: A paid-in surplus equal in amount to not less than 20 percent of its paid-in capital; and A fund to be designated as undivided profits equal in amount to not less than five percent of its paid-in capital. The proposed officers have sufficient banking or trust company experience, ability, and standing, and the proposed directors have sufficient business experience, ability and standing, to indicate reasonable promise of successful operation. The name of the proposed state bank or trust company is not so similar as to cause confusion with the name of an existing financial institution. Provision has been made for suitable quarters at the location in the application. If, in the opinion of the Department, any one of the six foregoing criteria has not been met, and cannot be remedied by the Applicant, it cannot approve the application. An Applicant can, however, take corrective action in most circumstances, to meet the criteria set forth in Sections 658.21(3)(4)(5) or (6), Florida Statutes, if any one of these is found to be lacking. For example, if all other statutory criteria are met, the Applicant may increase capital, or make certain changes in the board of directors, or change the name or alter the provisions for suitable banking house quarters, because these factors are, at least to some degree, within its control. It is the Department's policy to allow applicants to make certain changes to meet these criteria if all other criteria are met; to do otherwise would be to subject applicants to unnecessary red tape. However, it is the Department's position that there is little, if anything, that an applicant can do to alter its ability to meet the criteria set forth in Sections 658.21(1) and (2), Florida Statutes, since the applicants cannot easily change the economic and demographic characteristics of an area. Therefore, if either one or both of these criteria are not met, the Department cannot approve the application. For the purposes of applications for authority to organize and operate a bank, Section 658.12(19), Florida Statutes, defines the primary service area (PSA) as: " . . . the smallest geographical area from which a bank draws, or a proposed bank expects to draw, approximately 75 percent of its deposits; the term also means the smallest geographic area from which a trust company or the trust department of a bank or association draws, or a proposed trust company or a proposed trust department of a bank or association expects to draw, approximately 75 percent of the assets value of its fiduciary accounts." The Applicant's PSA which incorporates portions of the City of Stuart, unincorporated Martin County and a portion of unincorporated Martin County known as Palm City appears to have boundaries delineated around a natural market area. The designated boundaries do not unrealistically exclude competing financial institutions or include areas of concentrated population. The Department concludes that a market exists for the Applicant in the PSA and that the Applicant may reasonably expect approximately 75 percent of its business to arise from the PSA. Consequently, the Department deems that the PSA has been realistically delineated and that the criteria set forth in Section 658.12(19), Florida Statutes, for a realistically delineated PSA has been met. It is the opinion and conclusion of the Department that public convenience and advantage will be promoted by the proposed bank's establishment. Therefore, the criterion in Section 658.21(1), Florida Statutes, is met. As set forth in Rule 3C-10.051(3)(a)(1), Florida Administrative Code, the location and services offered by existing financial institutions in the service area are indicative of the competitive climate of the market. The traffic patterns in the area, as well as the area's general economic and demographic characteristics shall also be considered. Because it is recognized that the establishment of a new bank or trust company anywhere would promote convenience and advantage for at least a few people, substantial convenience and advantage for a significant number of people must be shown; otherwise, a new bank could be justified for every street corner in the state. Clearly such a result was not the legislative intent in regulating entry into the banking industry, nor is it in the public interest. Based upon the facts in the record, the Department has determined that the establishment of the proposed new bank will substantially increase convenience to a significant number of residents and workers of the PSA. The location of the proposed site at a shopping center 0.2 miles from the only bridge from the eastern end of the PSA to the western end makes it convenient to residents, shoppers and commuters. The Department, therefore, concludes that the criteria of public convenience and advantage is met. It is the opinion and conclusion of the Department that local conditions indicate reasonable promise of successful operation for the proposed bank and those already established in the area. Therefore, the criterion in Section 658.21(2) Florida Statutes, is met. As set forth in Section 658.21(2)(a) and (b) , Florida Statutes, and Rule 3C-10.051(3)(b) , Florida Administrative Code, current economic conditions and, to a lesser extent, the growth potential of the area in which the new bank or trust company proposes to locate are important considerations in determining its probable success. Essential to the concept of banking opportunity is that there does and will exist a significant volume of business for which the bank or trust company can realistically compete. The growth rate, size, financial strength, and operating characteristics of financial institutions in the primary service area are also important indicators of economic conditions and potential business. It is noted that the statutory standard requires that: " . . . local conditions indicate reasonable promise of successful operation for the proposed state bank or trust company and those banks . . . already established in the primary service area . . ." Banking involves a public trust. Unlike private enterprise generally, banks operate on the public's capital and therefore, the Legislature has vested in the Comptroller the responsibility of protecting the public interest. Furthermore, the failure of a bank, as opposed to private enterprise generally, may have an unsettling effect on the overall economic welfare of the community, and that is why the Florida Legislature and the United States Congress have imposed stringent requirements for the industry. This Department is responsible for enforcing this legislative standard. Public interest is best served by having a banking system whereby competition is encouraged, where appropriate, yet at the same time, ensuring that the financial resources of the residents of the community are stable and safe. That was the obvious intent of the Legislature in regulating entry into the banking industry. The facts in the record show a significant and growing number of residential developments that are not centrally served by any main office, commercial bank, and no state-chartered banks at present. Thus, a significant number of PSA businesses and residents, especially on the western side of the PSA from the St. Lucie River, can be expected to patronize the proposed bank, insuring that there is a reasonable promise of successful operation. The facts in the record show that the rate of growth in deposits within the PSA exceeded the rate of growth in deposits in Martin County and the rate of deposit growth was more than four times greater than the rate of inflation for the same period. Based upon the above, the Department concludes that local conditions do indicate a reasonable promise of successful operation for the proposed bank and for those financial institutions already established in the area. It is the opinion and conclusion of the Department that the proposed capital structure of the proposed new bank is adequate. Therefore, the criteria of Section 658.21(3) Florida Statutes, is met. Capital should be adequate to enable the new bank or trust company to provide necessary services . . ., including loans of sufficient size, to meet the needs of prospective customers. Capital should be sufficient to purchase, build, or lease a suitable permanent facility complete with equipment. Generally, the initial capital for a new nonmember bank should not be less than $1.0 million in non-metropolitan areas and $1.5 million in metropolitan areas. The capital referred to in the Findings of Fact shall be allocated among capital stock, paid-in surplus, and undivided profits in the ratios set forth in Subsection (3) of Section 658.21, Florida Statutes. The proposed capital accounts of $1.5 million are allocated according to the statutory ratios. It is the opinion and conclusion of the Department that the criteria of Section 658.21(4), Florida Statutes, are met. As set forth in Rule 3C-10.051(3)(d), Florida Administrative Code, the organizers, proposed directors, and officers shall have reputations evidencing honesty and integrity. They shall have employment and business histories demonstrating their responsibility In financial affairs. At least one member of a proposed board of directors, other than the chief executive officer, shall have direct banking or trust company experience. In addition, the organizers, proposed directors and officers shall meet the requirements of Section 658.33, Florida Statutes. Officers shall have demonstrated abilities and experience commensurate with the position for which proposed. Members of the initial management group, which includes directors and officers shall require prior approval of the department. Changes of directors or chief executive officer during the first year of operation shall also require prior approval of the department. While it is not necessary that the names of the proposed officers be submitted with an application to organize a new state bank, the chief executive officer and operations officer must be named and approved at least sixty (60) days prior to the bank's opening. The Department concludes that the proposed directors have, as a group, good character, sufficient financial standing and business histories demonstrating ability and experience commensurate with the positions for which they are proposed and at least one proposed director (other than the chief executive officer) has direct banking experience. It should be noted that interlocking directorships involving existing financial institutions competitively near the proposed site of a new institution are discouraged. Such interlocking directorships could possibly restrict competition and create fiduciary problems. The Department concludes that there is no interlock problem in this instance. It is the opinion and conclusion of the Department that the name of the proposed new bank, First American Bank of Martin County, would not cause confusion with the name of a Florida financial institution. Therefore, the criterion of Section 658.21(5), Florida Statutes, is met. It is the opinion and conclusion of the Department that provisions has been made for suitable banking house quarters in the application's specified area. Therefore, the criterion of Section 658.21(6), Florida Statutes, is met. As set forth in Rule 3C-10.051(3)(f), Florida Administrative Code, permission to open in temporary quarters may be granted, for good cause shown. Under the rules of the Department, the permanent structure of a new bank should contain a minimum of 2,500 square feet, unless the Applicant satisfactorily shows that smaller quarters are justified due to the performance of certain auxiliary services off-premises. In addition, it shall meet the Federal Bank Protection Act requirements and be of sufficient size to handle the projected business for a reasonable period of time. The banking house . . . facility shall be of a nature to warrant customer confidence in the institution's security, stability and permanence. Other pertinent factors include availability to adequate parking, adequate drive-in facility if such is contemplated, and possibilities for expansion. Temporary quarters are not contemplated and Applicant's permanent quarters meet the above standards. Rule 3C-10.051(5), Florida Administrative Code, relating to insider transactions requires that: Any financial arrangement or transaction involving, directly or indirectly, the organizers, directors, officers and shareholders owning 5 percent or more of the stock, or their relatives, their associates or interests must he fair and reasonable, fully disclosed, and comparable to similar arrangements which could have been made with unrelated parties. Whenever any transaction between the proposed bank or trust company and an insider involves the purchase of real property, appraisals of land and improvement thereon shall be made by an independent qualified appraiser, and be dated no earlier than 6 months from the filing date of the application. The Department has determined that there is no insider transaction involving the leasing of the proposed bank's office space. Therefore, the criterion in Rule 3C-10.051(5) Florida Administrative Code, is met. RULING ON PROTESTANTS' EXCEPTIONS Section 120.57(1)(b)12, Florida Statutes, provides as follows: " . . . The agency shall allow each party at least 10 days in which to submit written exceptions to the report." The Department's procedural Rule 3C-9.11, Florida Administrative Code, Post-Evidentiary Procedures, follows the wording of the statute and provides that "the Department shall allow each party 10 days from the date of the hearing officer's report in which to submit written exceptions thereto pursuant to Section 120.57(1)(h) 12, Florida Statutes." The Department interprets that the word "submit" means that the Department must receive the exceptions by the 10th day in the same manner as when documents are required to be filed by a date certain. See Sonny's Italian Restaurant v. State of Florida, 414 So.2d 1156 at 1157. In Sonny's Italian Restaurant v. State, the Third District Court of Appeal in a per curiam decision affirmed a final agency order upon a holding that: "Any error resulting from the entry of the Final Order on July 2, 1981, prior to receipt of Appellant's exceptions to the recommended order, is not material in light of the fact that the exceptions, dated July 6, 1981, were not filed within the requisite 10-day period of Section 120.57(1)(b)8, Florida Statutes, when measured from either the date the recommended order was entered (June 19), or the date submitted to the agency and parties (June 23)." The wording in Section 120.57(1)(b)8, Florida Statutes, concerning the time for filing of exceptions is identical to that of Section (1)(b)12 concerning the filing of exceptions for applications for a license or merger pursuant to Title XXXVIII. The Report of the Hearing Officer, C. Michael Ruff, in this case was done and entered on April 4, 1983, with a cover letter dated April 5, 1983, and was received by the Department on April 6, 1983. A copy of Protestant American Bank of Martin County's exceptions was received by the Department on April 21, 1983. A copy of Protestant First National Bank and Trust Company of Stuart's exceptions were received by the Department on April 19, 1983. The Department deems that all exceptions were untimely filed since the last day to file exceptions with the Department was April 15, 1983. Nevertheless, it has been determined that the exceptions that were untimely received would not have had any effect on the final outcome of this matter.
The Issue In Case No. 00-0262, the issue is whether Respondent Wells is guilty of various acts and omissions that would justify the imposition of an order removing him as a director of Respondent First Bank or imposing upon him an administrative fine of $10,000. In Case No. 00-0262, an additional issue is whether Respondent Alters waived his right to request a hearing; if not, an additional issue is whether Respondent Alters is guilty of various acts and omissions that would justify the imposition of an order removing him as a director of Respondent First Bank or imposing upon him an administrative fine of $5000. In Case No. 00-0434, the issue is whether Respondent First Bank must pay Petitioner the costs of the examination conducted by Petitioner from September 13 through October 15, 1999, and, if so, the amount of such costs for which Respondent First Bank is liable.
Findings Of Fact Background of First Bank and Wells The incorporators filed Articles of Incorporation for Respondent First Bank of Jacksonville (First Bank) on August 8, 1988. Requiring at least five directors, the articles identify the following persons as the initial directors: Irby S. Exley, Sr., Edward L. Green, Nicholas W. Kish, William C. Mick, Jr., and Respondent Clyde N. Wells, Jr. (Wells). Wells, as “President/Cashier” of First Bank, filed amended articles of incorporation on July 25, 1990, naming the same initial directors. Elaborating upon the method of electing directors, the amended articles provide that the shareholders shall elect directors, except when the board of directors elects a director to fill a vacancy. Article V, Paragraph 4, of the amended articles authorize the election of a director by the vote of a “majority of the remaining or sitting directors, although less than a quorum of the Board is sitting at such vote.” Wells was a scholarship student at the University of Georgia, from which he graduated in 1958. He attended law school at the University of Georgia and earned his law degree in 1962. After a year or two practicing with a large corporate law firm in Philadelphia, Wells moved to Jacksonville, where he joined a local law firm and began to specialize in corporate, tax, and real estate law. He later obtained Florida Bar certification in tax law. Wells first became professionally involved with banks when he represented several banks owned by Florida National Bank. Leaving the regulatory work to larger firms, Wells and his firm provided legal services in loans, transactions, and litigation. In the late 1960s, Wells became a director of, and general counsel to, Marine National Bank. Although he continued to provide services for Florida National Bank, Wells served Marine National Bank until its sale in 1982. Wells’ involvement with Marine National Bank introduced him to the operational side of banking, such as receiving and disbursing funds, and the regulatory environment in which banks function. At this time, Wells acquired some knowledge about banking hardware and software. Wells’ involvement with Marine National Bank also introduced him to the regulatory side of retail banking. For instance, the Office of the Controller of the Currency criticized the extent to which buildings and land represented the bank’s capital. Wells communicated with the federal regulatory agency about a possible sale of a building, but the situation eventually resolved itself by the growth of the bank’s other assets. While associated with Marine National Bank, Wells was closely involved with the establishment of other banks owned by the holding company that owned Marine National Bank. Following the sale of Marine National Bank in 1982, Wells served as special counsel to First Commercial Bank of Live Oak. He also served as special counsel to General Financial Systems, a 29-bank holding company that controlled the banks with the largest deposits in Palm Beach County. After General Financial Systems sold its banks, Wells returned to a general law practice in Jacksonville. In 1985, after Wells had been out of banking for at least three years, Wells and some Jacksonville residents discussed the possibility of forming a new bank, which became First Bank. From 1986-89, Wells was involved in organizing First Bank. He and the others hired Scott Bain as a consultant and president. Mr. Bain, who had been a vice president of Barnett Banks for several years, served the group for a couple of years. However, at about the time of the opening of First Bank, Mr. Bain suffered a personal tragedy in the death of a young child, and he and his wife moved to North Carolina. Wells tried to persuade Mr. Bain to return to Jacksonville and manage First Bank when it opened. Wells had not intended to serve as the president of First Bank, although he had likely intended to provide legal services to the bank. Of the 310,000 outstanding shares in First Bank, Wells personally owns 75,000 shares and Welco Investment Trust, of which Wells owns beneficially, 90,000 shares. The value of Wells’ overall investment in First Bank was originally valued at $1.7 to $2.0 million. Background of Federal and State Regulation of First Bank Annual Examinations and Reports of Examination First Bank began operations on August 28, 1989, as a federally insured State bank that is not a member of the Federal Reserve System. As such, First Bank is under the concurrent jurisdiction of the Federal Deposit Insurance Corporation (FDIC) and Petitioner. In practice, the federal and state banking agencies alternate responsibility for conducting annual bank examinations, which must take place at intervals no greater than 36 months. Following annual examinations, Petitioner has prepared reports of examinations (ROE) dated July 5, 1995; September 2, 1997; and September 13, 1999. The FDIC has prepared ROEs dated May 22, 1996; December 7, 1998; and March 20, 2000. Petitioner commenced the proceeding to remove the directors approximately three months after the ROE dated September 13, 1999. The 1999 ROE followed the 1998 ROE by only nine months, and the 2000 ROE followed the 1999 ROE by only six months. Counsel devoted a significant amount of hearing time to issues involving the admissibility of these six ROEs. The Administrative Law Judge declined to admit any of the ROEs as hearsay exceptions in the form of official records or business records. After considerable discussion, the Administrative Law Judge admitted the ROE dated September 13, 1999, for all purposes (subject to a relatively minor exception set forth above) and admitted the 1998 and 2000 ROEs, but not for the truth of their contents. A particularly difficult evidentiary issue arose as to the admissibility of the 2000 ROE. Although the FDIC was prepared to allow Petitioner to call as a witness the FDIC examiner who had prepared this ROE, the FDIC was unwilling, until several days after the hearing had started, to allow opposing counsel to examine the work papers supporting this ROE. As authorized by federal law, the FDIC had withheld these work papers when the FDIC examiner had been deposed. After the FDIC belatedly agreed to produce these work papers, opposing counsel argued that the tardiness of the production had prejudiced their clients. Most persuasively, counsel argued that this tardy production of work papers would impose upon their clients considerable additional costs that would have been saved if the FDIC had produced the work papers by the time of the deposition of the federal examiner. Finding merit to this claim, the Administrative Law Judge excluded the 2000 ROE for the truth of its contents. Federal and State Enforcement Decisions Using the findings of the various ROEs, Petitioner and the FDIC have issued three orders concerning First Bank. These are the FDIC’s May 26, 1998, Decision and Order to Cease and Desist, which is based on a Recommended Decision dated January 22, 1998 (collectively, Cease and Desist Order); Petitioner’s October 13, 1998, consent Final Order approving a September 29, 1998, Settlement Stipulation (collectively, Consent Order); and the FDIC’s September 8, 1999, Safety and Soundness Order (Safety and Soundness Order). FDIC’s 1998 Cease and Desist Order Based on Petitioner’s ROE dated July 5, 1995, and the FDIC’s ROE dated May 22, 1996, the Cease and Desist Order notes that Petitioner had assigned First Bank a composite CAMEL rating of 2, with a 5 for the management component, and that the FDIC also had assigned a 5 for the management component. The evaluation scheme, now known as CAMELS ratings, assigns a rating ranging from the best of 1 to the worst of 6 for composite performance and for each of six criteria crucial to a bank’s operation: capital, assets, management, earnings, liquidity, and sensitivity. “Capital” is the adequacy of the capital. As defined in the FDIC Division of Supervision Manual of Examination Policies (FDIC Examination Manual), “capital” is a measure of the maintenance of “capital commensurate with the nature and extent of risks to the institution and the ability of management to identify, measure, monitor, and control these risks.” For capital, a rating of 1 means “a strong capital level relative to the institution’s risk profile”; a rating of 2 means “a satisfactory capital level relative to the financial institution’s risk profile”; a rating of 3 means “a less than satisfactory level of capital that does not fully support the institution’s risk profile,” even “if the institution’s capital level exceeds minimum regulatory and statutory requirements”; a rating of 4 means “a deficient level of capital” in which “viability of the institution may be threatened”; and a rating of 5 means “a critically deficient level of capital such that the institution’s viability is threatened.” “Assets” is the quality of assets, including the loan and investment portfolios, real estate, and other assets. As defined in the FDIC Examination Manual, a rating of 1 means “strong asset quality and credit administration practices”; a rating of 2 means “satisfactory asset quality and credit administration practices”; a rating of 3 means “asset quality or credit administration practices are less than satisfactory”; a rating of 4 means “deficient asset quality or credit administration practices”; and a rating of 5 means “critically deficient asset quality or credit management practices.” “Management” is, according to the FDIC Examination Manual, the “capability of the board of directors and management, in their respective roles, to identify, measure, monitor, and control the risks of an institution’s activities and to ensure a financial institution’s safe, sound, and efficient operation in compliance with applicable laws and regulations.” As defined in the FDIC Examination Manual, the following ratings apply to management: A rating of 1 indicates strong performance by management and the board of directors and strong risk management practices relative to the institution’s size, complexity, and risk profile. All significant risks are consistently and effectively identified, measured, monitored, and controlled. Management and the board have demonstrated the ability to promptly and successfully address existing and potential problems and risks. A rating of 2 indicates satisfactory management and board performance and risk management practices relative to the institution’s size, complexity, and risk profile. Minor weaknesses may exist, but are not material to the safety and soundness of the institution and are being addressed. In general, significant risks and problems are effectively identified, measured, monitored, and controlled. A rating of 3 indicates management and board performance that need improvement or risk management practices that are less than satisfactory given the nature of the institution’s activities. The capabilities of management or the board of directors may be insufficient for the type, size, or condition of the institution. Problems and significant risks may be inadequately identified, measured, monitored, or controlled. A rating of 4 indicates deficient management and board performance or risk management practices that are inadequate considering the nature of the institution’s activities. The level of problems and risk exposure is [sic] excessive. Problems and significant risks are inadequately identified, measured, monitored, or controlled and require immediate action by the board and management to preserve the soundness of the institution. Replacing or strengthening management or the board may be necessary. A rating of 5 indicates critically deficient management and board performance or risk management practices. Management and the board of directors have not demonstrated the ability to correct problems and implement appropriate risk management practices. Problems and significant risks are inadequately identified, measured, monitored, or controlled and now threaten the continued viability of the institution. Replacing or strengthening management or the board of directors is necessary. Section 4.1.V of the FDIC Examination Manual links a bank’s performance under the other CAMELS components to its management component: “Consequently, examiners’ findings and conclusions in regard to the other four elements of the CAMELS rating system are often major determinants of the management rating.” “Earnings” means “not only the quantity and trend of earnings, but also factors that may affect the sustainability or quality of earnings,” such as likely loan losses or undue exposure to interest-rate volatility. As defined in the FDIC Examination Manual, a rating of 1 indicates “earnings that are strong”; a rating of 2 indicates “earnings that are satisfactory”; a rating of 3 indicates “earnings that need to be improved”; a rating of 4 indicates “earnings that are deficient” because they are “insufficient to support operations and maintain appropriate capital and allowance levels” and may leave the institution with “erratic fluctuations in net income or net interest margin, the development of significant negative trends, nominal or unsustainable earnings, intermittent losses, or a substantive drop in earnings from the previous years”; and a rating of 5 indicates “earnings that are critically deficient.” “Liquidity” is the ability of the financial institution to meet its anticipated funding needs with cash, assets readily convertible to cash, deposits, and loans. As defined in the FDIC Examination Manual, a rating of 1 means “strong liquidity levels and well-developed funds management practices”; a rating of 2 means “satisfactory liquidity levels and funds management practices” so that the institution “has access to sufficient sources of funds on acceptable terms to meet present and anticipated liquidity needs,” even though “[m]odest weaknesses may be evident in funds management practices:; a rating of 3 means “liquidity levels of funds management practices in need of improvement” because the institution “may lack ready access to funds on reasonable terms or may evidence significant weaknesses in funds management practices”; a rating of 4 means “deficient liquidity levels or inadequate funds management practices”; and a rating of 5 means “liquidity levels or funds management practices so critically deficient that the continued viability of the institution is threatened.” “Sensitivity” is sensitivity to market risk, which reflects the “degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect a financial institution’s earnings or economic capital.” As defined in the FDIC Examination Manual, a rating of 1 means that “market risk sensitivity is well controlled and that there is minimal potential that the earnings performance or capital positions will be adversely affected”; a rating of 2 means that “market risk sensitivity is adequately controlled and that there is only moderate potential that the earnings performance or capital position will be adversely affected”; a rating of 3 means that “control of market risk sensitivity needs improvement or that there is significant potential that the earnings performance or capital position will be adversely affected”; a rating of 4 means that “control of market risk sensitivity is unacceptable or that there is high potential that the earnings performance or capital position will be adversely affected”; and a rating of 5 means that “control of market risk sensitivity is unacceptable or that the level or market risk taken by the institution is an imminent threat to its viability.” According to the FDIC examination manual, the composite rating is based on a “careful evaluation of an institution’s managerial, operational, financial, and compliance performance.” A composite rating of 1 means that the financial institution is “sound in every respect and generally [has] components rated 1 or 2.” A composite rating of 2 means that the financial institution is “fundamentally sound” and generally has “no component rating more severe than 3.” A composite rating of 3 means that the financial institution exhibits: some degree of supervisory concern in one or more of the component areas. These financial institutions exhibit a combination of weaknesses that may range from moderate to severe; however, the magnitude of the deficiencies generally will not cause a component to be rated more severely than a 4. Management may lack the ability or willingness to effectively address weaknesses within appropriate time frames. Financial institutions in this group generally are less capable of withstanding business fluctuations and are more vulnerable to outside influences . . .. Additionally, these financial institutions may be in significant noncompliance with laws and regulations. Risk management practices may be less than satisfactory relative to the institution’s size, complexity, and risk profile. These financial institutions require more than normal supervision, which may include formal or informal enforcement actions. Failure appears unlikely, however, given the overall strength and financial capacity of these institutions. A composite rating of 4 means that the financial institution exhibits: unsafe and unsound practices or conditions. There are serious financial or managerial deficiencies that result in unsatisfactory performance. The problems range from severe to critically deficient. The weaknesses and problems are not being satisfactorily addressed or resolved by the board of directors and management. Financial institutions in this group are generally not capable of withstanding business fluctuations. There may be significant noncompliance with laws and regulations. Risk management practices are generally unacceptable relative to the institution’s size, complexity, and risk profile. Close supervisory attention is required, which means, in most cases, formal enforcement action is necessary to address the problems. Institutions in this group pose a risk to the deposit insurance fund. Failure is a distinct possibility if the problems and weaknesses are not satisfactorily addressed and resolved. A composite rating of 5 means that the financial institution exhibits: extremely unsafe and unsound practices or conditions; exhibit[s] a critically deficient performance; often contain[s] inadequate risk management practices relative to the institution’s size, complexity, and risk profile; and [is] of the greatest supervisory concern. . . . The Cease and Desist Order states that Petitioner’s ROE dated July 5, 1995, found the management of First Bank unsatisfactory because: [First Bank’s] staffing was found to be inadequate, in part because of excessive employee turnover. [First Bank’s] board of directors was failing to provide [First Bank] sound management, adequate guidance in the form of appropriate written policies, or adequate supervision of management. Wells dominates [First Bank’s] board of directors, and the board of directors did not adequately supervise management’s operation of [First Bank]. [First Bank’s] board of directors had not responded to regulatory recommendations with respect to deficiencies in [First Bank’s] operating policies. [First Bank] did not have a Strategic Plan. [First Bank] employed an annual budget that had no written assumptions to support its projections and unrealistically continued to project net losses. Wells could not attest to the accuracy of the general ledger, [First Bank] lacked an effective internal audit program, and [First Bank] needed to hire a full-time president, a cashier, and a loan officer. [First Bank’s] board of directors inappropriately delegated its authority by permitting Wells to set his own salary and bonus and by permitting Wells to authorize and approve payments of legal bills by [First Bank] to Wells’ law firm without review by [First Bank’s] board of directors. [Petitioner] cited these practices as an apparent conflict of interest.] [First Bank’s] Consolidated Reports of Condition and Income as of December 31, 1994 and March 31, 1995 contained errors and needed to be amended and re-filed. During the period covered by the Report, [First Bank] had violated six laws and regulations, including violations of the Financial Record Keeping and Reporting of Currency and Foreign Transactions regulation, 31 C.F.R. Part 103. [First Bank] did not adequately segregate the duties of its employees. The door to the Bank’s computer room was frequently left open, providing unrestricted access to the computer facility. The Cease and Desist Order states that the FDIC’s ROE dated May 22, 1996, found that Wells, who was the controlling shareholder of First Bank, had been the only officer of First Bank since its formation and had served as the bank’s president, chief executive officer, chairman of the board of directors, and general counsel--all despite the fact that, prior to September 1989, Wells’ banking experience had been limited to that of bank counsel and director. The Cease and Desist Order states that the ROE dated May 22, 1996, found that First Bank had failed to respond as required to Petitioner’s July 5, 1995, ROE because: [First Bank’s] board had not adopted the following policies in conformity with the Board resolution [adopted after Petitioner’s examination]: Loan Policy, Appraisal Policy, Regulation O Policy, Amendment and Restatement of Asset/Liability Management Policy, and Strategic Plan. [First Bank’s] general ledger had not been reconciled and appropriate internal routine and controls had not been implemented. The Board had neither adopted the First Amended Internal Controls and Audit Program, nor implemented it as required. [First Bank] still employed a budget that had not been revised since 1994, which incorporated outdated assumptions. [First Bank] had engaged in twenty-five violations of fifteen statutes and regulations. [First Bank] had failed to submit any reports with respect to its continuing violation of section 655.60(2) of the Florida Statutes. Concerning internal routine and controls, the Cease and Desist Order states that the ROE dated May 22, 1996, found that First Bank had failed to respond as required to Petitioner’s ROE dated July 5, 1995, because: [First Bank] had not reconciled its general ledger suspense account since February, 1995. During the period covered by the FDIC’s May 22, 1996 examination, [First Bank] did not routinely reconcile its subsidiary ledgers. [First Bank] failed to segregate the duties of its employees. From October, 1995 until March 31, 1996, [First Bank’s] general ledger suspense account had an unreconciled gross credit balance that ranged from $96,000 to $186,000. As of March 31, 1996, which was the date as of which the FDIC examined its financial records during the May 22, 1996 examination, [First Bank’s] general ledger suspense account had an unreconciled gross credit balance of $137,000. From February, 1995 through May 22, 1996, [First Bank] did not reconcile the demand deposit suspense account. As of March 29, 1996, [First Bank’s] demand deposit accounts as reflected in the general ledger exceeded the demand deposit accounts as reflected in subsidiary ledgers by $8,949. As of March 29, 1996, [First Bank’s] time deposit accounts as reflected in the general ledger exceeded the time deposit accounts as reflected in subsidiary ledgers by $740,367. As of June 12, 1996, [First Bank’s] time deposit accounts as reflected in the general ledger were short by $74,474 of the time deposit accounts as reflected in subsidiary ledgers. As of May 27, 1996, [First Bank’s] total loan accounts as reflected in the general ledger were short by $12,000 of the total loan accounts as reflected in the subsidiary ledgers, and examiners were unable to reconcile these accounts during the FDIC’s May 22, 1996 examination. From January 1996 to April, 1996, [First Bank] did not reconcile its correspondent account with Independent Banker’s Bank of Florida. As a result of [First Bank’s] failure to reconcile its correspondent account with the Independent Banker’s Bank of Florida from January, 1996 to April, 1996, [First Bank] filed a Report of Condition and Income (“Call Report”) as of March 31, 1996, that incorrectly stated [First Bank’s] federal funds sold position by $51,000. As of the FDIC’s May 22, 1996 examination, three of [First Bank’s] prepaid expense accounts had not been accurately reconciled since March, 1996, and an accurate reconciliation of these accounts during the examination led to a correction in [First Bank’s] March 31, 1996 Call Report and to two items being classified as Loss. [First Bank’s] vault cash account was not reconciled between March, 1995 and April, 1q996, and during the FDIC’s examination, [First Bank’s] vault cash was found to be short by $831. [First Bank’s] teller cash accounts were not reconciled from September, 1995 until the FDIC’s May 22, 1996 examination, when one teller cash account was found to be short by $97 and another teller cash account was found to be short by $498. [First Bank] failed to make appropriate entries reflecting depreciation in four depreciation accounts from January, 1996 until the FDIC’s May 22, 1996 examination and in two other depreciation accounts from February, 1996 until the FDIC’s May 22, 1996 examination. As a result of the failure to keep the depreciation accounts current, [First Bank’s] March 31, 1996 Call Report failed to reflect $5,000 in depreciation for February and March, 1996, and the May 22, 1996 classified [sic] as Loss $6,000 in unrecognized depreciation for April and May, 1996. During the period covered by the FDIC’s May 22, 1996 [ROE, First Bank’s] wire transfer logs were incomplete, no review of daily wire transfer transaction logs was performed, and neither internal nor external audit procedures extended to review of [First Bank’s] wire transfers. Legal expenses of $4,284 for services performed by Wells’ law firm on behalf of [First Bank] between September and December, 1995, did not reflect the dates the expenses were incurred. [First Bank] operated without a security officer from March, 1996, until the FDIC’s May 22, 1996 examination. Concerning administration, supervision, and control, the Cease and Desist Order states that the ROE dated May 22, 1996, found the following conditions: Forty seven percent of the loan files reviewed by FDIC examiners, as measured by dollar volume, reflected documentation exceptions regarding credit data or collateral documentation. [First Bank] had not incorporated the requirements of Rule 3C-100.600 into its Appraisal Policy despite the fact that this discrepancy was pointed out to [First Bank] in [Petitioner’s] July 5, 1995 [ROE] and in subsequent correspondence between the Bank and [Petitioner]. Several of [First Bank’s] commercial loan files did not contain current financial statements from the borrowers. Some of [First Bank’s] loan files contained no evidence that financial statements that had been obtained from borrowers had ever been analyzed by [First Bank’s] personnel. Although [First Bank’s] Loan Policy includes a loan grading system, [First Bank’s] management had not implemented a loan grading program and did not maintain a watch list of loans that merit special attention. [First Bank] had not corrected deficiencies in its Investment Policy that had been identified by [Petitioner] in its July 5, 1995 [ROE]. These deficiencies included a failure to address potential investments in mortgage derivatives and structured note securities. [First Bank] had neither implemented a consistent system of accounting procedures nor employed a full-time accounting person or a qualified cashier or a qualified loan officer in response to the recommendations received from its external auditor and from [Petitioner] during 1995. In the absence of a qualified cashier and in the absence of a qualified loan officer, [First Bank] required lower level employees to perform functions for which they were not qualified. As for electronic data processing systems, the Cease and Desist Order notes that the FDIC, which, on June 11, 1996, had conducted an examination of First Bank’s information systems, had assigned them an unsatisfactory rating of a 4, signifying “unacceptable conditions and a high potential for operational or financial failure.” Noting that the FDIC examiner had recommended that the FDIC pursue action against First Bank to correct the deficiencies in its information systems, the Cease and Desist Order states that the FDIC’s ROE dated June 11, 1996, found the following deficiencies: [First Bank] operated its data center without internal audit coverage of the data center’s operations. [First Bank] had not tested a backup site for its data processing operations for three years. [First Bank] failed to maintain backup data files in a fireproof area. [First Bank] operated its data center without a disaster recovery program. [First Bank’s] electronic information system was not compatible with the system in use at the backup site, because [First Bank’s] operating system and applications software had not been updated with the vendor’s new software releases for the previous two years. [First Bank’s] software was not updated because [First Bank’s] hardware system was outdated and lacked the capacity to operate the updated software. [First Bank] was operating its data center in contravention of its EDP Policy with respect to the following: failure to store daily backup tapes in a fireproof location; failure to review on line log reports daily; failure to perform reconciliations on records regarding demand deposit accounts, savings accounts, certificates of deposit, or loan accounts; and failure to perform periodic internal audits of [First Bank’s] data processing functions. [First Bank’s] disaster recovery program was such that [First Bank’s] ability to continue operations without interruption after a disaster was questionable. [First Bank] operated its data center without appropriate internal controls with respect to the following: failure to reflect access to the data center by non- data center personnel; failure to review the daily on-line activity report; [and] failure to reconcile the daily totals generated by [First Bank’s] application programs to the general ledger. [First Bank] operated without a policy regarding the use of microcomputers, although [First Bank] was using microcomputers in its operations. Concerning annual financial disclosures, the Cease and Desist Order states that the ROE dated May 22, 1996, found the following failures: As of the FDIC’s May 22, 1996 examination, [First Bank] had failed to prepare an annual financial disclosure statement by March 31 of any year since [First Bank] opened for business in 1989. By letter dated April 24, 1996, in response to a request for [First Bank’s] annual financial disclosure, [First Bank] transmitted to William L. Durden, an attorney for minority shareholders of [First Bank], a financial disclosure that consisted only of a balance sheet and a net income figure and did not include the legend required by section 350.4(d) In April of each year from 1990 through 1996 inclusive, [First Bank] transmitted to its shareholders a notice of the annual shareholder’s [sic] meeting but failed to include in each such notice an announcement regarding the availability of annual financial disclosures. By letter[s] dated July 17, 1995, August 1, 1995, September 25, 1995, and October 10, 1995, Donald A. Robinson, an attorney for the estate of a deceased shareholder of [First Bank] requested [First Bank’s] annual financial disclosure statement for the year 1994. [First Bank] had not, as of the FDIC's May 22, 1996 examination, provided the annual financial disclosure statement required by Robinson. By letter dated May 8, 1996, William L. Durden, an attorney representing minority shareholders of [First Bank], requested [First Bank’s] annual financial statement. On May 24, 1996, [First Bank] transmitted to Durden financial information that included a balance sheet but did not include the remainder of the information required by section 350.4(a). The Cease and Desist Order discusses the failure of Wells, who was representing First Bank in the FDIC proceeding, to participate effectively. In early 1997, Wells failed to comply timely with an order compelling discovery, and he belatedly produced documents that were not fully responsive to the discovery requests, although he later supplemented his response. During oral argument on May 1, 1997, in response to a motion for sanctions, Wells claimed that arm and back conditions had prevented him from moving boxes of documents and fulfilling his discovery obligations. Unpersuaded by Wells’ “incredible” claims, the federal Administrative Law Judge determined, at the hearing and by written order dated May 12, 1997, that Wells had tried to delay the hearing. For sanctions, the federal Administrative Law Judge excluded all evidence related to documents not timely produced, except for certain documents prepared by the FDIC and documents generated by First Bank and delivered to the FDIC before the commencement of the proceeding. Following the administrative hearing, which took place from June 2-9, 1997, the Administrative Law Judge assessed total costs for discovery abuses of $3245.44. The Cease and Desist Order determines that the FDIC proved by a preponderance of the evidence that First Bank had engaged in unsafe or unsound banking practices, as defined by 12 U.S.C. section 1818(b), “by operating with a board of directors that had failed to require Bank management to implement necessary practices and procedures that reflect operational guidelines established by the board of directors.” The Cease and Desist Order determines that the FDIC proved by a preponderance of the evidence that First Bank had violated 12 C.F.R. 364.101, Standards for Safety and Soundness, by failing to maintain adequate internal controls and information systems; 12 C.F.R. 326.8 by failing to develop and maintain administration of a program reasonably designed to monitor compliance with the Bank Secrecy Act; 12 C.F.R. 350.3(a) by failing to prepare and make available on request an annual disclosure statement; 12 C.F.R. 350.3(b) by failing to timely provide its annual financial disclosures statement to persons requesting this document; 12 C.F.R. 350.4(a)(1) by failing to include in its annual financial disclosures information that is comparable to the information contained in specified Call Report schedules; and 12 C.F.R. 350.8 by failing to promptly provide an annual financial disclosure statement to persons requesting this document. The Cease and Desist Order determines that the FDIC proved by a preponderance of the evidence that First Bank had violated Section 658.48(1), Florida Statutes, by extending credit to any one borrower exceeding 25 percent of the bank’s capital accounts when the loan was fully secured; Section 655.044(2), Florida Statutes, by carrying as an asset in any published report or any report submitted to Petitioner a note or obligations that is past due or upon which no interest has been received for at least one year; Section 658.48(5)(d), Florida Statutes, by failing to document as a first lien real estate mortgages securing loans; and Section 655.60(2), Florida Statutes, by making loans based on the security of the real estate without adequate written appraisal standards and without policies previously established by the board of directors. Based on these violations, the Cease and Desist Order concludes that First Bank “repeatedly engaged in imprudent acts that resulted in an abnormal risk of loss or damage to the Bank” and “defiantly refused to implement needed remedial actions.” The Cease and Desist Order thus suggests an “enforceable functioning program that will facilitate operation of the Bank in a safe and sound manner.” In conclusion, the Cease and Desist Order warns that the “fact that the institution may not be operating at a loss in the current economic climate is no guarantee that unsafe and unsound practices will not eventually bear a bitter fruit.” The Cease and Desist Order discusses at length one substantive exception of First Bank and two substantive exceptions of the FDIC to the Recommended Decision, from which the preceding citations have been drawn. As for First Bank’s exception, the Cease and Desist Order recognizes that “smaller institutions cannot be expected to maintain the same level of segregation of responsibilities as their larger counterparts,” but the order rejects the exception. As for the FDIC’s exceptions, the Cease and Desist Order concludes that First Bank also violated 12 U.S.C. Section 1817(a)(1) by submitting erroneous, uncorrected Call Reports dated December 31, 1994; June 30, 1995; September 30, 1995; December 31, 1995; and March 31, 1996; and 12 C.F.R. 309.6(a) by disclosing its (favorable) supervisory subgroup assignment without FDIC authorization. The Cease and Desist Order orders First Bank to cease and desist from the following unsafe or unsound banking practices or legal violations: Failing to provide adequate supervision and direction over the affairs of the Bank by the board of directors of the Bank to prevent unsafe or unsound practices and violations of laws and regulations; Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits. Failure by the Bank’s board of directors to require Bank management to implement practices and procedures that reflect operational guidelines established by the Bank’s board of directors; Failing to provide the Bank with operational personnel who have experience that is adequate to ensure safe and sound operation of the Bank and to ensure compliance with applicable laws and regulations; Failing to provide adequate training to operational personnel; Operating the Bank with policies and practices that result in excessive employee turnover; Failing to implement generally accepted internal accounting procedures and effective internal audit controls; Failing to adopt and implement fully an appropriate loan policy, an . . . appropriate appraisal policy, and an appropriate asset/liability management policy; Failing to maintain financial records sufficiently accurate to enable the Bank to comply with applicable reporting requirements established by federal laws and regulations; Failing to prepare accurate annual financial statements; Failing to make accurate annual financial disclosure statements available to shareholders in a timely manner; Omitting pertinent or required financial information from the Bank’s annual disclosure statements; Failing to maintain adequate documentation in loan files; Failing to correct operational problems identified by the Bank’s external auditors; Operating the Bank with inadequate information systems and management reporting systems, as described in the FDIC’s EDP [ROE dated] June 11, 1996; and Engaging in violations of applicable federal and state laws and regulations, as more fully described [in the FDIC’s ROE dated] May 22, 1996. The Cease and Desist Order directs First Bank and its institution-affiliated parties to take the following affirmative action: Not later than thirty (30) days from the effective date of the ORDER, the Bank’s board of directors shall develop, or shall retain an independent banking consultant with experience in the evaluation of bank management to develop, a written analysis of the Bank’s management and staffing needs (“Management and Staffing Plan”), which shall include, at a minimum: identification of both the type and number of officer and operational staff positions that are needed to manage and supervise the affairs of the Bank in a safe and sound manner; evaluation of each current Bank officer and staff member to determine whether these individuals possess the ability, knowledge, experience,training, and other qualifications that are required to perform present and anticipated duties, including adherence to the requirements of this ORDER, adherence to the Bank’s policies, and operation of the Bank in a safe and sound manner; a review of the rate of turnover of Bank employees during the past five years and a plan to recruit, hire, and retain any additional or replacement personnel with the requisite ability, knowledge, experience, and other qualifications to fill Bank officer or staff positions consistent with the analysis and assessment heretofore described in Paragraph 1(a)(i) and (ii) of this ORDER; and a review of the training deficiencies that were identified in the FDIC’s [ROE dated] May 22, 1996. Not later than thirty (30) days from the effective date of this ORDER, the written Management and Staffing Plan shall be submitted to the Regional Director and to the Comptroller for review and comment. Not later than sixty (60) days from the date of such submission, the Bank’s board of directors shall approve the Management and Staffing Plan, taking into consideration any comments received from the Regional Director and/or the Comptroller within that period, and such approval shall be recorded in the minutes of the Bank’s board of directors. Thereafter, the Bank shall implement the Management and Staffing Plan. Subsequent modifications of the Management and Staffing Plan may be made only if, at least [30] days prior to the effective date of any proposed modification, the Bank submits such proposed modification to the Regional Director and to the Comptroller for review and if the Bank’s board of directors shall have approved such modification after considering any responsive comments submitted by the Regional Director and/or the Comptroller. Not later than ninety (90) days from the effective date of this ORDER, the Bank shall have and retain qualified management consistent with the Management and Staffing Plan that is required by Paragraph 1 of this ORDER. At a minimum, such management shall include officers with proven ability in managing a bank of comparable size. Such officers shall have proven ability in managing a loan portfolio of at least comparable size and shall have an appropriate level of lending, collection, and loan supervision experience necessary to supervise any anticipated growth in the Bank’s loan portfolio, and shall have proven ability in managing the assets and operations of a financial institution of at least comparable size and with banking operations experience sufficient to supervise the upgrading of the Bank’s operational deficiencies. Such officers shall be provided the necessary written authority to implement the provisions of this ORDER. The qualifications of management shall be assessed on its ability to: comply with the requirements of this Order; operate the Bank in a safe and sound manner; comply with applicable laws and regulations; and restore all aspects of the Bank to a safe and sound condition. As long as this ORDER remains in effect, the Bank shall notify the Regional Director and the Comptroller in writing of any changes in management. Such notification shall be in addition to any application and prior approval requirements established by section 32 of the FDI Act, 12 U.S.C. §1831i, and implementing regulations; must include the names and qualifications of any replacement personnel; and must be provided at least [30] days prior to any individual’s assuming a management position. Not later than sixty (60) days from the effective date of this ORDER, the Bank shall adopt and implement an internal audit program. Thereafter, the Bank shall operate with an effective, ongoing system of internal audits. Not later than thirty (30) days from the effective date of this ORDER, the Bank’s board of directors shall adopt, and the Bank shall implement, a plan to correct the Bank’s internal routine and control deficiencies, including specific provisions to assure that: suspense accounts are reconciled in a timely fashion; subsidiary accounts are reconciled to the general ledger in a timely fashion; accounting errors, once discovered, are resolved in a timely fashion; general ledger entries are initiated consistently, correctly, and in a timely fashion; and the duties of Bank employees are segregated in a manner that minimizes the potential for misapplication of funds, defalcation, or sabotage. Effective immediately, and until such time as the Bank’s accounts are successfully reconciled, the Bank shall retain the full-time services of a qualified, independent accountant, who shall be responsible for reconciling the Bank’s accounts as expeditiously as possible, but in no event later than thirty [30] days from the effective date of this ORDER. Not later than thirty (30) days from the effective date of this ORDER, the Bank shall amend its [Call Reports] as of December 31, 1996; December 31, 1997; and March 30, 1998, to the extent deemed necessary by the Regional Director, and shall file amended [Call Reports] that accurately reflect the Bank’s financial condition as of the date of each such report. Not later than thirty (30) days from the effective date of this ORDER, complete and accurate annual financial disclosure statements that conform in all respects to the requirements of Part 350 of the FDIC Rules and Regulations, 12 C.F.R. Part 350, shall be provided without charge to all persons who have requested copies of the Bank’s annual disclosure statements as of December 31, 1996, and December 31, 1997. Thereafter, the Bank shall prepare such disclosure statements, and make such disclosure statements available, in conformity with Part 350 of the FDIC Rules and Regulations. Not later than January 31, 1999, the Bank shall engage a qualified, independent accounting firm to conduct an opinion audit of the Bank’s books as of December 31, 1998. Upon completion of such audit, the independent accounting firm shall present its final report directly to the Bank’s board of directors. The Bank’s board of directors shall cause the Bank to correct promptly all deficiencies that may be identified in such audit report. The minutes of the Bank’s board of directors shall record any action that is taken by the Bank’s board of directors in response to such audit report. Effective immediately, and until such time as the Bank has been able to reconcile its accounts, as required by Paragraph 5 of this ORDER, and to correct its [Call Reports], as required by Paragraph 6 of the ORDER, the Bank’s board of directors shall, not less frequently than monthly, review all actions taken by the Bank to correct the deficiencies in the Bank’s accounting practices and internal routines and controls identified [in the FDIC’s May 22, 1996, ROE]. Such review shall be recorded in the minutes of the Bank’s board of directors. Not later than sixty (60) days from the effective date of this ORDER, the Bank shall develop, and the Bank’s board of directors shall review, an appropriate plan (the “EDP Plan”) for the safe and sound operation of the Bank’s electronic data processing equipment, software, operating procedures, and facilities, which shall include any modifications, consistent with guidance issued by the Federal Financial Institutions Examination Council, that may be necessary for the Bank to achieve Year 2000 readiness. Within [60] days from the effective date of this ORDER, the Bank shall submit such EDP Plan to the Regional Director and to the Comptroller for review and comment. Within 30 days from the receipt by the Bank of the FDIC’s written response to the EDP Plan, and after consideration by the Bank’s board of directors of comments from the Regional Director, if any, the Bank’s board of directors shall approve, and the Bank shall implement, such EDP Plan. Thereafter, for as long as this ORDER shall remain in effect, the Bank’s board of directors shall ascertain that the Bank’s electronic data processing is conducted in accordance with such EDP Plan. At a minimum, such EDP Plan shall provide for: the acquisition and operation by the Bank of hardware and software systems that are appropriate for the safe and sound conduct of the Bank’s business; development and implementation of an appropriate, ongoing internal audit of the operations of the Bank’s information systems; immediate acquisition and permanent retention of access to an EDP backup facility that is operationally compatible with the Bank’s hardware, software, and data files; appropriate segregation of duties among the Bank employees (and contractor personnel, if any) who perform functions related to electronic data processing; storage of backup copies of operating systems, application programs, and data files in a secure, fire- resistant environment at a remote site; reconciliation of all major applications to the general ledger on a daily basis; development and implementation of an appropriate policy . . . regarding the Bank’s use of microcomputers; prompt review by the Bank’s board of directors of all audit reports and regulatory reports regarding the Bank’s electronic data processing, and written recordation of the responses by the Bank’s board of directors to such reports; i[x]. prompt correction of all information systems deficiencies identified in audit reports and regulatory reports; and x. periodic review of the Bank’s EDP Policy by the Bank’s board of directors and of Bank management’s implementation of the Bank’s EDP Policy and EDP Plan. Not later than thirty (30) days from the effective date of this ORDER, the Bank shall eliminate from its books, by collection, charge-off or other proper entries, all assets or portions of assets classified “Loss” by the FDIC as a result of its examination of the Bank as of May 22, 1996, which have not been previously collected or charged off, unless otherwise approved in writing by the Regional Director and the Comptroller. Not later than sixty (60) days from the effective date of this ORDER, the Bank shall review and revise its written loan policy to include the following elements: a requirement that before advancing any loan the Bank must obtain, analyze, and verify credit information which will be sufficient to identify a source of repayment and support for the scheduled repayment plan; a requirement that all collateral documentation or evidence of collateral documentation be obtained and reviewed before loan proceeds are disbursed; a requirement for the maintenance and review of complete and current credit files on each borrower with extensions of credit outstanding; [a] requirement for the establishment of criteria and guidelines for the acceptance and review of financial statements; and [a] requirement for appraisal procedures which, at a minimum, satisfy the requirements of Part 323 of the FDIC’s Rules and Regulations, 12 C.F.R. Part 323, and applicable Florida banking laws and regulations. Not later than sixty (60) days from the effective date of this ORDER, the Bank shall implement procedures to ensure that the Bank’s loan policy and all subsequent modifications to the Bank’s loan policy are strictly enforced. 13. Not later than sixty (60) days from the effective date of this ORDER, the Bank shall correct the cited deficiencies in the assets listed for “Credit Data or Collateral Documentation Exceptions” [in the FDIC ROE dated] May 22, 1996. Thereafter, the Bank shall service these loans in accordance with its written loan policy as amended to comply with this ORDER and in accordance with safe and sound banking practices. Not later than January 31, 1999, the Bank shall prepare a realistic and comprehensive budget and earnings forecast for calendar year 1999 and shall submit this budget and earnings forecast to the Regional Director and Comptroller for review and comment. As long as this ORDER remains in effect, the Bank shall prepare annually realistic and comprehensive calendar year budget and earnings forecasts for each year subsequent to 1998 and shall submit these budget and earnings forecasts to the Regional Director and the Comptroller for review and comment no later than January 31 of each year. In preparing the budget and earnings forecasts required by paragraph 14 of this ORDER, the Bank shall, at a minimum: identify the major areas in, and means by which the board of directors will seek to improve, the Bank’s operating performance; and describe the operating assumptions that form the basis for, and adequately support, major projected income and expense components. Quarterly progress reports comparing the Bank’s actual income and expense performance with budgetary projections shall be submitted to the Regional Director and Comptroller concurrently with the other reporting requirements set forth in paragraph 23 of this ORDER. The Bank’s board of directors shall meet and review such progress reports, which review shall be recorded in the minutes of the board of directors. Not later than thirty (30) days from the effective date of this ORDER, the Bank shall take all necessary steps, consistent with sound banking practices, to eliminate or correct all violations of law and regulations committed by the Bank, as described [in the FDIC ROE dated] May 22, 1996. In addition, the Bank’s board of directors shall take appropriate steps to ensure that the Bank is operated in compliance with all applicable laws and regulations. Not later than thirty (30) days from the effective date of this ORDER, the Bank shall adopt and implement an internal loan review and grading system to provide for the periodic review of the Bank’s loan portfolio in order to identify and categorize the Bank’s loans, and other extensions of credit which are carried on the Bank’s books as loans, on the basis of credit quality. Within ninety (90) days from the effective date of this ORDER, the Bank shall have and thereafter retain a qualified Bank Secrecy Act officer (“Officer”). The Officer must be a senior bank official who shall be responsible for the Bank’s compliance with [the] Bank Secrecy Act, 31 U.S.C. §§5211-5326, its implementing regulation, 31 C.F.R. Part 103, and Part 326 of the FDIC Rules and Regulations, 12 C.F.R. Part 326. The Officer shall be given written authority by the Bank’s board of directors to implement and supervise the Bank’s Bank Secrecy Act program, including but not limited to, providing appropriate training for the Bank’s employees in the bank secrecy laws and regulations (the “Bank Secrecy Laws”) enumerated in section 326.8(b) of the FDIC Rules and Regulations, 12 C.F.R. §326.8(b); establishing internal controls and procedures reasonably designed to prevent violations of the Bank Secrecy Laws; and performing or supervising periodic internal audits to ascertain compliance with the Bank Secrecy Laws and/or the Bank’s Bank Secrecy program. The Officer shall report directly to the Bank’s board of directors. The Bank shall provide the Officer with appropriate training in the Bank Secrecy Laws, and each instance of said training shall be reported to, and recorded in, the minutes of the board of directors. The Bank shall promptly notify the Regional Director and the Comptroller of the identity of the Officer. If the Officer is to be added as a director of the Bank or employed as a senior executive officer, the Bank shall comply with the requirements of section 32 of the Act, 12 U.S.C. §1831i, and section 303.14 of the FDIC Rules and Regulations, 12 C.F.R. §303.14, prior to the addition of the Officer to such position. The assessment of whether the Bank has a qualified Officer shall be based upon the Officer’s record of achieving compliance with the requirements of this ORDER and with the Bank Secrecy Laws. Within ninety (90) days from the effective date of this ORDER, the Bank shall adopt and implement a written program to ensure the Bank’s compliance with the Bank Secrecy Act, 31 U.S.C. §§5311-5326, as required by 12 C.F.R. §326, Subpart B. At a minimum, a system of internal controls shall be designed to: identify reportable transactions in a timely manner in order to obtain all the information necessary to properly complete the required reporting forms; ensure that all required reports are accurately completed and properly filed; ensure that customer exemptions are properly granted and recorded, including the maintenance of documentation sufficient in detail so as to substantiate exemptions granted; provide for adequate supervision of employees who accept currency transactions, complete reports, grant exemptions, or engage in any other activity covered by 31 C.F.R. Part 103; and v. establish dual controls and provide for separation of duties. The Bank shall adopt and implement a system of testing, internal or external, for compliance with the Bank Secrecy Act and the Department of the Treasury’s Regulation for Financial Record Keeping and Reporting of Currency and Foreign Transactions (“Financial Record Keeping Regulations”), 31 C.F.R. Part 103, which include, at a minimum: a test of the Bank’s internal procedures for monitoring compliance with the Bank Secrecy Act, including interviews of employees and their supervisors who handle cash transactions; a sampling of large currency transactions followed by a review of currency transaction report filings; a test of the validity and reasonableness of the customer exemptions granted by the Bank; a test of the Bank’s record keeping system for compliance with the Bank Secrecy Act; and documentation of the scope of the testing procedures performed and findings of the testing. Any apparent violations, exception or other problems noted during the testing procedures should be promptly reported to the board of directors. Each calendar quarter following the effective date of this ORDER, the Bank or a consultant shall perform an internal audit of the Bank’s Bank Secrecy Act program. Any audit of the Bank Secrecy Act program performed by the Bank shall be performed or supervised by the Officer. The results of the audit and any recommendation by the Officer, the consultant and/or the board of directors shall be recorded in the minutes of a meeting of the board of directors. Effective immediately, and for as long as the ORDER shall remain in effect, the Bank’s board of directors, not less frequently than monthly, shall review all actions taken by the Bank to comply with the requirements of this ORDER. Such review by the board of directors shall be recorded in the minutes of the Bank’s board of directors. Not later than sixty (60) days from the effective date of this ORDER, the Bank’s board of directors shall develop a three-year strategic plan for the Bank (“Strategic Plan”), which shall address, at a minimum: (i) economic conditions and economic forecasts regarding the Bank’s market area; (ii) potential methods for achieving growth in the Bank’s total assets; (iii) potential methods for improving the Bank’s operations in the context of any projected growth in the size of the Bank’s total assets; (iv) carrying on the functions of the Bank’s management in the event of a loss of the services of current personnel; and (v) integration of an assessment of the Bank’s staffing needs with the Bank’s business plan. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER: (i) in conjunction with the Bank’s next shareholder communication and also (ii) in conjunction with its notice or proxy statement preceding the Bank’s next shareholder meeting. The description shall fully describe this ORDER in all material respects. The description and any accompanying communication, statement or notice shall be sent to the FDIC . . . and to the Comptroller, for review at least twenty (20) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC or the Comptroller shall be made prior to dissemination of the description, communication, notice or statement. Not later than ninety (90) days from the effective date of this ORDER, and not later than thirty (30) days following the end of each calendar quarter while this ORDER is in effect, the Bank shall furnish written progress reports to the Regional Director and to the Comptroller detailing the form and manner of all actions taken to secure compliance with this ORDER and the results of such actions. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Comptroller have released the Bank in writing from making further reports. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the appropriate board meeting. As a result of the sanctions imposed upon [First Bank] for failure to produce discovery and violations of Orders issued by the Administrative Law Judge, not later than thirty (30) days from the receipt of this ORDER, the Bank’s board of directors shall pay costs in the amount of $3,235.44 to the FDIC. Pursuant to delegated authority, the Regional Director may, upon a showing of good cause, amend the compliance deadlines for any of the undertakings required by this ORDER. The provisions of this ORDER shall become effective ten (10) days from the date of its issuance and shall be binding upon the Bank, its institution-affiliated parties, and its successors and assigns. Further, the provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC. Petitioner’s 1998 Consent Order Based on Petitioner’s ROE dated September 2, 1997, the Consent Order settled administrative litigation that Petitioner had instituted against First Bank, Wells, and the other directors who are respondents in this case, plus one director no longer serving as a director of First Bank. In that litigation, Petitioner sought, among other things, an order removing Wells from the board of directors of First Bank and prohibiting Wells from serving on the board of directors of any other state-chartered financial institution. Paragraph 4 of the Settlement Stipulation incorporated into the Consent Order requires the respondents to cease and desist from violations of Section 655.033(1), Florida Statutes, and to take the following “affirmative remedial action”: As soon as practicable, but in no event later than sixty days after the execution of this Settlement Stipulation by the Respondents, and subject to prior approval by [Petitioner], Respondents shall hire new and appropriately qualified management personnel to assume responsibility for daily operations and core banking functions of [First Bank] for the duration of the Consent Order. Management personnel acceptable to [Petitioner] shall be selected and employed to perform the positions of president/chief executive officer, cashier, and senior lending officer. Any person selected by the Board of Directors to serve as president/chief executive officer shall have a demonstrated capability to manage a bank comparable in size to [First Bank]. Any person selected by the Board of Directors to serve as cashier shall have a demonstrated ability to manage and balance the accounts of a bank comparable in size to [First Bank]. Any person selected by the Board of Directors to serve as senior lending officer must have a demonstrated level of lending, collection, and loan supervision experience necessary to supervise and enhance the safety and soundness of the loan portfolio of the Bank. In determining whether to approve the selection of any person under this paragraph, [Petitioner] shall make its determination based on the ability of the candidate to: operate the bank in a safe and sound manner; comply with all applicable laws and regulations; assist in restoring the Bank to a safe and sound condition; and comply with the requirements of the [Cease and Desist Order] applicable to their area(s) of responsibility. The president, as chief lending officer of the Bank, may also discharge the duties of senior lending officer until the Bank has employed an individual to fill the position on a permanent basis. Upon written request submitted to [Petitioner] by the president employed by the Bank pursuant to Paragraph 4.A.1 of this Stipulation, the selection of a permanent senior lending officer may be delayed for no more than 90 days beyond the deadline specified in Paragraph 4.A in order to facilitate the hiring of a qualified person. For the duration of [the] Consent Order . . ., the Respondents shall provide [Petitioner] and the FDIC with written notice of any change in the complement of executive officers employed by the Bank. Any replacement executive officer as defined in §655.005(1)(f), Florida Statutes, shall be subject to the approval procedures of §655.0385, Florida Statutes. An application for approval must be submitted to [Petitioner] and to the FDIC at least 30 days before the candidate’s assumption of management duties on behalf of the Bank. Effective on the date that his successor as president and chief executive officer is approved by [Petitioner] and FDIC, [Wells] shall resign as President and Chief Executive Officer of [First Bank]. All named Respondents agree on behalf of the Bank, and [Wells] agrees individually as well, that, subsequent to this resignation, Wells will take no further action on behalf of [First Bank] in the capacity of “executive officer” within the meaning of §655.005(1)(f), Florida Statutes, for the duration of the Consent Order . . .. Nothing in this paragraph shall be construed to prohibit Wells from serving as legal counsel, inclusive of general counsel, or as consultant to [First Bank], or from receiving appropriate, reasonable compensation from [First Bank] for services provided by Wells in the capacity of counsel or consultant to the Bank. [Petitioner] agrees that Wells may serve as a director of [First Bank] and may serve on any duly constituted committee of the Board of Directors. Wells may continue to serve as Chairman of the Board of Directors if, and only if, by appropriate resolution of the Board of Directors of the Bank in accordance with §655.005(1)(f), Florida Statutes, he is excluded from participating, other than in the capacity of a director, in any major policymaking functions of [First Bank], and receives no additional compensation attributable to service as Chairman of the Board of Directors of the Bank. This paragraph shall not be deemed to disallow [Wells] from participation in reasonable Bank-paid group insurance. Respondents agree to adopt a resolution of the Board of Directors of [First Bank], pursuant to §655.006(1)(f), Florida Statutes, excluding [Wells] from participating, other than in the capacity of a director, in any major policymaking functions of [First Bank]. This resolution shall be maintained in force by the Board of Directors for the duration of [the] Consent Order . . .. Respondents agree that the primary tasks of the new management employed pursuant to this Stipulation will be to eliminate all unsafe and unsound practices detailed in [Petitioner’s] September 1997 [ROE] and to assure compliance by [First Bank] with the [Cease and Desist Order]. Respondents agree to provide new management with written authority by resolution to take such actions as may be appropriate and necessary to implement remedial action and compliance assurance activity. Respondents, individually and collectively, agree to take all actions appropriate and necessary to remedy any and all deficiencies in policies and procedures applicable to [First Bank] as noted in periodic examination reports prepared by [Petitioner] and the FDIC. [Wells] agrees that he shall not willfully or intentionally interfere with the proper execution or discharge of delegated or assigned duties performed by the new management personnel employed by the Bank under the provisions of this Stipulation. Actions taken by [Wells] that fall within the scope of authority of a director of the Bank shall not be deemed to violate this paragraph. [Wells] acknowledges that [Petitioner] considers this paragraph to be a material term of this Stipulation and that any violation of this paragraph will be deemed a material breach of the Consent Order. Paragraph 10 of the Settlement Stipulation states that the respondents acknowledge that, although they do not waive their right to litigate such issues, the “failure to comply with any of the terms, obligations, and conditions of this Stipulation or [Consent Order] will constitute grounds for disciplinary or other adverse action.” 3. FDIC’s 1999 Safety and Soundness Order Paragraph 2 of the Safety and Soundness Order states that the FDIC has determined that First Bank is deficient in meeting the safety and soundness standards set forth in Part 364 of the FDIC Rules and Regulations, 12. C.F.R. Chapter III, and the laws of the State of Florida. In particular, Paragraph 2 states: The board of directors has failed to provide sufficient resources for the Bank to meet Year 2000 timetables established by the FFIEC; The Bank’s Year 2000 project plan does not adequately address critical aspects of the Year 2000 program; The Bank’s Business Resumption Contingency Plan is inadequate; The Bank has not fully implemented its formal Year 2000 liquidity guidelines; The Bank has not completed an effective external review of its Year 2000 program. The Safety and Soundness Order asserts that the FDIC notified First Bank of these deficiencies on May 21, 1999, and “requested” that First Bank submit a compliance plan. First Bank submitted a compliance plan, but the FDIC found it unacceptable and issued, on July 21, 1999, a Notice of Intent to Issue a Safety and Soundness Order. In a response filed on August 4, 1999, First Bank submitted a revised Year 2000 Plan. However, Paragraph 6 of the Safety and Soundness Order states that the FDIC found the revised plan “unacceptable” for the following reasons: The board of directors has failed to allocate the necessary resources in order to comply with FFIEC guidelines. The bank is currently operating without a President and Chief Executive Officer and the Year 2000 project manager has not been given the requisite authority to fulfill his responsibilities regarding Year 2000 readiness. The plan does not establish acceptable guidelines for the renovation of all mission-critical systems within an acceptable time frame. The plan fails to address implementation of internal mission-critical systems that are Year 2000 ready. The plan does not provide a strategy to test the business resumption contingency plan. The plan does not specifically require that monthly management reports to the board of directors contain the information outlined in the “Interagency Statement on Year 2000 Business Risk.” The plan does not provide for the submission of monthly written progress reports to the Regional Director of the FDIC and the Comptroller of the State of Florida. Concluding that First Bank is deficient in meeting the safety and soundness standards established under Part 364 of the FDIC Rules and Regulations, 12 C.F.R. Part 364, the Safety and Soundness Order directs First Bank to: Allocate all necessary resources to achievement compliance with FFIEC Year 2000 guidelines. Within 15 days of the effective date of this Order, the board of directors shall: hire and retain a qualified Year 2000 consultant, or qualified personnel, to oversee implementation of an acceptable Year 2000 Plan, whereby the Bank achieves compliance with all FFIEC Year 2000 guidelines within 20 days of the effective date of this Order. The board of directors shall provide the consultant or hired personnel with sufficient resources to achieve Year 2000 compliance within that time frame. The qualifications of the Year 2000 consultant or personnel shall be assessed on the ability of the Year 2000 consultant or personnel to comply with the provisions of this Order. appoint and retain a qualified senior bank officer as the Year 2000 project manager. The board of directors shall provide the Year 2000 project manager with sufficient resources and authority to achieve Year 2000 compliance. The Year 2000 project manager shall submit monthly reports regarding the status of the Bank’s Year 2000 readiness to the board of directors. The monthly reports shall address the items specified for quarterly board reports in the Guidelines, the FFIEC Guidelines and, specifically, the FFIEC’s December 17, 1997 issuance entitled “Interagency Statement on Year 2000 Business Risk.” The qualifications of the Year 2000 project manager shall be assessed on his/her ability to comply with the provisions of this Order. Within 15 days of the effective date of this Order, renovate, as necessary, all mission-critical systems used by the Bank to make them Year 2000 ready and, within 20 days from the effective date of this Order, implement those Year 2000 ready systems. Develop a Business Resumption Contingency Plan within 20 days of the effective date of the Order that provides workable plain language guidance to employees and can be implemented immediately. At a minimum, the Business Resumption Contingency Plan shall: set forth the Bank’s plans to recover lost or damaged data and to mitigate risks associated with the failure of its systems at critical dates; include identification of the Bank’s core business processes and a specific recovery plan for the possible failure of each core business process; establish a manual bookkeeping system to operate parallel with the computer system beginning November 1, 1999, unless the FDIC and State Regulatory authorities have reviewed and verified that the bank is operating in compliance with all FFIEC Year 2000 guidelines; and develop a method to validate and test the Business Resumption Contingency Plan within 20 days of the effective date of the Order. Provide for the external review of Year 2000 readiness by a qualified, independent third party within 30 days from the effective date of the Order. Establish a line of credit with the appropriate Federal Reserve Bank within 20 days of the effective date of this Order. Following the effective date of this Order[,] the Bank shall send to its shareholders or otherwise furnish a description of this Order (i) in conjunction with the Bank’s next shareholder communication and also (ii) in conjunction with its notice or proxy statement preceding the Bank’s next shareholder meeting. The description shall fully describe this Order in all material respects. . . . Provide for the submission of a progress report on the requirements of this Order within 30 days of the effective date of the Order, and monthly thereafter, until the Order is terminated. The progress report shall be sent to the Regional Director of the FDIC and the Comptroller of the State of Florida. The Safety and Soundness Order concludes: This ORDER will become effective ten (10) days after its issuance. The provisions of this ORDER will be binding upon the Bank, its institution-affiliated parties, successors and assigns. Each provision of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision shall be modified, terminated, suspended, or set aside by the FDIC. By Order Terminating Safety and Soundness Order issued on April 2, 2000, the FDIC cancelled the Safety and Soundness Order. First Bank’s Response to Regulatory Interventions These cases are about the adequacy of First Bank’s efforts to solve its operational problems as addressed by the directives from Petitioner and the FDIC. The Cease and Desist Order and Consent Order arise from the three reports of examination issued in 1995, 1996, and 1997. The period during which First Bank responded to these directives is largely 1998 and 1999. Petitioner’s ROE dated September 13, 1999, is the contemporaneous, comprehensive assessment of the adequacy of First Bank’s efforts and responses. These cases also require consideration of the role of Wells in creating and eliminating the operational problems experienced by First Bank. Petitioner’s representatives have frequently stated that the problems of First Bank would be amenable to quick solution if Wells were to sever his policymaking, consulting, and legal counseling ties to the bank. Although the determinative facts in this case are largely confined to 1998 and 1999, the preceding nine years’ operation of First Bank is relevant to the analysis of the events of 1998 and 1999. During the first nine years of the bank’s existence, Wells served as the president, until he was forced to resign, pursuant to the Consent Order, in the fall of 1998. After his resignation, though, Wells remained intimately involved with the bank’s operations as a director, consultant, and general counsel. Under Wells’ supervision as president, the bank’s internal accounting was so poorly maintained that nearly all of the internal accounts of First Bank were out of balance for extended periods of time and demanded many months of effort to balance these accounts and reconcile the subsidiary ledger accounts with the general ledger account. Under Wells’ supervision as president, an unreasonably large opportunity for employee theft existed because the bank's employees did not perform financially sensitive tasks under dual control, even to the extent practicable for a small bank. Under Wells’ supervision as president, the bank’s information technology and data processing systems were poorly integrated into operations and insufficiently secured to prevent the loss of data in the event of catastrophe. Under Wells’ supervision as president, the bank’s personnel turned over at excessive rates. However, under Wells’ supervision as president, First Bank initially earned composite CAMELS ratings of 2 during four ROEs conducted by Petitioner and the FDIC in 1992, 1994, and 1995. During this time, First Bank earned four ratings of 1 for capital and assets, three ratings of 2 and one rating of 1 for liquidity, and three ratings of 2 and one rating of 3 for earnings. However, even during this period, First Bank earned three ratings of 3 and, in 1995, one rating of 5 for management. The 1996 and 1997 ROEs, on which the Cease and Desist Order are based, assigned First Bank composite ratings of 3, and the 1998, 1999, and 2000 ROEs assigned First Bank composite ratings of 4. The record does not explain why these management problems intensified in the mid 1990s. However, under Wells’ supervision as president, these problems undermined the operations of First Bank and ultimately necessitated the regulatory interventions of the Cease and Desist Order and Consent Order. The record amply demonstrates that, without these interventions, First Bank, under Wells’ supervision as president, would have been unable or unwilling to resolve the numerous issues undermining its operations. The Cease and Desist Order and Consent Order issued at a point when the federal and state regulators reasonably expected that First Bank, although a small bank, would have matured operationally after nine years’ existence. However, even the minutes of the meetings of the board of directors of First Bank for 1997 reveal a disturbing level of disorganization and lack of focus among the directors, especially Wells. The minutes of the March 11, 1997, meeting of the board of directors illustrate one aspect of the organizational problems confronting First Bank and Wells’ inability to identify a plan for resolving the matter. According to the minutes of this meeting, Wells complained that: Organization of the Bank was proving to be one of the most difficult challenges possible. Personnel have failed or refused to follow policy guidelines and administrative requirements. The Bank generated several hundred forms prior to the organization of the Bank to expedite the handling of administrative, operational, loan and compliance matters. Most of these forms are basically disregarded by staff personnel. Employee turnover has been an ongoing problem at First Bank. However, the March 11 minutes reveal that Wells ignored the opportunity to analyze the challenge of attracting and retaining qualified personnel and identify specific solutions. Instead, Wells indulged himself in a personal diatribe whose evident purpose seems to have been to assign the blame for First Bank’s personnel problems on the undisciplined youth of Jacksonville and, to a lesser extent, their parents and school administrators. Displacing an informed examination of First Bank’s pay structure and working conditions, Wells’ denunciation of the pool of potential bank employees stated: Virtually all of the businesses and trades are publicly complaining over the quality of personnel and the ability of employees to to [sic] discharge assigned duties. This results from either lack of or poor training and the failure of the student or institution to educate the graduate in the various disciplines of which he or she were engaged in the educational process. Unfortunately, high school graduates exhibit a “warehousing” mentality. These young people oftimes describe and exhibit the attitude that they have been warehoused for their last few years of high school as opposed to receiving serious educational training and support. Conversations with educators at the high school level indicate that the students are undisciplined and virtually out of control. Responsible teachers from both Wolfson and Mandarin High Schools have advised the Bank that discipline is missing from the children’s home life. These educators say that School policy and procedures, as well as parent objections, prevent adequate discipline being applied during the school day. We are continuing to search for qualified personnel or graduates of various institutions who may be able to assist the Bank within the available employment funds of the Bank. Evidently having satisfied himself that he had adequately addressed the bank’s considerable personnel issues, Wells, according to the minutes, then turned to apparent maintenance deficiencies concerning the exterior of First Bank and, again, found Jacksonville youth to blame. Noting that three juveniles had recently been arrested for throwing golf balls and shooting guns into merchants’ signs along San Jose Boulevard, Wells stated that vandals had broken off all outside water spigots and removed floodlights at the bank. “Consequently, we are cautious about the implementation of further sign work and about repair to existing exterior facilities because of a continuing destructive environment. Merchants advise the Bank that these are, in large part, ‘latchkey’ young people who are frustrated and bored, but because of circumstances engage in destructive conduct against both public and private property.” Three months later, though, the minutes were not so richly detailed as to Wells’ description of the pending FDIC administrative litigation, in which he represented First Bank without fee. As already noted, Wells’ inability or refusal to comply timely with discovery and his “incredible” explanation not only resulted in the imposition of over three thousand dollars in discovery costs, but also in the exclusion of much of the bank’s evidence from the hearing. The first meeting of the board of directors after the Administrative Law Judge imposed these sanctions was May 20, 1997. The minutes state only that Wells advised the other directors that all pleadings would be kept in the wall unit at the bank, and he “encouraged the Directors to become very aware of the various allegations and defenses being filed in this regard.” The minutes of the meeting of the board of directors on June 26, 1998, report confirmation from Wells that “the payment of costs on sanctions had been paid to the FDIC,” although the statement does not reveal whether Wells or First Bank paid this amount. The record does not permit detailed findings of the substance of Wells’ legal representation of First Bank, apart from his obvious mishandling of the FDIC litigation and his prudence in deferring to outside counsel for the present litigation. Much of Wells’ work has involved the preparation of documentation, as to which he is experienced, and nothing in the record suggests any incompetence in this area. Some of his work has involved regulatory matters, as to which he is now experienced, but the record does not support a finding of any special competence in this area, even now. However, the record reveals a considerable level of disorganization in at least one aspect of Wells’ legal work: invoicing. According to the minutes of the meeting of the board of directors on October 31, 1997, Wells presented the board in October 1997 several invoices for legal work that he had done in 1996. The minutes of the meeting of the board of directors on April 16, 1998, note that bank staff had found an unpaid legal statement from Wells dating back three years. The minutes of the meeting of the board of directors on October 15, 1998, acknowledge the receipt of previously unpresented legal invoices for work done by Wells 12-21 months earlier. Under Wells’ supervision as president, First Bank adhered to conservative financial practices, protecting the quality of the bank’s loan portfolio, but at the expense of growth. In its initial business plan, First Bank had projected total assets of $15 million within three years. As of June 30, 1999, First Bank had total assets of only $8.3 million, down from a high of $9.3 million on December 31, 1993. Although its capital remains sufficient for its level of operations, First Bank had, until the quarter ending March 31, 2000, less capital than when it was organized. First Bank has never paid a dividend to Wells or its minority shareholders, who are dissatisfied with the performance of their investment and have commenced litigation against Wells and First Bank. First Bank’s earnings have declined in recent years. Net income in 1995 and 1996 was about $100,000 annually. Net after-tax earnings were $71,000 and $31,000 for 1997 and 1998, respectively. In 1999, First Bank suffered a net after-tax loss of $33,000. From 1997-99, First Bank’s interest income was $675,000, $624,000, and $290,000, respectively. However, year-to-date figures, through June 30, 2000, reveal that First Bank’s total income was $313,298--107 percent of budget--and its total expenses were $278,851--85 percent of budget. The bank’s performance through June 30, 2000, may reflect a reversal of the negative trends in earnings and revenues, which, at least for revenues, may have been partly attributable to the end of adverse local publicity concerning Y2K compliance. During the latter half of 1999 and early 2000, First Bank was the subject of numerous unflattering newspaper stories in The Florida Times-Union reporting, among other things, that the FDIC had issued the Cease and Desist Order, Petitioner had required Wells to resign as president in the Consent Order, the person hired to replace Wells as president had resigned only nine months after taking the job, First Bank was the last of over 10,000 banks under the FDIC to have demonstrated Y2K compliance, minority shareholders had sued for $3.5 million for the mismanagement of the bank, and First Bank, although financially sound, had been unable to balance its books and maintained poor internal controls. The directors are unpaid and, except for Wells, do not appear to own shares of First Bank. When he served as president, Wells earned $20,000 in 1989, $40,000 annually from 1990-93, and $62,000 annually from 1994 through his resignation as president in 1998. Following Wells’ resignation as president, a consulting agreement between First Bank and Welco, Inc., a corporation controlled by Wells, has required Wells personally to provide consulting services at the hourly rate $40 with a guaranteed annual minimum of $38,000. From all sources, as president, general counsel, and consultant, Wells has received compensation of over $500,000 from First Bank in its 11 years of existence. Three major additions to personnel marked 1998. The first such addition was the replacement of Wells by A. Richardson Tosh (Tosh), as reflected by the minutes of the meeting of the board of directors on September 9, 1998. The minutes state that First Bank hired Tosh, as president and chief executive officer, for $50,000 annually. Following regulatory approval, Tosh began working in these capacities in mid October 1998. The next two personnel events were the addition of James Giddens (Giddens) and Kim Jufer (Jufer). The minutes of the meeting of the board of directors on November 13, 1998, confirm and ratify the employment of Giddens in an unspecified capacity and Jufer as the manager of the operations department and staff accountant. Tosh’s banking career began in March 1964. Prior to his arrival at First Bank, Tosh had been the president of three financial institutions for a total of over 16 years. In his conversations with Wells, Tosh learned that his duties would be twofold: eliminating operational problems and marketing. The two main operational problems confronting Tosh were out-of-balance accounts and Y2K compliance. Tosh found the books and records in extremely poor condition. As Giddens testified, almost every account was out of balance. These erroneous books and records generated unreliable financial information for the board of directors and the FDIC in quarterly financial reports known as call reports submitted by the bank. The directors were aware of the problem, although probably not its severity; the 1997 and 1998 minutes reflect unsuccessful attempts by the directors to have a bank employee balance the internal accounts. Jufer and Giddens proved indispensable to the task of balancing the bank’s accounts. However, consistent with the relatively limited authority extended Tosh, he had to obtain the approval of the board of directors to hire these two employees. Jufer worked fulltime on the books and records, and Tosh worked parttime to help her until Giddens, who is a certified public accountant with considerable bank audit experience, joined First Bank a few weeks after Jufer’s arrival. Tosh’s second operational concern was Y2K compliance. By October 1998, First Bank had already missed one FDIC deadline. Shortly after Giddens’ arrival, Tosh turned his attention to the Y2K problem. If ever good, the relationship between Tosh and Wells did not take long to start to deteriorate. Other directors assured Tosh that they wanted him to report any incidents of interference by Wells in the performance of Tosh’s duties as president. An early example of the extensiveness of the involvement of the board of directors, although not necessarily Wells alone, in the management of First Bank is reflected in the minutes of the meeting of the board of directors on November 13, 1998, in which the directors approved directives detailing specific job responsibilities of all bank employees. The board issued numerous directives, whose effects were to limit Tosh’s managerial authority. At the next meeting of the board of directors, which took place on December 10, 1998, the minutes state that Tosh informed the board that he was outsourcing payroll functions, and the board directed Tosh not to outsource the payroll due to the limited number of employees. At the first board meeting of 1999, which took place on January 14, Tosh reported that he had found a bank in Perry whose hardware and software systems were sufficiently compatible with those of First Bank that it might serve as a backup source for disaster recovery. The directors requested that Tosh find a second site, but Tosh justly responded that their first priority should be testing the Perry bank to see if the backup plan could be implemented there. By this time, Tosh was handling Y2K issues, as well as other operational matters, such as compliance with the requirements of the Bank Secrecy Act, collection matters, and some internal control issues. As to these matters, Respondent Gunti was also intimately involved. By letter to Wells and the other directors dated February 7, 1999, Tosh complained about their use of directives without obtaining management input to solve the problems of the bank. In particular, Tosh criticized directives that could delay time-sensitive projects, such as Y2K testing. Tosh also noted a tendency for the directors to provide employees with binders full of policies and procedures, rather than hire experienced, competent employees capable of implementing bank policies. Addressing Wells, Tosh suggested that “it is time for him to limit his duties to those that we agreed on at the time of my interviews.” He added: “it is clear that nearly everyone that works here at the bank has a difficult time working with Mr. Wells. This level of frequent tension is not conducive to a productive workplace. Furthermore, tension produces turnover.” Turning to recent accomplishments, Tosh commended Jufer and Giddens for their work. Referring to the recent FDIC examination, which resulted in the ROE dated December 7, 1998, Tosh observed that as many as seven FDIC examiners had been at the bank for four weeks. Conceding that they were only doing their job, Tosh wrote that the timing of the examination “could not have been much worse for us.” Exacerbating the disruption to staff, such as Jufer and Giddens, was that the examiners were having the same problem that staff has in finding necessary records. Turning to work to be undertaken, Tosh noted that First Bank was having trouble finding a senior loan officer, but had obtained an extension to mid March from Petitioner to fill this position. Referring to marketing, Tosh conceded that he had not been active and that the bank needs to grow, but, when he had agreed to take on substantial marketing duties, he had had no idea of the “chaos” present at First Bank. As for Y2K mainframe testing, Tosh expressed his concern that the bank has no one with the expertise to evaluate their testing. Tosh concluded this portion of the letter with his concern, shared by the board, of the “lack of income in the near term for the bank.” He repeated his expectation, first stated during his interviews, that he hoped that the bank would spend the money to prepare to make profitable loans. On this point, he reemphasized the importance of a good senior loan officer who, although costly, would bring a book of business to First Bank. Tosh described the building as “exceptional,” but “filthy dirty” inside and lacking bright lighting and signs at night. Tosh concluded his letter by returning to the issue of Wells. Asserting that “Wells has steadfastly held onto the CEO functions,” Tosh warned that he would not remain with First Bank only to serve as a branch manager and ensure apparent compliance with the Consent Order. Tosh asked the board to “reassign and limit [Wells’] continued management function.” At the meeting of the board of directors on March 30, 1999, Tosh reported that the testing at the Perry bank had been successful, and the board reminded him that they wanted a second backup site. The minutes of the March 30 meeting reveal another aspect of the disorganization of First Bank. Hampering the bank’s efforts to timely find documents and present an attractive place to bank for customers, the minutes note that several directors “had complained of the organization and clean-up of internal Bank facilities because of the unsightly stacking of binders, file boxes standing in the teller areas visible to customers, records stacked in the lounge area, discarded equipment being stacked in a pile in the lounge area, waste materials needing shredding or other destruction, [and] unsightly organization of the storage areas (including material storage).” However, the minutes of the special meeting of the board of directors on August 18, 1999, disclose that, five months later, the unattractive disarray and obvious disorganization of the bank’s premises continued to be a problem. At a special meeting of the board of directors on April 12, 1999, the directors emphasized the need for prompt action on marketing and business development. The [Acting] Chairman [Respondent Gunti] restated the continuing operating loss must be addressed by management promptly. He again reaffirmed repeated requests for a marketing plan from Mr. Tosh and recommendations for business development activity. The Chairman stated that the Bank staff is being underutilized for customer service because of the poor attendance of customers. . . . At a special meeting of the board of directors on April 20, 1999, the directors asked Tosh to review available services for prospective customers and to survey competitors for the services that they provide customers. At the meeting of the board of directors on April 22, 1999, Tosh reported that he had made little progress in finding a senior loan officer. However, he reiterated that Wells had not interfered with his performance of his duties. By internal memorandum to the directors dated April 28, 1999, Tosh asked the board to consider Jufer’s compensation. The memorandum states that Tosh had promised her a salary review in six months, if she would initially accept $30,000 annually. Praising her work to this point, Tosh recommended that the board promote her to vice president, raise her salary to $34,000 annually, and pay her a bonus of $2000. At the meeting of the board of directors on May 13, 1999, Tosh reported that the findings of the Y2K examination team were unsatisfactory, and he recommended that the board engage a consultant to review the status of the bank’s Y2K compliance. The minutes are not clear as to the action that the board took, but it did not accept Tosh’s recommendation. Wells opposed this recommendation because he had not yet finished preparing the bank’s Y2K plan. According to the minutes of the May 13 meeting, Tosh again reported that Wells had not interfered with Tosh’s performance of his duties and that efforts to find a senior loan officer had not been successful. On questioning by directors as to possible interference by Wells, Tosh noted one incident in which a signature on a bank check had been lined out, but Respondent Gunti stated that he had done it because he was not aware of the nature of the payment. Illustrative, though, of the extent to which the directors involved themselves in management, Tosh had written the check to purchase some much-needed office furniture. Again, the directors inquired about the marketing efforts. The minutes note that Tosh was to have implemented a call program, but he had been unable to do so. The May 13 minutes also disclose that the directors had appointed Giddens as vice president and comptroller. Two days later, Tosh announced his resignation, effective June 15, 1999. Jufer also resigned at this time. By memorandum dated May 25, 1999, to the board of directors, Tosh warned that First Bank needed immediately to engage a consultant to assure timely Y2K compliance. The memorandum states: “We are lay people trying to do a specialty project. . . . Since the overall Y2K plan should have been done last summer, we are risking too much by doing it at this late date by ourselves.” Petitioner called Tosh as a witness, and his testimony was somewhat adverse to Respondents. However, Tosh testified that Respondents Gunti and Minor participated actively in directors' meetings and were concerned about compliance with the Cease and Desist Order and Consent Order. Tosh also testified that, by the summer of 1999, the mainframe and software were Y2K compliant. This testimony is credited. Tosh’s experiences at First Bank reveal the detailed level to which directors involved themselves in management issues, although, for a bank as small as First Bank, this is not unusual. However, Tosh’s experiences also reveal some of the shortcomings of the directors in handling management issues. The directors repeatedly misprioritized important tasks. From the start of their relationship with Tosh, for example, the directors were preoccupied with Tosh's spending valuable time finding a second backup site. As Tosh recognized, this would have been a misallocation of limited resources given the numerous operational challenges lying ahead of First Bank, especially as to Y2K compliance. Later, the directors became preoccupied with Tosh's spending time marketing First Bank. Although Tosh could have improved revenues by focusing more effort in marketing, his insignificant shortcomings in marketing had considerably less effect on revenues than did the directors’ misguided refusal to take Tosh’s recommendations to pay a sufficient sum of money to attract a senior loan officer with a book of business and to hire a Y2K consultant in May of 1999. The failure of the directors to timely obtain expert Y2K assistance proved especially costly to bank revenue later in 1999 after a deposit runoff due to adverse publicity surrounding First Bank. Although First Bank’s hardware and software were in fact Y2K compliant when Tosh departed, the directors failed to appreciate the magnitude of the remaining tasks of demonstration testing and preparation of a Y2K compliance plan, which Wells, despite his unfamiliarity with hardware and software systems, had been trying without success to prepare. However, Tosh also serves as a useful reference point concerning the overall condition of First Bank, despite the managerial shortcomings revealed during his tenure. Two weeks after his departure, Tosh introduced investors who, with Tosh, were interested in purchasing the stock of First Bank. At a special meeting of the board of directors on June 8, 1999, the directors approved the hiring of T. Dale Ferguson (Ferguson) as loan officer, effective June 15, 1999. At a regular meeting of the board of directors on June 10, 1999, the directors approved the hiring of Ferguson as senior loan officer, subject to regulatory approval. At a special meeting of the board of directors on June 24, 1999, the directors approved the appointment of Giddens to the position of interim president, pending the conclusion of an advertisement campaign for a permanent president. As Wells and Respondent Gunti noted, though, the adverse publicity received by First Bank had also hampered its search for a president. By letter dated July 14, 1999, to the board of directors, Petitioner notified each director that he was in violation of the Consent Order and Settlement Stipulation and, absent corrective action within 90 days, Petitioner would seek administrative fines in the amounts of $10,000 against Wells, $5000 against Respondents Alters, Drummond, and Gunti, and $2500 against Respondent Minor. At a special meeting of the board of directors on July 16, 1999, the directors approved the hiring of outside counsel to defend the bank in the legal action brought by the minority shareholders. Also, noting deficiencies cited by the FDIC in First Bank’s Y2K compliance, the directors approved an enlargement of the duties of a consultant, Reed Dearing (Dearing), to various Y2K duties. At a special meeting of the board of directors on August 10, 1999, the directors reviewed with Ferguson the marketing plan to increase bank revenues. The directors approved an executive directive specifying officer marketing activity and asked Ferguson to survey the activity of competitors to assist the directors in strategic planning. At a meeting of the board of directors on August 26, 1999, Ferguson, who was serving as Y2K project manager for First Bank, reported that the bank’s Y2K plan had failed to win approval for a second time, and the bank had assigned to Dearing the task of rewriting the plan. A letter dated August 23, 1999, from Dearing to Wells states that the May 13, 1999, business resumption contingency plan, which First Bank adopted as part of its Y2K plan, lacked necessary content, made vague assumptions, and was extremely wordy and unreadable. The letter notes that Y2K work by Ferguson has been hampered by the failure of the board to delegate him any authority, so that he must continually seek board approval for all decisions. Dearing noted that the deficiencies in the business resumption contingency plan were the focus of the FDIC’s pending Safety and Soundness Order. After Tosh’s departure, Giddens continued to work on the books and records. Although he had already completed the majority of the work, considerable, detailed effort remained. Having already restored the books and accounts so that they were accurate on a going-forward basis, Giddens analyzed information, often years old, to achieve a comprehensive balancing and reconciliation. Eventually, the main adjustment was an addition, to the bank’s favor, of $21,214.36 to the cash items account, as accepted by the board of directors on October 29, 1999. At the request of Petitioner’s examiners, Giddens issued corrected call reports to reflect this adjustment. The best indicator of the point of completion of Giddens’ work on the books and records is found in the minutes of a special meeting of the board of directors on August 31, 1999. The outside auditor appeared at the meeting and informed the directors that he was again working on his audit for the years 1996 and 1997, which he had been forced to suspend due to the condition of the books and records. On August 18, 1999, outside auditors issued an independent auditors report concerning First Bank’s financial position through 1998. As interim president of First Bank, Giddens was only employed at the rate of $14 hourly for an average of 15 hours of week. Freely expressing his dissatisfaction with his rate of pay, although not the hours, Giddens nevertheless testified that Wells had not interfered with Giddens’ performance of his duties. In reality, those duties are more in the nature of a chief financial officer, not chief executive officer. Giddens has over 30 years’ experience in bank auditing and accounting, including internal controls. His limited experience in operations derives from an assignment to Jamaica on which he was to hire and train a bank auditor, but, due to an unexpected strike, Giddens had to run operations for a relatively short period of time. Working on the books and records, Giddens gained a unique insight into the problems of First Bank. For example, where Wells might complain generally about employees misusing forms, Giddens encountered specific instances, such as the practice of some employees to use loan checks when they ran out of cashier checks, thus leaving both accounts out of balance. As his work on the books and records began to reach completion in the summer of 1999, Giddens devoted more time to internal controls. Dual control of sensitive assets, such as travelers’ checks or the night deposit box, poses unique problems for a bank with only a half of a dozen employees. However, Giddens implemented numerous internal controls to reduce the risk of employee theft. For example, under Giddens, First Bank imposed dual control upon travelers’ checks, even though Giddens had never seen another bank have to do this; Fedline wire transfers (where one person had to load and another person had to transmit), even though First Bank’s wire transfer procedures left it no more exposed to risk than had the procedures of Barnett Bank, where Giddens had worked for many years immediately prior to coming to First Bank; tellers’ cash drawers, for which different persons do unannounced money counts; and official checks, where, due to employee attrition, different persons perform the necessary reconciliations. As for internal auditing, Giddens admitted that First Bank lacks a program, but, befitting a bank of its size, has internal control systems that are verified periodically by independent persons. As Respondents Gunti and Minor testified, the directors do not do internal audits, but Giddens does. In fact, on December 20, 1998, Giddens and Tosh found a $1700 shortage in one teller’s cash box, and they referred the matter to the state attorney’s office. As for accounting practices, Giddens detailed all of the objections of Petitioner’s examiners and rebutted each of them or showed that they did not present a material risk of loss or damage. As for security practices, Giddens acknowledged that the combinations and locks had not been changed since the departure of Tosh, and the bank needs to deal with these issues. However, the bank had already dealt with minor deficiencies with the bait money that it supplies tellers in the event of a robbery. In general, Giddens testified credibly that First Bank is adequately staffed to handle the volume of business that it experiences. As described by Respondent Gunti, First Bank handles only about 40 transactions daily. At a special meeting of the board of directors on September 17, 1999, the directors gave Ferguson the authority to do whatever was necessary to implement the Y2K plan, including the business resumption contingency plan, and authorized him to purchase, on a competitive basis, needed items, as outlined in a Y2K budget. At a meeting of the board of directors on September 29, 1999, the directors for the first time in this record cast opposing votes as to a matter. Respondent Alters noted that the directors had received a letter of intent to purchase the assets or stock from the Bank by Evergreen Bancshares, Inc., evidently a different group from that in which Tosh had been involved. Wells moved that the board require the prospective purchaser first to provide background information, but Respondent Alters moved that the directors waive this requirement and consider the prospective offer directly. Joining Wells were Respondent Drummond and Wells’ son, who had been recently appointed to the board, so that Respondent Alters’ attempt to waive the requirements was defeated. However, Respondent Drummond later switched his vote, so that the directors waived the requirements that the prospective purchaser first provide background information. At Wells’ request, the directors deferred consideration of the matter until October 1, 1999. At the same meeting, Ferguson reported to the directors that the FDIC had rejected the first two Y2K plans submitted by First Bank. Dearing had given management a rough draft of his rewrite on September 15, 1999, but management had made some changes with which Dearing had disagreed. The Y2K committee had adopted a revised plan on September 27, 1999, but the FDIC had recently informed the bank that it had to rewrite the entire Y2K plan. Ferguson reported to the directors that he had deferred implementing his business development responsibilities until he had completed his Y2K tasks. At a special meeting of the board of directors on October 4, 1999, the directors agreed to respond to the Evergreen letter of intent, but to require certain conditions precedent to further discussion, including disclosure to the directors of the amount of the purchase offer to the minority shareholders. At a special meeting of the board of directors on October 25, 1999, the board of directors discussed the Safety and Soundness Order and the Y2K deficiencies cited in that order. At a meeting of the board of directors on October 29, 1999, the directors addressed earnings, noting that expenses were over budget and income was under budget. They discussed the continuation of an operating loss and addressed Ferguson’s marketing activity, which remained on hold until resolution of the Y2K issues. Directors advised Ferguson that customer service and attention to detail would increase revenues, not, as he had tried, reduced banking costs. By letter dated November 12, 1999, to the board of directors, Ferguson noted that the FDIC had still not determined that First Bank was Y2K compliant. However, according to his letter, the FDIC Y2K examiner had said that the plan looked “fine,” but that the FDIC had not issued a written determination. Ferguson detailed recent Y2K activity, documenting his considerable efforts at securing regulatory approval. At a meeting of the board of directors on November 12, 1999, the directors discussed five loan delinquencies. The largest of the loans was for about $101,000 and was secured by a first mortgage on a residence valued at $400,000 several years ago. The smallest loan was for $649. A third loan was due to an internal error by First Bank in which it credited an account with $22,000 and did not discover the error for five months. After obtaining a note from the account holder, First Bank received a couple of payments, but had received nothing more, and collections prospects were dim. The last two loans were to Respondent Alters. One was a $20,000 unsecured note for leasehold improvements that became due on August 1, 1999. Respondent Alters had requested a renewal of the loan. The other loan was for a balance of $2800, which had been renewed in January 1999 for an additional 18 months; however, Respondent Alters had already fallen behind by three monthly payments of $153 each. Respondent Alters assured Ferguson that he would pay the past- due payments on these loans. Also at this meeting, Ferguson assured the directors that First Bank had complied with all Y2K requirements and should be certified as having done so. Ferguson stated that the bank had discharged all of its responsibilities under the Safety and Soundness Order, except for mailing notices to shareholders at the next regular communication with shareholders. At a special meeting of the board of directors on November 19, 1999, the directors told the chair of the loan committee to obtain from Respondent Alters adequate security for the $20,000 unsecured loan, as well as to require that Respondent Alters bring current a first mortgage loan and home equity loan secured by his residence. Ferguson advised the directors that Petitioner’s examiners, as part of their examination resulting in the September 13, 1999, ROE, would require that First Bank add $16,000 to its loan loss reserves due to the loans to Respondent Alters and the account holder wrongly credited with $22,000. Giddens also informed the board that one of Petitioner’s examiners had told him to amend the bank’s call reports to reflect the $21,214.36 credit to the cash items account. At a special meeting of the board of directors on November 23, 1999, Petitioner’s Bureau Chief and counsel presented the September 13, 1999, ROE. The Bureau Chief noted that the condition of First Bank was “very poor” with continuing violations of laws and regulations, deficiencies in internal controls, and other problems. The Bureau Chief stated that the “basic reason” for these problems was Wells, and he restated an earlier demand, which he had presented to the directors in the summer, that they remove Wells from the board and as general counsel. The Bureau Chief stated that Petitioner would bring an enforcement action, if the directors failed to act. Respondent Minor noted that the other directors could not legally remove Wells, and the Bureau Chief acknowledged the obvious problem posed by directors trying to remove another director who was the majority shareholder. Petitioner’s counsel added that Petitioner would prove by clear and convincing evidence that Wells is “in complete control of the bank and its operation.” An FDIC representative attending the meeting noted that First Bank would be upgraded from unsatisfactory, presumably concerning Y2K compliance. Petitioner’s examination of First Bank ran from September 13 to October 15, 1999. The ROE dated September 13, 1999, contains an composite CAMELS rating of 4 and component ratings of 2 for capital, 2 for assets, 5 for management, 4 for earnings, 3 for liquidity, and 3 for sensitivity. There can be no dispute concerning the ratings for capital, assets, and earnings. As for earnings, First Bank was experiencing an operating loss in 1999 and a downward trend in earnings. A rating of 4 for earnings indicates “intermittent losses” and “significant negative trends.” The record likewise permits no challenge to the rating of 3 for sensitivity, as the bank did not maintain an active system for identifying, measuring, and monitoring interest rate risk. A rating of 3 for sensitivity indicates either that the “control of market risk sensitivity needs improvement or that there is significant potential that the hearings performance or capital position will be adversely affected.” First Bank needed to improve its control of market risk and therefore did not merit a rating of 2 for sensitivity. The liquidity rating of 3 is clearly erroneous, however. The examiner assigned to this component correctly rated First Bank a 2, but the examiner in charge changed the rating to a 3. In doing so, the examiner in charge weighed the loss of nearly three quarters of a million dollars in deposits. The ROE states that public knowledge of First Bank’s Y2K difficulties had resulted in a decline in liquid assets. Although the ROEs dated December 7, 1998, and March 20, 2000, were not admitted for the truth of their contents, their contents are available to impeach other evidence. Both the 1998 and 2000 CAMELS ratings for liquidity were 2. The liquidity ratio in 1998 was substantially the same as the liquidity ratio in 1999; both years, the ratio of cash and short-term, marketable securities to deposits and short-term liabilities was around 30 percent. Likewise, the 1999 ratio of net loans and leases to total assets--63.69 percent--had not changed significantly from the prior year. The reliability of First Bank on potentially volatile liabilities had actually halved from 1998 to 1999. Another improvement as to liquidity from 1998 to 1999 was that First Bank had increased its credit line with the Independent Bankers’ Bank of Florida by $1 million to $1.713 million. The 2000 liquidity analysis also undermines the 1999 liquidity rating of 2. The 2000 ROE found that First Bank, misinterpreting a state statute, had reserved an additional 15 percent of a specified amount, resulting in the maintenance of more generous levels of liquidity than required. It is a likely inference that First Bank similarly misinterpreted the statutory requirement in 1999. The 2000 analysis also notes that the deposit base stabilized through the end of 1999, after an earlier runoff. The 2000 analysis states that the bank’s largest depositor is the Welco Investment Trust, which maintains 22 percent of the total deposits and is controlled by Wells. One adverse development arising after the 1999 ROE is that First Bank appears no longer to have its line of credit with Independent Bankers’ Bank of Florida. But the 2000 analysis notes that the loan portfolio, reflecting the bank’s “extremely conservative collateral-based lending philosophy,” does not leave it particularly vulnerable to economic risk, especially given the strength of the local economy, including real estate, which accounts for 70 percent of the bank’s loans. Referring to the FDIC Examination Manual definitions of ratings for liquidity, the 3 assigned in the 1999 ROE is clearly erroneous, probably reflecting undue weight assigned to a few months during which the Y2K runoff was at its height and apprehension that the deposit runoff might continue. A rating of 3 means that the bank’s liquidity levels or funds management practices are in need of improvement--facts not present in this record. A rating of 2 indicates satisfactory liquidity levels and funds management practices, even though “[m]odest weaknesses” may accompany funds management practices--facts clearly supported by this record. Of course, the key component is management, for which the 1999 ROE assigns First Bank a 5. As defined in the FDIC examination manual, this rating is reserved for management and directors that have not “demonstrated the ability to correct problems and implement appropriate risk management practices.” These uncorrected problems “now threaten the continued viability of the institution.” The rating of 4 accommodates “deficient management or board performance” in which the “level of problems and risk exposure is excessive.” Under a rating of 4, uncorrected problems “require immediate action by the board and management to preserve the soundness of the institution.” As distinguished from a rating of 5, for which replacing or strengthening management or the board is “necessary,” a rating of 4 means that replacing or strengthening management or the board “may be necessary.” A rating of 4 for management, thus, hardly represents a regulatory endorsement. To the contrary, a rating of 4 accommodates significant management deficiencies. Although not as severe as the irredeemable and comprehensive incompetence reflected by a rating of 5, these management deficiencies may nonetheless eventually impact the soundness of the institution and may only be correctable by the replacement of the incompetent parties. The present record supports a management rating of 4, not 5, in the 1999 ROE. The most difficult rating to examine is the composite rating. Under the FDIC Examination Manual, a bank with a 5 for any component generally cannot qualify for a composite rating of 3. Therefore, with a 5 in management, First Bank properly should have received no better than a composite rating of 4, which First Bank received in the 1999 ROE. However, raising the management component to a 4 and the liquidity component to a 2 increases the likelihood that the correct component rating would be 3. The distinction between the composite rating of 3 and 4 is the distinction between an institution that requires only “some degree of supervisory concern” and one that is engaging in “unsafe and unsound practices.” This is the basic question posed by these cases. In 1998 and 1999, First Bank accomplished much, including the two main tasks confronting Tosh: cleaning up the books and records and attaining Y2K compliance. Later in 1999, First Bank implemented greater internal controls, obtained an independent audit of its financial position, and implemented improved accounting, data processing, and security procedures. Even in management, First Bank showed some improvement in late 1998 and 1999, as reflected in part by the gains in the areas identified in the preceding paragraph. Capable persons filled key managerial roles during this time. From the time of Wells’ resignation as president to the present, Giddens has ably served as cashier, although not, as nominally titled, as president. For nearly the same period, Ferguson has served well as senior loan officer; for the reason noted in the Conclusions of Law, his post-hearing departure--probably not a positive development--is not properly included in this record. For the first part of this period, Tosh served ably as president. Petitioner claims that Wells effectively served as president during Tosh’s tenure. However, despite Tosh’s letter somewhat to the contrary, Tosh’s assurances to the board were consistent. Frankly, the best inferential proof that Wells was not serving, in effect, as president during Tosh’s tenure was the success enjoyed by Tosh, Giddens, and Jufer and, thus, First Bank. When Wells was in charge, the operations of First Bank suffered; after Wells resigned as president, the operations of First Bank improved substantially. The other board members made an honest effort to ensure compliance with the Consent Order, and they were successful. Petitioner claims that Wells effectively served as president after Tosh’s departure. As already found, Giddens was not really the president. However, he performed some tasks that might be associated with a chief executive officer, and the directors and Ferguson performed the remainder. Wells did not rise above the rest of the directors and seize executive control of First Bank after Tosh left. Gradually, the other directors, especially Respondents Gunti and Minor, acquired more experience with banking operations and were better able to discharge these tasks. The directors held numerous meetings, sometimes only days apart, from 1997 through 1999. Some of the directors visited the bank almost daily. Although they did not oppose Wells often, they did on at least two occasions. In addition to the handling of the already-discussed Evergreen offer, Respondents Gunti and Minor, evidently as part of a majority of the board, wisely prevailed upon Wells to sign the Settlement Stipulation. Undoubtedly, the directors have been influenced by Wells, at times strongly. However, this influence does not, as Petitioner contends, mean that Wells has reasserted his previous duties as president. It is more likely that this influence is due to Wells’ status as the majority shareholder, largest depositor, and, despite his shortcomings, only board member with legal and banking experience. By permitting Wells to serve as a director, consultant, and general counsel, the Consent Order necessarily permitted Wells to occupy a significant role in guiding the affairs of First Bank, especially when, as here, the directors have assumed greater management responsibilities. Undoubtedly, the directors, other than Wells, still offer more in enthusiasm and dedication than they do in experience in banking operations. But they, perhaps including Wells, have demonstrated the capacity to learn from past mistakes. At present, there is a reasonable chance that the other directors will continue to develop and exercise independent judgment, so as not to follow Wells’ occasional invitation to preoccupy themselves with unimportant details rather than larger issues. At the same time, the other directors will have the benefit of the example of Wells’ conservative banking philosophy, tight-fisted control of costs, and overall commitment to the bank. At times, Wells’ leadership has been wrongheaded, as evidenced by his preoccupation with trying to complete the Y2K business resumption contingency plan despite his clear lack of qualifications. At times, Wells’ leadership has been indiscriminate, as evidenced by his preoccupation with controlling costs at the expense of missed opportunities for innovation and growth. At times, Wells’ leadership has been absent, as evidenced by his bizarre denunciation of the job market when he and the other directors badly needed to make some tough decisions to stop excessive employee turnover and retain qualified management. It is unclear whether Wells will respond to this regulatory intervention by maturing as a director and allowing the other directors and bank management also to develop, perhaps in different directions. If Wells is unable to do so, this regulatory intervention notifies him that future material deficiencies in his performance will become increasingly costly for him personally and also, eventually, for the bank to which he has devoted himself. As discussed in the Conclusions of Law, for the extraordinary relief of removal or restriction of a director, Petitioner must first prove a willful violation of the Consent Order or Settlement Stipulation. These documents incorporate the Cease and Desist Order, but not, for the reasons explained in the Conclusions of Law, the Safety and Soundness Order. The considerable and reasonably successful efforts, during late 1998 and 1999, of all of the directors, including Wells, to overcome the considerable problems facing First Bank preclude a finding, by clear and convincing evidence, of a willful violation of the Consent Order or Settlement Stipulation. Even if Petitioner had proved a willful violation of the Consent Order or Settlement Stipulation, it would have to prove, by clear and convincing evidence, that, as a result of the violation, First Bank will likely suffer loss or other damage, that the interests of the depositors or shareholders could be seriously prejudiced, or that Wells has received financial gain and, as to the financial-gain criterion, the violation involves personal dishonesty or a continuing disregard for the safety and soundness of First Bank. Petitioner has failed to prove that any violation will likely cause First Bank to suffer loss or damage or could cause serious prejudice to depositors or shareholders. It is unnecessary to consider at length the financial-gain criterion because, even if Petitioner had proved financial gain to Wells, Petitioner has not proved any dishonesty or disregard for the bank’s safety and soundness in Wells’ compensation. For these reasons, Petitioner is not entitled to an order removing or restricting Wells. This finding would be unchanged by the application of the preponderance standard of proof. However, as noted in the Conclusions of Law, for the more modest relief of an administrative fine, Petitioner is required to prove, again by clear and convincing evidence, a mere violation of the Settlement Stipulation. As noted in the Conclusions of Law, the fine is up to $2500 daily for any such violation, up to $10,000 daily for a reckless violation, and at least up to $50,000 daily for a knowing violation. Petitioner has proved that Wells violated the Settlement Stipulation by failing to cause First Bank to employ a president after the departure of Tosh and a senior loan officer before the arrival of Ferguson. The record does not suggest that various committees of directors can take the place of qualified persons in these key managerial positions. Although insufficient to establish a reassertion of presidential duties, Wells' position of leadership on the board, as well as the focus of the Consent Order in removing Wells as president, fairly impose upon Wells personally the monetary responsibility for these failures. The record amply supports the inference that, if Wells had wanted to fill these two key managerial positions at all times, the board would have done so. It did not because Wells did not. As Petitioner must live by the deal that it struck, so must Wells. It is unnecessary to determine Wells’ state of mind in connection with these violations of the Settlement Stipulation. The periods of noncompliance as to the positions of president and senior loan officier lasted far longer than four days, so the $2500 daily fine, which does not require a reckless or knowing violation, justifies considerably more than the $10,000 fine that Petitioner seeks to impose at this time. This is a personal fine for which Wells shall neither seek nor accept reimbursement, directly or indirectly, from First Bank. As discussed in the Conclusions of Law, Petitioner is entitled to the costs of examination and supervision only if it proves, by a preponderance of the evidence, that First Bank has engaged in an unsafe or unsound practice. Petitioner has failed to prove such a practice. In particular, Petitioner has failed to prove that any violation of an order from Petitioner or the FDIC creates the likelihood of loss, insolvency, or dissipation of assets or otherwise prejudices the interest of the specific financial institution or its depositors. Even if Petitioner had proved such a practice, it would be precluded from recovering any costs, at this time, due to the recent pressure upon First Bank's earnings and the extraordinary expenditures that it made during 1999 in improving its operations and responding to regulatory interventions. Obviously, though, this finding is not an exemption from the responsibility to pay such costs in the future, under appropriate circumstances. The final issue is whether Respondent Alters waived his right to demand a hearing. The Administrative Law Judge gave Respondent Alters the time between the two sets of hearing dates to obtain from an old computer a print-out of a letter in which he claimed to have requested a hearing. Petitioner’s representatives disclaimed any knowledge of such a letter. Producing a dated letter at the latter portion of the hearing, Respondent Alters was required to admit that, although he had not earlier disclosed this substantial addition, he had typed in the date shown on the letter between the dates of the two hearings. Respondent Alters did not timely request a hearing, and he waived his right to request a hearing. Petitioner is thus entitled to any and all relief that it seeks against him.
Recommendation It is RECOMMENDED that the Department of Banking and Finance enter a final order: Dismissing Respondent Alters’ request for a hearing as untimely filed under circumstances showing that he waived his right to request a hearing and imposing such penalties as the department deems fit, consistent with law. Dismissing the department’s claim for reimbursement of examination and supervision costs from First Bank for the 1999 examination. Imposing a $10,000 fine against Respondent Wells, with a condition that he pay the fine personally and neither seek nor accept reimbursement, directly or indirectly, from First Bank. Dismissing all other claims for relief against Respondent Wells and all claims for relief against the remaining respondents, other than Respondent Alters. DONE AND ENTERED this 8th day of March, 2001, in Tallahassee, Leon County, Florida. ___________________________________ ROBERT E. MEALE Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 8th day of March, 2001. COPIES FURNISHED: Honorable Robert F. Milligan Department of Banking and Finance Office of the Comptroller The Capitol, Plaza Level 09 Tallahassee, Florida 32399-0350 Robert Beitler, Acting General Counsel Department of banking and finance Fletcher Building, Suite 526 101 East Gaines Street Tallahassee, Florida 32399-0350 Richard T. Donelan, Jr. Chief Banking Counsel Robert Alan Fox Assistant General Counsel Department of Banking and Finance Suite 526, The Fletcher Building 101 East Gaines Street Tallahassee, Florida 32399 William G. Cooper Cooper, Ridge & Beale, P.A. 200 West Forsythe Street, Suite 1200 Jacksonville, Florida 32202 Jeffrey C. Regan Hendrick, Dewberry & Regan, P.A. 50 North Laura Street, Suite 2225 Jacksonville, Florida 32202 Timothy D. Alters, pro se 2020 Vela Norte Circle Atlantic Beach, Florida 32233 Arthur G. Sartorius, III 1919 Atlantic Boulevard Jacksonville, Florida 32207
Findings Of Fact Upon consideration of the oral and documentary evidence adduced at the hearing, the following relevant facts are found: The applicant Gulf State Bank of Franklin County is located in Carrabelle, Florida, and was established in 1971. There are no other banking facilities in Carrabelle and the applicant presently has no branch banking facilities. The applicant's total asset level is 8.1 million dollars, and it has maintained a capital to total assets ratio which has continuously exceeded seven percent. As of December 31, 1978, the capital to total asset ratio was 7.6 percent. With the exception of the first year of operation, the applicant's net earnings to total assets have exceeded the ratio of 0.5 percent. During the last two years, this ratio has exceeded one percent. As of the June 30, 1978, comparative figures report, the applicant had total deposits of $6,555,000.00, showing a decrease of about 5.4 percent from June of 1977. It has been the applicant's established policy to reinvest all earnings rather than paying dividends. The applicant proposes to open two branch banking facilities - one in Apalachicola and one in Eastpoint. Presently, the only banking facility in these areas is the protestant Apalachicola State Bank. This bank has its main office in downtown Apalachicola and it was established in 1906. It is a full service bank, and increased its total deposits by 18.6 percent between 1977 and 1978. On March 15, 1978, the Protestant opened a branch banking facility in Eastpoint, Florida. Although a $5,000.00 profit was projected for the first year of operation, the protestant's branch in Eastpoint is not presently operating at a profit. The protestant's Eastpoint branch has drive-in windows and offers all services with the exception of trust accounts and large loans. Both the main office and the Eastpoint branch of the protestant began offering Saturday morning banking hours approximately five weeks before the hearing in these proceedings. The only other financial institution in the area is a branch office of the Citizens Federal Savings and Loan Association of Port St. Joe, which was expected to begin operations in early March of 1979. As of July 1, 1977, Franklin County had an estimated population of 8,128, increasing only 1,063 above the 1970 population census. The majority of growth occurred in the unincorporated area of the County, which includes Eastpoint. The source of population growth is net migration. Between 1970 and 1977, net migration accounted for 85.32 percent of the County's growth, leaving about 14 percent attributable to natural increase. The percentage of the 15 to 44 year old age group has increased from 33.9 percent in 1960 to 38.9 percent in 1977. The age group of 65 and older has increased from 13 percent in 1960 to 17 percent in 1977. A medium projection for the county's population is 8,600 for the year 1980, 9,200 for 1985 and 10,200 for 1990. While the per capita income level of the County has grown at a higher percentage rate as compared to the state average, the per capita income level for Franklin County is the lowest in the State. In 1975-76, that figure was $3,061.00 as compared to a state average of $6,021.00. The unemployment rate in Franklin County was the highest in the State in September, 1978, sitting at 16.5 percent as compared to the state average of 7.6 percent. Franklin County's figure was down to 12 percent in October, 1978. Residents and business people in the area gave testimony to the effect that there is sufficient employment available in the area, but that it is difficult to find people willing to work. As indicated above, Eastpoint is among the fastest growing areas of Franklin County. Approximately one-third of the 75 businesses located in Eastpoint have come in or relocated to more modern facilities within the past three years. Another area of large growth is St. George Island. Leisure Properties, Inc. has eight approved subdivisions, three of which are presently completely sold. In 1978, that company realized $3,000,000.00 income from land sales on the Island. A 28-unit motel and a condominium is planned for St. George Island, as is a State park. It is estimated that when the State park becomes operational, 5,000 visitors will come to the Island on a daily basis during the 100-day season. It can be expected that such activity and traffic will promote and attract the existence of service facilities and service personnel. Approximately 80 percent of the construction work on St. George Island is performed by local contractors. The value of residential permits on the Island represented $1,021,360.00 in 1978. The proposed Apalachicola branch banking facility is to be located at 73 Avenue E, or on the northeast quadrant of the intersection of U.S. 98-319 (Avenue E) and Sixth Street. This site is presently owned by the applicant and is located 22.5 miles West of the main Carrabelle office and 6.2 miles West of the proposed Eastpoint branch. The applicant proposes to construct a concrete story and a half building with 1500 square feet on the first floor and 540 square feet on the second floor. The applicant plans to utilize three inside teller stations, one walk-up teller station and one drive-in teller window. In December of 1978, 29 percent (or $2,111,000.00) of the applicant's total deposits represented accounts from the proposed Apalachicola service area. A majority of this amount (22.1 percent of the applicant's total deposits) were deposits of public funds by various county departments located in the courthouse in Apalachicola. In addition, the applicant has $576,000.00 (representing 12.22 percent of its total loan portfolio) in loans to individuals and businesses in the Apalachicola service area. It is projected that the total estimated deposits for the proposed Apalachicola branch will be $1,800,000.00 at the end of the first year of operation, $2,700,000.00 at the end of the second year and $3,300,000.00 at the end of the third year of operation. The management for the proposed Apalachicola branch was hired two years in advance of tee anticipated opening date for training and familiarization with the proposed service area. He is a vice president of the applicant bank and a member of its board of directors. Prior to that, he had an auditing and accounting background. At its February, 1979, meeting, the applicant's stockholders voted to authorize the board of directors to name two additional directors during the year. The board intends to name these two new directors from the new Apalachicola service area after approval is obtained. The proposed Eastpoint branch is to be placed on Lot 8, Block 1, of the David Brown Estate Subdivision located on the Northeast quadrant of the intersection of Island Drive and Avenue C. This site is 16.4 miles West of the main Carrabelle office. This branch is considered to be a drive-in facility of the proposed Apalachicola branch, and only a 12 by 12 foot concrete block building with two teller stations is planned. During December of 1978, the applicant had $415,000.00 in deposit accounts (representing 5.7 percent of the applicant's total deposits) in the proposed Eastpoint service area. The applicant also has $788,500.00 in loans to individuals and businesses in the Eastpoint service area, representing 16.7 percent of its total loan portfolio. The applicant projects for the Eastpoint branch total estimated deposits in the amount of $300,000.00 by the end of the first year of operation, $450,000.00 by the end of the second year and $600,000.00 by the end of the third year. The primary service area of the proposed Eastpoint branch includes St. George Island which is connected to Eastpoint by a causeway. The proposed Eastpoint branch will be managed by a supervisor below officer level, but will be under the office management of the proposed Apalachicola branch manager. The Eastpoint branch will have all standard deposit, withdrawal and clearing services. The names of the proposed branches are Gulf State Bank of Franklin County - Apalachicola Branch and Gulf State Bank of Franklin County - Eastpoint Branch. There was no evidence to illustrate that the applicant was not in substantial compliance with all state and federal laws affecting its operations. In accordance with the provisions of Florida Statutes, Section 120.57(1)(a)(12), conclusions of law and a recommendation are not included in this Report. Respectfully submitted and entered this 26th day of March, 1979, in Tallahassee, Florida. DIANE D. TREMOR Hearing Officer Division of Administrative Hearings 530 Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Alfred O. Shuler Post Office Box 850 Apalachicola, Florida 32320 J. Ben Watkins Watkins and Watkins 41 Commerce Street Apalachicola, Florida 32320 Michael A. Gross Comptroller Gerald A. Lewis Assistant General Counsel State of Florida Office of the Comptroller The Capitol The Capitol Tallahassee, Florida 32304 Tallahassee, Florida 32304
The Issue Whether the Respondent violated Section 475.25(1)(a) and (i), Florida Statutes.
Findings Of Fact The admissions by the Respondent, together with the records introduced at the hearing by the Florida Real Estate Commission show that Respondent was a licensed real estate broker holding license no. 0122293. The Respondent admitted his participation in all the transactions referenced in the administrative complaint. The bank records and other evidence introduced at the hearing show that the Respondent's escrow account maintained at Liberty Bank of Cantonment lacked sufficient funds to pay the bills which Respondent admitted were owed Lawyers Title Insurance Co. in the amount of $44.00. The Respondent testified that he had paid these bills only two days before the instant hearing with a check on his personal bank account. From the Respondent's testimony, it is clear that he failed to maintain sufficiently detailed records to permit him to account for monies in his escrow account in the Liberty Bank of Cantonment and in the bank account which he maintained with the First State Bank in Pensacola, Florida. The closing statements relating to the Netzer/Hayes transaction showed that the Respondent received $1,225.00. His records for this transaction showed checks on his escrow account relating to this transaction in the amount of $1,481.60. Respondent testified that the error in this transaction occurred when he erroneously stubbed one check as relating to the Netzer/Hayes transaction, when in actuality it related to a separate transaction. However, under cross examination the Respondent could not identify the transaction to which this check related. The Respondent admitted depositing the money involved in the Netzer/Hayes transaction to his Cantonment Liberty Bank escrow account. He also admitted that he had made no transfer of funds from the Cantonment bank account to his First State Bank account. The Respondent admitted and the evidence indicates that payments were made at closing from the First State Bank account. The Liberty Bank account records show a balance of less thank $731.00 at all times after 9-30-76. Therefore, insufficient funds were maintained by the Respondent in the Liberty Bank escrow account to satisfy the obligations on the account arising from the Nitzer/Hayes transaction. Furthermore, the Respondent's handling of escrow account at the Liberty Bank in Cantonment was as it related to this transaction was improper The admissions of Respondent and the evidence introduced showed that he was the broker involved in the Suttles/ Kamplain transaction. No evidence was introduced that the Respondent failed to advise Suttles that he initially had accepted a $250.00 note in lieu of cash as an earnest money deposit. The evidence is clear that upon receipt of the money, the Respondent deposited this money to his account in the First State Bank of Pensacola. Although this account was not designated an escrow account, it did bear the designation of a management account. It was not established by substantial and competent evidence that a management account was not an escrow account. The Suttles/Kamplain transaction closed without problem; however, there is no explanation of the disbursement of the $250.00 received as an earnest money deposit in the records of this transaction. Regarding the Suttles/Gordon transaction, it was established that the Respondent was the broker who handled this transaction. No substantial and competent evidence was produced that the Respondent failed to disclose to the Gordons that he did not obtain an initial $100.00 deposit on the transaction. The record is clear that the Respondent did receive a check in the amount of $1,500.00 from Mr. Suttles which the Respondent deposited to his account in the First State Bank. The Gordons did testify that the Respondent was authorized to allow the Suttles to occupy the premises prior to closing. After occupying the property, the Suttles were to make rental payments to be credited to the payment of the mortgage. After moving into the house, Mr. Suttles and his wife began to have domestic problems, and he immediately ceased to make all rental payments upon the property. Mr. Suttles did not advise the Respondent that he was not making payments and did not intend to make further payments on the house. Mr. Suttles did avoid all of Respondents efforts to contact him. The Suttles and the Gordons did execute the closing papers but by the time the papers were executed, Mr. Suttles failure to make the rental payments had caused a deficiency in payment of the mortgage. Because the mortgage was in arrears, the transaction could not close. When the Respondent became aware of the Suttles' separation, he began to make arrangements to have them vacate the Gordon house. However, Respondent failed to keep the Gordons fully advised as to the statuts of this transaction. Further, the check given to the Gordons by Respondent was not honored by the First State Bank of Pensacola because of insufficient funds in the Respondent's account to meet this obligation. The Respondent retained and disbursed portions of the $1,500.00 deposited to the account, although the transaction did not close. Money was disbursed to the Gordons and Respondent took out his commission. Whether Respondent was not entitled to disburse the monies under the contract between Respondent and the Gordons cannot be determined upon the evidence presented. However, it is clear that Suttles was a bona fide purchaser, who after he entered into occupancy, determined that he would not complete the transaction; and under the terms of the contract between the Respondent and the Gordons, the Respondent earned his commission when a purchaser was obtained. It is clear that the Respondent did not keep the Gordons properly advised of the situation regarding the sale of their house to the Suttles; and that the Respondent's check to the Gordons on the First State Bank was not honored because the account was impaired. The evidence and testimony taken as a whole at the hearing shows that Respondent did not keep a running balance of the accounts which he maintained at the Liberty Bank of Cantonment or the First State Bank of Pensacola. The evidence further shows that the Respondent failed to withdraw commissions earned in their total amount subsequent to closings on property, did not pay bills which closing statements indicate he was obligated to pay, permitted inter-bank transfers of funds owed him by banking institutions to his escrow or management account, did not take steps to ensure that the First State account was properly and clearly titled as an escrow account, did not properly annotate withdrawals from his escrow accounts, and failed to maintain money in his escrow account until it was disbursed.
Recommendation The record taken as a whole indicates that the violations for which the Respondent is responsible are the result of his culpable negligence as opposed to any dishonest or fraudulent act. However, the Respondent is so devoid of any knowledge of his responsibilities with regard to monies entrusted to him that he may not safely be permitted to function as a real estate broker. Based upon the foregoing-findings of fact and conclusions of law, the Hearing Officer recommends that the Florida Real Estate Commission revoke the license of Respondent as a registered real estate broker. DONE and ORDERED this 9th day of March, 1978, in Tallahassee, Florida. STEPHEN F. DEAN Hearing Officer Division of Administrative Hearings Room 530 Carlton Building Tallahassee, Florida 32304 COPIES FURNISHED: Robert Pierce, Esquire Florida Real Estate Commission 400 West Robinson Avenue Orlando, Florida 32801 O. E. Adams, Esquire Post Office Box 12217 Pensacola, Florida 32002 ================================================================= AGENCY MEMORANDUM ================================================================= Orlando, Florida November 27, 1978 MEMORANDUM TO: Renata Hendrick, Registration Supervisor FROM: Manuel E. Oliver, Staff Attorney RE: PD 3267 (PD 15776) FREC vs. Ralph D. Villeneuve t/a Don's Realty 122293-1 DOAH Case No. 78-091 Please find enclosed copies of the Final Order filed on April 13, 1978, in the reference case together with the opinion filed on November 2, 1978 by the District Court of Appeal, First District of Florida, affirming the Commission's Order, as well as a copy of the mandate issued by said Court on November 20, 1978. By virtue of the foregoing, the order of the Commission revoking defendant's registration has become firm and effective in all respects. Please make the necessary annotations in the records for all effects. Manuel E. Oliver Staff Attorney MEO/km Enclosures:* * NOTE: Enclosures noted in this memorandum are not available at the division and therefore not a part of this ACCESS document.
The Issue The general issue to be resolved in this proceeding concerns the entitlement of the organizers of the C&L Bank of Blountstown and the Calhoun State Bank for authorization to organize their respective corporations for the purpose of conducting general banking business in Calhoun County, Florida. See Section 658.19, Florida Statutes. The standards by which the applicants' entitlement to the authority sought is to be measured are set forth in Section 658.21, Florida Statutes, and Chapter 3C-10, Florida Administrative Code.
Findings Of Fact Procedural Background On February 18, 1986, the organizers of the applicant C&L Bank of Blountstown (C&L) submitted to the Department of Banking and Finance (Department) an application, pursuant to Section 658.19, Florida Statutes, for authority to organize a corporation for the purpose of conducting a general banking business in Calhoun County, Florida. On April 11, 1986, the organizers of the Calhoun State Bank (Calhoun State) submitted an application for authority to organize a corporation for the same purpose in Calhoun County, Florida. Notice of receipt of the application of the C&L Bank of Blountstown (C&L) was published in the Florida Administrative Weekly on February 28, 1986, under the name "C&L Bank of Blountstown." Notice of receipt of the application of the Calhoun State Bank (Calhoun) was published in the Florida Administrative Weekly on April 25, 1986, under the name "Calhoun State Bank." A Petition for Leave to Become a Party to the Proceedings was filed by the applicant Calhoun State Bank, on or about May 8, 1986, and an Amended Petition for Leave to Become Party was filed by Calhoun on or about May 14, 1986. The Amended Petition for Calhoun contained a request that the applications of both the Calhoun State Bank and the C&L Bank of Blountstown be considered concurrently by the Department and the Hearing Officer. The Amended Petition contained objections to the granting of the application of the C&L Bank of Blountstown on the following grounds: "The proposed C&L Bank of Blountstown would be viewed in Blountstown as a branch of the existing C&L Bank of Bristol, which is located in Bristol, Florida, and the similarity of manage- ment and directorship of the proposed C&L Bank of Blountstown and the C&L Bank of Bristol, would have an extremely adverse effect on the proposed Calhoun State Bank. The proposed C&L Bank of Blountstown would be in possible violation of laws and regulations, both State and federal, which prohibit and/or discourage inter- locking directorships and officers in certain banks, given the proximity of the C&L Bank of Bristol and the proposed C&L Bank of Blountstown and the similarity of identity of management and directorship of the existing bank and the proposed bank." The proposed directors of the C&L Bank of Blountstown then filed a Petition for Public Hearing and Notice of Intention to Appear on or about May 15, 1986. That petition contained the following objections to the granting of Calhoun State Bank's application: "The current economic conditions and growth potential of the proposed primary service area for the C&L Bank of Blountstown was insufficient to support both the C&L Bank of Blountstown and the proposed Calhoun State Bank. The proposed directors of the Calhoun State Bank were lacking the direct banking experience required by law to ensure successful operation of the Calhoun State Bank." The application of the C&L Bank of Blountstown was deemed substantially complete on or about March 12, 1986, and the application of the Calhoun State Bank was deemed substantially complete on May 27, 1986. It was supplemented by additional information requested by the Department on or about July 1, 1986. On or about March 21, 1986, Ben and Faye Eubanks, shareholders of the C&L Bank of Bristol, filed a Petition for Public Hearing with the Department in opposition to the C&L application and on March 24 filed a "Petition for Leave to Become Party to Proceedings..." directed to the C&L application objecting to it on grounds that a grant of it would adversely affect the financial posture of the C&L Bank of Bristol. A Petition for Public Hearing directed to the Calhoun State Bank application was also filed by the Eubanks on or about May 16, 1986. That petition contained an objection to the granting of the application of Calhoun State Bank on similar grounds. On June 4, 1986, the Hearing Officer granted Calhoun State Bank leave to intervene in the C&L proceeding. On June 18, 1986, the Eubanks filed their Notice of Withdrawal of the application for public hearing in the C&L proceeding. On August 15, 1986, the Hearing Officer consolidated the C&L and Calhoun proceedings for final hearing inasmuch as the applications had been filed within 60 days of each other as envisioned by Rule 3C- 9.02(8), Florida Administrative Code. On or about August 26, 1986, the Eubanks withdrew their Petition for Public Hearing in the Calhoun State Bank proceeding. The C&L proceeding had originally been noticed for hearing to be held on July 14, 1986. On or about July 11, 1986, the parties consented to a Motion for Continuance which was granted. The consolidated proceedings were rescheduled for hearing for September 8 through September 11, 1986, in Tallahassee, Florida. The cause came on for hearing as noticed and the trial proceeded for four days. Notice of the hearing was published by the C&L Bank of Blountstown within the time period prescribed by rule in the Calhoun County Record, a newspaper of general circulation. The applicant Calhoun State Bank failed to effect publication of Notice of Hearing in the Calhoun County Record, so that a supplemental hearing became necessary. The parties agreed to a continued proceeding to give them an opportunity to renotice the hearing so as to obviate Calhoun's failure to publish notice and C&L's technically deficient notice. C&L and Calhoun accordingly republished a combined Notice of Continued Public Hearing in compliance with the rules of the Department in the Calhoun County Record on October 2, 1986, and filed the evidence thereof in these proceedings. On October 20, 1986, the final hearing was reconvened, at which time the complete trial transcript of the previous public hearing was made available for review, comment and testimony by members of the general public. No members of the public appeared at this properly noticed hearing and the hearing was concluded. Demographic, Economic and Financial Service Data Applicable to Both Applications Both applicants have proposed primary service areas for their respective proposed banking institutions encompassing Calhoun County. Population trends for that proposed service area (PSA) and, comparatively, for the State of Florida, are as follows: Area 1970 1980 1984 Average Annual Percent Change 1970-1980/1970-1984 Florida 6,791,418 9,739,992 10,930,389 3.67 3.45 County (Calhoun) 7,624 9,294 9,325 2.00 1.45 Unincorporated County 4,817 6,184 6,186 2.53 1.78 PSA 7,624 9,294 9,325 2.00 1.45 Municipalities Altha 423 478 479 1.23 0.89 Blountstown 2,384 2,632 2,678 0.99 0.83 10. Both the State of Florida at large and Calhoun County are comparable in age grouping, while there is a significant difference at the beginning and end of the age grouping scale between Liberty County and the State, as shown by the following table: Age Grouping Area 0-14 15-24 25-44 45-64 65 and over State of Fla. 2,090,624 1,675,790 3,091,078 2,339,183 2,091,257 Percent of Total: 18. 5 14.8 27.4 20.7 18.5 Calhoun County 2,115 1,566 2,297 1,992 1,536 Percent of Total: 22.2 16.5 24.2 21.0 16.2 Liberty County 1,180 764 1,132 897 557 Percent of Total: 26.0 16.9 25.0 19.8 12.3 The number of households in Calhoun County has increased at a rate comparable to that of the State of Florida at large and per capita personal income trends for Calhoun and Liberty Counties and the State of Florida are listed below: PER CAPITA PERSONAL INCOME Compound Annual 1979 1980 1981 1982 1984 Change County Calhoun $4,768 $5,066 $6,082 $6,362 $ 6,374 8.05 percent State $8,257 $9,245 $10,368 $10,927 $11,593 9.12 percent Liberty County $4,759 $5,339 $6,274 $6,794 $7,289 8.90 percent Calhoun County was demonstrated to have a higher unemployment rate than that of the State of Florida at large while Liberty County has a lower unemployment rate than Calhoun but higher than that of the State as a whole as depicted in the following table: ANNUAL UNEMPLOYMENT RATES 1980 1981 1982 1983 1984 County (Calhoun): 9.4 percent 12.1 percent 17.5 percent 17.6 percent 12.9 percent State: 5.9 percent 6.8 percent 8.2 percent 8.6 percent 6.3 percent Liberty County: 6.3 percent 8.1 percent 9.6 percent 9.9 percent 8.3 percent Thus, the population of Calhoun County stood at 9,294 at the time of the 1980 census and was estimated by the University of Florida, in its data in evidence, to be approximately 9,506 persons in 1985. This represents a 0.45 percent average annual growth rate, in comparison to the average annual growth rate for the State of Florida of 2.98 percent over that same time period. The mid-range projection for Calhoun County population derived from this data for 1990 is 9,800, which represents a 0.63 percent average annual growth rate in comparison to the projected State of Florida average annual growth rate of 2.22 percent. Thus, while the Florida growth rate has declined somewhat as projected for 1990, the Calhoun County growth rate, while small, has increased somewhat in the 1990 projection in evidence. This trend belies the prediction made by Dr. Gaines, Calhoun State Bank's expert witness, to the effect that the Calhoun County population will remain static between the years 1990 and the year 2000. It seems highly unlikely that Calhoun County will experience no population growth in that entire decade and to that extent Dr. Gaines' testimony is not credited. In a similar vein, it is noted that Dr. Gaines found that Calhoun County's population growth from 1970-1980 largely resulted from net migration of persons into the County, to the extent of 73.53 percent of the County's growth during that decade, and that no net migration had occurred during the years 1980-1986. His figures show that 91.97 percent of the State of Florida's population growth in the decade 1970-1980 resulted from migration which rate declined to 88.89 percent for the years 1980-1986. If that be the case, it is difficult to conclude that, although the migration rate may have declined in the last six years into Calhoun County, that, as Dr. Gaines opined, no migration into the County resulted. Thus, to this extent also, Dr. Gaines' findings are not credited and are contrary to the preponderant competent, substantial evidence of record. It can thus be seen that the population of Calhoun County currently is approximately twice that of Liberty County or 9,506 residents, as opposed to 4,530 residents for Liberty County. Per capita personal income in Calhoun County was shown to be $7,023 as opposed to $12,773 for the State of Florida at large. The unemployment rate for Calhoun County at the end of 1985 was 11.4 percent compared to the Statewide average rate of 6 percent. As can be seen from the above data, Liberty County's unemployment rate is somewhat lower than Calhoun's, while higher than the State of Florida average. Calhoun County has not shown a pattern of rapid growth in the past or present, but it has demonstrated a stable, steady and somewhat increasing growth pattern. No projected downturn in growth is expected. These economic indicators, considered in conjunction with the rather large number of deposits enjoyed by the sole commercial bank presently operating in Calhoun County, as compared to other commercial banks in Florida operating in similar market areas, reveal that there is room in Calhoun County for a new financial institution based upon these indicators alone. Calhoun County is presently served by three financial institutions, as well as the Calhoun-Liberty County Credit Union, whose membership is made up of County employees. There are two branch offices of North Carolina National Bank of Florida (NCNB), a wholly-owned subsidiary of North Carolina National Bank, which operates hundreds of branch offices in Florida and the southeastern United States. Those two branch offices are located in Blountstown and Altha, which lies approximately 10 miles to the north of Blountstown in Calhoun County. The other institution is a branch office of First Federal Savings and Loan Association of Marianna. Calhoun County had a population per financial institution office of 3,188 during 1985-86, ranking it 29th among the 67 Florida counties. If one additional financial institution was added in the County, its ranking would drop to 44th out of 67 counties. If two additional banking institutions were added to Calhoun County, its ranking would drop to 56. The NCNB branch office in Blountstown is the only full service banking institution in Calhoun County. This office had $34.4 million in deposits from individuals, partnerships and corporations as of September 30, 1985. This figure represents a decline in deposits of $1.5 million in the one year since September 30, 1984. It is unique for a commercial bank with a deposit base on the order of $34 million to have no direct competitor in its primary service area. NCNB acquired its present office in Blountstown when it acquired the Ellis Bank Corporation in 1984 and with it the former Ellis Bank of Blountstown. After that acquisition, the level of service continued to fall as it had during the last several years of the Ellis Bank's tenure in Blountstown. Despite testimony that the level of service of NCNB has improved somewhat since the initial merger period, it is clear that private and commercial customers of NCNB feel a high level of dissatisfaction with that institution, as evidenced by the survey conducted by Dr. Gaines. Twenty percent of the NCNB residential (noncommercial) customers surveyed in the Blountstown and Bristol areas were unable to name any strengths of that institution in contrast to an eleven percent average of customers for other institutions surveyed in and around the proposed PSA. Seventy percent of NCNB customers surveyed were able to cite specific, unaided examples of weaknesses in the institution, the major one being out-of-town ownership and control. Concerning overall quality of service at NCNB, 50 percent of the residential customers indicated that quality of service had declined since NCNB's acquisition of the Ellis Bank. Only 4 percent felt that quality of service had improved in that time period. Commercial customers of NCNB surveyed were also critical of that institution. Seventeen percent of them were unable to name any strengths. Eighty-four percent were able to name specific examples of weaknesses in NCNB. Sixty-five percent of the commercial customers surveyed felt that quality of service had decreased since the purchase of Ellis Bank by NCNB. Although the financial soundness of the NCNB office in Blountstown (as opposed to profitability) would not be severely affected if deposits were reduced by $20 million with the advent of one or more competing new banks, such a dramatic decrease is not initially projected. Both of the applicants project that they would be profitable at deposit levels substantially less that an aggregate of $20 million. The organizers of the applicant Calhoun State Bank project that they will have deposits of $3,082,000 by the end of their first year of operation, with a before-tax profit of $87,000 during the first year. The C&L Bank of Blountstown applicant projects deposits of approximately $4,250,000 and a before-tax profit of $14,024 by the end of its first year of operation. The C&L Bank of Bristol has a significant customer base in Calhoun County, with approximately $1.5 million in deposits coming from former customers of NCNB. Approximately $2,000,000 of Bristol's time deposits are held by Calhoun County depositors and approximately $3.5 million of its loans are to Calhoun County residential and commercial borrowers. In view of the likely close name identification of the applicant C&L Bank of Blountstown with the present C&L Bank of Bristol, a substantial number of the Blountstown and Calhoun residents who presently bank with C&L of Bristol would likely change their deposits and other banking business to the C&L Bank of Blountstown if it were authorized. Thus, a significant amount of the deposits to be attracted by C&L Bank of Blountstown would come from present Calhoun County customers of the C&L Bank of Bristol. This factor, coupled with the C&L Bank of Blountstown being able to attract a reasonable share of the normal growth of the deposit base in Calhoun County and Blountstown, as would Calhoun State Bank, coupled with the large size of the NCNB branch in Blountstown, indicates that although substantial deposits would be garnered by either of the proposed banks, from NCNB, the safety and soundness of that institution would not be placed at risk by the authorization of a new bank in Calhoun County. Nevertheless the testimony and evidence establish that a significant number of depositors in Calhoun County will switch their deposits from the NCNB branches to any new bank or banks authorized in Calhoun County. The publicly perceived deficiencies in service by NCNB involving its out-of-town management and lack of local control and decision-making are significant. A significant diversion of both future potential depositors and present NCNB depositors will occur with the advent of any new bank. First Federal Savings and Loan Association's branch in Blountstown offers only limited services allowed a savings and loan institution. It does not offer checking accounts or commercial loans. Some of its deposits will transfer to either proposed bank, if authorized, because of customer preference for an institution offering a full range of banking services. The Calhoun- Liberty County Employees' Credit Union is a fairly large institution, but is limited in usage to County employees. Some of these potential bank customers will move their accounts from the Credit Union to either C&L or Calhoun State because of the preference for the full services offered by a bank. This is less likely to occur with the customers of both First Federal Savings & Loan Association and the Credit Union if NCNB remains the only full service commercial banking alternative for the above- mentioned reasons concerning community perception of deficient service at NCNB. Primary Service Areas Both applicants allege that their primary service areas will be Calhoun County. The evidence clearly establishes that any new bank chartered to serve Blountstown and Calhoun County would draw 75 percent of its deposits from that County. Calhoun County is twice as large as Liberty County in population, with 9,506 residents as opposed to 4,530 residents in Liberty County. NCNB, which represents 73 percent of all bank deposits derived from Calhoun County obtains 85 percent of its total deposits from that County. Dr. Gaines, Calhoun State Bank's expert witness, performed a survey of bank customers in Blountstown and Bristol and determined that only 8 percent of the Blountstown population sampled cross over the State Route 20 two-lane road and bridge over the Apalachicola River to bank at the C&L Bank of Bristol. Only 24 percent of NCNB customers actually sampled were residents of Bristol. Although the C&L Bank of Bristol derives approximately 26 percent of its total deposit base from Calhoun County deposits, the vast majority of these deposits were represented by public funds and certificates of deposit or other time deposits greater than $100,000. The C&L Bank of Bristol currently enjoys only about 6 percent of Calhoun County's total deposits and 3-4 percent of that County's core deposits, which in turn represent only 3.5 percent of C&L Bank of Bristol's total core deposits; core deposits being deposits by residential and commercial customers. These factors reveal that, although the more densely populated area of Liberty County of Bristol and its immediate environs might be termed a "secondary service area" that, especially in view of the deposit source experience of NCNB, the primary service area of any bank locating in Blountstown and its vicinity will be Calhoun County, particularly Blountstown and the immediate surrounding area since that is the only significant population center in Calhoun County, which area would include Altha, some ten miles distant. C&L BANK OF BLOUNTSTOWN APPLICATION Reasonable Promise of Successful Operation Calhoun County is a sparsely populated area with residents and businesses engaged primarily in timber and other agricultural operations and the operation of small retail businesses. The County is not growing rapidly, as demonstrated by the above-found indicia of growth, but is expected to enjoy a consistent, steady growth in the reasonably foreseeable future. C&L's deposit base in Calhoun County will primarily consist of household and small business depositors and borrowers. C&L established that it will likely attract some $3,250,000 in deposits captured from existing financial institutions, chiefly NCNB, over a one to three year period after initiation of operations. Additionally, bank deposits in Calhoun County have recently been increasing at a rate of approximately $2.5 million per year and C&L expects to garner approximately $1,000,000 of this deposit growth each year. The deposit projections placed in evidence by C&L were shown to be conservative and reasonable, especially in view of the widespread customer dissatisfaction with NCNB for the reasons found above and which will, for at least the first one to three years of C&L's operation, result in a substantial capture of those present NCNB deposits. The projections of expected expenses and earnings contained in the schedules filed with C&L's application, and in evidence, were shown to be conservative and reasonable and are accepted insofar as they reveal the likely operational experience of C&L in competing with those institutions already operating in the service area. The location of the proposed C&L Bank will offer a greater convenience to potential bank customers in Calhoun County who seek an alternative to the NCNB full service bank, the only other feasible alternative at the present time being the C&L Bank of Bristol. The C&L Bank of Blountstown will likely capture a substantial portion of the small amount of core deposit business of C&L of Bristol originating in Calhoun County because of the convenience to customers of having an additional bank in the primary service area, obviating the necessity of a six mile trip to Bristol for such customers. Dr. Heggestad established moreover, that C&L Bank of Bristol would only lose approximately $250,000 of its deposit base over a three year period to C&L of Blountstown. This diversion of deposits to C&L of Blountstown would in no way jeopardize C&L Bank of Bristol since such a loss of deposits would only reduce potential net profits by approximately $3,750, not a significant amount. Correspondingly, C&L of Bristol's loan volume derived from Calhoun County is approximately the same as its base of "core deposits" and is approximately 3 percent of the Calhoun County loan market. The loan volume of C&L of Bristol would also probably decrease in a rather insignificant amount with the granting of an application to either new bank proposed for Blountstown, based primarily on the convenience factor offered by C&L's being placed in the Blountstown-Calhoun primary service area, as an alternative to the NCNB full service bank and more easily accessible than C&L of Bristol. Capital Structure The capital structure of the C&L Bank of Blountstown is $1,000,000. $800,000 of this amount is stated, paid-in capital. $260,000 is represented by paid-in surplus and $40,000 will be represented by undivided profits. The C&L Bank of Blountstown will issue 100,000 shares of common stock at a par value of $8 per share. Stock ownership will not be widespread, rather approximately 90 percent of the stock will be owned or controlled by members of the Board of Directors and their immediate families in approximately the same ownership pattern prevailing with the C&L Bank of Bristol. The remaining 10 percent of the C&L Bank of Blountstown stock will be initially offered to the shareholders of the bank of Bristol who are not the organizers and/or directors of the C&L Bank of Blountstown. Any stock not so conveyed to the other shareholders of C&L Bank of Bristol will then be offered to the public at large. The proposed capital structure of the C&L Bank of Blountstown satisfies the requirements of Section 658.21(3), Florida Statutes, and Rule 3C-10.051(3)(c), Florida Administrative Code. Banking Site and Quarters The proposed C&L Bank of Blountstown has made arrangements to purchase a parcel of land approximately 191' x 381' located on the corner of Warren and Gaskin Streets in Blountstown, Florida. This location lies at the intersection of Highway 20 and Highway 71, which are the two major transportation arteries into the City of Blountstown. The site fronts on Warren Street, which will give street access on three sides of the property. C&L intends to purchase the land from John Morgan McClellan and has a current option to purchase the site. Mr. McClellan, who is one of the proposed directors, has agreed to sell the site to C&L for $150,000. An independent appraisal attached as Exhibit F to C&L's application establishes the fair market value of the site. The proposed building will contain 2,800 square feet of heated space, consisting of a lobby, two offices and a bookkeeping area. Adequate provision has been made for suitable quarters for the proposed bank which satisfies the requirements of Section 658.21(6), Florida Statutes, and Rule 3C- 10.051(3)(f), Florida Administrative Code, and the site has been specifically designated by street address in satisfaction of the requirement in Rule 3C-10.051(6)(A), Florida Administrative Code. Officers and Directors The proposed directors and officers of C&L Bank of Blountstown all reside or have businesses in or near the PSA except for Jerry M. Smith, who is a native of the Blountstown area. The proposed directors and officers have extensive general business and banking experience in the PSA. The proposed directors have managed the C&L Bank of Bristol since its inception and during their tenure in that capacity that bank has enjoyed a consistent growth in deposits, generally favorable loan to deposit ratios and a steady increase in profitability. Under their management, the C&L Bank of Bristol has enjoyed an increased stock valuation at an average rate of 17 percent per year. The proposed officers and directors of C&L Bank of Blountstown are as follows: A. Gerald Cayson is a lifelong resident of Blountstown and has successfully operated a timber and cattle farming business owned with his father and brother in Calhoun County. He served for twenty years as United States Postmaster for the City of Blountstown. He was an original organizer and a current director and vice-chairman of the C&L Bank of Bristol. He has also served on the Board of Directors of the First National Bank of Alachua since 1971. Douglas R. Davis, Jr. is a lifelong resident of Calhoun County and president and co-owner of a pharmacy and a jewelry store in Blountstown. He was an original organizer of C&L Bank of Bristol and currently serves on its executive and loan committees. Michael R. James, an organizer and proposed director of the C&L Bank of Blountstown is also its proposed Chief Executive Officer. He is a resident of Bristol and currently is the Chief Executive Officer of the C&L Bank of Bristol and has served in that position for a number of years. He is chairman of its loan committee and a member of its executive committee. Previously he was employed as a State banking examiner and as a vice-president and branch manager of another commercial bank. John Morgan McClellan co-owned and operated a building supply business in Blountstown for approximately 21 years and currently is a real estate broker in Calhoun County. He was an original organizer of the C&L Bank of Bristol and currently serves on its Board of Directors. Additionally, he has served on the Board of Directors of the First Federal Savings and Loan Association, Marianna, Florida, for the past ten years. Jerry M. Smith is currently president and chairman of the Board of Directors of the First National Bank of Alachua. He is also chairman of the board of the First Alachua Banking Corporation as well as C&L Bank of Bristol. He was an original organizer of the C&L Bank of Bristol and also serves as chairman of its executive committee. R. Malone Peddie formerly owned and operated a swimming pool construction business in north Florida. He is currently president and chairman of the board of 0PM, Inc. and LBJ, Inc. which are companies engaged in real estate investment. He, too, was an original organizer of the C&L Bank of Bristol and serves as chairman of its audit committee. Gordon P. Revell is a lifelong resident of Bristol and is currently principal of the Bristol Elementary School. He is chairman of the board of directors of Revel and Revell Corporation which owns and operates a 110 bed long-term care facility in Liberty County. He was also an original organizer of the C&L Bank of Bristol and serves on its loan committee. James W. Weaver, Jr. is a lifelong resident of Liberty County and is currently president of Weaver Oil Company in Blountstown. He and his father co-own a convenience food store chain in northern Florida. He was an original organizer of C&L Bank of Bristol and serves on its loan committee. James W. Weaver, Sr. is co-owner of Weaver Oil Company, Inc. and is the former chairman of the board of C&L Bank of Bristol. He served in that capacity from 1975-1979 and currently serves on its audit committee. Mr. Michael James, who is currently president of the C&L Bank of Bristol, is proposed to be the president of the C&L Bank of Blountstown. Sufficient substantial evidence has been presented to establish the qualifications and capabilities of Mr. James to successfully serve the applicant bank in that position. The organizers, proposed directors and officers of the applicant C&L Bank of Blountstown have been established to have reputations in their communities for honesty and integrity. All have significant active business experience so as to establish their capabilities for responsible dealing in financial matters and their abilities to make sound investment and business decisions. They have been demonstrated to have a sufficient understanding of financial affairs. A number of members of the proposed Board of Directors including the Chief Executive Officer have direct banking experience related to establishment of a new bank in the same type of market. Thus, it has been established that the organizers, proposed directors and officers of the proposed C&L Bank of Blountstown meet the requirements of Section 658.21(3), Florida Statutes, and Rule 3C-10.051(3)(c), Florida Administrative Code. Additionally, three of the ten organizers and directors of the proposed C&L Bank of Blountstown are Calhoun County residents and all represent diverse occupational and business interests, in satisfaction of Rule 3C-10.051(3)(D)(4), Florida Administrative Code. Proposed Name The organizers of C&L Bank of Blountstown have proposed two potential names for the new bank, one being "C&L Bank of Blountstown" and the other being "Bank of Blountstown." C&L prefers to use the name "C&L Bank of Blountstown" and no objection to the use of that name is of record. The use of the name C&L Bank of Blountstown will likely cause greater public acceptance of the new bank and enhance to some extent its ability to attract depositors because of the widespread customer satisfaction and name recognition attributable to the C&L Bank of Bristol. Expert Testimony C&L offered Dr. Arnold A. Heggestad as an expert in general banking, bank finance and economics, as well as banking regulation. It was thus established that there are prospects for moderate but steady growth in the economy of the PSA as that relates to population, average income, sales of goods and Services and concomitantly, bank deposits. This moderate growth, coupled with the likely capture of some deposits from NCNB as well as the small percentage of Calhoun County deposits presently enjoyed by the C&L Bank of Bristol, shows that Calhoun County is sufficiently strong economically to support an additional bank. There will be a significant convenience and advantage for the general public in the Calhoun County community served by the entry of C&L into that market. This is especially true in view of the widespread dissatisfaction with NCNB which occupies an essentially monopolistic position in that market and for the further reason that those depositors in Calhoun County now banking at C&L of Bristol will likely show a propensity to move their banking business to C&L of Blountstown for reasons of convenience and its close name identification with the Bristol Bank, which enjoys a high customer satisfaction rating. It was also established through Dr. Heggestad's testimony that the C&L Bank of Blountstown and the C&L Bank of Bristol will not substantially compete with each other since their service areas only overlap in an insignificant way as that is measured by the low percentage of the Bristol bank's core deposits derived from Calhoun County and the fact that Blountstown and Calhoun County residents would be less likely to journey to Bristol to do their banking with the advent of any new bank in Blountstown, to the extent that those customers choose not to bank at NCNB. The overlapping directorships of the C&L Bank of Bristol and the proposed C&L Bank of Blountstown will not serve to significantly restrict competition since, as found above, the two PSAs do not significantly overlap and the Bristol bank is a relatively minor participant in the Calhoun County banking market, especially for core deposits from residential and private commercial customers. The overlapping directorships of these two banks will not create a fiduciary conflict for the directors as to the interests of the respective bodies of shareholders since both institutions will be owned and controlled by the same people in fairly equal amounts. Because of the substantial identity of ownership there would be no incentive for one Board of Directors, in its policies, to do competitive harm to the other bank. The organizers and directors of the C&L Bank of Blountstown do not propose to inaugurate banking policies which would serve to undercut the operations and to d& competitive harm to the C&L Bank of Bristol and in fulfilling their fiduciary duties to shareholders they are unlikely to encounter conflicts of interest in this regard since the two banks will not be competing in any significant way in the same PSA. Dr. Heggestad additionally established that C&L would attract approximately $1,000,000 a year from new deposit growth in the area and over a three year period would attract approximately $3.25 million from existing financial institutions in the market, primarily from NCNB, due to its high level of customer dissatisfaction. C&L can reasonably expect to attract about $8,000,000 in assets based upon the projected deposit growth in the area, together with its capture of a substantial amount of the NCNB deposits, by the end of its third year. In its first year of operation, C&L will show a relatively small after-tax loss. In the second year it should earn a very modest profit and by the third year will earn a profit of approximately $47,000, according to Dr. Heggestad's calculations and projections, which are accepted. In the context of the C&L Bank of Blountstown competing with the NCNB, and the other existing institutions, it has been established that the projection of total deposits at the end of each of the first three years is reasonable and the projected statement of earnings over the three year period, as well as the deposit base, is reasonable. The capital structure of C&L outlined in its application is ample and sufficient to engage successfully in the banking business at the outset of operations and the proposed bank should earn a positive rate of return by its second year of operation and sustain an adequate capital structure. There is a reasonable promise that C&L will be a successful competitor in the Calhoun County market with NCNB and those two banks should be able to sustain themselves at a profitable return on equity. C&L Bank of Blountstown will have success in penetrating the Calhoun County market given the peculiar circumstance of its being occupied to the extent of 73 percent of total deposits by NCNB, the widespread dissatisfaction with NCNB, and the convenience and name recognition factors which will attract present Calhoun customers of C&L of Bristol. Thus, the C&L Bank of Blountstown would be a viable institution if granted a charter. NCNB would remain a stable Calhoun County bank, even though its deposit base will shrink somewhat as the result of the advent of C&L. The deposits and earnings projections of C&L are reasonably based on current economic and demographic conditions and projected growth potential in the PSA. Because it is important to evaluate the ability and experience of a bank's organizers in order to predict its likelihood of success, Dr. Heggestad made an analysis of the past performance of the C&L Bank of Bristol. C&L of Bristol has been in operation approximately eleven years and under the same management which proposes to open and manage the C&L Bank of Blountstown. Dr. Heggestad determined, based upon a comparative analysis of other banking institutions of comparable size in Florida, that the C&L Bank of Bristol has performed quite well in light of the market in which it operates, which is characterized by rather modest growth in the various economic indicators alluded to above. Its costs of doing business, including the amount spent on director's fees, were shown to be well below the average bank in its class. In evaluating the likelihood of successful operation of C&L, Dr. Heggestad also considered the performance of C&L of Bristol as compared to the performance of NCNB, its closest and largest competitor. During the period of time in question, 1978-1984, the performance of NCNB has declined and the performance of C&L of Bristol has improved. The performance of C&L of Bristol surpassed NCNB through the year 1984, thereafter reports for NCNB as an independent bank are no longer available because it became a branch of NCNB of Florida in October of 1985. Dr. George Gaines, testifying as an expert witness for Calhoun State Bank, acknowledged that in his market analysis of all financial institutions located in Blountstown and Bristol he found that the C&L Bank of Bristol had the best rating in the group and that the general satisfaction of residential and commercial customers regarding C&L of Bristol was very high. It is, therefore, reasonable to conclude that the same management group which has operated C&L of Bristol successfully for more than ten years would be successfully able to compete in the Calhoun County banking market by opening the proposed new C&L Bank of Blountstown. This is especially true since it has been established that any new bank opening in Calhoun County would likely attract as much as $1,000,000 of deposits from NCNB the first year of operation due to the customer preference factors mentioned above and this, coupled with the above-referenced name recognition and convenience factors, which will allow it to capture C&L of Bristol deposits from Calhoun County and the successful record of its management group, renders it likely that C&L of Blountstown would be best able to successfully compete in the Calhoun County market. In this connection, it has not been shown that C&L would capture all of the Bristol bank's deposit and loan volume from Calhoun County. In fact, C&L Bank of Bristol would lose only approximately $250,000 of its deposit base over the first three years of operation of C&L of Blountstown, which would result in an insignificant decline in its profitability. Thus, in actuality the C&L Bank of Bristol will not be a substantial competitor with any new bank, or with NCNB, in the PSA. The bulk of the deposits enjoyed by the Bristol bank from the PSA consist of public funds and time deposits of $100,000 or more which are less likely to be shifted to a new bank entering the Calhoun County market because such depositors are less likely to be influenced by the convenience and name recognition factors and loan policy factors discussed above. In summary, it has been demonstrated without question that the C&L Bank of Blountstown would be able to successfully compete with existing institutions in the Calhoun County market. In fact there is a high probability that it would be best able to compete against the existing Calhoun County banking institutions because of the advantages found above. CALHOUN STATE BANK APPLICATION Calhoun has represented in its application and in its evidence at hearing that its primary service area would consist of Calhoun County, Florida. Calhoun's witnesses established that they reasonably expect that any new financial institution in that County could expect to draw 75 percent of its deposit base from Calhoun County residents and businesses. In light of this and the findings made above, it is determined that the Primary Service Area of Calhoun State Bank would be Calhoun County and particularly the immediate vicinity of Blountstown and Altha. See Rule 3C-10.051(12), Florida Administrative Code. Proposed Directors and Officers The proposed directors of Calhoun State Bank are D. Finlay Corbin, Roy H. Golden, M. Brooks Hayes, B. Hayes Leonard, T. Michael Tucker, Jr., J. Max Waldorf and Glenn Terrell Warren. These proposed directors, with the exception of Roy H. Golden and M. Brooks Hayes, have had some direct banking experience. Concerning the business experience of the proposed directors and the diversity of that experience, it has been shown that M. Brooks Hayes has owned and managed timber lands in Calhoun County in excess of 30 years. Glenn T. Warren is engaged in the business of contracting and farming and as a director of the Ellis Bank and NCNB from 1978-1986. B. Hayes Leonard also served as a member of the advisory board of NCNB and as a director of its predecessor, Ellis Bank of Blountstown, from 1978-1986. He is active in the timber production business. D. Finlay Corbin also served as a member of the advisory board of NCNB and a director of the Ellis Bank of Blountstown for the same period of time. Mr. Corbin is a practicing dentist in Blountstown. J. Maxwell Waldorf has served in the same capacity on the board of the Ellis Bank and NCNB. Mr. Waldorf is from Altha, Florida, and owns and operates a hardware store as well as engaging in farming operations. Mr. Roy H. Golden is a pharmacist in Blountstown and has been an active business man in Calhoun County for over 40 years. Mr. T. Michael Tucker also served as a member of the Board of Directors of Ellis Bank and the advisory board of NCNB from 1983 until April 7, 1986. The organizers of Calhoun State Bank expect either Mr. Bowers Sandusky, the current president of the NCNB of Blountstown, or Mr. W. Steven Thames, currently a vice president of the Citizen State Bank of Marianna, to be Calhoun State's president. Both men have significant banking experience. The organizers and proposed directors, as well as the proposed officers of the applicant Calhoun State Bank, have reputations for honesty and integrity. All the organizers and directors have significant experience in business and financial affairs and represent diverse occupational and business interests. At least one member of the proposed Board of Directors, as well as each of the proposed Chief Executive Officers, has direct banking experience. Thus, the proposed directors and officers of Calhoun State Bank meet the minimum requirements of Sections 658.21(4) and 658.33, Florida Statutes, and Rule 3C- 10.051(3)(d), Florida Administrative Code. Corporate Name and Bank Site The corporate name of the proposed "Calhoun State Bank" is reserved with the Department of State, which satisfies the requirements of Subsection 658.21(5), Florida Statutes, and Subsection 3C-10.051(3)(E), Florida Administrative Code. The proposed charter site for the Calhoun State Bank is a parcel of land of approximately 3 acres located at 611 West Central Avenue, Blountstown, Florida. The proposed bank will occupy a building, to be constructed, which will be in excess of 2,500 square feet. The Calhoun State Bank organizers have purchased the lot for $100,000.00. Provision has been made for suitable quarters for the proposed Calhoun State Bank, which satisfies the requirements of Subsection 658.21(6), Florida Statutes, and Subsection 3C- 10.051(3)(F), Florida Administrative Code. The proposed site has been specifically designated by street address, which satisfies Subsection 3C- 10.051(6)(A), Florida Administrative Code. Capital Structure The capital structure of the proposed Calhoun State Bank would total one million dollars as follow: $800,000.00 to stated capital, $160,000.00 to paid up surplus, and $40,000.00 to undivided profits. The Calhoun State Bank intends to issue 100,000 shares of common stock with par value of $8.00 per share and a selling price of $10.00 per share plus a .25 cent per share organizational expense fee. The proposed capital for the Calhoun State Bank will be adequate to enable it to provide necessary services to meet the needs of prospective customers. The proposed capital structure of the Calhoun State Bank satisfies the requirements of Subsection 658.21(3), Florida Statutes, and Subsection 3C-10.051(3)(c), Florida Administrative Code. There will be a wide distribution of stock ownership, all of which will be within the PSA. The organizers have disclosed the anticipated amount of stock each will retain. The Calhoun State Bank has satisfied the requirements of Subsection 3C-10.051(4), Florida Administrative Code, as well. Projected Operating Experience The applicant Calhoun State Bank presented Dr. George Gaines and Mr. Bowers Sandusky, who testified concerning the projected deposits, income, expenses and the likely operational viability of the proposed bank as a competitor to NCNB. It is thus established that Calhoun State Bank is likely to sustain a loss of $26,000 its first year of operation and a profit in the second and third years of operation of $52,000 and $91,000, respectively. The projection of total deposits for the first three years of operation, as well as the earning statement and the projection that Calhoun State Bank would earn a positive rate of return by the end of the third year and could sustain an adequate capital structure, were shown to be reasonable insofar as it postulates Calhoun State Bank's likely operating experience with only NCNB, the Savings and Loan Institution and the Credit Union as its competitors. Calhoun State Bank's three year projections, like C&L Bank of Blountstown's, relate only to the projected advent of one new bank for the Blountstown area as a competitor, primarily with NCNB. The projected operating experience in the above particulars for either applicant bank with the other applicant bank as a likewise chartered competitor, together with NCNB, has not been established in this record, although Dr. Gaines generally opined that he felt that NCNB as well as both applicant banks could survive in the Calhoun County market and could be profitable, although all three banks would be significantly smaller than the present size of NCNB. That opinion is not credited in light of the evidence in support of the findings made below on this subject. Probability of Success Both Dr. Heggestad and Dr. Gaines opined that a new bank in Blountstown, Florida, with prudent, sound banking practices and good management, would have a reasonable probability of being successful in competing with NCNB and could garner a significant share of the Calhoun County market for bank deposits and loans, given the peculiar circumstances of Calhoun County in having only one full service commercial bank in the PSA. The operating experience in terms of expected deposits, deposit growth, profitability and maintenance and growth of capital for either of the applicant banks, under the scenario envisioned by Dr. Gaines of two new banks competing with NCNB, has not been proven, however. Given the small size of the PSA from a demographic standpoint (9,506 population) together with the low growth rate of the PSA banking market, as measured by the above-referenced economic and demographic factors, it has not been proven that all three banks could remain sound depositories and lenders for Calhoun County area customers and remain profitable and otherwise financially viable competing in such a small market over a significant period of time. Accordingly, it must be determined which of the two applicant banks can more successfully penetrate the Calhoun County market in a successfully competitive way and serve the public convenience and advantage by becoming a strong and profitable financial institution alternative to NCNB as a stable depository for residents of the area, while attaining a sufficiently favorable loan to deposit ratio so as to adequately address the financial needs of potential customers in the PSA who may seek an alternative to the NCNB lending services. The above-named expert witnesses for both applicant banks acknowledge that a new bank in Calhoun County can successfully penetrate the market in the PSA involved, provided it possesses a prudent local Board of Directors familiar with sound banking practices and capable of competent day to day management. Thus, it is appropriate to examine the Boards of Directors and organizers of the two applicant banks to determine which is more likely to most successfully manage a new bank in the Blountstown market, so as to offer a safe, sound depository and lending institution which will grow in profitability and asset base so as to be able to accommodate the financing needs of the banking public in the PSA. In this connection, as found above, the proposed Board of Directors of Calhoun State Bank each served on the Board of Directors of the Ellis Bank of Blountstown from 1978 until it was acquired by NCNB in March 1984, with the exception of T. Michael Tucker. Mr. Tucker served as a member of the Ellis Board of Directors from 1983 until 1984 and each of the proposed directors served on the advisory board of NCNB, albeit with little decision-making autonomy, from the acquisition of the Ellis Bank in 1984 by NCNB until they all resigned on April 7, 1986. The Ellis Bank of Blountstown was a member of a bank holding company and not locally owned. During the time the Calhoun State organizers served on its board, there were two other board members from outside Calhoun County. One of these members was a representative of the Ellis Holding Company which owned the bank. This member traveled to Calhoun County to attend Board of Directors' meetings and, in conjunction with the Chief Executive Officer of Ellis Bank of Blountstown, made the investment decisions and decisions regarding pricing of loans for the Ellis Bank of Blountstown as a representative of the holding company. The Calhoun organizers who served on the Ellis Bank Board thereby acquired little expertise in the independent pricing of loans. The pricing of loans is a key element of the experience of a bank officer or director, as loan pricing is one of the most important tools used by a bank in competing with other banks. The Ellis Bank of Blountstown, during the time the Calhoun organizers served on its board, also received its instructions concerning potential investments for the bank directly from the principal shareholder in the Ellis Holding Company. Such decisions were not arrived at by the local Board of Directors. The Ellis Board of Directors did have significant autonomy, however, in making actual lending decisions to customers. This factor is of significance in evaluating the Ellis Bank's performance in Blountstown during the period when all but two of the Calhoun State Bank organizers served on its Board of Directors, because the Board of Directors of a banking institution by and large sets the institution's lending policy and other aspects of its operational philosophy. In evaluating the performance of the Ellis Bank, later the NCNB branch, with a view toward determining whether its former Board of Directors can most successfully manage a new bank in the Calhoun County market, such factors as return on assets, the ratio of net income to total capital, and the loan to deposit ratio should be considered. The return on assets reflects the ability of the bank's management to manage assets of the bank in order to maximize return on equity invested by shareholders and to allow the bank to adequately meet the financial needs of its customers. It was established that a one percent return on assets is considered a favorable operating ratio for a commercial bank. In this context the performance of the Ellis Bank of Blountstown during the period that the Calhoun directors or organizers served on its board exhibited a marked decline. In 1978, when the Calhoun organizers joined the Board of Directors, the Ellis Bank of Blountstown exhibited a quite favorable return on assets in excess of 2.3 percent. By 1984, when the Ellis Bank was acquired by NCNB, that performance had deteriorated to a level of 0.77 percent. From 1980 to 1984, the Ellis Bank's performance steadily declined from the aforementioned 2.3 percent to 1.52 percent in 1981; 1.41 percent in 1982; 0.98 percent in 1983; until the above mentioned level of 0.77 percent was reached in 1984. An additional performance factor which should be considered is the ratio of net income to total capital, which is a reflection of a bank's profitability and the measure of return realized on share holder equity. When the Calhoun organizers became members of the Ellis Bank's Board of Directors in 1978, the Bank exhibited a 30 percent profit after tax on its equity, which is a very favorable return. That performance level dropped sharply, however, so that by 1981 the bank showed a return of 22.3 percent. The ratio of net income to total capital dropped steadily until it stood at the level of approximately 13 percent in 1984. Perhaps the most significant performance factor to employ in evaluating the success of a bank's operations is its loan to deposit ratio. This factor demonstrates how well a bank services the needs of the community in which it operates since the primary business of a bank is to receive deposits and to make loans. The loan to deposit ratio reflects how well a bank is marketing its product in the community in terms of how much money it lends to enable consumers to meet their personal financial needs and to enable businesses to obtain debt capital for operation, expansion and other legitimate purposes, which, in turn, serves to expand the business base of a community upon which a bank depends for its deposit growth. The former Chief Executive Officer of Ellis Bank of Blountstown acknowledged that in a community such as Blountstown it would be normal to expect a loan to deposit ratio for a commercial bank operating in such a circumstance to be in the neighborhood of 70-75 percent. This witness also acknowledged that, as the Chief Executive Officer of the former Ellis Bank, he and the members of the Board of Directors, which included all but two of the present organizers of Calhoun State Bank, established local bank lending policies. Calhoun State Bank demonstrated that expected loan to deposit ratios for the years 1986-1989 will be 50 percent, 62 percent and 63 percent, respectively. These projected loan to deposit ratios, however, do not reflect the actual historical performance of the Ellis Bank of Blountstown experienced under the stewardship of the Calhoun State Bank organizers while they were in charge of its lending policies and decisions. In fact, from 1978- 1984, the Ellis Bank's loan to deposit ratio declined from a quite favorable level of 78.94 percent to a low level of 44.84 percent. The loan to deposit ratios for those years were as follows: 1978 - 78.94 percent; 1979 - 64.54 percent; 1980 - 63.16 percent; 1981 - 51.01 percent; 1982 - 52.70 percent; 1983 - 51.39 percent; and for 1984 a low of 44.84 percent. Thus, the Ellis Bank of Blountstown experienced, with the exception of a slight increase for 1982, a steady decline in this key determinative indicator of how well the bank used its assets in terms of lending out its deposits so as to earn interest income, as that reflects on profitability. The performance record of the Ellis Bank and its successor, NCNB, is reflected in the results of the customer satisfaction survey mentioned herein conducted by the Calhoun organizers. It was thus shown that 20 percent of the current NCNB customers were unable to name any strengths in that bank, and seventy percent of those surveyed named specific weaknesses in the institution, which was the worst performance rating in the survey. This high level of customer dissatisfaction may be reflected in the declining loan to deposit ratio experienced by Ellis and NCNB and to some extent the declining loan to deposit ratio may be a cause of much customer dissatisfaction. In this connection, Dr. Heggestad established that one of the primary reasons for customer dissatisfaction with the performance of NCNB was the low availability of loans. In any event, the banking institutions for which all but two of the Calhoun organizers served as Directors or advisory board members from 1978-1986, and from whence would likely come Calhoun's Chief Executive Officer, received the highest level of public criticism of the financial institutions surveyed in the area, including the Bank of Bristol, from which the organizers of the C&L, the competing applicant, obtained their banking experience and performance record. Mr. Steven Thames, one of the proposed Chief Executive Officers for the Calhoun State Bank, did not testify in this proceeding, however, the evidence of record establishes his qualifications as adequate to serve as Chief Executive Officer of a banking institution. Mr. Thames, however, has not served as the Chief Executive Officer of any financial institution in the past and the evidence did not reflect that he has served in any official capacity with a de novo bank. Mr. Michael James, the proposed Chief Executive Officer for C&L Bank of Blountstown, on the other hand, has served as a Chief Executive Officer for approximately ten years with the C&L Bank of Bristol and further that experience involved the organization and operation of a newly chartered bank from its initial capitalization and opening through approximately ten years of generally consistent improvement in terms of growth of deposits, loan to deposit ratio, return on equity and profitability. Mr. Bowers Sandusky has served as the Chief Executive Officer of Ellis Bank of Blountstown from 1972-1984. In 1984, when that bank was acquired by NCNB, Mr. Sandusky continued to serve as City Executive for NCNB in Blountstown. Up until the 1984 acquisition, Mr. Sandusky and the members of the Board of the Ellis Bank of Blountstown established the investment and lending policies at the Ellis facility. Mr. Sandusky acknowledged that he and the Ellis Board of Directors had a large amount of local autonomy in terms of investment and lending decisions. In conjunction with that circumstance from 1978, at which point the Calhoun organizers joined the management of the Ellis Bank, through 1984, that facility did not perform well in terms of the above found factors regarding banking performance. Additionally, Mr. Sandusky on two occasions has assisted proposed bank charter applicants who sought to establish competing institutions during the time he was serving as Chief Executive Officer of Ellis Bank and the NCNB Branch. Mr. Sandusky acknowledged that NCNB would lose as much as $1,000,000 in deposits by the end of the first year if a new bank is approved for Blountstown, which would affect his profitability significantly. Despite that fact Mr. Sandusky has made no change in his bank's officer call program or other efforts in the face of the potential advent of a new bank in Blountstown in an effort to forestall a continued decline in his bank's financial strength and profitability. This is especially significant in light of the fact that NCNB enjoys as much as 85 percent of the total deposits from Calhoun County which indicates a substantial likelihood that any new bank entering the presently substantially monopolistic market in that County will attract a very substantial percentage of those deposits. The C&L Bank of Bristol, on the other hand, has performed quite well for a bank of its size in the type of banking market involved herein characterized by very modest growth. It has fairly consistently improved its financial strength and profitability in terms of the various indicia of banking performance discussed above with regard to the Ellis Bank and its successor NCNB. Because Dr. Heggestad found that the probable success of a new bank in Calhoun County depended so much upon the skill and banking ability of the proposed management, he did an analysis of the performance of C&L Bank of Bristol as to profitability and overalls financial performance since the inception of C&L Bank of Bristol because its management team would be the same as that of the proposed C&L Bank of Blountstown. This analysis was performed by comparing that bank with all institutions of the same approximate size in the State of Florida, that is, from $10-15,000,000 in assets. It was thus established that the C&L Bank of Bristol's return on assets, which reflects the ability of management, has been consistently favorable. A standard rule of thumb in the banking industry is that a one percent return on assets is a good return. The C&L Bank of Bristol experienced a 1.78 percent return in 1981, 3.55 percent in 1982, declined to 1.06 percent in 1983, and rose again to 1.42 percent in 1985. In terms of comparison with its peers in 1981, it was in the top 20 percent in this indicia of performance, was ranked at 68 percent of all banks in the comparison for 1982, 53 percent for 1983, 75 percent for 1984, and in 1985 ranked in the 84th percentile, performing better than all but 16 percent of the banks in Florida of its approximate size. In terms of return on equity, there has been some fluctuation. The C&L of Bristol has had as high as a 20 percent return and experienced a 15 percent return in 1985, which still puts that bank in the top 20 percent of banks of its size, or better than four out of five banks in its size class. The capital to assets ratio is a reflection of the safety or financial soundness of a banking institution. A 7 percent capital to asset ratio is the safe minimum for banks of this type, according to Dr. Heggestad. In 1985, the Bristol Bank experienced a 10.37 percent capital to assets ratio. The interest spread reflects the difference between the cost of a bank's funds and the amount it charges as interest on those funds when they are lent to customers. The Bristol Bank has averaged about a 5 percent interest spread over the period of its existence which places it in about the 40th percentile of banks in its class, which means it is about average in terms of how much it pays for and "marks up" its lendable funds which, in turn, has a significant effect on profitability. Shareholders, of course, tend to desire a larger interest spread in order to enhance profitability. From the consumer standpoint, however, an interest spread of this magnitude tends to indicate favorable loan prices as that reflects on the ability of the bank to compete in the lending market in its operating area which, in turn, can enhance its loan portfolio and deposit base over time. In terms of non-interest income, the Bristol Bank experienced a very good performance by increasing its ranking with other banks in its class, from the 41st to the 66th percentile over the life of the institution. In terms of the overhead costs to asset ratio, it ranks in the 81st percentile, which means it is considerably below the average bank in its class in terms of overhead costs as related to total assets. The Bristol Bank's loan to deposit ratio has been declining, but still remains at the average for all banks in its class. It experienced a very unfavorable loan to deposit ratio in 1981 and in 1985 it was in the bottom 15 percent of banks in its class, which suggests problems the bank is experiencing in the low per capita income, low growth market it chiefly operates in Liberty, and, to some extent, Calhoun Counties. In the category of net "charge-off" of loans, the Bristol Bank experienced a negative net charge-off in 1981, which means it collected more money on loans previously charged off than had been initially charged off as uncollectable. The bank ranked in the top 10 percent for banks in its class in that category. In 1982 it experienced a significant decline in collecting charged-off loans and was near the bottom of its class. It rose to about an average position in this category in 1983, and in 1984 was again in the top 10 percent, experiencing another significant decline in 1985. It was established, however, that, as compared to all other banks in its class, the Bristol bank and its management team was performing quite well in consideration of the weak economic market in which it operates. Because of the very small demographic size of the Bristol Bank's market, the slow growth of that market, and the low per capita income of the population, the Bristol Bank has operated at a substantial disadvantage compared to other banks in that analysis group, and yet has still performed quite well, as established by Dr. Heggestad. Dr. Heggestad also compared the C&L Bank of Bristol's performance directly with the Ellis/NCNB Bank. Since 1979, shortly after the present Board of Directors/Advisors of Ellis/NCNB began managing that bank, it has consistently deteriorated in its loan activity as measured by its loan to deposit ratio, going from approximately 77 percent down to approximately 45 percent over that time period, while the C&L Bank of Bristol has consistently increased its loan activity relative to deposits each of those years until 1985 when it registered a slight decline. Thus in terms of the basic function of a bank creating loans from its deposits, the C&L Bank of Bristol and its management team have consistently outperformed the Calhoun State Bank organizers at NCNB. Likewise, since 1978, profitability has declined sharply at Ellis/NCNB. It also declined at C&L of Bristol, but the management of C&L of Bristol has reversed that situation since 1983 and is now showing more profitability percentage-wise than the NCNB Bank. In terms of profitability as measured by net income after taxes against total capital, (in the study period) the Ellis Bank initially experienced a very high return on equity which has consistently declined. The C&L of Bristol profit also declined, but this measure of profitability also registered an increase since 1983, surpassing the rate of return to shareholders experienced by NCNB. Thus, in comparing the management of the Bristol Bank to all other financial institutions in its size class as well as directly to Ellis/NCNB, which operates in the same general geographical and economic circumstance, it has been shown that the C&L Bank of Bristol's management performed quite well and significantly better than that of Ellis/NCNB. Finally, over the life of the Bristol bank, although it has experienced both increasing and declining loan to deposit ratios and profitability, the fact remains that it has averaged a 17 percent annual return on share holder investment, which places the Bristol bank near the top of all banks in its class in terms of return to shareholders. Finally, Dr. Heggestad analyzed the possibility of two new banks entering the Calhoun County market. He established that it would be very difficult for two new banks to successfully begin operations at the same time in that County, given the moderate economic and demographic growth indicators which characterize that banking market. The growth simply is not enough to sustain two new banks. If two new bank charters were issued for Calhoun County, both banks would struggle to obtain an adequate market share in competing with NCNB. To some extent this would be in the consumer's best interest because loan rates would likely drop and deposit rates would increase as each bank attempted to obtain sufficient depositors and loan interest income to be successful. Each of the banks would have to purchase deposits, meaning that in order to sustain any growth, they would have to purchase money outside of the Calhoun County market by buying Certificates of Deposit and other funds in other areas. This is an expensive way to increase lendable funds and it would drive the costs of both banks up significantly. Dr. Heggestad established that if that situation occurred, both banks would have to struggle to survive and neither would thrive, which would mean that neither of them would be viable competitors for the large NCNB institution, which in the long run would not serve the interests of the consumer in Calhoun County very well because it would tend to retard ready loan availability which is necessary in order to finance expansion of the economic base of the County which circumstance would come full circle and tend to retard growth of the banks themselves. In short, Dr. Heggestad established that there is not a reasonable promise of successful operations for two new banks in Calhoun County. In summary, it has been established that the public convenience and advantage would best be served by the approval of one new State bank for the Calhoun County PSA delineated herein. It is determined in light of the factors enumerated above that the approval of a single new State bank will best ensure a strong competitor and healthy competition in that banking market, which presently is somewhat monopolistic. It has been established that the advent of two new banking institutions in Calhoun County at this time will result in all three banking institutions having to struggle to survive, and obtain a modicum of growth in deposits, loan to deposit ratio, adequate return on assets and share holder equity and the other indicia of successful banking performance. Such an eventuality would, in effect, restrict healthy competition and likely result in at least two of the three resulting banks failing to thrive and failing to become successful, truly financially sound public depositories and lending and investment institutions. In consideration of all the criteria enumerated in Section 658.21(1-6) Florida Statutes, it is found that the C&L Bank of Blountstown applicant, in light of its organizers', officers' and directors' proven bank management ability and record of success with a de novo bank, and in consideration of the economic and demographic conditions and growth potential of the PSA, will have the most likelihood of success as a new banking institution. It will represent the strongest potential competitor for the primary existing financial institution, NCNB. Its advent in that banking market will result in stronger competition for NCNB chiefly because of the proven superior management ability of its organizers and Chief Executive Officer and the advent of the C&L Bank of Blountstown in the Calhoun County PSA has been demonstrated to not likely result in destructive competitive effects on NCNB and the C&L Bank of Bristol. Both those institutions are likely to remain sound depositories for public and private funds and to remain effective providers of lending and other services for residential and commercial customers. 1/ DONE and ENTERED this 27th day of January, 1987 in Tallahassee, Florida. P. MICHAEL RUFF Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 27th day of January, 1987.
Findings Of Fact The Application involves the proposed organization of a new bank in the State of Florida, Pine Banking Corporation (hereinafter referred to as the "Proposed Bank"). The Applicants, Francisco Jaime Pinheiro, Nelson Pinheiro and Noberto Pinheiro, are citizens of Brazil. Francisco Pinheiro has been in the banking business for 20 year. Francisco Pinheiro has been the president of BMCSA, a wholesale bank in Brazil, for 14 years. Francisco Pinheiro is a vice-president of the Federation of Brazilian Banks. BMCSA has been in operation for 51 years. It has branches in 15 of the most important capitols of Brazil. It has capital equity of approximately 100 million dollars and assets of approximately 700 million dollars. During the past 5 years, BMCSA has been cited by a financial magazine in Brazil as having the best development and performance in Latin America. There are approximately 300 banks in Brazil. BMCSA ranks between the 18th and 22nd largest bank in Brazil. The Applicants desire to form a bank in Florida in order to support small and medium sized export companies. The Applicants have worked in the international market since 1982, mainly through United States' banks in New York. The proposed president and chief executive officer of the Proposed Bank is Alberto Espinosa. Mr. Espinosa has been in the banking business in the United States for approximately 22 years. For the past 17 years Mr. Espinosa has been involved in international banking. Mr. Espinosa was the general manager for the Bank of New England International, the Edge Act Bank of New England. Mr. Espinosa worked in Miami, Florida, from 1976 through 1979, and during the past five years. He is, therefore, familiar with the community that the Proposed Bank will serve. The proposed board of the Proposed Bank will consists of people in the community with a variety of backgrounds: a CPA, a banking attorney, exporters, freight forwarders and bankers. At least six members have banking experience. The head of credit of the Proposed Bank will be Maria Justo, who occupied a similar position at the Bank of New England, the Edge Act Bank of New England. The Proposed Bank will have a credit committee on the board responsible for every credit the bank proposes. One officer will be hired to insure compliance with the Community Reinvestment Act. Initial capital for the Proposed Bank will be $5,000,000.00. The economic study used to determine public convenience and necessity was prepared by David Starke, president of Financial Institution Consultants, Inc. Financial Institution Consultants, Inc., is engaged in activities as a consultant to financial institutions. The company provides services involving banking charters, branching, mergers, acquisitions and regulatory matters. Mr. Starke opined that the primary service area of the Proposed Bank, which consists of all of Dade County, Florida, was drawn in accordance with Chapter 3C-9, Florida Administrative Code, the Proposed Bank will enhance public convenience and advantage, there is a reasonable probability of success without undue injury to any other existing financial institution and the proposed capital is adequate. DONE and ENTERED this 4th day of December, 1990, in Tallahassee, Florida. LARRY J. SARTIN Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 4th day of December, 1990. COPIES FURNISHED: Raul J. Valdes-Fauli, Esquire Robert S. Turk, Esquire Suite 3400, One Biscayne Tower 2 South Biscayne Boulevard Miami, Florida 33131-1897 Albert T. Gimbel Chief Banking Counsel Office of the Comptroller The Capitol, Suite 1302 Tallahassee, Florida 32399-0350 Honorable Gerald Lewis Comptroller, State of Florida The Capitol Tallahassee, Florida 32399-0350 ================================================================
Findings Of Fact Upon consideration of the oral and documentary evidence adduced at the hearing, the following relevant facts are found: The Atlantic Bank of St. Augustine has its main office at 24-28 Cathedral Place, downtown St. Augustine, St. Johns County, Florida, and was established in 1934. It is now a wholly owned subsidiary of the Atlantic Bancorporation. The applicant has one existing remote drive-in facility located approximately one mile from the main office and about nine-tenths of a mile from the proposed branch site. This facility does not offer full services, and, at the time a decision was made to apply for another branch, it was not feasible to expand this existing facility due to insufficient available land. According to the most recent data available, the applicant's adjusted capital to asset ratio was 8.3 percent and its net income to asset ratio was .94 percent for 1978. The applicant's liquidity ratio is in the 40 to 45 percent range. Its asset condition is very good as is its past performance. The applicant has suffered a declining percentage share of the market, decreasing from 50.2 percent in 1970 to 40.2 percent at year end 1978. According to the applicant, this is a result of having only one full service facility which is located in the congested downtown area of St. Augustine. The main purposes of the proposed branch are to provide more convenience for the applicant's existing customers (38 percent of which are estimated to reside in the proposed primary service area) and to protect its market share of bank customers. The applicant's management team is composed of eleven directors and non-director senior officers. Its president and chief executive officer has been with the applicant since 1950 and was born and raised in the City of St. Augustine. Three of its other officers have in excess of twenty-two years of banking experience. The proposed branch manager, Robert George Allen, is currently on the applicant's staff as an assistant vice-president and manager of the installment loan department, and has twelve years of banking experience. The site for the proposed branch is located northwest of the intersection of U.S. Highway No. 1 on State Road 312. The owner of the land for the proposed site is the Craig Funeral Home, which is not directly or indirectly associated with this application. The land will be purchased by the applicant at a cost of $180,000.00. The applicant will construct a 4,930 square foot one- story concrete block building on the site at a cost of approximately $260,000.00. The facility will have 34 parking spaces with three inside and five outside teller stations. The site will contain 200 feet of frontage on U.S. Highway No. 1 and will have both northerly and southerly access off said highway. The applicant intends to offer a full range of services at the proposed branch facility. The primary service area of the proposed branch is depicted on the map attached to the application. It is bounded on the west by Interstate 95, on the east by the Atlantic Ocean, on the south by the St. Johns/Flagler County line and on the north by State Road 16, on the east by the San Sebastian River to Anastasia Island, then the south city limits of St. Augustine and the Atlantic Ocean. Within the applicant's primary service area, there are two remote banking facilities, both of which opened in 1975 and one of which belongs to the applicant, situated 0.9 and 1.2 miles north of the proposed site. Also, the protestant's approved, but unopened, main office is to be located 0.2 miles south of the proposed site. The latter two sites are located on the same, west side of U.S. Highway No. 1 and are separated by a K-Mart store. The protestant is the only independently owned bank in St. Augustine. It has a primary service area which is similar to the applicant's proposed primary service area. On the day prior to the administrative hearing in this cause, the protestant closed the purchase on its land and is now contemplating the opening of a modular facility pending construction of its permanent facility. There are also two savings and loan offices located within the applicant's primary service area. Near the primary service area, there is another branch facility (Barnett) and two main commercial banking offices -- Barnett Bank of St. Johns County and the applicant's bank, located 2.2 and 2.3 miles northeast of the proposed branch site. There are also three more savings and loan offices located near the primary service area. The two existing and operating banks in the area -- Barnett and the applicant -- had, as of December 31, 1978, total deposits of $54.78 and $36.62 million, respectively. Barnett showed a significant increase in loans and demand deposits, while the applicant illustrated a decline in deposits and a smaller percentage increase in loans. The county totals show an increase of 13.5 percent in loans, a decrease in demand deposits of 11 percent, an increase in time deposits of 12.7 percent and an increase in total deposits of 3.3 percent, for a total of $101,446,000.00. The savings and loan offices within and near the proposed primary service area have demonstrated increases in deposits ranging from 7.6 percent to over 100 percent. The applicant estimates the volume of total deposits for the proposed branch to be $1.297 million at the end of the first year, $2.699 million at the end of the second year and $4.171 million at the end of the third year of operation. The applicant estimates a loss of $56,530.00 the first year, a profit of $49,129.00 the second year and a profit in the third year of $156,076.00. The name of the proposed branch is to be Atlantic Bank of St. Augustine - St. Augustine South Branch. The applicant has received no notification that it is not in substantial compliance with the regulatory laws and statutes. Official state population estimates for the primary service area are not available. The applicant, however, estimates the population of the area to be 8,900 in 1974 and 12,792 in 1978. These figures are based primarily on estimates of a population of 12,700 for a slightly smaller area made by the Board of the County Commissioners in May, 1979, for the purpose of a grant assistance application. Based on the same data, the applicant projects the primary service area population for 1980 to be 14,438. The population growth rate for the area between 1974 and 1978 was thus estimated at 43.7 percent, for an average annual growth rate of 10.9 percent. Inasmuch as official estimates for the applicant's primary service area are not available, the Office of the Comptroller considered the trends of population changes in the city, the beaches, the county and the unincorporated areas, as measured by the University of Florida Division of Population. Some of the relevant population data considered was the following: St. Augustine Beach 632 1,131 St. Augustine 12,352 12,611 Unincorporated Area 17,412 31,188 St. Johns County 31,035 44,550 These figures illustrate that the fastest population growth has occurred in the unincorporated areas of the County. The University of Florida projects a population of 47,600 in the County by the year 1980, for an average annual growth rate of 3.4 percent. Almost all of the County's population growth between 1970 and 1978, 94.56 percent, has resulted from net migration, but not necessarily exclusive of retirees. Between 1970 and 1977, there was some increase in the weight of the 65+ age group, but a larger increase occurred in the weight of those ages 15-64, the labor age group. The former increased from 14.1 to 15.5 percent, while the latter increased from 57.9 to 62.0 percent. For the twelve months ending December 1978, the county showed an unemployment rate of 7.7 percent, as compared to the state average of 6.6 percent. Recent monthly data indicates a rise in the rate of unemployment in St. Johns County -- 8.7 percent in March, 1979, as compared with a state average of 5.8 percent. For April, the county figure is 8.4 percent and the state average is 5.3, percent. The per capita personal income for St. Johns County increased from $5,356.00 in 1976 to $5,689.00 in 1977, a 6.6 percent increase. This growth is somewhat slower than the state average of 9.8 percent, and the county's per capita incomes remained below the state averages of $6,101.00 and $6,697.00, respectively, for the same years. In accordance with the provisions of Florida Statutes 120.57(1)(a)(12), conclusions of law and a recommendation are not included in this Report. Respectfully submitted and entered this 15th day of August, 1979, in Tallahassee, Florida. DIANE D. TREMOR, Hearing Officer Division of Administrative Hearings 101 Collins Building Tallahassee, Florida 32301 (904) 488-9675 COPIES FURNISHED John E. Hankal Hankal and Wolfe Post Office Drawer H-1 St. Augustine, Florida 32084 Roger A. Larson Graham, Hodge, Larson and Hume, P.A. Suite 415, Kilgore Square 2400 West Bay Drive Largo, Florida 33540 Michael A. Gross Assistant General Counsel Office of the Comptroller The Capitol Tallahassee, Florida 32301 Comptroller Gerald A. Lewis State of Florida The Capitol Tallahassee, Florida 32301
The Issue In DOAH Case No. 92-2455 the Department of Banking and Finance, Division of Banking (Department) seeks to recover the costs of examination and supervision of Bay Bank and Trust Company (Bay Bank). As reason, Bay Bank is alleged to have engaged in unsafe or unsound practices as discovered in the examination the Department made of Bay Bank on March 31, 1991. In addition, the Department seeks to impose a late payment penalty in the amount of $100.00 per day commencing on November 15, 1991, and an administrative fine of $1000.00 per day commencing on December 16, 1991. See Section 655.045(1), Florida Statutes (1991). In DOAH Case No. 92-3744 the Department seeks entry of a cease and desist order directed to Bay Bank and to John Christo, Jr. (Christo, Jr.) and John Christo, III (Christo, III). See Section 655.033, Florida Statutes (1991). Moreover, the Department seeks to remove Christo, Jr. and Christo, III, as Bay Bank Directors and to prohibit their participation in the affairs of Bay Bank or any other financial institution regulated by the Department. See Section 655.037, Florida Statutes (1991). In particular the Department seeks to impose this discipline based upon alleged unsafe and unsound practices as determined through the Department's March 31, 1991, examination conducted at Bay Bank and the Federal Deposit Insurance Corporation (FDIC) examination conducted at Bay Bank on November 18, 1991; for alleged breaches of the written agreement entered into between Bay Bank and the Department following the March 31, 1991 examination; for alleged violation of the Federal Reserve Act, 12 C.F.R. s. 215.4, known as Regulation O; for alleged violation of Section 23A of the Federal Reserve Act, 12 U.S.C. s. 371(c), and for alleged violation of fiduciary duties associated with the previously described acts by Christo, Jr. and Christo, III.
Findings Of Fact Prehearing Stipulations of Fact The following facts were admitted and required no proof at the final hearing: At all times material hereto, Bay Bank and Trust Company ("Bay Bank") has been a state-chartered, federally insured bank operating under Charter No. 188-T, having a principal place of business at 509 Harrison Avenue, Box 1350, Panama City, Florida, 32402. At all times material hereto, Florida Bay Bank, Inc. ("FBB") has been a Florida corporation operating as a one bank holding company. FBB owns 100 percent of Bay Bank. At all times material hereto, John Christo, Jr. has been chairman of the board of FBB, John Christo, III has been president and Irene Christo has been secretary/treasurer. Until November, 1992, John Christo, Jr. was Chairman of the Board and Chief Executive Officer of Bay Bank. From November, 1992, John Christo Jr. has been Chairman of the Board of Bay Bank. Until July, 1992, John Christo, III was a Director and President of Bay Bank. From July, 1992 until the present, Christo III has been Vice-Chairman of the Board of Bay Bank. At all times material hereto, JCJ Irrevocable Trust ("JCJ Trust") has been a trust, the managing trustee of which has been John Christo, III. Each of the children of John Christo, Jr. has possessed a beneficial interest in JCJ Trust in at least the following amounts: John Christo, III - 40 percent James Phillip Christo - 30 percent Irene L. Christo - 30 percent FBB has two classes of voting securities outstanding, voting preferred stock and common stock. At all times material hereto, John Christo, Jr. owned approximately 97 percent of the preferred stock and JCJ Trust owned more than 65 percent of the common stock of FBB. John Christo, Jr. was Chairman of the Board and owned approximately 32 percent of the outstanding shares of Bay Savings Bank, a state chartered savings and loan association in West Palm Beach. JCJ Trust owned approximately 37 percent of Bay Savings Bank. FBB owned approximately 5 percent of Bay Savings Bank. Bay Savings Bank failed and was placed in receivership by the Resolution Trust Corporation on September 6, 1992. On April 18, 1986, the Board of Directors of Bay Bank voted to approve two irrevocable standby letters of credit in favor of SouthTrust Bank of Alabama, N.A. ("SouthTrust") for the benefit of John Christo, Jr. (LOC #281) and JCJ Trust (LOC #282) respectively. These letters of credit were unsecured. These loans at SouthTrust were originally obtained by the Christos for the purpose of providing the initial capitalization of Bay Savings Bank in West Palm Beach. These letters of credit were subsequently renewed and approved by the Board of Directors of Bay Bank on April 18, 1989 and again on February 15, 1990. These renewal letters of credit, like #281 and #282, were unsecured. On February 19, 1991, the Board of Directors of Bay Bank voted to again renew the irrevocable letters of credit in favor of SouthTrust for the benefit of and to secure the debts of JCJ Trust and John Christo, Jr. to SouthTrust. Christo, Jr. was present at the board meeting when the board voted to approve LOC #509. Christo, III voted with the Board of Directors of Bay Bank to approve LOC #509. On February 25, 1991, Bay Bank issued the irrevocable letter of credit (LOC #509) in favor of SouthTrust in the aggregate amount of $425,000 for the benefit of and to secure a debt owed by JCJ Trust to SouthTrust. The terms of LOC #509 permitted SouthTrust to draw any amounts of funds due and payable to SouthTrust from JCJ Trust that were at least 30 days past due, up to the limit of LOC #509. On September 23, 1991, SouthTrust sent Bay Bank a letter indicating that SouthTrust would draw on LOC #509 because JCJ Trust owed SouthTrust $433,429.17, which amount was past due for more than 30 days. On October 2, 1991, Bay Bank funded a loan in the amount of $425,000 to JCJ Trust to cover LOC #509 as drawn upon by SouthTrust. The note was signed by Christo, III as trustee of JCJ Trust. The note was unsecured. On February 25, 1991, Bay Bank issued the irrevocable letter of credit (LOC #510) in favor of SouthTrust in the aggregate amount of $425,000 for the benefit of and to secure a debt by Christo, Jr. to SouthTrust. The terms of LOC #510 permitted SouthTrust to draw any amount of funds due and payable to SouthTrust from Christo, Jr. that were at least 30 days past due, up to the limit of LOC #510. Christo, Jr. was present at the board meeting when the board voted to approve LOC #510. John Christo, III voted with the Board of Directors to approve LOC #510. On August 26, 1991, SouthTrust notified Bay Bank that it would draw on LOC #510 because Christo, Jr. owed SouthTrust $425,000, which amount was past due for more than 30 days. On September 3, 1991, Bay Bank funded an unsecured loan in the amount of $425,000 to Christo, Jr. to cover LOC #510 as drawn upon by SouthTrust. The note was signed by Christo, Jr. Although bank documents reflect board approval of LOC #509 and #510, there is no bank document relating to LOC #509 or #510 reflecting approval by the Board of Directors, on or about the time of the issuance of LOC #509 and #510, of the terms of any loan to John Christo, Jr. or JCJ Trust that might be made should the letters of credit be drawn upon by SouthTrust. In December, 1990, Bay Bank exchanged a 1986 Ferrari Testarossa with FBB in exchange for a 1984 Ferrari 4001. The Bank booked the value of the 4001 as $35,954 and FBB booked the value of the Testarossa at $110,793. The Testarossa had a market value in excess of that of the 4001. No security was given by FBB in connection with this transaction. Other Facts The State Examination and Findings Pursuant to Section 120.57(1)(b)15, Florida Statutes (1992 Supp.) (Use of Manuals) Consistent with long-standing practices in examining Bay Bank and other financial institutions over which the Department has had jurisdiction, it performed an examination to assess Bay Bank's financial condition and banking practices. This examination took place on March 31, 1991. In performing the examination it employed the use of a manual produced by the FDIC which the Department has used in conducting examinations beginning in 1977, to include examinations of Bay Bank. The Department also utilized its Examination Procedures Manual. Again, this manual had been referred to in the past when conducting examinations of this and other regulated institutions. As had been its custom the Department also utilized a document known as Management Evaluation Guidelines, derived from information gained from the state of Texas. Prior to the March 31, 1991 examination the Department had used the Management Evaluation Guidelines in performing examinations of Bay Bank. The Department has substantially affected the interest of Bay Bank and the Christos by resort to the three manuals in conducting the March 31, 1991 examination. None of these manuals had been adopted as rules when the March 31, 1991 examination was made; however, on August 6, 1993, Respondent noticed its intent to adopt the manuals as rules through incorporation by reference into an existing chapter within the Florida Administrative Code. The FDIC Manual establishes a rating system known as the Camel rating system. That acronym stands for measurements of a bank's condition related to capital, asset quality, management, earnings and liquidity. Out of component scores assigned to those measurements of the bank's condition, but not through averaging, an aggregate score is assigned which identifies the overall health of the institution. An aggregate score of 1 is the highest rating, with aggregate scores of 4 or 5 considered to be substandard. In March, 1991, as in its general experience with prior examinations, the Department equated the assigned aggregate score of 4 with unsafe and unsound practices by Bay Bank. This opinion was held when taking into account the specific conditions within the bank found at the time of examination and as set forth in the post-examination written report. The Camel rating system had its origin with the Federal Financial Institutions Examinations Council and was designed to identify institutions that needed closer supervisory attention. It is a system that had been used in regulation of banks since the 1970s. The FDIC Manual and the state Examination Procedures Manual include definitions of the numerical ratings found within the Camel rating system. The source material for arriving at the Camel ratings are constituted of the lending institution's records and other information gathered during the examination sessions. In assigning the Camel ratings in the March 31, 1991 examination, the Department followed these approaches. In addition to the Camel rating system, the FDIC Manual sets forth criteria related to determining whether a bank violated federal banking statutes and regulations. On this occasion the Department considered the criteria set forth in the FDIC Manual to determine whether Bay Bank violated federal law. The Department's Examination Procedures Manual explains procedural steps that the examiners took in conducting the March 31, 1991 examination. The state Examination Procedures Manual affords latitude to the examiners to deviate from guidelines set forth in the manual if the deviation can be supported in writing. The right to deviate from the guidelines was available upon the occasion of the March 31, 1991 examination. Over and above the possibility that an examiner, in this case an examiner performing the examination on March 31, 1991, would deviate from the guidelines set forth in the state Examination Procedures Manual, the entire examination process draws upon the experience of the examiner in a somewhat subjective manner and in recognition that the activity of bank examination is one that requires flexibility in thinking. Specific guidance to the examiners contained within the state Examination Procedures Manual includes a statement of expected documentation that a bank should have in support of its loans, instructions concerning how to grade the bank, as well as how to proceed with the examination, to include various operational steps to be taken while conducting the examination. The state Examination Procedures Manual also sets forth personnel duties for the examiners. The state Examination Procedures Manual sets forth the need for bankers to adhere to safe and sound banking practices. The Management Evaluation Guidelines sets forth guidance for the examiners, to include their responsibilities in the March 31, 1991 examination, related to assessing bank management. This guidance is in addition to the guidance set forth in the FDIC Manual and the state Examination Procedures Manual. The Management Evaluation Guidelines sets out instructions about its use and provides worksheets to be executed in the assessment process. The rating system contemplated by the Management Evaluation Guidelines ties in with the Camel rating system. Aside from the legal requirements set forth in Chapter 655, Florida Statutes, the Department has not established formal rules which would further define the term "unsafe and unsound" practices as that term describes the circumstances under which the Department would assess a bank for costs of examination and supervision, seek to order a bank or its directors, officers and employees to cease and desist or seek the removal of a bank's officers and directors and to restrict and prohibit those officers and directors from participating in the affairs of that bank or any other financial institution over which the Petitioner has regulatory authority. Other than information gained during an examination, to include the March 31, 1991 examination, concerning perceptions held by the examiners about the Camel ratings for the bank, as reflected in the examination report provided to the bank and through the aforementioned manuals, the Department has made no attempt to specifically describe its use of the Camel ratings. The explanation of the Camel rating as set forth in the three manuals would become codified requirements of law if the rule enactment process is concluded. The contents of those manuals would be specifically disseminated to affected persons with that eventuality; however, such an arrangement would have only prospective utility as a means to specifically notify a regulated entity concerning the imposition of the regulatory terms set forth in the manuals. When the March 31, 1991 report of examination was prepared there were no formal written rules or other written guidance concerning the occasion upon which the Department would seek a written agreement as opposed to an imposition of a cease and desist order in trying to correct problems with a bank discovered through the examination process. Instead, the Department exercised its discretion consistent with findings made during the examination. The three manuals offer assistance in the proper exercise of regulatory discretion concerning corrective action directed to a given institution and had that part to play in the March 31, 1991 examination process as well as the overall decision to pursue the present cases. As far back as 1984 it has not been the Department's policy to provide copies of the state Examination Procedures Manual to institutions being examined under its terms. It was not the policy to provide a copy of the state Examination Procedures Manual to the Bay Bank at the March 31, 1991 examination. On the other hand, there has never been any prohibition against allowing the members of the banking industry in Florida or others to have access to the state manual. Similarly, the Department does not provide copies of the FDIC Manual to the public, nor did it provide a copy of the FDIC Manual to Bay Bank when the March 31, 1991 examination was conducted. The Department does not deem the failure to provide that manual and the state Examination Procedures Manual as an inappropriate oversight. The Department is not conversant with the opportunities which the public, to include Bay Bank, would have to obtain the FDIC Manual from federal officials. The Department makes the assumption that the FDIC Manual is available from the FDIC. Finally, Respondent does not publish the Management Evaluation Guidelines for the benefit of members of the regulated industry, but it would provide a copy of the Management Evaluation Guidelines on request. In particular, it did not provide a copy of the Management Evaluation Guidelines to Bay Bank associated with the March 31, 1991 examination. None of the three manuals discussed are deemed to be confidential. Ultimately, the decision to take administrative action based upon the findings made in the March 31, 1991 examination must be factually supported and legally correct, whatever contribution was made to the regulatory function when the Department chose to make its customary usage of the three manuals in performing the March 31, 1991 examination. Petitioners Exhibit No. 2 is the report of examination for March 31, 1991. It identifies the aggregate Camel rating of 4 and sets forth the reasons for that finding. As set forth in the report of examination there were numerous unsatisfactory conditions found during the March 31, 1991 examination. In particular, the findings in the report of examination identify a number of unsafe or unsound practices, together with other shortcomings in the performance by Bay Bank, its management, employees and directors. In carrying out the examination of March 31, 1991, the examination team was constituted of 14 examiners to include two Area Financial Managers, two Financial Examiner Analyst Supervisors, and two Financial Specialists. Two members of the examination team were trainees. The work performed by the trainees was supervised and the examination findings made were not constituted of work performed by the trainees that had not been reviewed. In conducting the examination 2,538 hours were devoted to the task. Additionally, the examiner in charge spent 116 hours planning the examination and writing the report of examination, activities conducted away from the bank. The costs of examination and supervision was $67,494.20. Review was made of the examination report through various department employees. This arrangement was in accordance with normal departmental routine for conducting such review. The only notable change to the report prepared by the Examiner in Charge concerned the component Camel rating for assets wherein the Examiner in Charge had failed to offer a written explanation for assigning a component rating of 4 when written guidelines in the state Examination Procedures Manual called for a 5 for that component. Consequently the component rating was changed by the Bureau Chief for the area where Bay Bank conducts its business. This change for the asset component did not modify the overall Camel rating. Among the unsafe and unsound practices discovered in the March 31, 1991 examination was Bay Bank's failure to establish an adequate loan loss reserve. The management and directors had set aside approximately 1.364 million dollars for loan loss reserve. The methodology utilized by the Department to identify an adequate loan loss reserve revealed the need for 4.05 million dollars to be available for that function. That methodology is accepted. Therefore, the deficiency in the loan loss reserve approximated 2.686 million dollars. This shortfall was brought about by the ineffective methods of risk identification which the bank management and its directors had utilized prior to the March 31, 1991 examination. For a substantial period of time prior to the March 31, 1991 examination Bay Bank had maintained a significantly higher percentage of noncurrent loans and leases than its peers, while maintaining a loan loss reserve comparable to its peers. This contributed to the inadequate loan loss reserve. Bay Bank questioned the formula employed by the Department to establish loan loss reserves wherein it is anticipated that 10 percent losses are contemplated for substandard loans. Bay Bank claimed to have a loss experience for substandard loans in the range of 2 to 4 percent. Nonetheless, the Bay Bank internal loan watch-list estimated the loss of approximately 9.14 percent for each loan that it had designated as substandard, which more closely approximates the formula utilized by the Department in establishing a proper loan loss reserve. The deficiency in the loan loss reserve is high and contrary to standards expected of Bay Bank in maintaining a loan loss reserve, so much so that it constitutes an unsafe and unsound practice. Without providing an adequate reserve the financial health of the banking institution is at risk, in that the management has a false picture of the bank's condition when making decisions about banking activities. The deficiency in the loan loss reserve creates the likelihood of abnormal risk or loss, insolvency, or dissipation of assets or other serious prejudice to the interests of the bank and its depositors. During the March 31, 1991 examination, the examiners found numerous instances where the bank management had failed to establish or enforce internal routines and controls. Included within those findings were: Improper recordation of other real estate (ORE) within the bank's books, contrary to bank loan policies, Failure to obtain and maintain current appraisals on ORE and pending ORE, Failure to establish adequate records to allow reconciliation of income and expenses relating to ORE and to maintain adequate documentation thereof, Failure to comply with the bank's loan policies preventing the continued accrual of interest on loans delinquent 90 days or more, Failure to implement credit risk grades established in loan policies more than a year before the examination period, Disorganized and outdated loan file information, Statutory violations associated with loans that were past due for more than a year and Failure to document secured real estate loans as first liens, a requirement by the bank's loan policy and state law. As the examination report states, Bay Bank's Board of Directors had implemented a corrective plan of action dated January 31, 1989, which responded to material deficiencies that had been reported in the June 30, 1988 FDIC report of examination and the November 30, 1987 Department report of examination. The findings within the March 31, 1991 examination show significant violations of the internal plan for corrective action implemented on January 31, 1989, especially in the area of adequate loan policies and the need to insure compliance with the requirements of law. The failure to establish and enforce internal routines and controls and noncompliance with the January 31, 1989 corrective plan of action point to practices and conduct contrary to proper expectations incumbent upon Bay Bank, its management and directors, thereby constituting unsafe and unsound practices that creates the likelihood of abnormal risk or loss, insolvency, or dissipation of assets or otherwise seriously prejudices the interests of Bay Bank or its depositors. The March 31, 1991 examination revealed violations of laws and regulations governing the bank's activities. Taken together these violations point to an unsafe and unsound practice that creates the likelihood of abnormal risk or loss, insolvency or dissipation of assets or otherwise seriously prejudices the interests of the bank or its depositors. On the occasion of the March 31, 1991 examination it was appropriate for the Department to advise Bay Bank to refrain from paying dividends until asset quality, earnings and capital had improved sufficiently to justify dividend payments. Prior to the examination Bay Bank had paid questionably high dividend amounts in a circumstance in which the bank's capital position was tenuous. The excessive levels of adversely classified loans discovered during the March 31, 1991 examination were somewhat the product of conditions in the local economy. However, the outside influences in the economy did not completely explain the deteriorating loan portfolio and offer a defense to imprudent lending practices and the failure to adequately diversify the loan portfolio. The imprudent lending practices were manifested through inadequate risk identification and lack of proper attention to problem loans. In the final analysis the bank management and directors were responsible for the loan portfolio's substandard condition. The circumstances associated with adversely classified loans as commented on in the March 31, 1991 examination report are indicators of unsafe and unsound practices by bank management and the directors, creating the likelihood of abnormal risk or loss, insolvency, or dissipation of assets or otherwise seriously prejudicing the interests of the bank or its depositors. Costs of Examination, Late Payment Penalty and Administrative Fine On July 26, 1991, the Department transmitted a copy of its March 31, 1991 examination report to Bay Bank. Then on July 31, 1991, the Department began a free-form negotiation process to try and get Bay Bank to honor an invoice in the amount of $67,494.20 which constituted the costs associated with examination and supervision for the March 31, 1991 examination. The theory for claiming those costs was pursuant to Section 655.045, Florida Statutes (1991), which indicates that the Department may recover the costs of the examination and supervision against banks engaging in unsafe and unsound practices as defined at Section 655.005(1)(d), Florida Statutes (1991). The correspondence dated July 31, 1991, asked Bay Bank to remit payment within 30 days of receipt of the invoice setting forth the costs of the examination and supervision. The correspondence reminded Bay Bank that a late payment penalty of up to $100.00 a day might be imposed for overdue examination and supervisory fees. This reminder was as contemplated by Section 655.045, Florida Statutes (1991). A dialogue commenced between the Department and Bay Bank through further correspondence in which Bay Bank was unavailing in its attempt to convince the Department that its practices as revealed through the March 31, 1991 examination were not unsafe and unsound, thereby setting aside the right for the Department to assess the costs of examination and supervision. Rather than apprising Bay Bank that it could contest the preliminary agency decision concerning assessment of costs of examination and supervision related to the March 31, 1991 examination, by resort to procedures set forth in Section 120.57, Florida Statutes, the Department sent another free-form notification on October 2, 1991, stating that the Department continued to assert its claim based upon the belief that the practices found in the March 31, 1991 examination constituted unsafe and unsound practices. Again the October 2, 1991 correspondence instructed Bay Bank to remit $67,494.20 within 30 days of receipt of the letter. Having failed to hear from the bank by virtue of its October 2, 1991 communication, the Department again wrote on November 13, 1991, this time telling Bay Bank that the Department had determined to impose a late payment penalty of $100.00 per day commencing November 5, 1991, and of the possibility of imposing a $1,000.00 per day administrative fines if payment were not received. This November 13, 1991, correspondence was free-form. As with prior correspondence it did not advise Bay Bank of its right to seek relief pursuant to Section 120.57, Florida Statutes. On February 5, 1992, another free-form communication was provided vying for the cost of the examination and supervision related to the March 31, 1991 examination, reminding Bay Bank that the Department was persuaded that it was entitled to a late payment penalty of $100.00 per day commencing November 5, 1991, and informing Bay Bank that as of December 16, 1991, a date upon which the Department surmised Bay Bank had received an earlier communication, that the Department was imposing an administrative fine of $1,000.00 per day. As was the circumstance of prior occasions the February 5, 1992 correspondence was free- form and failed to advise Bay Bank concerning its right to seek administrative relief from the decision by the agency to seek the costs of examination and supervision for alleged unsafe and unsound practices. Finally, the Department issued an administrative complaint to recover the costs of examination and supervision associated with the March 31, 1991 examination. This complaint was dated March 11, 1992, and advised Bay Bank of its right to contest the determination concerning whether the practices by Bay Bank were unsafe and unsound, thus entitling the Department to collect the costs of examination and supervision associated with the March 31, 1991 examination. The administrative complaint also asserted claims for late penalty and administrative fines dating from November 5, 1991 and December 16, 1991 respectively. Bay Bank contested the administrative complaint leading to the formal hearing which this recommended order addresses. Absent a rule describing the occasion upon which the Department would seek to recover costs of examination and supervision for unsafe and unsound practices, the Department has acted rationally and has been acceptably consistent in exercising its discretion to recover the costs of examination and supervision when comparing the Bay Bank experience to other circumstances where the Department had the opportunity to recover costs of examination and supervision based upon unsafe and unsound practices within an institution. Further Administrative Correction: The Written Agreement Based upon the results of the March 31, 1991 examination the Department deemed it necessary to initiate administrative action against Bay Bank and its directors in accordance with Section 655.033, Florida Statutes (1991). That provision allows the Department to impose cease and desist orders for unsafe and unsound practices, violations of laws relating to the operation of the bank, violation of rules of the Department, violation of orders of the Department or breach of any written agreement with the Department. The law contemplates that a complaint shall be drawn stating the facts that support the action and noticing the accused of the opportunity to seek hearing pursuant to Section 120.57, Florida Statutes. The Department did not file the formal administrative complaint. Instead, through negotiations with Bay Bank and its directors it addressed the concerns the Department had about the findings made in the report of examination through entry of a written agreement between the Department and Bay Bank and its directors. In anticipation of the written agreement the directors of Bay Bank passed a resolution in support of the written agreement. The directors took that action on September 17, 1991. Two directors were not immediately available to execute the written agreement as such by signing the document. Their unavailability delayed the submission of the written agreement signed by Bay Bank until October 4, 1991. On that date Bay Bank transmitted the signed written agreement to the Department. In support of the written agreement there was a stipulation between the parties to enter into the written agreement. Given the language of the stipulation to enter the written agreement and the written agreement itself, it was contemplated that both documents be executed simultaneously by the Bay Bank directors and that the Department would sign the stipulation to enter the written agreement at the time that the directors signed the stipulation to enter the written agreement. The signing of the stipulation to enter into the written agreement and the written agreement itself by Bay Bank directors and the signing of the stipulation to enter into the written agreement by the Department would make the written agreement effective upon the date of issuance by the Department subsequent to those activities. The written agreement would be issued after the Comptroller signed it. The stipulation to enter into the written agreement was signed by both parties on October 7, 1991. The language employed with the signing of the stipulation to enter the written agreement stated: WHEREFORE, and it is resolved, that in consideration of the foregoing, the Department and Bay Bank and Trust Co., Panama City, Florida and each of the directors, hereby execute this Stipulation and consent to its terms, this 7th day of October, 1991. The exact language related to the effective date of the written agreement was set forth in the stipulation to enter into the written agreement at Paragraph 6 which stated: Effectiveness. Bay Bank and each of the directors stipulate and agree that the Agreement attached hereto shall be effective on the date of its issuance by the Department. The version of the written agreement upon which the Department has based its actions is dated September 29, 1991, and carries the Comptroller's signature. On October 9, 1991, through correspondence from Department's counsel to counsel for Bay Bank, the Department acknowledged receipt of the written agreement signed by the directors. The October 9, 1991 correspondence from the Department to the bank goes on to describe the notion that when the Comptroller signed the written agreement one of the originals would be forwarded to the bank for its file. This comment makes the meaning of the September 29, 1991, signature by the Comptroller unclear. Further contributing to the confusion, there is a reference in the next paragraph to the October 9, 1991 correspondence, to the effect that some conversation was held between counsel for the Department and a Joel McLamore in the office of counsel for the bank, about an agreement made in the course of that conversation, that the written agreement had an effective date of September 29, 1991. On October 14, 1991 the written agreement was docketed by the Department. On that same date the Department sent the bank a copy of the written agreement as executed by the Comptroller. Again, this correspondences from the Department stated that the written agreement had an effective date of November 29, 1991. On November 12, 1991, further correspondence was directed from the Department to Bay Bank making mention that the Department considered the effective date of the agreement to be September 29, 1991. Before the occasion of the administrative complaint seeking a cease and desist order and removal and prohibition directed to Christo, Jr. and Christo, III there was no dispute concerning the effective date of the written agreement. Now Bay Bank and the Christos assert that the written agreement was effective on October 7, 1991, contrary to the Department's position that the effective date is September 29, 1991. The general purposes which the parties had in mind for entering into the stipulation for entry of the written agreement are set out in Paragraph 1 to that stipulation which states: Consideration. The Department has determined that necessary grounds exist to initiate an administrative proceeding pursuant to Section 655.033, Florida Statutes, against Bay Bank and each of the directors. Bay Bank and each of the directors wish to cooperate with the Department and avoid the initiation of administrative litigation. Accordingly, Bay Bank and each of the directors, hereby stipulate and agree to the following terms in consideration of the Department's forbearance from initiating such administrative litigation through the attached Written Agreement (hereinafter Agreement). This intent by the parties to resolve their differences is brought forth in the written agreement where it states: WHEREAS, in an effort to avoid the consequences of protracted litigation and by virtue of signing the Stipulation, Bay Bank and each of the directors have waived their rights to separately stated Findings of Fact and Conclusions of Law, such findings and conclusions would be taken from and based upon the most recent State Report of Examination, specifically the State's Report of Examination dated March 31, 1991. By the terms of the stipulation for entry into the written agreement Bay Bank and its directors consented had agreed to the entry of the written agreement and to comply with the provisions, without admitting or denying violations of laws or regulations or rules and without admitting or denying that those entities had engaged in any unsafe and unsound practices. There was a section within the stipulation to enter into the written agreement which spoke to the matter of future administrative action by the Department against Bay Bank or its directors where it stated: 7. Future Action. The Stipulation is being entered into without prejudice to the rights of the Department and to take such further action, joint or severally, against Bay Bank and the directors as the Department deems necessary and appropriate to insure compliance with the terms of the Stipulation and the attached Agreement, any other Agreement or order entered against Bay Bank, and/or to prevent any violation of laws relating to financial institutions. The written agreement did not speak to the opportunity for the Department to seek costs of examination and supervision pursuant to Section 655.045, Florida Statutes (1991), and to pursue removal and prohibition actions against Christo, Jr., and Christo, III, as Bay Bank officers pursuant to Section 655.037, Florida Statutes (1991), based upon findings made in the March 31, 1991 examination. Among requirements of the written agreement was found Paragraph 5 (a) which states: As of the effective date of this Agreement, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who has a loan or other extension of credit from the Bank which has been charged-off or classified, in whole or in part, "Loss" or "Doubtful" and is uncollected. The prohibition of this paragraph 5(a) shall not prohibit the Bank from renewing or extending the maturity of any credit, provided that the renewal or extension is approved by the full board and that all interest due at the time of such renewal or extension is collected in cash from the borrower. An additional requirement of the written agreement was set forth in Paragraph 7 where it states: As of the effective date of this Agreement, all new loans or lines of credit (including renewals and extensions of existing loans and lines of credit, but excluding additional advances under existing lines of credit) in an amount of $200,000 or more shall require the prior approval of the Bank's board of directors or the directors' committee designated to approve and review loans, and all such loans or lines of credit shall be supported by a written summary that provides the board of directors or directors' committee with the information sufficient for it to make a prudent decision. The Department seeks to impose discipline based upon alleged violations of the written agreement as set forth in the administrative complaint of May 15, 1992. Specifically, that administrative complaint contains allegations of violation of the written agreement associated with Paragraphs 5(a) and 7 directed to Bay Bank and the Christos for cease and desist and as a means of removal and prohibition against the Christos. Concerning Paragraph 5(a), Bay Bank allowed a customer to post over drafts on his checking account, thus maintaining an overdraft position, commencing September 28, 1991, and ending November 18, 1991. The allegations related to Paragraph 7 are discussed under the section in the recommended order detailing events about the letter of credit and a subsequent loan to JCJ Trust said to be made without board approval and proper documentation. Beyond alleged violations of the compromise of the differences between the Department, Bay Bank and its directors embodied by the written agreement, the May 15, 1992 administrative complaint seeks to impose discipline against the Christos for findings made in the course of the March 31, 1991 examination. Those allegations are associated with the manner in which the Christos conducted themselves as officers and directors of Bay Bank based upon findings made through the examination of March 31, 1991 related to the Christos' fiduciary duties. These latter allegations are grounded upon the contention that the Christos were responsible for the unsafe and unsound practices discovered during the March 31, 1991 examination. In response to problems with the payment of dividends Paragraph 2e of the written agreement stated: 2. (e) During the life of this Agreement, the bank shall not pay any dividends at any time it is in noncompliance with the capital and reserve requirement specified in paragraphs 2.(b), 3., 9., or Section 658.37, Florida Statutes. Prior to declaration of dividends, the board of directors will certify the bank's compliance with the cited sections and provide that certification to the Department. Letters of Credit and Loans On April 18, 1986, Bay Bank issued an unconditional/ irrevocable letter of credit to South Trust Bank of Alabama for JCJ Trust and a similar letter of credit to South Trust Bank of Alabama for Christo, Jr. Both letters of credit were in the amount of $425,000.00. The letters of credit expired on February 25, 1989. South Trust had required letters of credit as preconditions to granting the loans described on the stipulated facts herein. At some point in time unsigned notes and security agreements were placed in the files of Bay Bank associated with the Christo, Jr., and JCJ Trust letters of credit. The terms of the notes and security agreements to address the contingency that South Trust Bank would draw upon the letters of credit were not identified. Also missing was an amount of collateral to secure repayment. Nonetheless, there appeared to be a commitment by Bay Bank to meet the contingency where South Trust Bank drew upon the letters of credit by Bay Bank by then offering to loan money to Christo, Jr. and JCJ Trust at an undisclosed rate. The Bay Bank records merely describe the collateral arrangement for such a contingent liability as "open". Further letters of credit were requested by Christo, Jr. and JCJ Trust and issued by Bay Bank in the amount of $425,000.00 each to favor South Trust. The next letters of credit were issued on April 26, 1989. The duration of those letters of credit was until February 25, 1990. The letters of credit of April 26, 1989, had been approved by action of the Bay Bank directors through a common certification for John Christo, Jr., and JCJ Trust in which Christo, Jr. and Christo, III, abstained from voting and other beneficiaries through the JCJ Trust who were directors to Bay Bank were absent. When the letters of credit were issued on April 26, 1989, the loan line presentation for Christo, Jr. and JCJ Trust revealed that no collateral was required when issuing the letters of credit to favor South Trust Bank. Included with the documents under consideration by the directors when they decided to issue these letters of credit was customer profile information for Christo, Jr., a statement of financial condition dated December 31, 1988 for Christo, Jr., a balance sheet for JCJ Trust from December 31, 1988, a February 28, 1989 portfolio investment review for JCJ Trust, and a review of assets of JCJ Trust as of December 31, 1988. On February 15, 1990, the Bay Bank directors again voted to approve lines of credit to favor South Trust Bank in amounts of $425,000.00 each at the request of Christo, Jr. and JCJ Trust. The common certification of approval shows that Christo, Jr. and Christo, III abstained, while Missey Christo and Phillip Christo beneficiaries under JCJ Trust and directors voted to approve the issuance of the letters of credit. Again the loan line presentations for Christo, Jr. and JCJ Trust reveal that collateral was not required in issuing the two letters of credit. The terms of the duration of the letters of credit issued on February 25, 1990, ended on February 25, 1991. The beginning date for the letters of credit was February 25, 1990. The Bay Bank records reveal a customer profile of John Christo, Jr., as associated with the letter of credit approved on February 15, 1990. The information concerning the customer profile is dated February 13, 1990. On February 19, 1991, the Bay Bank directors were requested to and voted to issue letters of credit to favor South Trust Bank related to Christo, Jr. and JCJ Trust in the amount of $425,000.00 each. The common certification of approval shows that Christo, Jr. abstained from voting. Christo, III, voted in favor of the letters of credit as did Phillip Christo and Missey Christo, other directors and beneficiaries under JCJ Trust. In association with the letters of credit on February 19, 1991, the loan line presentations for Christo, Jr. and JCJ Trust revealed that no collateral was provided. The act of approval involved a customer profile for Christo, Jr. from February 12, 1991. Also included was a balance sheet for JCJ Trust dated December 31, 1989, with notes to the financial statement. The duration of the respective letters of credit was February 25, 1991 through February 25, 1992. A draft or drafts drawn on the respective letters of credit would be honored through March 25, 1992. Each time Bay Bank through its directors voted to approve letters of credit to favor South Trust Bank at the request made by Christo, Jr. and JCJ Trust, the directors exercised distinct acts of discretion. The letters of credit issued in 1986, 1989, 1990 and 1991 did not establish terms that would entitle Christo, Jr. and JCJ Trust to an automatic renewal once a prior letter of credit expired. Each letter of credit had its own identifying number. The common features of the respective letters of credit were that they were irrevocable and transferable. Commencing with the series of the letters of credit issued in 1989 and extending through the series in 1990 and 1991, the basis for drawing on the letters of credit was a statement from South Trust Bank that the amount for which the draft was drawn was representative of amounts due and payable by Christo, Jr. or JCJ Trust to South Trust Bank on loans extended from South Trust Bank to Christo, Jr. and JCJ Trust which were a minimum of 30 days past due. The March 31, 1991 examination did not report that the actions by Christo, Jr., Christo, III, and other beneficiaries that the JCJ Trust who were directors had violated any laws or regulations in their conduct around the time the Bay Bank directors' made their February 19, 1991 decision to approve the letters of credit to favor South Trust Bank. Contentions of violations of laws or regulations concerning the conduct by Christo, Jr. and Christo, III first arose in the May 15, 1992 administrative complaint for cease and desist and removal and prohibition. The administrative complaint concerning inappropriate action by Christo, Jr. and Christo, III in their consideration of the extension of the letters of credit to South Trust Bank through the February 19, 1991 meeting of Bay Bank directors and the consequences of that decision is somewhat premised upon findings made by the FDIC in the November 18, 1991 examination as adopted by the Department, in which the FDIC reported violations of the Federal Reserve Act, 12 C.F.R. 215.4 (Regulation O), and Section 23A of the Federal Reserve Act, 12 U.S.C. s. 371(c). Related allegations about the letters of credit are based upon claims of breaches of fiduciary duties by the Christos. A further discussion of the November 18, 1991, federal examination follows. A notation was made in the March 31, 1991 examination concerning the Christo, Jr. letter of credit issued on February 25, 1991 in the amount of $425,000.00 wherein it is described in the examination report as, "additionally, a contingent liability of an unfunded, unsecured letter of credit to South Trust Bank of Alabama, N.A. to secure a $425,000.00 note there, also exist." As of August 26, 1991, Christo, Jr. was past due on his obligation to South Trust Bank and South Trust Bank drew upon the letter of credit. The draw was in the amount of $425,115.00 which was paid from Bay Bank to South Trust Bank on August 26, 1991. On September 3, 1991, Christo, Jr. signed a term disclosure note and security agreement in the amount of $425,000.00 at an annual interest rate of 10.736 percent. That interest rate was not more favorable than an ordinary customer of Bay Bank could have obtained. No security was required when Bay Bank made its September 3, 1991 loan to Christo, Jr. On September 23, 1991, the JCJ Trust debt to South Trust Bank having been overdue for more than 30 days, South Trust Bank drew upon the letter of credit associated with JCJ Trust. The draw was in the amount of $425,000.00. On October 2, 1991, a loan in the principle amount of $426,479.80 was made from Bay Bank to JCJ Trust, Christo, III as Trustee, to cover the draw that had been made by South Trust Bank against Bay Bank upon the letter of credit. The granting of this loan is alleged to be in violation of paragraph 7 to the written agreement. It is not a violation because the loan predates the effective date of the written agreement. The maturity date on the loan made on October 2, 1991, was October 1, 1992. The annual percentage rate was 10.885, interest terms that were not more favorable to JCJ Trust than would be available to Bay Bank's ordinary customers. In February, 1992, the Bay Bank directors took action to approve the loan that had been made to JCJ Trust on October 2, 1991. No indication is made in the credit file records of Bay Bank concerning the date upon which the Bay Bank directors may have approved the September 3, 1991 loan to Christo, Jr. Prudent lending practices would not have justified the approval of the February 26, 1991, letters of credit requested by Christo, Jr. and JCJ Trust when taking into account credit information made available to the Bay Bank directors, especially when considering that the letters of credit were approved without provision of security from the requesting parties, Christo, Jr. and JCJ Trust. It can be inferred that Christo, Jr., Christo, III, and other directors were aware that the custom and practice within Bay Bank was to not extend letters of credit in excess of $100,000.00 without requiring provision of security in the way of mortgages on real estate, certificates of deposit or a combination of both forms of security. At the time the February 19, 1991 decision was made to approve the letters of credit to South Bay at the request of Christo, Jr. and JCJ Trust, it can be inferred that Christo, Jr. and Christo, III, recognized that terms of credit should not have been granted to those requesting parties because the arrangements did not comport with terms available to other borrowers. This admonition included reference to more beneficial terms to "related interests" and "affiliates." JCJ Trust was a "related interest" and "an affiliate" at the time the decision was reached on February 19, 1991, to approve the letter of credit requested by JCJ Trust through Christo, III. Christo, Jr. and Christo, III, as trustee for JCJ Trust had made no alternative arrangements to make Bay Bank whole in the event South Trust Bank called on the letters of credit issued February 26, 1991. This refers to an arrangement separate and apart from the unsecured notes which were signed by Christo, Jr., and JCJ Trust in the person of Christo, III, following the draws by South Trust against the letters of credit, as a means of protecting Bay Bank at a time when the bank was troubled financially. The February 19, 1991, decision to approve letters of credit requested by Christo, Jr. and JCJ Trust were not adequately supported with an underlying written justification contrary to existing bank policy and prudent banking practice. As with the extension of the line of credit on February 26, 1991, the financial position of Christo, Jr. did not justify the unsecured loan that Bay Bank made to him on September 3, 1991. These arrangements were contrary to prudent banking practice. Moreover, it was violative of the Bay Bank loan policies and constituted more favorable treatment than an ordinary customer would receive. The loan was contrary to the policies in that the unsecured loan was not "supported by satisfactory balance sheet and income statement information with repayment from demonstrated cash flow or reasonably certain conversion of its assets." Similar problems were in evidence concerning the loan made to JCJ trust on October 2, 1991. Prudent bankers would not have extended the credit to JCJ Trust, to include a lack of security, contrary to the credit opportunities a normal customer would have had. The balance sheet available to support the JCJ loan was out of date. Moreover, the availability of funds to repay the loan according to the balance sheet was inadequate. The problems with the Christo, Jr. September 3, 1991 loan concerned heavy debt obligations for notes payable to Bay Bank and South Trust and a questionable position concerning assets that were readily available to meet debt service at the time the decision was being reached to extend the September 3, 1991 credit. These problems were evident in the December 31, 1989 financial statement pertaining to Christo, Jr. The principle asset available to JCJ Trust to meet the debt obligations contemplated by the October 2, 1991 loan were associated with Bay Bank stock. The Bay Savings Bank stock which was shown on the December 31, 1989 balance sheet for JCJ Trust had no value as support for the October 2, 1991 loan in that the savings bank had been declared insolvent by the Department and placed in conservatorship through the Resolution Trust Corporation in September, 1991. The Bay Bank stock was not a liquid asset to meet the loan obligation, there being no apparent market for its disposal as a means to obtain ready cash to meet the debt obligation envisioned by the note issued on October 2, 1991. Nor could dividends be anticipated as a means to meet the debt obligation, Bay Bank having been criticized in the March 31, 1991 examination for paying out dividends in a circumstance in which there was a need to infuse additional capital to bolster the loan loss reserve deficit and in view of the limiting features in the written agreement concerning payment of dividends. In this connection the true value of the Bay Bank stock when considering the methods employed for its valuation is uncertain during the period of time at which the loans were made to JCJ Trust and Christo, Jr., those dates being October 2, 1991 and September 3, 1991 respectively. Although more recent financial statements not found in the credit files associated with the loans made on September 3, 1991, and October 2, 1991, to Christo, Jr. and JCJ Trust respectively was potentially available in making the decisions concerning those loans, those more recent financial statements do not depict a financial position by the borrowers that would justify the loans. Strictly considered, the existence of other financial statements had no pertinence at the time that the loans were made, because the loan and discount committee and the directors made their decisions based upon matters found within the credit file and it is their actions at the moment that warrant criticism. After the letter of credit issued on February 25, 1991 to Christo, Jr. was drawn upon, the September 3, 1991 note for repayment by Christo, Jr., to Bay Bank was one without collateral and for which no payment was due until maturity on September 3, 1992 and about which the source of repayment was questionable. Therefore, it involved more than the normal risk of repayment. After the letter of credit issued on February 25, 1991 to JCJ Trust was drawn upon, the October 2, 1991 note for repayment by JCJ Trust to Bay Bank as one without collateral and for which no payment was due until maturity on October 1, 1992 and about which the source of repayment was questionable. Therefore, it involved more than the normal risk of repayment. Christo, III's claim that when he voted on February 19, 1991 to approve the JCJ Trust letter of credit that he did so through inadvertence is not persuasive. The protocol for considering this letter of credit was the same as had been the case in the past when the directors decided to provide a letter of credit for JCJ Trust. On those prior occasions Christo, III, had abstained from voting on the JCJ Trust on a single voting sheet for JCJ Trust and Christo, Jr. Nothing had changed in the voting sheet format for February 19, 1991. His claim that he was confused and mistakenly voted for the JCJ Trust letter of credit on February 19, 1991, because it also contained a reference to the Christo, Jr. letter of credit is not credible. The idea that his decision was inadvertent based upon some confusion is rejected in favor of the inference that his choice to vote was through negligence or intent. FDIC Examination The circumstances associated with the JCJ Trust February 25, 1991 letter of credit and the ensuing loan of October 2, 1991, that have been described form the basis for the FDIC through the November 18, 1991 report of examination to comment that violations of the Federal Reserve Act, 12 C.F.R., s. 215.4 and Section 23A of the Federal Reserve Act, 12 U.S.C. 371(c) had occurred. In addition, the FDIC in its November 18, 1991 examination rated Bay Bank through the Camel rating system as an aggregate 4. As with the prior rating by the Department, Bay Bank was observed by the FDIC to be engaged in unsafe and unsound practices through acts of commission or omission by its management team and directors. Although some changes can be seen through the findings made in the state examination performed on March 31, 1991 compared to the report of examination by the FDIC on November 18, 1991, Petitioner's Exhibit No. 6, they do not tend to substantially alter the impression about the persistent problems within the institution. In particular, the FDIC directed criticism to the board of directors concerning the need for the directors to ensure that executive management was cognizant of applicable laws and regulations pertaining to the bank's activities and the need to develop a system to affect and monitor compliance with those laws and regulations. This observation was made notwithstanding the recognition that members of the board of directors for Bay Bank would not necessarily be expected to have personal knowledge of those laws and regulations, but would need to make certain that the laws and regulations received high priority attention by the bank's everyday managers. The FDIC also commented on a problem with maintaining an appropriate internal control system and an adequate means of auditing as evidenced by violations found within the November 18, 1991 report. The board was reminded to evaluate the adequacy of the bank's loan watch-list as that device was calculated to assist in determining the proper allowance for loan losses, and from there establish a sufficient loan loss reserve. The loan loss reserve was criticized. The regulators subsequent adjustment to the loan loss reserve calculation following the November 18, 1991 examination still revealed a deficiency in the loan loss reserve. There was a continuing problem with asset quality showing a further deterioration from the March 31, 1991 state examination. This pertains to adversely classified loans in the categories of loss and doubtful loans, when taking into account the need to comply with the written agreement in charging off 100 percent of loss and 50 percent of doubtful. Among the adversely classified loans which were mentioned in the FDIC examination was the October 2, 1991 loan to JCJ Trust. The November 18, 1991 report reminded Bay Bank to dispose of other real estate at the earliest favorable opportunity. The FDIC examination pointed out the weakness in the bank's capital position due to large loan losses. When the examination was conducted on November 18, 1991, the liquidity ratio was found to be unsatisfactory. Fiduciary Duties Generally, Christo, Jr. and Christo, III, were sufficiently apprised of the practices which are complained of and proven here to be held accountable for their respective actions or inactions as bank officers. More specifically, Christo, Jr., and Christo, III, were knowledgeable concerning the respective financial positions of Christo, Jr., and JCJ Trust associated with the letters of credit approved on February 25, 1991, for Christo, Jr., in his personal capacity and Christo, III, as Trustee for JCJ Trust. The Christos knew or should have known about the Bay Bank loan policies for issuing letters of credit on February 25, 1991. The basis for imputing this knowledge or need for knowledge is premised upon the fact that Christo, Jr., was then CEO and Christo, III, was then president of Bay Bank. Given their positions as officers the Christos knew or should have known that the letters of credit that were issued on February 25, 1991, were by terms dissimilar to those afforded the ordinary bank customer when receiving a letter of credit. Similarly, the Christos knew or should have known that the loans that were made to Christo, Jr., and JCJ Trust on September 3, 1991 and October 2, 1991 respectively were pursuant to arrangements that were not otherwise available to an ordinary bank customer. Another reason for holding the Christos to knowledge of relevant requirements for proper practices and conduct in bank affairs is based upon the fact that Christo, Jr., had been a banker, and for the most part, a chief executive of a bank, for a period approximating 30 years at the time the decisions were made concerning the letters of credit and loans once the letters of credit were drawn upon. In a related capacity Christo, III, has been a national bank examiner and has worked in banking for a period of approximately 25 years to include 10 years service with Bay Bank as an executive officer. Notwithstanding their background and knowledge the Christos allowed conditions to arise in association with the issuance of the two letters of credit and the loans that were made following draws, in contravention of internal loan policies, prudent banking practices and laws and regulations. It is to be expected that the Christos should have reminded the other directors that internal bank policies and laws and regulations would not allow more favorable treatment for Christo, Jr., and JCJ Trust concerning the issuance of letters of credit in February of 1991 and loans in September and October, 1991, to pay back the draws, especially when taking into account that security was not required for the transactions in question. The need for the other directors who voted to issue the letters of credit and to approve loans following the draws, to conform to acceptable banking practices in their respective positions as directors, does not excuse the Christos from their affirmative duty to remind the other directors to conform to internal policies and laws and regulations concerning equal treatment of other persons and bank officials when establishing letters of credit and making loans. The Christos failed to properly exercise their fiduciary duties when action was taken concerning the letters of credit and subsequent loans following the draws. It was not enough for Christo, Jr., to abstain from participating in the decision to approve his letter of credit and that for JCJ Trust. It was even more inappropriate for Christo, III, to affirmatively vote in favor of the letters of credit for JCJ Trust and Christo, Jr. The arrangements made for the benefit of Christo, Jr., and JCJ Trust left Bay Bank exposed for $850,000.00 in disbursements without security should the letters of credit be drawn upon and that arrangement continued following the decision to make loans to Christo, Jr., and JCJ Trust in a related amount after the letters of credit were drawn upon. The Christos as the principal managers of the bank when the examinations were conducted were shown through the findings made in the examination reports to have breached their fiduciary duties. By failing to meet their responsibilities concerning the findings made in the two examinations and related to the Christo, Jr., and JCJ Trust letters of credit and loans, the Christos engaged in unsafe and unsound practices whose consequences created the likelihood of abnormal risk or loss, insolvency or dissipation of assets which seriously prejudice the interests of Bay Bank and its depositors when taking into account the overall condition of Bay Bank at the time at which the letters of credit were issued and the loans made following the draws. History of Regulatory Correction The external history of action by the Department to correct problems within Bay Bank is constituted of the written agreement that has been described. Consistent Agency Practices As alluded to before, the treatment given other institutions which the Department regulates when considering the propriety of assessing the costs of examination and supervision does not point out inconsistent agency practices. Having reviewed the evidence concerning inconsistent agency practice in removal and prohibition of individuals from participating in banking in Florida, while the means to affect removal from an institution may not have always been the same, the outcome anticipated by that process is sufficiently consistent and the factual differences between cases do not lead to a finding that the agency has acted inconsistently when comparing its effort to remove the Christos with other removal actions described at hearing.
Recommendation Based upon the findings of facts and the conclusions of law, it is, RECOMMENDED: That a final order be issued which assesses the cost of examination and supervision for the March 31, 1991 examination in the amount $67,494.20; That denies the imposition of a levy for late payment of $100.00 per day commencing November 5, 1991 and beyond; That denies the imposition of an administrative fine for intentional late payment in the amount of $1,000.00 per day commencing December 16, 1991 and beyond; That orders Bay Bank, its officers, directors, or other persons participating in the conduct of the affairs of Bay Bank, to cease and desist from engaging in practices which would allow Christo, Jr., and Christo, III, to obtain credit from Bay Bank in contravention of laws and regulations, and which breach the October 14, 1991 written agreement and Bay Bank internal policies; That prohibits Christo, Jr., from participating in Bay Bank or any other financial institution regulated by the Department as an officer or in a similar position for Bay Bank or any other financial institution or becoming a director in any other financial institution and that restricts Christo, Jr., in his directorship at Bay Bank from participating in any decision to select or dismiss Bay Bank officers or directors; That prohibits Christo, III, from participating in Bay Bank or any other financial institution regulated by the Department as an officer or in a similar position for Bay Bank or any other financial institution or becoming a director in any other financial institution and that restricts Christo, III, in his directorship at Bay Bank from participating in any decision to select or dismiss Bay Bank officers or directors; DONE and ENTERED this 1st day of February, 1994, in Tallahassee, Florida. CHARLES C. ADAMS, Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 1st day of February, 1994. APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-2455 and 92-3744 The following discussion is given concerning the proposed facts submitted by the parties: Petitioner's Facts: Paragraphs 1 through 26 are subordinate to facts found. Paragraphs 27 and 28 constitute conclusions of law. Paragraphs 29 through 81 are subordinate to facts found. Paragraph 82 constitutes legal argument. Paragraphs 83 through 85 are subordinate to facts found. Paragraph 86 is not relevant. Paragraphs 87 through 123 are subordinate to facts found. Paragraph 124 is rejected. Paragraphs 125 through 136 are subordinate to facts found. Paragraph 137 constitutes legal argument. Paragraphs 138 through 145 are subordinate to facts found. Paragraph 146 constitutes a conclusion of law. Paragraph 147 is subordinate to facts found. Paragraph 148 constitutes a conclusion of law. Paragraphs 149 through 152 constitute legal argument. Paragraph 153 through 170 are subordinate to facts found. Paragraphs 171 through 181 constitute legal argument. Paragraph 182 through 201 are subordinate to facts found. Respondent's Facts: Paragraphs 4 through 7 with the exception of the latter sentences found within subparagraphs 13 through 15 to paragraph 7 are subordinate to facts found. Those latter sentences within the subparagraphs are not relevant. Paragraphs 8 through 10 are subordinate to facts found. Paragraph 11 is subordinate to facts found with the exception that subparagraph 1 in its suggestion that the Department does not adequately explain its assignment of an aggregate score is rejected, as is the contention at subparagraph 9 that Camel rating may be changed at a "whim" and that a change was made to a component Camel rating in the March 31, 1991 examination without justification for that change. Paragraph 12 is subordinate to facts found. Paragraph 13 is rejected. Paragraph 14 is not relevant. Paragraphs 15 through 30 are subordinate to facts found. Paragraph 31 as it attempts to defend the accusations in the administrative complaint is rejected. Paragraph 32 is subordinate to facts found. Paragraphs 33 through 36 are not relevant. Paragraph 37 is subordinate to facts found. Paragraph 38 is rejected. Paragraph 39 is not relevant. Paragraph 40 is rejected. Paragraph 41 is not relevant. Paragraph 42 is subordinate to facts found. Paragraph 43 is not relevant. Paragraphs 44 through 48 are subordinate to facts found, except that the subparts to Paragraph 48 constitute legal argument. Paragraph 49 is not relevant. The first sentence to Paragraph 50 is not relevant. The second sentence is rejected. Paragraphs 51 and 52 are rejected. Paragraph 53 constitutes legal argument. Paragraphs 51 and 52 are rejected. Paragraph 53 constitutes legal argument. Paragraphs 54 through 56 are not relevant. Paragraphs 57 and 58 are rejected. Paragraph 59 is not relevant. Paragraph 60 does not form a defense to the accusations. Paragraph 61 and 62 are rejected. COPIES FURNISHED: Alan C. Sundberg, Esquire Robert Pass, Esquire E. Kelley Bittick, Jr., Esquire Carlton, Fields, Ward, Emmanuel Smith & Cutler, P.A. 500 Barnett Bank Building 215 South Monroe Street Tallahassee, Florida 32301 William G. Reeves, General Counsel Albert T. Gimble, Chief Banking Counsel Department of Banking and Finance Suite 1302, The Capitol Tallahassee, Florida 32399-0350 William A. Friedlander, Esquire Raymond B. Vickers, Esquire Craig S. Kiser, Esquire 424 West Call Street Tallahassee, Florida 32301 Gerald Lewis, Comptroller Department of Banking and Finance The Capitol, Plaza Level Tallahassee, Florida 32399-0350
