United States General Accounting Office

GAO Report to the Chairman, Committee on

Government Reform and Oversight,

House of Representatives

June 1998 BANK SUPERVISION

Closure of the

Rushville National

Bank

GAO/GGD-98-80

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B- 278532 

June 15, 1998

The Honorable Dan Burton

Chairman, Committee on Government

 Reform and Oversight

House of Representatives

Dear Mr. Chairman:

This letter responds to your August 1, 1997, request for an independent

review of the events leading up to the 1992 closure of the Rushville

National Bank (Rushville) by the Office of the Comptroller of the Currency

(OCC). Accordingly, we reviewed whether OCC followed its policies and

procedures in its (1) net worth calculation and loan classifications, which

led to Rushville’s being declared insolvent; (2) decision to close the bank

before implementation of the Federal Deposit Insurance Corporation

Improvement Act (FDICIA);1

 (3) contacts with the bank that recalled a loan

to Rushville’s holding company; (4) determination of civil money penalties

assessed against the former Rushville chairman and directors (hereafter

referred to as Rushville directors); and (5) involvement with the proposed

sale of Rushville holding company stock by Rushville’s suspended

chairman.

To respond to your request, we interviewed officials of OCC, the Federal

Deposit Insurance Corporation (FDIC), the Federal Reserve, and the

Department of Justice. We also met with Rushville directors and reviewed

over 100 boxes of documents concerning Rushville, which were

maintained by OCC and FDIC, as well as other related material. We also

reviewed documents that we obtained from the Federal Reserve and

Rushville directors. See appendix I for a detailed discussion of our scope

and methodology.

Results in Brief During our review, we found that OCC properly calculated Rushville’s net

worth. Also, we did not find evidence that OCC’s loan classifications or

insolvency determination were improper. Although some calculations and

classifications were based to a great extent on examiner judgment, the

examiners’ net worth calculation and loan classifications followed OCC

procedures. However, our review of loan classifications was made more

difficult by the lack of certain documentation.

1

P.L. 102-242, 105 Stat. 2236 (1991).

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We determined that FDICIA’s prompt corrective action provisions—which

went into effect the day after Rushville was closed—would not have

allowed Rushville to remain open longer. Congress enacted FDICIA to

eliminate delays in the closure of problem institutions, and OCC officials

told us that, for that reason, even if they had not had a pre-FDICIA basis to

close Rushville, they would have closed the bank without delay once

FDICIA was implemented.

In our review of OCC E-mail and related documents, we found no support

for the allegation that OCC tried to close Rushville by seeking to influence

the recall of a loan made by a creditor bank to Rushville’s holding

company. OCC officials and officers of the creditor bank told us that OCC

never attempted to influence the recall of the holding company loan.

Officers of the creditor bank told us that they first sought repayment of the

loan in 1990 because the Rushville bank stock that collateralized the loan

was of questionable value and they doubted the Rushville chairman’s

capacity to repay the loan.

Regarding the penalties assessed against Rushville directors, we found

that OCC followed its policies and procedures. However, in a number of

instances in the 1990s, the penalties ultimately assessed by OCC were

higher than those originally proposed by district officials. While

documentation was insufficient for us to ascertain how the OCC amounts

were determined, OCC procedures allow for such penalty adjustments

when circumstances warrant.

We found no evidence substantiating the Rushville directors’ assertion that

an OCC official told the Rushville chairman during the meeting at which he

was suspended that he could not sell his stock. Moreover, when OCC

became aware of the misunderstanding, OCC sent a letter to the chairman

stating that he could sell his stock subject to OCC approval.

Background OCC closed Rushville on December 18, 1992, on the basis of its

determination that the bank had a negative net worth of about $326,000

and thus was insolvent. At the time, Rushville was a two-branch bank with

$38 million in assets. During that same year, OCC also closed 15 other small

U.S. banks with assets under $50 million.

Rushville had been the subject of OCC scrutiny since at least 1978 when it

entered into a memorandum of understanding with OCC in which Rushville

directors agreed to correct such insider abuses as excessive insider fees

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and overdraft payments to directors. The Rushville directors consented to

an OCC cease-and-desist order in June 1983 directing the bank to correct

unacceptable lending practices, and the directors consented to an

amended order OCC issued a year later in response to questionable expense

payments to insiders. In 1984, OCC took the first of four civil money penalty

actions against several Rushville directors on the basis of violations of

banking laws. Finally, on November 12, 1992, OCC suspended the chairman

from participating in the affairs of the bank for engaging in unsafe and

unsound practices, and, on December 11, 1992, all but one bank director

resigned from the board. Appendix II shows key events affecting

Rushville, with a focus on events surrounding OCC’s closure of the bank.

OCC assessed 14 Rushville directors civil money penalties totaling $374,000

from 1984 to 1993. OCC based these penalties on the individuals’ having

undertaken prohibited actions, such as improper payments of Rushville

directors’ legal fees; multiple violations of limits on loans to executive

officers; and illegal loans to its holding company. When we completed our

audit work in April 1998, civil money penalties of $295,000 assessed

against bank directors had not been paid.

From the mid-1980s until after Rushville’s closure, Rushville directors

initiated a number of lawsuits seeking redress in the federal courts for

what the directors believed were wrongful actions by federal banking

regulators. In response to OCC’s 1985 civil money penalty assessment, the

directors initially requested an administrative hearing to contest the

penalties, but subsequently requested that OCC’s civil money penalty

assessment be dismissed. The directors asserted that OCC did not have the

authority to assess these civil money penalties. When the administrative

law judge denied the request for dismissal, the directors unsuccessfully

filed suit in the district court questioning OCC’s authority to assess civil

money penalties.2

 When the court found that it lacked jurisdiction to hear

the case, the directors again requested an administrative hearing. The

administrative law judge upheld the original penalty assessment. In

June 1989, at the end of the administrative process, OCC imposed the

penalties. The directors unsuccessfully appealed OCC’s decision to the

Seventh Circuit Court of Appeals and the Supreme Court.3

2

The district court found that the law (12 U.S.C. 1818(h)) establishes a review procedure that allows an

individual to request an administrative hearing to review the assessment. The individual may then

appeal an unfavorable administrative ruling to the court of appeals. The court found that the only

exception to this appeal process exists where the actions of the Comptroller of the Currency clearly

depart from his statutory authority. Abercrombie v. Clarke, 641 F. Supp. 598 (S.D. Ind. 1986); aff’d 833

F.2d 672 (7th Cir. 1987).

3

Abercrombie v. Clarke, 920 F.2nd 1351 (7th Cir. 1990), cert. denied 112 S. Ct. 52 (1991).

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In 1994, the directors filed suit in district court seeking money damages

from the government for various common law and constitutional torts

alleging that OCC violated the Administrative Procedure Act when it closed

Rushville. The case was dismissed by the district court and the appeal at

the Seventh Circuit Court of Appeals was dismissed.

Subsequently, the directors filed three suits seeking redress. One suit

alleged violations of the constitutional due process rights of Rushville’s

directors by individual OCC officials.4

 Another suit appealed OCC’s

imposition of penalties and restitution in the early 1990s.5

 Both suits were

dismissed by the courts. The remaining suit seeking compensation for

OCC’s seizure of the bank as a taking under the Fifth Amendment is still

pending.6

No Evidence Found

That OCC’s Net Worth

Calculation and Loan

Classifications Were

Improper

Rushville directors have questioned whether OCC followed its policies and

procedures in closing Rushville and have alleged that OCC misclassified

performing loans during its last examination to make it appear that the

bank was insolvent. Accordingly, you asked us to review whether OCC

followed its policies and procedures in its net worth calculation and loan

classifications during its final examination before Rushville’s closure.

Although our in-depth review of 25 problem loans found that many loan

classifications were not well documented, we found that, except for the

lack of documentation, examiners followed established OCC procedures

and generally accepted accounting principles in their net worth calculation

and loan classifications.

GAO’s Review of OCC’s Net

Worth Calculation

Our review found that OCC’s net worth calculation showing that Rushville

was insolvent by about $326,000 was essentially based on examiners’

determination that the bank lacked sufficient equity to cover estimated

loan losses from problem loans. Documentation from past examinations

and interviews indicate that, over the previous decade, OCC had been

critical of Rushville’s allowance for loan losses, which represented a

reserve for bad debts. In 1983, the directors consented to an OCC

cease-and-desist order that required Rushville to maintain a capital ratio of

4

Hoosier Bancorp v. Rasmussen, 90 F. 3d 180 (7th Cir. 1996).

5

Snyder v. Board of Governors of the Federal Reserve System, No. 96-1403 (D.C. Cir. May 8, 1997).

6

Hedrick v. United States, No. 95-684C (Ct. Cl. filed Oct. 16, 1995).

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B- 278532 

7 percent.7 In December 1992, Rushville’s capital ratio was at minus

1 percent, which was well below the level required by the cease-and-desist

order.

Following generally accepted accounting principles, OCC examiners

determined Rushville’s net worth during the December 1992 examination

by valuing its loan portfolio and then determining the amount of equity the

bank should be setting aside to absorb losses. By comparing the two

amounts, the examiners determined that Rushville lacked sufficient bank

equity to cover loan losses. Table 1 shows the calculation that OCC used to

make its determination.

7

The capital-to-asset ratio measures the level of protection available to cover future losses. As a

general rule, a higher capital-to-asset ratio provides more protection against future losses. A

well-capitalized bank has a total risk-based capital ratio of 10 percent or more.

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Table 1: OCC’s Calculation of

Rushville’s Net Worth (as of Dec. 17,

1992) 

Calculation Amount

1. OCC charge-offs to allowancea $694,858

2. OCC calculated general reserveb 319,549

3. OCC calculated specific reservesc 736,800

4. Total: OCC required allowance for loan losses (Add lines 1, 2,

and 3)d 1,751,207

5. Less: Rushville’s allowance for loan lossesd 626,706

6. Total: Required provision for loss (Subtract line 5 from line 4) 1,124,501

7. Reversal of interest and expenses previously recordede 304,578

8. OCC calculated other real estate disposition reservesf 42,924

9. Total: Equity required (Add lines 6, 7, and 8) 1,472,003

10. Less: Bank equityg 1,145,214

11. Total: Equity capital deficit (Subtract line 10 from line 9) ($326,789)

aCharge-offs represent loans removed from the asset balances in the accounting records

because the probability of collection for such loans is remote. When a charge-off occurs, a

corresponding amount of the allowance for losses is also removed or a current provision for loss

is charged against income.

bA reserve for general losses in a bank’s loan portfolio. The size of the reserve is based on

historical loss rates for different loss categories of classified loans.

cA reserve for specific loans where collection in full is highly questionable.

dA reserve of funds to absorb estimated loan losses from the problem assets of a bank’s loan and

lease portfolio.

eAn adjustment to reverse interest receivable on loans where receipt of future interest payments is

unlikely and to reverse expenses that the bank has not paid.

f

A reserve for other real estate owned—real estate Rushville acquired by default from borrowers

who were not able to meet their loan payments—to adjust the value to market value and to

account for the costs of disposing of the asset.

gRepresents capital stock, bank surplus, undivided profits, and gross earnings.

Source: OCC.

We reviewed OCC workpapers from the final examination of Rushville and

traced the amounts shown in table 1 back to the bank’s accounting

records, and we met on several occasions with OCC officials to discuss the

net worth calculation. After reviewing the OCC calculations, we found OCC’s

determination to be appropriate. In a few instances, we found that OCC

examiners chose to apply less stringent bases for their net worth

calculation than they might have applied. For example, when OCC

examiners calculated Rushville’s general reserve, they chose to use a

3-year average (1989 through 1991), which resulted in a lower general

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B- 278532 

reserve amount. Examiners could have used the 3-year period of 1990

through 1992—the year of Rushville’s closure—which would have

increased the reserve requirements by $53,000. However, examiners used

the earlier 3-year average because they wanted to use a period that would

not be influenced by their 1992 loan classifications.

The largest OCC adjustment during the December 1992 net worth

calculation was the $736,800 that examiners established for specific

reserves, as shown in table 1. Examination records indicated that OCC

examiners based this adjustment on their judgments (1) that borrowers

were unlikely to repay some questionable loans and (2) that the supporting

collateral was weak. We focused most of our attention on how the

examiners supported this part of the net worth calculation because the

specific reserves had the greatest impact on Rushville’s insolvency

determination. The results of our review of Rushville’s loan portfolio are

discussed in the following section.

GAO’s Review of

Rushville’s Loan Portfolio

Workpapers from OCC’s final Rushville examination documenting the loan

portfolio analysis indicated that examiners focused on a large number of

problem loans, which are loans posing a greater than normal risk of

default. OCC examiners reviewed 134 loans, or 77 percent of Rushville’s

loan portfolio, which included 175 loans with a combined value of about

$17.8 million. Of this 175-loan portfolio, examiners classified loans totaling

$5.9 million as problem loans. OCC further documented decisions reached

on 71 of these problem loans (64 reclassified loans from the previous

examination and 7 newly classified loans) through a process called a

migration analysis, which OCC uses in such cases to compare

classifications and explain the basis for changes.

Our review of these comparisons was the first step we took in reviewing

the Rushville directors’ allegation that OCC inappropriately downgraded

sound loans, thereby causing Rushville’s insolvency. We reviewed all 71

loans from OCC’s migration analysis and then focused on 20 of these loans

that had outstanding balances of over $100,000. The loan comparison was

a key starting point because it listed loans with a classification that had

changed from the previous year. Rushville directors were concerned that

many loans were improperly classified in 1992.

In addition, we identified for further study five other loans from OCC’s loan

comparison that had relatively large outstanding balances and OCC

calculated specific reserves. These loans were not sufficiently documented

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B- 278532 

by OCC for us to initially determine why the loans were written down. OCC

examiners told us that many of the bank’s loans were poorly documented,

and that they had to exercise considerable judgment in classifying

Rushville loans because of poor loan records and the departure of

Rushville directors and loan officers who were most knowledgeable about

the loans.

The anticipated losses from the 25 problem loans we reviewed represented

over 88 percent of the $694,858 OCC charge-offs and over 77 percent of the

$736,800 OCC calculated specific reserves. For 12 of the loans in our

sample, where it was possible to identify the underlying rationale for the

classification, OCC’s classifications seemed justified. For the remaining 13

loans in our sample, it was not completely clear how examiners arrived at

their classifications. Such insufficient documentation was an agency

problem we previously identified during an earlier 1993 review of the

quality of OCC’s examinations.8

 We also noted that the limited

documentation OCC had on some of the Rushville loans exceeding $100,000

did not meet agency requirements that were in effect at the time of

Rushville’s closure in 1992. OCC’s procedural guidance at that time required

sufficient documentation of significant write-downs for loans over

$100,000 so that a reviewer could understand the rationale for the

write-down.9

To better understand the basis for OCC’s classifications of the remaining 13

sampled loans, we reviewed available Rushville loan files maintained by

FDIC in Chicago and Dallas. We also asked OCC examiners and Washington,

D.C., staff to summarize the factors influencing their classification of these

loans. The FDIC files contained actual bank documents on some of the 13

loans, including loan files, security agreements, minutes from board

meetings, and various legal documents, but we were unable to find key

documents that would have allowed us to fully ascertain the basis for the

examiners’ loan classifications for the 13 loans. In these cases, we used

OCC summaries prepared at our request that generally supported OCC

officials’ statements asserting that examiners used accepted agency norms

for valuing loans. On the basis of the additional information provided by

OCC on these loans and the lack of conflicting information in Rushville loan

files maintained by FDIC, OCC’s classifications appeared appropriate.

8

Bank Examination Quality: OCC Examinations Do Not Fully Assess Bank Safety and Soundness

(GAO/AFMD-93-14, Feb. 16, 1993).

9

In 1993, OCC removed this requirement because OCC officials thought the additional documentation

was not needed for their purposes.

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Finally, to ascertain the disposition value of the 13 problem loans, we

asked FDIC to tell us the amount it received on the loans or their collateral

at the time of their disposition. FDIC records showed that the 13 loans were

sold with other FDIC assets, written off by FDIC, or sold for lower amounts

than those that were shown on Rushville’s records following negotiations

with the borrower. On average, FDIC received 35 percent of the loan’s book

value, not considering the reserves for loan losses. Specifically, 10 of the

loans were disposed of at an amount lower than the value projected by

OCC, and the other 3 loans were sold for an amount higher than the amount

OCC initially projected. (See app. III.)

FDICIA Intent Was to

Speed the Closure of

Problem Institutions

OCC closed Rushville 1 day before new regulatory procedures for closing

problem institutions became effective on December 19, 1992, following the

enactment of FDICIA. Rushville directors have expressed the belief that

these new FDICIA procedures would have allowed the bank to remain open

for at least an additional 90 days, and they have alleged that OCC closed the

bank before the procedures came into effect to prevent Rushville’s

directors from restoring Rushville to solvency.

Accordingly, you asked us to review whether OCC closed Rushville before

FDICIA’s implementation to prevent the bank from remaining open for at

least another 90 days, and whether other banks were closed before the

implementation of FDICIA to avoid having to keep them open under FDICIA.

Our analysis of FDICIA and its effect on Rushville’s closure indicated that

FDICIA’s implementation would not have provided an additional time period

in which OCC would have let Rushville stay open. We found that OCC did

not appear to have taken actions to quickly close other banks to avoid the

effects of FDICIA’s implementation.

To obtain evidence and views on whether FDICIA affected Rushville’s

closure, we reviewed the requirements of FDICIA and met with Rushville

directors and with OCC officials. Contrary to the Rushville directors’ belief

that FDICIA allows for more lenient treatment of problem institutions,

FDICIA’s capital provisions direct federal banking regulators to take prompt

corrective action to resolve the capital weakness of institutions that fall

below minimum capital standards.10

10Bank and Thrift Regulation: Implementation of FDICIA’s Prompt Regulatory Action Provisions

(GAO/GGD-97-18, Nov. 21, 1996).

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Specifically, the FDICIA provisions require OCC to promptly close critically

undercapitalized banks, such as Rushville.11 The provisions, which

supplement rather than limit or replace OCC’s existing enforcement

authority and earlier capital adequacy guidelines, give OCC up to 90 days12

to recapitalize, sell, or close such banks. However, OCC can take action to

close such banks at any time during the 90-day period. According to OCC

officials, they would have not delayed closing Rushville because of its

insolvency and its inability to raise capital.

Our review of other banks closed in the 6 months before and after the

closure of Rushville did not find evidence that the other banks were

treated more favorably. In the 6 months before Rushville’s closure, OCC

closed 22 national banks—although 13 of the 22 banks were subsidiaries

of a single holding company. We found that OCC closed these banks for

reasons similar to those that were the basis for Rushville’s closure (i.e.,

insider abuse, inadequate reserves, and weak loan administration). Our

review of these banks’ closing books indicated that OCC did not hasten

their closure so as to close them before FDICIA came into effect. Similarly,

we did not find evidence that other banks closed during the 6 months after

Rushville’s closure were treated more favorably than Rushville. In the 6

months after Rushville’s closure, OCC closed 15 national banks. We did not

find that these banks were allowed to remain open after FDICIA came into

effect without an active plan for their recapitalization.

11A critically undercapitalized bank is a bank whose capital levels have decreased to less than

2 percent of the bank’s ratio of tangible equity to total assets. Before FDICIA, banks could have capital

ratios between zero and 2 percent and remain open. However, with FDICIA, OCC would have been

required to close the bank or take other corrective action when the bank’s capital level fell below

$740,000, instead of waiting for Rushville’s capital to fall below zero.

12Under 12 U.S.C. 1831o(h)(3), OCC may extend the initial 90-day closing period to 270 days. If a bank

receiver is not appointed within 90 days, OCC must determine, with the concurrence of FDIC, that the

decision to keep the bank open better serves the purposes of the statute and document the reasons for

its conclusions. This decision must be reviewed every 90 days and a receiver or conservator must be

appointed, unless a new determination is made. In any case, a receiver must be appointed if the

institution is critically undercapitalized during the quarter beginning 270 days after the date it became

critically undercapitalized, unless OCC determines that the bank meets certain conditions, including

positive net worth.

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No Evidence Found

That OCC Influenced

the Decision to Recall

Holding Company

Loan

Rushville directors alleged that, in early 1992, OCC conspired to close

Rushville by contacting Liberty National Bank of Louisville (Liberty) to

suggest that it call in a $800,000 loan13 to Rushville’s holding company,

Hoosier Bancorp, which was collateralized by Rushville stock. In response

to your request that we examine whether OCC was involved with the recall

of the Hoosier Bancorp loan and determine whether OCC followed its

policies and procedures in this matter, we reviewed OCC and Liberty

documents but found no evidence that OCC’s contacts with Liberty were

contrary to OCC policies and procedures.

Our interviews with OCC officials and others found no support for the

Rushville directors’ claim that OCC asked Liberty to recall the Hoosier loan.

OCC officials and Liberty officers stated that OCC had not attempted to

influence the recall of the Hoosier Bancorp loan. Moreover, our review of

internal OCC documents and trial depositions did not reveal any evidence

that OCC officials had asked Liberty officers to recall the loan. Officers of

the creditor bank told us that an internal loan review committee identified

the Hoosier loan as a problem in 1990 because the Rushville bank stock

that collateralized the loan was of questionable value and they doubted the

Rushville chairman’s capacity to repay the loan.

Our review found that communication between Liberty and OCC during the

period immediately preceding the 1992 loan recall involved Liberty

officials’ initiating contacts with OCC officials to inform them of the bank’s

intent to recall the loan and to later inform them about Rushville and its

directors’ lawsuits against Liberty. OCC officials told us that although they

might direct a bank to improve its loan portfolio, they would not direct a

national bank to initiate a loan recall because such an action would

necessitate OCC’s sharing information among banks. According to the

officials, OCC would share information among banks only in situations

where there is a compelling supervisory reason, such as when it learns of

criminal activity that affects other banks. OCC examiners in Louisville said

that they were never told by OCC officials in the Chicago district office or

Washington, D.C., headquarters to ask Liberty to recall the Hoosier

Bancorp loan. Examiners explained that the recall was strictly a business

decision by bank officials in which they were not involved.

13The Hoosier Bancorp loan originated in 1977 with a loan from Louisville Trust Bank at a principal

value of $900,000. The terms and conditions of the loan were renegotiated in 1980 and the principal

value was $1.7 million. Louisville Trust Bank merged with United Kentucky Bank in the early 1980s. By

1985, United Kentucky had merged with Liberty and the principal value of the loan was $1.6 million.

Liberty renegotiated and extended the loan several times in the early 1990s, reducing the principal

value. In July 1992, the Rushville chairman paid $530,000 against the principal, bringing the

outstanding loan amount to about $800,000. Another $100,000 principal payment was made in

November 1992; at maturity in December 1992, the loan had an outstanding balance of $700,000.

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Liberty officers told us that they sought repayment of Liberty’s loan to

Hoosier Bancorp in 1992 because the Rushville bank stock that

collateralized the loan was of questionable value. Liberty officers

conducted several examinations of Rushville and were concerned about

its poor financial condition. The officials said they were also prompted to

seek repayment by their doubts about the Rushville chairman’s capacity to

repay the loan. Records also show that Liberty sought termination of the

Hoosier loan on two previous occasions.

Liberty officers said their final recall decision was partly based on their

concern that Rushville could be closed and their collateral rendered

worthless under the prompt corrective action provisions of FDICIA. Liberty

officers told us that they were also prompted to recall the loan by the

November 12, 1992, suspension of the chairman from participating in

managing Rushville. In retrospect, they said that their concerns about the

chairman’s repayment ability were borne out by his failure to pay any of

the outstanding loan amount since November 1992. A 1997 federal court

judgment affirmed that Hoosier Bancorp and the chairman were liable for

the full amount of the loan.14

Finally, we found no evidence that OCC examinations of Liberty in the 3

years before the recall influenced Liberty’s decision to seek the recall by

singling out the Hoosier Bancorp loan as a problem loan warranting

special attention. Reports on OCC examinations of Liberty did not list the

Rushville loan as a problem loan until 1992. That year’s OCC report on the

Liberty examination mentioned the loan as one of Liberty’s large problem

loans. In the examination report, OCC agreed with Liberty’s internal

classification of the Hoosier Bancorp loan and with Liberty’s allowance for

losses on the loan.

Civil Money Penalties

Followed OCC

Procedures

Rushville directors alleged that the penalties OCC assessed against them

since the 1980s were arbitrary and excessive, and that OCC arbitrarily

assessed several directors penalties because they were publicly critical of

OCC. Accordingly, you asked us whether OCC had a process for determining

penalties, whether the process was followed in the Rushville case, and

whether the Rushville penalties were excessive. We found that OCC

14Rushville directors filed suit against Liberty’s corporate successor—Bank One, Kentucky. They

alleged that there was a conspiracy between the Comptroller of the Currency and Bank One to declare

Rushville in default on the loan, and that Bank One’s possession of the Rushville stock should be

considered satisfaction of the loan agreement. The Seventh Circuit Court of Appeals found that the

stock did not satisfy the debt and that there was no evidence that Bank One’s actions were improper.

Bank One counterclaimed, seeking to recover the principal and interest on the loan. The district court

entered judgment for Bank One. Snyder v. Bank One, Kentucky, N.A., 113 F.3d 774 (7th Cir. 1997).

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examiners and managers appear to have followed agency guidance in

assessing penalties. However, we were unable to determine how OCC set

many penalty amounts because documentation was incomplete, missing,

or unavailable due to the length of time that has elapsed since many of the

penalties were assessed. We did not find that OCC arbitrarily assessed

directors penalties because they were publicly critical of OCC, as alleged by

Rushville directors. In addition, we found that the penalties OCC assessed

the Rushville directors, including the $250,000 penalty OCC assessed the

Rushville chairman, while higher than average, were not the highest OCC

has assessed directors and officers of other banks since 1989.

OCC’s process for determining civil money penalties is a multistep process

involving examiners and officials in the applicable OCC district office and

Washington, D.C.15 After identifying violations and in concert with OCC

district officials, examiners consider whether actions by responsible bank

officers or directors warrant their recommending a money penalty and, if

so, what level the penalty should be.16 These recommendations are sent to

OCC staff in Washington, D.C., for review and analysis. The staff presents

the case to OCC’s Supervision Review Committee, which is made up of

senior OCC officials. The committee makes a recommendation to a Senior

Deputy Comptroller who determines the final recommended penalty

amounts. In the course of determining whether to assess a civil money

penalty and the amount of the penalty, OCC issues a 15-day letter to

affected individuals soliciting their views. At this point, the director or

officer is provided an opportunity to negotiate the penalty. If the penalty

assessment is contested, the case is brought before an independent

administrative law judge. The judge’s decision is sent to the Comptroller of

the Currency for the final determination of the penalty. The OCC’s

determination may be appealed to the U.S. court of appeals.

15The Financial Institution Regulatory and Interest Rate Control Act of 1978, P.L. 95-630, 92 Stat. 3641

(1978), gave OCC authority to levy money penalties for violations of various federal statutes and

regulations, including a money penalty of up to $1,000 per day for violation of a cease-and-desist order.

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, P.L. 101-73, 103 Stat.

183 (1989), OCC’s authority was expanded and money penalties were grouped into three categories.

The maximum penalty that could be assessed under each of the three tiers was $5,000 per day; $25,000

per day; and $1,000,000 per day. The harsher penalties are associated with more serious offenses. The

law requires that OCC take the following factors into account: (1) the financial resources of the

person, (2) good faith, (3) the gravity of the violation, (4) a history of previous violations, and (5) such

other factors as justice may require.

16OCC procedures require penalty amounts below $10,000 to be reviewed by the applicable OCC

district office. Similarly, penalties above $10,000 are to be referred to the Washington, D.C., office and

ultimately are reviewed by the Supervision Review Committee. District office penalty review authority

was increased to $20,000 in June 1992.

Page 13 GAO/GGD-98-80 Closure of the Rushville National Bank
B- 278532 

Evidence we reviewed indicated OCC followed its policies and procedures

for the penalties it assessed against Rushville directors in the 1990s. We

were not able to come to a similar conclusion on the penalties assessed in

the 1980s because complete documentation was not available. Table 2

shows the amounts of penalties and their resolution for the penalties OCC

assessed Rushville directors since 1984, which was the first year penalties

were assessed against the Rushville directors.17

Table 2: Civil Money Penalties OCC

Assessed Against Rushville Directors

or Officers Individual penalty assessments

Calendar year

of assessment Position

Number of

individuals

assessed money

penalties Proposeda Actualb

Amount

paid

1984 Director 1 $10,000 $5,000 $5,000

Director 1 10,000 10,000 0

1985 Chairman 1 15,000 15,000 15,000

Director 2 10,000 10,000 10,000

Director 1 10,000 10,000 10,000

Director 1 10,000 10,000 0

Director 1 10,000 2,000 2,000

1992 Chairman 1 20,000 10,000 10,000

Director 1 15,000 2,000 2,000

Director 3 10,000 3,000 3,000

Director 2 1,000 1,000 1,000

1993 Chairman 1 250,000 250,000 0

Vice

Chairman 1 25,000 25,000 0

Officer 1 25,000 4,000 4,000

aThe proposed civil money penalty assessment is the amount determined by the Supervision

Review Committee.

bThe actual civil money penalty assessment is the amount determined by OCC after negotiations

with the assessed individual.

Source: OCC.

OCC was able to provide us with limited documentation in support of the

penalty amounts it assessed in the 1980s. OCC officials told us that, with the

passage of 14 years, it was difficult for them to locate additional records

pertaining to some of the penalties assessed in 1984 and 1985. OCC’s

inability to locate such records limited our ability to determine how the

17In addition to the penalties mentioned in table 2, OCC is seeking to recover an additional $451,686

from the chairman and a director as restitution for losses resulting from insider transactions and

improper activities involving legal fees to defend the directors that were improperly paid by the bank.

Page 14 GAO/GGD-98-80 Closure of the Rushville National Bank
B- 278532 

amounts were chosen. Moreover, we noted that OCC’s penalty assessment

procedures at that time did not include guidance on the possible ranges of

penalty amounts that could be assessed.

We found that OCC initially set the amounts of the penalties it assessed in

1992 and 1993 on the basis of a penalty assessment matrix it began using in

January 1991. The penalty matrix provides guidance for examiners to use

in determining whether to assess civil money penalties and the amount of

such penalties. The matrix, which is intended to make the process of civil

money penalty assessment consistent and equitable, weights such factors

as severity, intent, pecuniary gain, loss to the bank, and concealment.

Although district examiners initially based the penalties they assessed in

1992 on penalty matrices, we found that many penalty amounts were

increased as the penalty assessments went through OCC’s review process.

We found that OCC procedures allow for such increases when

examiners-in-charge and OCC officials believe circumstances warrant them.

Specifically, written OCC policies and procedures emphasize that the

matrix is only a guide to use in determining an appropriate penalty. OCC

policies and procedures state that the matrix was not intended to reduce

the penalty assessment process to a mathematical equation, and that it

should not be a substitute for sound supervisory judgment.

In setting the 1992 Rushville penalties, OCC appears to have followed its

procedures that allow for such increases, but for two of the four

assessments we found little documentation to support the increases in

amounts or the use of factors not covered in the penalty matrix as the

basis for setting penalties. Specifically, documented explanations for the

1992 penalty amounts were missing or incomplete in the following two

instances.

• The $20,000 assessment against the chairman and the $15,000 assessment

against a director reflected $10,000 and $5,000 increases, respectively,

beyond the level the matrix recommended. The district staff’s

recommendation for a higher amount was based on similar noncompliance

by the chairman and director almost a decade earlier and by their

continuing disregard for a cease-and-desist order. The district’s

recommendation did not explain how the increases were chosen.

Washington, D.C., staff disagreed with the district recommendation,

arguing that the penalty matrix takes into account all of the circumstances

that should be considered in assessing a penalty. The district’s

recommendation was accepted by the Supervision Review Committee

Page 15 GAO/GGD-98-80 Closure of the Rushville National Bank
B- 278532 

because of the chairman’s and the director’s significant and long-standing

noncompliance.

• Penalties assessed against three directors were assessed at levels

exceeding the initial recommended amounts that district examiners

calculated using the matrix. In these instances, the matrix prepared by the

district staff recommended a letter of reprimand, but OCC’s district office

assessed the directors $10,000 each. The rationale given for the increase

was that setting a penalty of less than $10,000 would imply that OCC viewed

the directors’ current noncompliance as less serious than their previous

noncompliance, which resulted in a $10,000 assessment, according to OCC

documents.

OCC officials said they also based the penalties they assessed in 1993 on

penalty matrices. However, OCC was not able to furnish us with the

applicable matrices because they could not be located. Other documents

in OCC files provided insight into the rationale for the 1993 assessments,

but these documents provided less insight into how penalty amounts for

two of the three assessments were calculated. Specifically, documented

explanations for the 1993 penalty assessments were missing or incomplete

in the following two instances.

• The $25,000 penalty assessed against a director was first proposed to be

$10,000. However, the Supervision Review Committee increased the

penalty to $25,000 because the director was the nominal recipient of a

$300,000 loan, which caused a loss of about $300,000. Although we found

no documentation explaining how OCC arrived at the $25,000 penalty

amount, an independent administrative law judge found that the

assessment could have been as much as $5 million.18 The Comptroller of

the Currency subsequently adopted the $25,000 amount.

• The $250,000 penalty assessed against the chairman was based on the

district’s recommendation of a penalty amount of $125,000 or more.

Although the Supervision Review Committee cited the chairman’s

demonstrated “reckless disregard” for the law, for the soundness of the

bank, and for his own fiduciary duties as the reason for assessing $250,000,

we found no documentation explaining how OCC calculated the increased

amount. OCC officials told us that there are numerous violations described

in a variety of OCC documents justifying the $250,000 penalty. An

independent administrative law judge found that the assessment could

18The administrative law judge’s amount was based on the violation being assessable under the federal

statute at $5,000 per day for a period of about 3 years—the period during which the lending limit

restriction was violated. The administrative law judge agreed with OCC’s original assessment of

$25,000.

Page 16 GAO/GGD-98-80 Closure of the Rushville National Bank
B- 278532 

have been as much as $1.7 million,19 but subsequently the Comptroller of

the Currency adopted the $250,000 amount.

Evidence we reviewed indicated that OCC appears to have followed its

policies and procedures in assessing penalties against Rushville directors

who were publicly critical of OCC. Specifically, we did not find that OCC

arbitrarily assessed two directors penalties because of their public

comments, as alleged by Rushville directors. We found the directors were

actually assessed penalties for various violations, including their

noncompliance with a cease-and-desist order. Our review indicates that

certain public statements by Rushville directors in newspapers in July

1993 were made after penalties were assessed and thus could not have

influenced OCC penalty determinations in January 1993. OCC officials told

us that it is common for bank officials to make statements critical of OCC

after having civil money penalties assessed against them or having their

banks closed. OCC officials said that the penalty-setting process does not

consider these comments, and that such comments by Rushville officials

were not part of the penalty determination.

We found that the $250,000 penalty OCC assessed against the Rushville

chairman was not the highest penalty OCC had assessed since 1989.20 Over

the past 9 years, OCC assessed 21 individuals $250,000 or more. Twelve of

these individuals were assessed over $250,000, of which 5 were assessed

$1 million, and the highest amount assessed against 1 individual was

$1.9 million. Our comparison of OCC’s penalty assessment for the chairman

to its assessments in four similar cases involving penalties of more than

$250,000 indicated that OCC did not appear to have applied a more

stringent standard to the Rushville assessment.

No Evidence to

Support Claims of

Stock Sale Prohibition

Former Rushville directors alleged that OCC prevented the chairman from

selling his bank stock. You asked us whether OCC followed its policies and

procedures in its involvement with the proposed sale of Rushville stock. In

addition, you asked (1) whether OCC procedures and practices prevented a

director or officer of a bank from selling stock in the bank and (2) how

many times in the last 5 years OCC had prevented a director or officer from

19The administrative law judge’s amount was based on the violation being assessable under federal

statutes at $1,000 per day (pre-Financial Institutions Reform, Recovery, and Enforcement Act

(FIRREA)) for about 240 days and $5,000 per day (under the law as changed by FIRREA) for a period

of about 300 days—the periods of time during which the bank made illegal payments of legal fees. The

administrative law judge agreed with OCC’s original assessment of $250,000.

20Information on penalties first became public in 1989. Penalty information before 1989 was not readily

available, according to an OCC official.

Page 17 GAO/GGD-98-80 Closure of the Rushville National Bank
B- 278532 

selling stock. Our review of OCC procedures and practices indicated that

OCC does not prevent bank directors or officers from selling stock.

Furthermore, our review of documentation and discussions with OCC

officials provided no evidence that OCC had prevented a director or officer

from selling stock during the last 5 years or that it would prevent such a

stock sale in the future.

Regarding this allegation, a number of the Rushville directors claimed that

an OCC attorney expressly stated at the November 12, 1992, meeting at

which the chairman was suspended from banking that he could not sell his

Rushville stock. To better understand this allegation, we interviewed

Rushville directors and OCC officials present at the meeting and reviewed

their affidavits on the matter.

We did not find any documentation substantiating the allegation that OCC

officials prohibited the sale of stock. The OCC officials we interviewed

denied the Rushville directors’ claim. These officials told us that it is OCC’s

policy to approve the sale of stock by a suspended bank director or

officer, and they said, generally, that their only concern is that a

suspended director or officer not continue to be involved with the bank’s

affairs. Specifically, the officials told us that at the suspension meeting,

they told the chairman that he was being suspended, and then an OCC

attorney read aloud the applicable banking law21 under which he was

being suspended.

OCC officials told us that a misunderstanding could have occurred because

of the complicated language of the law and the adversarial nature of the

suspension meeting. The law read to the chairman says that a person

subject to a suspension order cannot transfer or attempt to transfer voting

rights in any institution, but the law does not address the subject of stock

sales. The suspension order presented to the Rushville chairman did not

address the issue of whether he could sell his Rushville stock. OCC officials

told us that they provided the chairman with no written guidance or

instructions, and they said that OCC has no written procedures on steps to

take in a suspension because suspensions occur so infrequently.

In response to a lawsuit filed to allow the chairman to sell his stock, OCC

officials sent a letter to the chairman’s attorney on December 4, 1992,

telling him that the chairman could sell his stock. However, the officials

stated in the letter that OCC would have to approve such a sale to ensure

that the person purchasing the stock had no connection to the chairman.

2112 U.S.C. 1818(e).

Page 18 GAO/GGD-98-80 Closure of the Rushville National Bank
B- 278532 

On December 23, 1992, the Department of Justice also notified the

chairman’s attorney that the chairman could sell his stock.

Rushville Liquidation

Cost Almost $9

Million

Following its closing, Rushville’s assets were acquired by FDIC in its role as

the liquidator for the Bank Insurance Fund. Liquidation, which is the next

step after an insolvent bank’s closure, is the process by which FDIC

disposes of a bank’s assets and attempts to recover the costs it incurs in

closing a bank. The final liquidation loss for Rushville amounted to about

$8.8 million.

This $8.8 million in liquidation costs can be broadly categorized as

$2.4 million in liquidation expenses, which represent FDIC’s operational

costs, and $6.4 million in losses22 from the disposition of Rushville assets,

according to FDIC documents. Operational costs represent the cost of FDIC

personnel directly assigned to the Rushville liquidation; other FDIC

personnel supporting the liquidation; and professional fees for auditors,

tax accountants, and appraisers. Losses from the disposition of assets

mostly represented losses from the sale of Rushville’s commercial and real

estate loans. Liquidation costs were partly offset by revenues from interest

on performing loans and earnings from Rushville’s securities.

Agency Comments We requested comments on a draft of this report from OCC, FDIC, and the

Federal Reserve. OCC generally agreed with the draft report’s contents (see

app. IV). FDIC and the Federal Reserve neither expressed any concerns nor

offered any comments.

We are sending copies of this report to the Ranking Minority Member of

your committee, the Indiana congressional delegation, other interested

congressional committees, the Comptroller of the Currency, the Chairman

of the Federal Deposit Insurance Corporation, the Chairman of the Board

of Governors at the Federal Reserve System, and other interested parties.

We will also make copies available to others upon request.

22Loss is the difference between the book value of a loan when FDIC acquires it and FDIC’s receipts

from selling the loan. The two largest loss categories for Rushville were commercial loan losses, which

totaled $2.9 million, and real estate mortgage losses, which amounted to $2.1 million.

Page 19 GAO/GGD-98-80 Closure of the Rushville National Bank
B- 278532 

Major contributors to this report are listed in appendix V. Please contact

me at (202) 512-8678 if you or your staff have any questions.

Sincerely yours,

Richard J. Hillman

Associate Director, Financial

 Institutions and Markets Issues

Page 20 GAO/GGD-98-80 Closure of the Rushville National Bank
Page 21 GAO/GGD-98-80 Closure of the Rushville National Bank
Contents

Letter 1

Appendix I 

Scope and

Methodology

24

Appendix II 

Selected Events

Concerning the

Rushville National

Bank Closure

26

Appendix III 

Results of GAO’s

Detailed Loan Review

27

Appendix IV 

Comments From the

Office of the

Comptroller of the

Currency

28

Appendix V 

Major Contributors to

This Report

29

Tables Table 1: OCC’s Calculation of Rushville’s Net Worth (as of

Dec. 17, 1992)

6

 Table 2: Civil Money Penalties OCC Assessed Against Rushville

Directors or Officers

14

Page 22 GAO/GGD-98-80 Closure of the Rushville National Bank
Contents

Abbreviations

FDIC Federal Deposit Insurance Corporation

FDICIA Federal Deposit Insurance Corporation Improvement Act

FIRREA Financial Institutions Reform, Recovery, and Enforcement

Act

OCC Office of the Comptroller of the Currency

Page 23 GAO/GGD-98-80 Closure of the Rushville National Bank
Appendix I 

Scope and Methodology

To determine whether OCC followed its policies and procedures in

calculating Rushville’s net worth and classifying the bank’s loans, we met

with OCC officials and staff in Washington, D.C.; Chicago, IL; Indianapolis,

IN; and Louisville, KY. In addition, we reviewed documentation available

at each of these locations, including examination workpapers. We also

asked the Rushville directors to indicate which loans they believed were

misclassified. Since the directors did not provide us with a list of

misclassified loans, we focused our attention on 71 problem loans (64

reclassified loans from the previous examination and 7 newly classified

loans) that were in OCC’s migration analysis. We then focused on 20 loans

that had outstanding balances exceeding $100,000. In addition, we

identified five smaller loans that had relatively large outstanding balances

and OCC calculated specific reserves from OCC’s migration analysis for

further study.

In addition, we reviewed Rushville loan files maintained by FDIC. We also

discussed the final examination and closure with FDIC staff in Washington,

D.C.; Chicago; Indianapolis; and Dallas; and the Federal Reserve staff in

Washington, D.C., and Chicago. Staff in our Accounting and Information

Management Division also reviewed OCC’s net worth calculation to

determine whether OCC followed generally accepted accounting principles.

To determine the impact of FDICIA on the closure of Rushville, we met with

Rushville directors and their attorneys to discuss their views on Rushville.

In addition, we discussed their allegations with OCC officials and staff in

Washington, D.C.; Chicago; Indianapolis; and Louisville and reviewed OCC

documentation. We also reviewed OCC’s closing books on 18 banks closed

before and after the implementation of FDICIA. Additionally, we discussed

FDICIA implications with the Federal Reserve staff in Washington, D.C., and

Chicago. Our Office of the General Counsel also reviewed legal issues

concerning FDICIA and the Rushville closure.

To determine whether OCC contacts with Liberty regarding the recall of the

Hoosier Bancorp loan followed OCC policies and procedures, we met with

directors from Rushville and several Liberty officers and reviewed

documentation they provided. In addition, we discussed the recall

allegation with OCC officials and staff in Washington, D.C.; Chicago;

Indianapolis; and Louisville. We also reviewed OCC documentation on

contacts with Liberty.

To determine whether OCC followed its policies and procedures in

assessing civil money penalties, we met with directors from Rushville and

Page 24 GAO/GGD-98-80 Closure of the Rushville National Bank
Appendix I 

Scope and Methodology

reviewed documentation they provided. In addition, we discussed the

Rushville civil money penalty allegation with OCC officials and staff in

Washington, D.C.; Chicago; and Indianapolis. We also reviewed available

documentation at each location and discussed this allegation with the

Federal Reserve staff in Washington, D.C. Our Office of the General

Counsel also reviewed the legal questions concerning the assessment of

civil money penalties.

To ascertain the nature of OCC’s involvement with the proposed sale of

Rushville stock by the chairman and whether OCC followed its policies and

procedures, we met with Rushville directors and reviewed documentation

they provided. In addition, we discussed the proposed Rushville stock sale

allegation with OCC officials and staff in Washington, D.C., and Indianapolis

and also reviewed available documentation at each location. Additionally,

our Office of the General Counsel reviewed the legal issues concerning the

chairman’s suspension as it related to the proposed sale of stock, and we

discussed this allegation with a Justice attorney who had responsibility for

representing OCC in this matter.

Finally, we reviewed various documents provided to us by several sources.

The directors of Rushville gave us documents that they considered

relevant, including a chronology of events and related depositions. We

reviewed approximately 100 boxes containing OCC documents subpoenaed

by your office and Rushville loan files maintained by FDIC. We also

reviewed OCC’s supervisory monitoring system files on Rushville and

Liberty, which provided a comprehensive picture of the background,

condition, and status of the banks and OCC’s supervisory plans. In addition,

we reviewed legal documents from federal courts involving recent court

proceedings regarding Rushville directors.

We conducted our review from August 1997 through April 1998 in

accordance with generally accepted government auditing standards.

Page 25 GAO/GGD-98-80 Closure of the Rushville National Bank
Appendix II 

Selected Events Concerning the Rushville

National Bank Closure

Date Event

December 31,

1982

OCC examination disclosed unacceptable lending practices and

deterioration in Rushville’s overall condition.

June 29, 1983 Rushville directors consented to an OCC cease-and-desist order

addressing criticized loans, loan policy, credit and collateral

exceptions, loan review, allowance for loan and lease losses,

budgets, expenses, and conflicts of interest.

June 27, 1991 Rushville directors consented to an OCC cease-and-desist order

requiring the appointment of a president and a certified

accountant.

May 26, 1992 A national newspaper listed Rushville as one of the nation’s most

troubled banks.

June 1, 1992 A Liberty officer contacted OCC to inform it that Liberty intended to

demand payment in full on the Hoosier Bancorp loan.

October 31,

1992

OCC began its final examination of Rushville.

November 12,

1992

OCC suspended the bank chairman for engaging in unsafe and

unsound practices and insider abuse.

November 16,

1992

State of Indiana withdrew its funds, thereby straining liquidity.

November 19,

1992

Liberty declared holding company loan in default and demanded

principal and interest.

December 10,

1992

OCC asked for FDIC-assisted purchase of Rushville or payout of

insured deposits.

December 11,

1992

Four Rushville directors resigned.

December 18,

1992

OCC examination showed the bank was capital insolvent and its

liquidity seriously impaired. The Comptroller of the Currency

declared Rushville insolvent, and FDIC was appointed its receiver.

December 18,

1992

OCC closed Rushville.

Source: OCC.

Page 26 GAO/GGD-98-80 Closure of the Rushville National Bank
Appendix III 

Results of GAO’s Detailed Loan Review

Loan Amounta

OCC

adjustmentb

OCC adjusted

book value

FDIC disposition

value Differencec

1. $205,030 $205,030 $0 $121,500 $121,500

2. 72,015 72,015 0 60,641 60,641

3. 89,928 49,928 40,000 43,666 3,666

4. 340,587 21,050 319,537 172,905 (146,632)

5. 418,117 238,117 180,000 35,000 (145,000)

6. 150,000 25,000 125,000 0 (125,000)

7. 113,753 56,553 57,200 12,500 (44,700)

8. 146,223 30,000 116,223 72,467 (43,756)

9. 100,471 24,000 76,471 49,699 (26,772)

10. 74,541 20,000 54,541 36,350 (18,191)

11. 127,788 70,188 57,600 45,580d (12,020)

12. 70,000 53,177 16,823 10,306 (6,517)

13. 58,347 29,000 29,347 26,989 (2,358)

Total $1,966,800 $894,058 $1,072,742 $687,603 ($385,139)

aThis was the loan amount at the time of the Rushville closure prior to OCC adjustment.

bOCC adjustments for specific allocation and/or loss write-off.

cFDIC disposition value less the OCC adjusted book value.

dThis amount represents the difference between the FDIC disposition value and FDIC’s cost to

acquire the property from the first lien holder and its foreclosure costs.

Sources: OCC and FDIC.

Page 27 GAO/GGD-98-80 Closure of the Rushville National Bank
Appendix IV 

Comments From the Office of the

Comptroller of the Currency

Page 28 GAO/GGD-98-80 Closure of the Rushville National Bank
Appendix V 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Patrick S. Dynes, Senior Evaluator

Nolani D. Traylor, Senior Evaluator

San Francisco Field

Office

Kane A. Wong, Assistant Director

Gerhard C. Brostrom, Communications Analyst

(233534) Page 29 GAO/GGD-98-80 Closure of the Rushville National Bank
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