Jake Butcher, chairman of the Knoxville bank that failed last week, headed off a 1976 attempt by the Comptroller of the Currency to take action against his bank by changing its charter from the federal to state, putting the bank out of the comptroller's control, congressional investigators said yesterday.
That action transferred supervision of Butcher's United American Bank to the Federal Deposit Insurance Corp. and to Tennessee authorities.
The FDIC's initial examination in 1977 was followed by nearly six years of jousting between the parties, with the agency urging the bank to change its ways and the bank apparently continuing its course, according to subcommittee investigators. The Comptroller of the Currency regulates nationally chartered banks, while the FDIC examines most state-chartered banks.
After the FDIC determined that United American was insolvent, it was closed Monday and bought by First Tennessee National Corp. of Memphis, which reopened it Tuesday.
A summary of federal regulatory involvement with United American was compiled last week by Rep. Doug Barnard Jr. (D-Ga.), chairman of the House subcommittee on commerce, consumer and monetary affairs. In a letter to FDIC Chairman William M. Isaac, Barnard said the comptroller had arranged a meeting with the bank's board of directors in late 1976 to warn them of irregularities. At Butcher's request the meeting was postponed. After the postponement, he announced the change of charter.
Barnard said many practices upset the comptroller's office, including:
* A sharp increase in salary and other compensation for Butcher, who gained control of the bank in 1975.
* Direct payment to Butcher of most of the commissions the bank earned selling credit life insurance, commissions the regulators said should go to the bank rather than officers or employes.
* A doubling of the dividend payment to shareholders--Butcher then was the principal stockholder--at a time when the bank needed to retain profits to shore up its financial condition.
* A large number of loans that were classified as "substandard."
Government sources said that when the FDIC made its initial examination of the bank in April, 1977, regulators were troubled by the large number of loans to bank officers, directors and employes--the loans then totaled about 70 percent of its capital--and the bank's weak earnings. However, sources said, the bank was considered to be in satisfactory condition.
A year later examiners discovered insider loans had doubled and felt the bank's cash reserves were stretched. By early 1979, however, FDIC examiners discovered a rising number of substandard loans--equal to about 90 percent of the bank's capital--and a continued high level of insider loans.
At the January, 1979, examination, sources said, the FDIC began to consider United American's problems "borderline serious," but a June, 1980, examination found the problem of substandard loans improving. In August, 1981, state examiners audited the bank and found no problem.
In November, 1981, FDIC examiners returned and spent 75 days in the bank, concluding that the situation was deteriorating.
Last November FDIC auditors returned not only to the Knoxville bank, but to four other banks in Kentucky and Tennessee that Butcher controlled, as well as to some banks controlled by his brother. Sources said the massive audit was launched to prevent one bank from selling bad loans to another, then returning them after the auditors left.