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Citizens State Bank

OCT l7 1997

Citizens State Bank
306 S. Elm Street
Bald Knob, Arkansas 72010-0200

Members of the Board:

We have reviewed your request to indirectly continue activities through the Citizens State Bank's (the "Bank") wholly owned subsidiary. Citizens State Investments. Inc. (the "Subsidiary"), that may not be permissible for a subsidiary of a national bank. The application was filed pursuant to Section 362.4(d)(4)(iii) and Section 362.3(c)(2) of the Federal Deposit Insurance Corporation (FDIC) Rules and Regulations and was accepted as a substantially complete application by the Memphis Regional Office on May 12, 1997.

The Bank has applied to continue to engage in a real estate investment activity through a wholly owned subsidiary by holding four properties that are not permissible for a national bank. National banks are not allowed to hold real estate investments indefinitely.

The Bank has also applied for permission to hold two other properties, the Five Star Farm Property and the Adkins Property, for a period of up to twelve months in order to allow time to divest. The two properties were acquired as Debts Previously Contracted ("DPC") prior to the enactment of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The state of Arkansas allows state chartered banks to hold DPC property in a subsidiary for an indefinite period. Therefore, pursuant to FDIC's interpretation as found in Activities and Investments of Insured State Banks, 57 Fed Reg. 53213. 53218(1992), the Bank would have ten years from the date of enactment of FDICIA or until December 19, 2001, to divest. However, since the Bank intends to divest these two properties as soon as possible, please keep the Memphis Regional Office apprised of your efforts toward that end.

For the reasons set forth in the attached Statement, the application was approved today subject to the following conditions:

1. The Bank shall take the necessary steps to operate the Subsidiary in a manner so as to ensure its separate corporate existence as a wholly-owned subsidiary that:

(a) is adequately capitalized;

(b) is separate and distinct from the operations of the Bank;

(c) maintains separate accounting and other corporate records;

(d) observes separate formalities such as separate board of directors meetings;

(e) maintain a board of directors with management expertise capable of conducting activities in a safe and sound manner;

(f) contracts with the Bank for any service on terms and conditions comparable to those available to or from independent entities; and

(g) Conducts business pursuant to separate policies and procedures designed to inform customers and prospective customers of the Subsidiary that the subsidiary is a separate organization from the Bank, including the placement of specific language on any debt instrument or contract with a third party disclosing that the Bank itself is not responsible for payment or performance.

2. The Bank's indirect real estate investment activities through the Subsidiary that are impermissible for a subsidiary of a national bank shall be limited to holding and leasing the York, Martin, Altom, and Bowen properties.

3. The Bank shall be well capitalized, as defined in Section 325.103(b)(1) of the FDIC's Rules and Regulations, after deducting the Bank's investment as well as the Bank's pro rata share of any retained earnings in the Subsidiary from Tier 1 capital.

4. Neither the Bank nor the Subsidiary shall engage in transactions with insiders of the Bank or their related interests that relate to the Subsidiary's real estate investment activities that are impermissible for the subsidiary of a national bank without the prior written consent of the appropriate FDIC Division of Supervision Regional Director.

5. Extensions of credit by the Bank to finance sales of assets by the Subsidiary do not involve more than the normal degree of risk of repayment and are extended on terms that are substantially similar to those prevailing at the time for comparable transactions with or involving unaffiliated persons or companies.

6. The consent granted herein is based on the facts and circumstances presented or known to the FDIC in connection with this request, and that the bank notify the FDIC of any significant change in facts or circumstances. The FDIC's action is conditioned upon its ability to alter. suspend, or withdraw its approval in the event the facts and circumstances presented in the application change significantly.

Questions relating to this matter may be referred to the Regional Director of the Memphis Regional Office at (901) 685-1603.

Keith W. Seibold
Acting Associate Director


FEDERAL DEPOSIT INSURANCE CORPORATION

RE: Citizens State Bank Bald Knob, Arkansas

Application Pursuant to Section 24 of the Federal Deposit Insurance Act to Indirectly Continue Activity That May Not Be Permissible for a National Bank

STATEMENT

Pursuant to the provisions of Section 24 of the Federal Deposit Insurance Act, an application has been filed with the Federal Deposit Insurance Corporation by Citizens State Bank, Bald Knob, Arkansas (Bank). The Bank requests FDIC consent to allow its subsidiary. Citizens State Investments. Inc. (the Subsidiary) to continue holding and leasing four real estate properties known as the York, Martin, Altom, and Bowen properties (three of which are leased as residential properties and one property is leased to a small business); and to hold pending disposition two real estate properties known as the Five Star Farm and Adkins Properties.

In general, real estate investment may not be a permissible activity for a national bank or a subsidiary of a national bank. Subsidiaries of state-chartered, FDIC-insured banks may not engage as principal in an activity prohibited to subsidiaries of nationally chartered banks unless they obtain consent from the FDIC. Consent may not be granted unless the bank is in compliance with applicable capital standards and the FDIC determines that the activity poses no significant risk to the deposit insurance fund. Arkansas banking statutes permit the holding of subject real estate investments.

The Bank does not engage in impermissible real estate activities beyond the subject investments and Bank management has indicated that it has no intention of engaging in any additional real estate activities.

The Bank meets the definition of "Well Capitalized" within the meaning of Part 325 of the FDIC s Rules and Regulations. The Bank s investments in the Subsidiary represented approximately 3.30% of Tier 1 capital as of June 30. 1997, and the Bank would continue to be "Well Capitalized" in the event its entire investment in the Subsidiary were deducted from capital. In connection with this application. the FDIC has also taken into consideration the favorable financial and managerial resources and future earnings prospects of the Bank.

Real estate investment is subject to a high degree of market risk and other specialized risks specific to real estate ownership and may also be of questionable benefit in the diversification of a financial institution's portfolio of assets. Due to these risks, real estate investment activities appear suitable to a financial institution only on a very limited scale and under restrictive conditions designed to control the various risks posed to the financial institution and the deposit insurance fund.

As prudential limitations and restrictions addressing the risks posed by real estate investment activities will be imposed, the subsidiary's real estate investment activities will not constitute a significant risk to the Bank Insurance Fund or present material safety and soundness concerns.

Based upon careful evaluation of all available information. the Acting Associate Director, acting under delegated authority has concluded that approval of the application is appropriate subject to the conditions specified below. The conditions are imposed for prudential reasons due to the volatility and other risks that are inherent in the subject real estate activity as well as to mitigate any potential insider conflicts of interests or risks associated with transactions between the Bank and the Subsidiary.

(1) The Bank shall take the necessary steps to operate the Subsidiary in a manner so as to ensure its separate corporate existence as a wholly-owned subsidiary that:

(a) is adequately capitalized;

(b) is separate and distinct from the operations of the Bank;

(c) maintains separate accounting and other corporate records;

(d) observes separate formalities such as separate board of directors meetings;

(e) maintain a board of directors with management expertise capable of conducting activities in a safe and sound manner;

(f) contracts with the Bank for any service on terms and conditions comparable to those available to or from independent entities; and

(g) conducts business pursuant to separate policies and procedures designed to inform customers and prospective customers of Subsidiary that the subsidiary is a separate organization from the Bank. including the placement of specific language on any debt instrument or contract with a third party disclosing that the Bank itself is not responsible for payment or performance.

(2) The Bank's indirect real estate investment activities through the Subsidiary that are impermissible for a subsidiary of a national bank shall be limited to holding and leasing the "York, Martin, Altom, and Bowen Properties".

(3) The Bank shall be well capitalized, as defined in Section 325.103(b)(1) of the FDIC's Rules and Regulations. after deducting the Bank's investment as well as the Bank's pro rata share of any retained earnings in the Subsidiary from Tier 1 capital.

(4) Neither the Bank nor the Subsidiary shall engage in transactions with insiders of the Bank or their related interests that relate to the Subsidiary's real estate investment activities that are impermissible for a subsidiary of a national bank without the prior written consent of the appropriate FDIC Division of Supervision Regional Director.

(5) Extensions of credit by the Bank to finance sales of assets by the Subsidiary do not involve more than the normal degree of risk of repayment and are extended on terms that are substantially similar to those prevailing at the time for comparable transactions with or involving unaffiliated persons or companies.

(6) The consent granted herein is based on the facts and circumstances presented or known to the FDIC in connection with this request, and that the bank notify the FDIC of any significant change in facts or circumstances. The FDIC's action is conditioned upon its ability to alter, suspend, or withdraw its approval in the event the facts and circumstances presented in the application change significantly.

ACTING ASSOCIATE DIRECTOR
DIVISION OF SUPERVISION



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