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Community Savings Bank

FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: Community Savings Bank, SSB Burlington, North Carolina

Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Continue to Engage as Principal in an Activity Which Is Not Permissible for a National Bank

ORDER

The Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") has fully considered all available facts and information relevant to section 24 of the Federal Deposit Insurance Act, 12 U.S.C. 1831a, and Part 362 of the FDIC's Rules and Regulations, 12 C.F.R. Part 362, relating to an application by Community Savings Bank, SSB, Burlington, North Carolina ("Bank"), for consent to continue to engage as principal in the activity of securing eight non-public deposit accounts for the amount of the deposits that exceed the FDIC insurance limitation. This represents an activity which is not permissible for a national bank.

The Board, having found that the Bank is in compliance with applicable capital standards and that the activity, with certain conditions imposed, does not appear to pose a significant risk to the applicable deposit insurance fund, although it does represent risk to the deposit insurance fund by increasing the cost of resolution, has concluded the application should be approved subject to certain conditions.

Accordingly, it is hereby ORDERED, for the reasons set forth in the attached Statement, that the application submitted by the Bank for consent to continue to engage in an activity that is not permissible for a national bank be and the same hereby is approved, subject to the following conditions:

1. That the consent granted applies specifically to the eight Individual Retirement Account ("IRA") deposits that were outlined in the Bank's January 17, 1995, application and subsequent communications to the Regional Director (Supervision) of the FDIC's Atlanta Regional Office;

2. That the Bank shall continue to meet all applicable minimum capital standards;

3. That the activity shall be subject to a one-time reporting to the Regional Director (Supervision) of the FDIC's Atlanta Regional Office. The report, due by the last day of the first month following receipt of this approval, shall contain, at a minimum, the:

(a) Name of each individual deposit account holder;

(b) Date deposit account matures;

(c) Amount of deposit;

(d) Name of asset pledged (as reflected on general ledger) ;

(e) Amount of asset pledged;

(f) Copy of pledge agreement;

(g) Verification that the Bank is accounting for the pledged assets in accordance with generally accepted accounting practices;

4. That the Bank shall not substitute collateral without prior written consent from the Regional Director (Supervision) of the FDIC's Atlanta Regional Office;

5. That the consent granted herein is based on the facts and circumstances presented or otherwise known to the FDIC in connection with this application. The Bank shall notify the FDIC of any significant change in facts or circumstances. If the facts and circumstances change significantly, the FDIC shall have the right to alter, suspend, or withdraw its approval; and

6. That notwithstanding the consent granted herein, the Bank shall be subject to any rule, regulation or policy subsequently adopted by the FDIC which could either prohibit or impose conditions on this activity.

Dated at Washington, D. C., this 9th day of April, 1996.

BY ORDER OF THE BOARD OF DIRECTORS


FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: Community Savings Bank, SSB Burlington, North Carolina

Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Continue to Engage as Principal in an Activity Which Is Not Permissible for a National Bank

STATEMENT

Pursuant to the provisions of section 24 of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. 1831a, Community Savings Bank, SSB, Burlington, North Carolina ("Bank"), has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). The Bank requests the FDIC's consent to continue to collateralize the uninsured portion of eight Individual Retirement Account ("IRA") deposits currently held by the Bank.

The activity of pledging assets to secure non-public deposits is not a permissible activity for a national bank. State-chartered FDIC-insured banks may not engage as principal in an activity prohibited to 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. North Carolina state law empowers state savings banks to pledge bank assets to secure non-public deposits.

On January 24, 1994, the Bank converted from a federal savings and loan association to a state savings bank (remaining a member of the Savings Association Insured Fund) and became subject to the restrictions of Part 362 of the FDIC's rules and regulations, 12 C.F.R. Part 362. Before the conversion, the applicant was permitted by the former Federal Savings and Loan Insurance Corporation or the former Federal Home Loan Bank Board (collectively referred to as "FSLIC") to pledge assets to secure non-public deposits in excess of the insurance limit ("the activity").

The Bank began the activity during the 1970's to protect IRA deposits in excess of the FDIC-insurance coverage.

The Bank has made application pursuant to Part 362 and requests permission to continue the activity until all eight of the currently pledged accounts have left the Bank or are no longer qualifying IRA deposits. The Bank states that it does not wish to continue the activity indefinitely and states that no new activity of this type will be initiated. The final date on which these accounts will roll out is not determinable since these short term accounts are intended to be continually rolled over into qualifying IRA accounts until paid out to the depositor upon retirement or to the depositor's beneficiary or estate upon his/her death.

At this time, the remaining collateralized deposits at this Bank consist of eight IRA accounts which total $1.6 million. These accounts are collateralized by $1.0 million of the Bank's assets; currently, cash deposits at the Federal Home Loan Bank of Atlanta. At the time the Bank offered this collateralization, it was available on all IRA accounts with balances in excess of $100,000.

According to Bank management, the collateralization "agreement" is evidenced by a safekeeping receipt of the underlying assets held by the depositor and there is no separately executed agreement or contract. The depositor does not have physical possession of the underlying assets.

The Bank, which meets the definition of "well-capitalized" within the meaning of Part 325 of the FDIC's rules and regulations, 12 C.F.R. Part 325, is in compliance with applicable capital standards with Tier 1 leverage, Tier 1 Risk-based, and Total Risk-based capital ratios of 15.11 percent, 30.50 percent, and 31.00 percent, respectively, as of the December 31, 1995, call report data. The Bank is in overall sound condition and is satisfactorily managed.

The Board of Directors ("Board") of the FDIC has reviewed available information and has also taken into consideration the financial and managerial resources and future earnings prospects of the Bank. The Board also considered the risks associated with the activity of collateralizing IRA deposits in excess of the FDIC-insured amount and evaluated the specifics of the Bank's completed application dated January 17, 1995, and subsequent documentation.

The Board has considered the practice and has found it to represent a system-wide risk and to potentially present safety and soundness concerns and to potentially present a significant risk or exposure to the deposit insurance fund (in that it increases the FDIC's cost of resolution) because the activity provides the equivalent of 100 percent insurance on deposits and removes market discipline; presents liquidity concerns and restricts borrowing capacity; increases the cost of liquidation and receivership; restricts marketing alternatives in the leastcost resolution and treats similar classes of depositors differently; puts national banks and weaker institutions at a competitive disadvantage in the acquisition of deposits; and presents the appearance of a conflict of interest and of a breach of fiduciary duties under certain circumstances.

While the FDIC has determined that engaging in the activity of pledging assets to secure deposits for the amount in excess of FDIC-insurance limits could potentially present safety and soundness problems and a significant risk to the applicable deposit insurance fund, the Board is persuaded by the facts of this case that the Bank can fulfill its current pledge arrangements, which were allowable at the time the Bank entered into them, without presenting risk to the deposit insurance fund provided certain conditions are met.

Specifically, the approval pertains only to the collateralized IRA accounts detailed in the Bank's January 17, 1995, application and subsequent documentation to the Atlanta Regional Office. The Bank shall continue to meet the minimum applicable capital standards. The Bank shall evidence compliance with the requirements of this approval through a one-time report to the Atlanta Regional Office of the FDIC (with periodic reports submitted when circumstances change). The Bank shall not substitute collateral without prior written approval from the Regional Director (Supervision) of the FDIC's Atlanta Regional Office. The Bank shall notify the FDIC of any significant change in facts or circumstances, and the FDIC shall have the right to alter, suspend, or withdraw its approval in the event the facts and circumstances presented in the application change significantly.

The Bank is also advised that because the Board has determined that this activity poses potential safety and soundness problems and a significant risk to the applicable deposit insurance fund, the Board is contemplating taking action in the form of a rulemaking which could either prohibit or impose conditions on this practice. Therefore, notwithstanding this approval of the application, the Bank shall fully comply with any rule, regulation or policy that may be adopted by the FDIC subsequent to this approval.

The Bank is advised that had the application been for consent to continue the activity, versus winding down the activity, the Board's conclusion may have been different.

Therefore, approval of the application, subject to the conditions in the Order, is warranted.

THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION



Last Updated 03/24/2011 Legal@fdic.gov