Decisions on Bank Applications
The Bank of Kaukauna
IN RE: The Bank of Kaukauna Kaukauna, Wisconsin
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal Through a Wholly-Owned Subsidiary in Investment Activities That May Not Be Permissible for a Subsidiary of 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, relating to the application by The Bank of Kaukauna, Kaukauna, Wisconsin (the "Bank"), for consent to indirectly retain through a wholly-owned subsidiary, Mullen Bender, Inc., a trademarked die used to manufacture a cable installation tool. This is an activity that may not be permissible, for a subsidiary of a national bank. The Bank has sought permission to continue to hold this company. This investment is allowed by the State of Wisconsin laws. The Board has concluded that 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 retain ownership of Mullen Bender, Inc., be and hereby is approved, subject to the following conditions:
(1) That the Bank and the Subsidiary shall take the necessary actions to operate the Subsidiary in a manner so as to ensure a separate corporate existence as a majority-owned subsidiary which:
(i) has sufficient operating capital in light of the normal obligations that are reasonably foreseeable for a business of its size and character within the industry;
(ii) maintains separate accounting and other business records;
(iii) observes separate business entity formalities such as separate board of directors' meetings;
(iv) conducts business pursuant to independent policies and procedures designed to inform customers and prospective customers of the Subsidiary that the Subsidiary is a separate organization from the Bank and that the Bank is not responsible for and does not guarantee the obligations of the Subsidiary; and
(v) has a current written business plan that is appropriate to the type and scope of business conducted by the Subsidiary.
(2) That the Subsidiary shall maintain liability insurance coverage appropriate for the type of business engaged in.
(3) With the exception of giving the Subsidiary immediate credit for uncollected items received in the ordinary course of business, the Bank may not carry out any of the following transactions with the Subsidiary unless the transaction is on terms and conditions that are substantially the same as those prevailing at the time for comparable transactions with unaffiliated parties:
(i) enter into a contract, lease, or other type of agreement with the Subsidiary; and
(ii) enter into any transaction in which the proceeds thereof are used for the benefit of, or are transferred to, the Subsidiary.
(4) That neither the Bank nor the Subsidiary may enter into any transaction with the Bank's executive officers, directors, principal shareholders, or related interests of such persons which relate to the Subsidiary's activities unless the transactions are on terms and conditions that are substantially the same as those prevailing at the time for comparable transactions with persons not affiliated with the Bank.
(5) That the Subsidiary may not expand its product line or begin direct manufacturing, marketing, or sales activities of the existing product without the prior written consent of the FDIC.
(6) That, in the event the facts and circumstances presented or otherwise known to the FDIC in connection with this request change significantly, the FDIC shall retain the ability to alter, suspend, or withdraw its approval.
Dated at Washington, D.C., this 27th day of July, 2000.
BY ORDER OF THE BOARD OF DIRECTORS
Robert E. Feldman
Executive Secretary
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: The Bank of Kaukauna Kaukauna, Wisconsin
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal Through a Wholly-Owned Subsidiary in Investment Activities That May Not Be Permissible for a Subsidiary of a National Bank
STATEMENT
Pursuant to section 24 of the Federal Deposit Insurance Act and part 362 of the Federal Deposit Insurance Corporation's ("FDIC") rules and regulations, The Bank of Kaukauna, Kaukauna, Wisconsin ("Bank"), has filed an application requesting the FDIC's consent for the Bank to continue the present activities of one of its subsidiaries, Mullen Bender, Inc. ("Subsidiary"). The Subsidiary, operating through outsourcing arrangements, manufactures a plastic tool frame called the Mullen Bender that bends cable wire to facilitate aerial cable installation. This activity has not been identified as permissible for a subsidiary of a national bank. State-chartered, FDIC-insured banks may not engage through a subsidiary in activities as principal which are not permissible for subsidiaries of national banks unless they obtain consent from the FDIC. The FDIC may not grant its consent unless the bank is in compliance with applicable capital standards and the FDIC determines the activity poses no significant risk to the deposit insurance fund. Wisconsin state law permits the Bank to hold the equity ownership interests of the Subsidiary with approval of the State authority, which the Bank has previously obtained.
The Bank acquired 75 percent of the Subsidiary's stock in 1985 -- in satisfaction of debts previously contracted -- and purchased the remaining 25 percent from the Subsidiary's other shareholder the same year. The Subsidiary's only assets are cash capital, a fully depreciated steel mold or die used to make the Mullen Bender, and the trademark rights to the Mullen Bender name. The Subsidiary has an unaffiliated plastics company manufacture the tool on the Subsidiary's behalf, under a longstanding arrangement. All of the tools are purchased at wholesale by a single unaffiliated cable tool sales firm, for resale to the firm's retail customers. Tools are shipped directly from the plastics company to the tool sales firm approximately eight times a year, at the direction of the Subsidiary. The Bank's equity investment in the Subsidiary is an amount equal to less than five percent of the Bank's Tier 1 capital. In reviewing this application, the Board of Directors of the FDIC ("Board") specifically notes that the Bank acquired the Subsidiary a number of years before the enactment of section 24 of the Federal Deposit Insurance Act and has operated it without incident continuously since that time.
The Bank is owned by Brogan Bankshares, Inc., a one-bank holding company. The Bank is in overall satisfactory condition, and its management is satisfactory. The Bank is in compliance with applicable capital standards.
The risks and financial prospects of commercial and manufacturing ventures vary widely depending on the particulars of the activity in question. The variables which a manufacturer must control in order to operate successfully can be numerous and, with the exception of the cost of capital and funds, significantly different from those typically confronted in banking. Balancing this is the fact that bankers, as lenders to manufacturing firms, and investment advisors to parties investing in them, must have some understanding of these variables.
The particular circumstances surrounding the Subsidiary's commercial activities largely eliminate most of the variables confronting other manufacturing operations, since they involve outsourced manufacturing and distribution of an uncomplicated product with an established market. Management represents it has no plans to change the Subsidiary's current practices or develop additional products. Even if the market for the Mullen Bender contracted for some reason, the Subsidiary has little or no inventory, no sunk costs to recover or debt to repay. Therefore, its capital would likely remain largely intact. However, since changes in the Subsidiary's operations might introduce certain variables, the Board is imposing a condition requiring the Bank to obtain the FDIC's written consent before the Subsidiary engages in any other activity.
The Subsidiary is potentially subject to a highly unpredictable risk that some party may attempt to make the Subsidiary a defendant in product liability litigation under state law, with attendant defense costs and liability exposure. Generally, courts recognize corporate subsidiaries as legal entities separate from their shareholders. However, there are occasions when courts pierce the corporate veil and hold a shareholder liable for the obligations of a subsidiary. The Board is imposing conditions on the Subsidiary designed to strike a reasonable balance between the costs associated with separating .a subsidiary from the parent Bank and the benefit of gaining reasonable assurance that the Bank's assets will not be subject to liability from some party seeking to hold the Bank liable for the Subsidiary's actions. The Board is also requiring the Subsidiary to maintain liability insurance appropriate for its line of business.
As a precaution, the Board is imposing certain conditions addressing transactions between or for the benefit of the Bank and the Subsidiary, as well as transactions relating to the Subsidiary's activities with Bank insiders. Requiring such transactions to be on terms comparable to those offered to unaffiliated parties protects the bank from direct or indirect disadvantage.
In light of the particular circumstances of the application and the prudential limitations and restrictions imposed, the Subsidiary's activities will not constitute a significant risk to the Bank Insurance Fund or present material safety and soundness concerns.
BOARD OF DIRECTORS
THE FEDERAL DEPOSIT INSURANCE CORPORATION