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McGehee Bank

FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: McGehee Bank McGehee, Arkansas

Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Continue to Indirectly Engage as Principal Through a Wholly-Owned Subsidiary in Real Estate Investment Activities That May Not Be Permissible for a Subsidiary of a National Bank

ORDER

The Board of Directors 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. Sect. 1831a, and Part 362 of the FDIC's Rules and Regulations, 12 C.F.R. Part 362, relating to an application by McGehee Bank, McGehee, Arkansas (the "Bank"), for consent to continue to indirectly engage as principal through its wholly-owned subsidiary, McBank Realty, Inc. (and one or more other majority-owned subsidiaries that may be formed) (defined collectively as the "Subsidiaries") in real estate investment activities that may not be permissible for a subsidiary of a national bank. The Board of Directors, having found that the Bank is in compliance with applicable capital standards and that the activity to be continued does not appear to pose, with certain conditions imposed, a significant risk to the applicable deposit insurance fund, 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 indirectly engage as principal through the Subsidiaries in real estate investment activities that may not be permissible for a subsidiary of a national bank be and the same hereby is approved, subject to the following conditions:

1. That the Bank and the Subsidiaries shall take the necessary actions to establish, and the Subsidiaries shall operate in a manner so as to ensure, a separate corporate existence as a majority-owned subsidiary which:

(a) is adequately capitalized,

(b) is physically separate and distinct in its operations 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) maintains a board of directors with one or more independent, knowledgeable outside directors and 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 Subsidiaries that the Subsidiaries are 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. That the Bank's Real Estate Investment (as defined below) in the Subsidiaries shall be limited to that which is currently held. The Bank may increase its Real Estate Investment under the following circumstances:

(a) The Real Estate Investment, including any increase, in any one Subsidiary may not represent more than 10 percent of Tier 1 capital, and the Investment in all such Subsidiaries may not exceed 15 percent of Tier 1 capital in the aggregate,

(b) The Bank's capital level, after deducting all Real Estate Investments in all of the Subsidiaries, shall equal or exceed the level required for a "well capitalized" institution pursuant to section 325.103(b)(1) of the FDIC's Rules and Regulations,

(c) The Bank shall provide an Investment Plan to the Regional Director of the FDIC's Division of Supervision on an annual basis that indicates the extent of the Bank's planned investments in the Subsidiaries and the manner in which concentration and diversification of risk issues within these Subsidiaries will be addressed. If the Regional Director has not objected to the Investment Plan within 45 days, the Bank may proceed within the parameters of subparagraph (a) without filing an application, and

(d) Any New Real Estate Investment Activity (as defined below) planned to be conducted by a Subsidiary must first be approved under the application procedures of Part 362;

3. That the Bank's capital level, after deducting all Real Estate Investments in all the Subsidiaries, equal or exceed the level required for a "well capitalized" institution pursuant to section 325.103(b)(l) of the FDIC's Rules and Regulations;

4. That the Bank shall, on a quarterly basis, perform the capital adequacy calculations described in paragraph 3 for the purpose of ascertaining its capital level, and that in the event the Bank falls below the level required for a "well capitalized" institution pursuant to section 325.103(b)(1) of the FDIC's Rules and Regulations, the Bank shall notify the FDIC within 15 days and submit to the FDIC an acceptable plan for restoring capital to a level required for a "well capitalized" institution;

5. That, henceforth, notwithstanding Parts 325 and 327 of the FDIC's Rules and Regulations, 12 C.F.R. Parts 325 and 327, the Bank's capital category for purposes of Prompt Corrective Action and the Bank's risk-adjusted deposit insurance premium shall be calculated based on the Bank's capital after deducting all Real Estate Investments, except that such deductions shall not be made when determining whether the Bank is "critically undercapitalized" as defined under Part 325 of the FDIC's Rules and Regulations;

6. That the Bank shall continue to meet all applicable capital standards,

7. That any extensions of credit by the Bank to any third parties shall be clearly disclosed to the Bank's board of directors prior to approval of the extension of credit and shall be documented in the board's minutes if such extension of credit to the third party.

(a) is for the purpose of making a direct investment in a Real Estate Subsidiary or in any investment in which a Real Estate Subsidiary has an interest, or

(b) involves the acceptance of a debt obligation of, or equity interest in, a Real Estate Subsidiary as collateral security for such extension of credit,

8. That, prior to the consummation of a transaction between any Subsidiary and any of the Bank's customers, any potential conflicts of interest be identified, be appropriately resolved, and be clearly disclosed to the Bank's board of directors and documented in the board's minutes;

9. That the Bank not engage directly or indirectly through any Subsidiary in any real estate investment activity or other transaction with insiders or their related interests without the prior written consent of the Regional Director of FDIC's Division of Supervision;

10. That the Bank shall:

(a) not condition any loan on the purchase or rental of real estate from the Subsidiary,

(b) not purchase real estate from any Subsidiary engaged in real estate investment activities in its trust capacity unless expressly authorized by the trust instrument, court order, or state law, and

(c) not extend credit to any borrower to acquire real estate from the Subsidiary (End Loans) unless it is consistent with safe and sound banking practice, does not involve more than the normal degree of risk of repayment and is extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions;

11. That transactions between the Bank and any real estate investment subsidiary shall be made in accordance with the restrictions of sections 23A and 238 of the Federal Reserve Act, 12 U.S.C. Sect. 371c and Sect. 371c-1, to the same extent as though the Subsidiary was an affiliate of the Bank as defined under sections 23A and 23B, with the exception that the collateral requirements and investment limitations of section 23A shall not apply to loans made by the Bank to finance bona fide sales of assets to third parties consistent with safe and sound underwriting requirements contained in paragraph 10(b) above; and

12. That the consent granted herein is based on the facts and circumstances presented or otherwise known to the FDIC in connection with these requests. 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.

Definitions. Except as otherwise set forth in this Order, capitalized terms used herein shall have the meanings set forth below:

(a) "Real Estate Investment" means the Bank's investment in all Real Estate Subsidiaries, including, equity interests, debt obligations of any Real Estate Subsidiary held by the Bank, the Bank's guarantees of debt obligations issued by any Real Estate Subsidiary, extensions of credit or commitments of credit from the Bank to a Real Estate Subsidiary, and any extensions of credit to any third parties for the purpose of making a direct investment in any Real Estate Subsidiary or making an investment in any investment in which any Real Estate Subsidiary has an interest. However, Real Estate Investment shall not include loans made by the Bank to finance End Loans.

(b) "End Loans" means any loan made by the Bank to a third party for the purpose of financing the bona fide sale of a Real Estate Subsidiary asset and which meets the requirements of paragraph 103(b) of this Order.

(c) "New Real Estate Investment Activity" means any real estate investment activity other than conducted by McBank Realty, Inc., as described in the application dated January 26, 1994, and subsequent written documentation provided to the Regional Office of the Division of Supervision ("application"), which is the subject of this Order.

The activities described in the application as being conducted by McBank Realty, Inc. are as follows. acquisition and lease of acreage and existing structures for agricultural or related purposes, acquisition of residential lots for development of low income housing for lease; acquisition and renovation of individual, residential or small commercial properties for lease, and acquisition and development of small tracts of commercial land for lease as office facilities.

(d) "Real Estate Subsidiary" means McBank Realty, Inc., or any other subsidiary that is or will engage in real estate investment activities.

Dated at Washington, D. C., this 21st day of December, 1995.

BY ORDER OF THE BOARD OF DIRECTORS

Robert E. Feldman
Deputy Executive Secretary


FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: McGehee Bank McGehee, Arkansas

Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Continue to Indirectly Engage as Principal Through a Wholly-Owned Subsidiary in Real Estate Investment Activities That May Not Be Permissible for a Subsidiary of a National Bank

STATEMENT

Pursuant to the provisions of section 24 of the Federal Deposit Insurance Act ("FDI Act") McGehee Bank, McGehee, Arkansas ("Bank"), has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). The Bank requests the FDIC's consent to continue to indirectly engage in real estate investment activities through a wholly-owned subsidiary of the Bank.

The activity of holding real estate investment properties for lease to third parties may not be a permissible activity for a national bank or a subsidiary of 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. Arkansas state law empowers state banks to hold, purchase, convey, mortgage, and lease real property, those powers permitted to banks may be conducted through one or more subsidiaries.

Since 1985, the Bank has engaged, through a wholly-owned subsidiary, in real estate leasing activities of a type not closely related to banking. The Bank has been engaged in the leasing of commercial buildings, farm land and residences attached thereto, and the acquisition of land for development of low income housing units for lease. The Bank requests consent from the FDIC to continue to engage in these activities, of a type not closely related to banking, in an amount not to exceed 15 percent of the Bank's total capital.

Investments in real estate, at any stage of the development process or even completed properties, can be generally characterized as risky in that there is a high degree of variability or uncertainty of returns on invested funds. The cyclical downturn in the real estate market in the late 1980's and early 1990's, and the impact of that downturn on financial institutions, provides an illustration of the market risk presented by real estate investment. In addition to the high degree of variability, real estate investments possess many risks that, while not entirely unique, are not readily comparable to typical equity investments (e.g., common stock). Real estate markets are for the most part localized, investments are normally not securitized, financial information flow is often poor, and the market is generally not very liquid.

Real estate investment risk is higher than for most traditional bank assets, such as loans or debt securities. Real estate investment can increase interest rate risk; optimum investment periods are typically long term; real estate is relatively lacking in liquidity; and real estate is subject to specialized risks such as environmental liability. In addition, real estate investment is of questionable benefit in the diversification of a financial institution's portfolio of assets. The experience and expertise of management is a critical factor, and there is much anecdotal evidence to suggest that the lack of adequate management creates a significant level of risk of loss.

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.

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 real estate investment activities and the risks associated with the owning, and the leasing of local commercial and farm properties and the acquisition of local vacant land for the development and lease to low income families.

In determining if a significant risk to the fund exists in the proposal, the Board evaluated the specifics of the Bank's application. In evaluating a Part 362 real estate activity application, the Board considers the types of real estate investment activity proposed to determine if any activity is suitable for an insured depository institution. The proposed subsidiary structure and its management policies and practices are reviewed to determine if a bank is adequately protected from litigation risk. Capital adequacy is analyzed to ensure that a bank first devotes sufficient capital to its more traditional banking activities. Capital adequacy is determined by a bank's "consolidated" and "bank only" leverage and risk-based capital ratios, with all investments in real estate investment subsidiaries excluded from capital in the "bank only" capital calculation. Limitations on investment in a subsidiary engaged in real estate investment activity are evaluated in order to assure that the maximum risk exposure to the bank is nominal. Policies relating to extensions of credit to third parties for subsidiary related transaction are evaluated to determine if they protect the bank from concentrations of risk. A bank's policies on engaging in transactions in which insiders are involved are reviewed to determine if they protect the bank from potential insider abuse. A bank's policies relating to the conditioning of loans on the purchase of real estate from the subsidiary and the extending of credit by the bank to third parties for the purpose of acquiring real estate from its subsidiary are reviewed to determine if they prevent undesirable tying relationships and to determine if they are adequate to ensure that sound credit underwriting is maintained. Having reviewed these areas, the Board is imposing conditions for prudential reasons due to the volatility and other risks which are inherent in the subject real estate activity, as well as to mitigate any potential insider conflicts of interest and to reduce risk to the deposit insurance fund.

As of June 30, 1995, the Bank's real estate investment activity represented approximately 5.51 percent of the Bank's Tier 1 capital and 0.92 percent of the Bank's total assets. The Bank is in compliance with applicable capital standards. The Bank states in its application that its investment in the Subsidiary will be limited to 15 percent of its equity capital; however, no feasibility study, financial projections, and/or business plan regarding the conduct of the activity was submitted in the application. Due to the lack of specific information on the financial and other risks associated with real estate investment that a subsidiary could potentially undertake, the FDIC has determined that it is appropriate to limit the Bank's real estate investment in the Subsidiaries to that which is currently held. The Bank may increase its real estate investment if the investment, including any increase, in any one Subsidiary does not represent more than 10 percent of Tier 1 capital, and the investment in all such Subsidiaries does not exceed 15 percent of Tier 1 capital in the aggregate; the Bank's capital level, after deducting all investments in all of the real estate Subsidiaries equals or exceeds the level required for a "well capitalized" institution pursuant to section 325.103(b)(1) of the FDIC's Rules and Regulations; and the Bank provides an Investment Plan to the Regional Director for FDIC's Division of Supervision on an annual basis that indicates the extent of the Bank's planned investments in the Subsidiaries and the manner in which concentration and diversification of risk issues within these Subsidiaries will be addressed. The Bank may proceed with the additional investment as long as the FDIC has not objected to the proposal within the 45-day notice period. In no event, however, may the Bank's aggregate investment, including the proposed investment, in any one subsidiary represent more than 10 percent of Tier 1 capital, and the total aggregate investment in all such subsidiaries represent more than 15 percent of Tier 1 capital, the investment limit requested by the Bank. Because the FDIC is limiting the activity of the Subsidiary, the Bank may form an additional subsidiary without making full application to the FDIC under Part 362 provided further that the subsidiary's real estate investment activities are limited to those activities described in the Bank's application dated January 26, 1994, and subsequent written documentation provided to the Regional Director of the FDIC's Division of Supervision. In order to ensure the Bank's capital is sufficient to support both traditional banking activities and real estate investment activities, the FDIC will also require that the Bank's capital, after deducting the Bank's aggregate investment, including the proposed real estate investment activity, in all Subsidiaries, equal or exceed the level required for a "well capitalized" institution pursuant to section 325.103(b)(1) of the FDIC's Rules and Regulations.

In order to promote the concept that real estate investment activities should be conducted in a separately and adequately capitalized subsidiary and to ensure that the appropriate insurance fund is adequately compensated for, and sufficiently protected from, additional risk in the event that "bank only" capital levels fall below "well capitalized" levels, the Bank's capital category for purposes of Prompt Corrective Action will be determined, and the Bank's risk-adjusted deposit insurance premium will be assessed, based on "bank only" capital ratios, except that such deductions shall not be made when determining whether the Bank is "critically undercapitalized" as defined under Part 325.

Given the high risk present in real estate investment activities, the FDIC has also imposed a condition requiring that transactions between the Bank and any subsidiary shall be made in accordance with the restrictions of sections 23A and 23B of the Federal Reserve Act to the same extent as though the subsidiary were an affiliate of the Bank as defined under sections 23A and 238, with the exception that the collateral requirements and investment limitations of section 23A shall not apply to loans made by the Bank to finance bona fide sales of assets to third parties provided any such loans are consistent with safe and sound banking practice, do not involve more than the normal degree of risk of repayment, and are extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions. Any such loans made by the Bank wil be reviewed by examiners at each regular safety and soundness examination conducted by the FDIC.

For the reasons outlined above, including the imposition of conditions, the Board of Directors has concluded that the proposed retention of interest in real estate does not pose a significant risk to the Bank Insurance Fund, provided certain conditions are observed, and therefore, approval of the application, subject to conditions in the Order, is warranted.

THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION



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