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Decisions on Bank Applications


Cumberland Bank

December 12, 1996

Board of Directors
Cumberland Bank
1000 Main Street
P.O. Box 410
Carthage, Tennessee 37030-0195

Members of the Board:

We have reviewed your request to indirectly continue activities through the bank's wholly-owned subsidiary, Cumberland Mortgage Company (the "Subsidiary"), that may not be permissible for a subsidiary of a national bank. The application, dated August 19, 1996, was filed pursuant to Section 362.4(d)(4)(iii) of the Federal Deposit Insurance Corporation ("FDIC") Rules and Regulations and was received by the FDIC's Memphis Regional Office on August 26, 1996.

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

1. That the Bank shall take the necessary actions to establish the Subsidiary, and operate the Subsidiary in a manner so as to ensure that it has 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 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 atom 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 indirect real estate investment in the Subsidiary, including equity interests, debt obligations of the Subsidiary held by the Bank, Bank guarantees of debt obligations issued by the Subsidiary, extensions of credit or commitments of credit from the Bank to the Subsidiary, and any extensions or commitments of credit to any third party for the purpose of making a direct investment in the Subsidiary or making an investment in any investment in which the Subsidiary has an interest (defined collectively as "Real Estate Investment"), shall be limited to not more than 10 percent of Tier I capital. For purposes of this Order, Real Estate Investment shall not include loans made by the Bank to finance bona fide sales of assets which meet the requirements of paragraph 9(b) below,

3. That the Subsidiary shall divest of real estate investment properties by September 1, 1999;

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

5. The Bank shall, on a quarterly basis, perform the capital adequacy calculations described in paragraph 4 above 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 Part 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;

6. 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;

7. That any extensions of credit to any third parties for the purpose of making a direct investment in the Subsidiary, making an investment in any investment in which the Subsidiary has an interest, or any acceptance of any debt obligation of or equity interest in the Subsidiary as collateral security for a loan or extension of credit to any third party by the Bank shall be clearly disclosed to the Bank's board of directors prior to approval of the extension of credit and documented in the board's minutes;

8. That the Bank and Subsidiary shall not engage in any transactions with insiders of the Bank or their related interests which relate to the Subsidiary's real estate investment activities without the prior written consent of the appropriate Regional Director;

9. That the Bank shall:

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

(b) Not extend credit to any borrower to acquire real estate from the Subsidiary unless it is consistent with safe and sound banking practice and does not involve more than the normal degree of risk of repayment and the credit 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;

10. That transactions between the Bank and the Subsidiary shall be made in accordance with the restrictions of Section 23A and 23B of the Federal Reserve Act, 12 U.S.C. Sect. 371c and Sect. 371c-1, to the same extent as though the Subsidiary were an affiliate of the Bank as defined under Sections 23A and 23B, with the exception that the collateral requirements of Section 23A shall not apply to existing loans. Furthermore, the collateral 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 9(b) above; and

11. 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 night to alter, suspend, or withdraw its approval.

Questions relating to this matter may be referred to Senior Examination Specialist D. Larry Bowen or Review Examiner Thomas M. Parzinger the FDIC's Memphis Regional Office at (901) 685-1603.

Sincerely,

Lawrence E. Morgan, Jr
Acting Associate Director


FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: Cumberland Bank Carthage, Smith County, Tennessee

Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Continue to Engage as Principal Through a Majority Owned Subsidiary in a Real Estate Activity 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 ("FDI") Act, Cumberland Bank, Carthage, Tennessee (the "Bank") has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). The Bank requests the FDIC's consent to continue to indirectly engage as principal through Cumberland Mortgage Company (the "Subsidiary"), a majority owned subsidiary, to retain and develop real estate property acquired in 1988 until it is able to divest of said property, but no later than September 1, 1999.

In general, the activity of holding real estate investment properties 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. Tennessee State law permits the holding of real estate investment properties by savings banks and their subsidiaries.

The Bank proposes to complete the development of a sub-division of single family home lots to be sold to contractors or individuals. The proposed project represents the final phase of a three phase development project which the Subsidiary began in 1988.

The Bank meets the definition of "well capitalized" within the of Part 325 of the FDIC's Rules and Regulations The Bank's proposed investment in and loans to the Subsidiary represents 9.5 percent of the Bank's Tier I capital as of September 30, 1996, and the Bank would continue to be "well capitalized" in the event its existing and proposed investment in and loans to 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 mav 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.

Based upon careful evaluation of all available facts and information, the Acting Associate Director, acting under delegated authority, has concluded that 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 and that approval of the application is appropriate subject to the conditions discussed below. The following conditions are imposed 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 interests or risks associated with transactions between the Bank and the Subsidiary;

That the Bank shall take the necessary actions to establish the Subsidiary, and operate the Subsidiary in a manner so as to ensure that it has 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 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 iriform 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;

That the Bank's indirect real estate investment in the Subsidiary, including equity interests, debt obligations of the Subsidiary held by the Bank, Bank guarantees of debt obligations issued by the Subsidiary, extensions of credit or commitments of credit from the Bank to the Subsidiary, and any extensions or commitments of credit to any third party for the purpose of making a direct investment in the Subsidiary or making an investment in any investment in which the Subsidiary has an interest (defined collectively as "Real Estate Investment"), shall be limited to not more than 10 percent of Tier I capital. Real Estate Investment shall not include loans made by the Bank to finance bona fide sales of assets if such loans are consistent with safe and sound banking practice and do not involve more than the normal degree of risk of repayment and the credit 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,

That the Subsidiary shall divest of real estate investment properties by September 1, 1999;

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

The Bank shall, on a quarterly basis, perform the capital adequacy calculations described in the paragraph above 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 Part 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;

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;

That any extensions of credit to any third parties for the purpose of making a direct investment in the Subsidiary, making an investment in any investment in which the Subsidiary has an interest, or any acceptance of any debt obligation of or equity interest in the Subsidiary as collateral security for a loan or extension of credit to any third party by the Bank shall be clearly disclosed to the Bank's board of directors prior to approval of the extension of credit and documented in the board's minutes,

That the Bank and Subsidiary shall not engage in any transactions with insiders of the Bank or their related interests which relate to the Subsidiary's real estate investment activities without the prior written consent of the appropriate Regional Director;

That the Bank shall:

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

(b) Not extend credit to any borrower to acquire real estate from the Subsidiary unless it is consistent with safe and sound banking practice and does not involve more than the normal degree of risk of repayment and the credit 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;

That transactions between the Bank and the Subsidiary shall be made in accordance, with the restrictions of Section 23A and 23B of the Federal Reserve Act, 12 U.S.C. Sect. 371c and Sect. 371c- 1, to the same extent as though the Subsidiary were an affiliate of the Bank as defined under Sections 23A and 23B, with the exception that the collateral requirements of Section 23A shall not apply to existing loans. Furthermore, the collateral 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 (b) of the paragraph above; and

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 night to alter, suspend, or withdraw its approval.

Finally, FDIC notes that the foregoing approval is unique to this application, that it was significantly influenced by Subsidiary's acquisition of the subject real estate interest prior to the effective date of Section 24, and that its view of de novo acquisition of such interest might well be different.

ACTING ASSOCIATE DIRECTOR
DIVISION OF SUPERVISION