RE: Farmers Bank of Portageville Portageville, Missouri
Application Pursuant to Section 24(d) of the
Federal Deposit Insurance Act to Indirectly Continue
Activity That May Not Be Permissible for a National Bank
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 Farmers Bank of Portageville, Portageville, Missouri ("the Bank"). The Bank requests the FDIC's consent for its wholly-owned subsidiary, FBP Development Corporation ("FBP"), to retain its investment interest in realty property, located in Portageville, Missouri, until it is able to divest itself of said property at a more favorable price.
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. The Missouri banking statutes permit the holding of subject real estate investments, and the State authority has recommended that the Corporation grant the Bank's request.
The Bank and FBP have been engaged in this activity since 1990, when the Bank transferred ownership of three tracts of other real estate acquired five years before through debts previously contracted to FBP for the purpose of sale and liquidation. The Bank and FBP have made reasonable efforts to sell the remaining real estate; however, the current market is soft, and near term divestiture under such conditions would likely result in a loss. During the time period the property has been held, FBP has been successful in liquidating the majority of the three tracts in a profitable manner. As various development activities have taken place at parcels located adjacent to the property held by FBP, Bank management believes that the Bank should be able to sell the property profitably, or at least minimize the amount of loss that would be sustained, if FBP is allowed to continue to hold this asset, which would not be permissible for a national bank. FBP's activities are confined to the Bank's market area and are generally confined to effecting a satisfactory disposal of the underlying real estate. The remaining parcel of unimproved real estate is FBP's only real estate investment, and the Bank has indicated that no further development or acquisition activities will be conducted through FBP.
The Bank, which meets the definition of "well capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations, is in compliance with applicable capital standards. The Bank's consolidated investment in the subsidiary represents only 2.60 of the Bank's Tier 1 leverage capital, and the Bank would continue to be "well capitalized" in the event its entire subsidiary investment 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, FBP's real estate investment activities will not pose significant risks to the Bank Insurance Fund or present material safety and soundness concerns.
Based upon careful evaluation of all available facts and information, the Associate Director, acting under delegated authority, has concluded that approval of the application is warranted subject to the restrictions discussed below. These 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 FBP.
FBP's real estate investments shall be limited to those currently held; the Bank shall continue to meet all applicable capital standards; the Bank shall divest its real estate interests held through FBP within five years of the date of the approval letter, and if the Bank has not divested itself of all of its interest within three years, then the Bank shall submit to the FDIC a written divestiture plan describing the means by which the Bank shall comply; the Bank shall prohibit any insider involvement in the real estate activity, unless the prior written approval of the FDIC is obtained; and the FDIC shall have the right to alter, suspend or withdraw its approval if circumstances change significantly. In addition, transactions between the Bank and FBP shall be made in accordance with the restrictions of Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. § 371c and § 371c-1, to the same extent as though FBP were an affiliate as defined under Sections 23A and 23B.
Finally, the FDIC notes that the foregoing approval is unique to this application, that it was significantly influenced by FBP's acquisition of the subject real estate interest prior to the effective date of Section 24(d), and that its view of de novo acquisition of such interest might well be different.