Application Pursuant to Section 24(a) of the Federal Deposit Insurance Act to Directly Continue an 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 First State Bank, Pineville, Kentucky (the "Bank"). The application requests the FDIC's consent to continue to guaranty a debt of the City of Middlesboro, Kentucky.
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.
The State Authority has not objected to the Bank's guarantee of the debt.
The situation leading to the application involved the Bank's entering into a guaranty agreement dated May 29, 1991. The guaranty agreement related to debt owed by the City of Middlesboro, Kentucky to the Middlesboro Airport Authority. The Middlesboro Airport Authority had agreed to sell a tract of land to the City of Middlesboro for $240,000. The tract of land was designated as the campus site for Southeast Community College, which had received a $5,600,000 grant for construction of three buildings, provided that the land was free and clear to build on. The City of Middlesboro was willing to acquire the property at the stated price of $240,000, payable in six annual installments of $40,000. The City is limited by statutory requirements of being able to only make one year commitments. To facilitate the transaction and ensure establishment of what was perceived as a much needed educational facility for the area, four financial institutions and two large businesses from the region pledged to contribute up to $40,000 each if the City of Middlesboro failed to make the required payments. This type of activity does not appear to be permissible for national banks.
The Bank's management is satisfactory, it is "well capitalized" and the Bank is in overall satisfactory condition. The City of Middlesboro has paid the original $240,000 loan to approximately $90,000, of which First State Bank guarantees $15,000. The City has no general obligation bonds outstanding, however, other bonds issued by the city or agencies of the city are rated "A" or better by a nationally recognized rating service. Even if the Bank is called upon to fund the entire $90,000 guarantee, the Bank will remain "well capitalized". Based on the foregoing, the FDIC has determined that continuing to guaranty the debt does not present a significant risk to the deposit insurance fund.
Having found that the State Authority does not object to the activity; that the Bank is in compliance with applicable capital standards; and that the guaranty agreement does not pose a significant risk to the deposit insurance fund; the FDIC concludes that approval of the Bank's request to continue the guarantee is warranted, subject to certain conditions.
The FDIC has conditioned its action in this case upon its future ability to alter, suspend, or withdraw its approval should the facts and circumstances present in the application change significantly. The Bank shall notify the FDIC of any significant change in facts or circumstances. In addition, the Bank shall continue to meet applicable capital standards.
The FDIC specifically notes that its consent action is unique to this case, that it was significantly influenced by acquisition pre-Section 24 and that its view of a de novo request to continue such an activity might well be different. Particularly, the issuance of a guarantee that could result in a claim on a bank's assets without an equivalent increase in assets is generally considered to be an unsafe and unsound banking practice and reflects unfavorably on the bank's management.