Decisions on Bank Applications
Hamlin Bank and Trust Company
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Hamlin Bank and Trust Company Smethport, Pennsylvania
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal Through a Majority-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. Sect. 1831a, and Part 362 of the FDIC's Rules and Regulations, relating to the application by Hamlin Bank and Trust Company, Smethport, Pennsylvania ("Hamlin"), for consent to indirectly acquire and retain through a wholly-owned subsidiary the stock of savings associations and bank holding companies not listed on a national securities exchange. This is an activity that may not be permissible for a subsidiary of a national bank. Hamlin also intends to make investments in unlisted bank stock via the subsidiary as permitted by section 362.4(c)(3)(iv)(B) of the FDIC's Rules and Regulations. Management of Hamlin has indicated that it has no intention of pursuing short-term trading activities; that it is aware that all investments must conform to the requirements of the Pennsylvania Banking Code of 1965; and that it intends to continue to acquire and retain listed equity securities at the bank level pursuant to section 362.3(b)(4) of the FDIC's Rules and Regulations. Hamlin has internal investment guidelines that establish a dollar volume target at cost for unlisted stocks of savings associations, banks, and bank holding companies at 10 percent of its Tier 1 capital; and a total dollar volume target at cost for all equity investments, including indirect holdings of unlisted stocks of savings associations, banks, bank holding companies, and direct holdings of equity investments pursuant to section 362.3(b)(4), at 50 percent of its Tier 1 capital. 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 Hamlin for consent to retain and acquire stock of unlisted savings associations and bank holding companies through a wholly- owned subsidiary, be and hereby is approved, subject to the following conditions:
(1) That the investment in unlisted stock of an insured savings association or bank holding company, as well as any unlisted insured bank stock permissible under section 362.4(c)(3)(iv)(B), shall be held indirectly through a single, majority-owned subsidiary organized for the purpose of holding such investments;
(2) That Hamlin shall maintain a "well-capitalized" status pursuant to Part 325 of the FDIC's Rules and Regulations after deducting from its Tier 1 capital the investment in equity securities of the subsidiary as well as any pro rata share of any retained earnings of the subsidiary, provided that the capital deduction shall not be used for purposes of determining whether the bank is "critically undercapitalized," and that this deduction shall be reflected on the appropriate schedule of Hamlin's consolidated report of income and condition;
(3) That without application, Hamlin or any of its subsidiaries may not extend credit to the majority- owned subsidiary, purchase any debt instruments issued by the majority-owned subsidiary, or originate any other transaction that is used to benefit the majority-owned subsidiary;
(4) That neither Hamlin nor the majority-owned 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 majority-owned 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; and
(5) That the FDIC shall retain the ability to alter, suspend, or withdraw its approval in the event the facts and circumstances presented in the application change significantly.
Dated at Washington, D. C., this 23rd day of December, 1997.
BY ORDER OF THE BOARD OF DIRECTORS
James D. LaPierre
Deputy Executive Secretary
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Hamlin Bank and Trust Company Smethport, Pennsylvania
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal Through a Majority-Owned Subsidiary in 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, Hamlin Bank and Trust Company, Smethport, Pennsylvania ("Hamlin"), has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). Hamlin requests the FDIC's consent to acquire and retain indirectly through a wholly-owned subsidiary, Hamlin Corporation ("Subsidiary"), the stock of savings associations and bank holding companies not listed on a national securities exchange. The proposal does not involve options, futures, short sales, equity securities of foreign companies, derivative products, or margin trading. Hamlin also intends to make investments in unlisted bank stock via the Subsidiary as permitted by section 362.4(c)(3)(iv)(B) of the FDIC's Rules and Regulations. Management of Hamlin has stated that the equity investment will be purchased as long-term investments, and that it does not intend to pursue short-term trading activities.
The activity of making investments in the stock of a savings association or a bank holding company may not be a permissible activity for a national bank or a subsidiary of a national bank. Insured state banks may not engage as principal in an activity prohibited to nationally-chartered banks unless consent has been obtained 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 funds. Hamlin has previously notified the FDIC and has received approval to continue to purchase and retain stock of corporations listed on a national securities exchange through the "grandfather" provision of section 362.3(b)(4) of the FDIC's Rules and Regulations. The instant application is limited to shares of savings association or bank holding company stock not listed on a national securities exchange. Hamlin has internal investment guidelines that establish a dollar volume target at cost for unlisted stocks of savings associations, banks, and bank holding companies at 10 percent of its Tier 1 capital; and a total dollar volume target at cost for all equity investments, including indirect holdings of unlisted stocks in savings associations, banks, bank holding companies, and direct holdings of equity investments pursuant to section 362.3(b)(4), at 50 percent of its Tier 1 capital.
Hamlin's management is aware that all investments must conform to the requirement of the Pennsylvania Banking Code of 1965. Section 311(d) of the Pennsylvania Banking Code of 1965 ("Banking Code") provides for a state-chartered bank to invest in shares of stock of a bank or bank holding company domiciled in Pennsylvania. No distinction is drawn between listed and unlisted stock. Section 311(d) of the Banking Code limits the investment to 10 percent of the sum of the par value of the issued and outstanding shares of any one bank holding company. Shares owned by all affiliates of a Pennsylvania bank holding company are aggregated to determine whether the 10 percent limitation is reached. Section 311(d) of the Banking Code also provides for the investment in stock of a Pennsylvania savings association, provided that an institution may hold no more than 10 percent of the outstanding shares of the common stock of the institution. Section 311(d) of the Banking Code further provides that the cost to any bank of the stock acquired or held in the aggregate shall not exceed the lesser of 10 percent of the total assets or 100 percent of the capital, surplus, and capital securities of the acquiring institution. Accordingly, Hamlin's proposal to acquire unlisted savings association and bank holding company stock is permissible under section 311(d) of the Banking Code.
The purchase of any equity stock entails risks related to the loss of investment, price volatility, and market liquidity. However, certain factors lessen these risks.
As of September 30, 1997, Hamlin had total assets of $223 million. Its financial condition, future earnings prospects, and management are regarded as strong. Hamlin's proposed investment limitations would facilitate prudent management of the investments through the wholly-owned subsidiary. Hamlin meets the definition of "well-capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations, and would continue to be "well-capitalized" after deducting the maximum proposed investment in equity securities of the Subsidiary from its Tier 1 capital.
Stock investment, while it may be somewhat riskier than lending, involves an application of financial analysis, economic assessment, and business judgment similar to lending expertise. The activity, subject to prudent supervision and judgment, may not prove to be unduly risky. The maximum investment, the conservative nature of the investment policy, and the restrictions under state law reduce the risk associated with the investment activity in this instance. Also, Hamlin's application is limited to unlisted savings association and bank holding company stock. Such institutions are part of a highly regulated industry which also provides some investment quality assurance.
Nevertheless, because investment in the stock of corporations other than banks may be of greater risk than other more traditional bank activities, the FDIC is imposing a condition requiring Hamlin to maintain a "well-capitalized" status pursuant to section 325.103 of the FDIC's Rules and Regulations after deducting from its Tier 1 capital the investment in equity securities of the Subsidiary as well as the bank's pro rata share of any retained earnings of the Subsidiary, provided that the capital deduction shall not be used for purposes of determining whether the bank is "critically undercapitalized." As such, Hamlin must have a Tier 1 leverage capital ratio of not less than 5.0 percent, a Tier 1 risk-based capital ratio of not less than 6.0 percent, and a total risk- based capital ratio of not less than 10.0 percent after the required deduction. In addition, Hamlin is required to reflect such deduction on the appropriate schedule of its consolidated report of income and condition.
No investment planned for the Subsidiary has any affiliation with any of the Hamlin's executive officers, directors, principal shareholders, or related interests of such persons. However, the FDIC is imposing a condition requiring that for any transactions of Hamlin and the Subsidiary entered into with Hamlin's executive officers, directors, principal shareholders, or related interests of such persons which relate to the Subsidiary, the terms and conditions of such transactions must be substantially the same as those prevailing at the time for comparable transactions with persons not affiliated with the bank.
The FDIC is also imposing a condition that Hamlin or any of its subsidiaries may not without application extend credit to the Subsidiary, purchase any debt instruments issued by the Subsidiary, or originate any other transaction that is used to benefit the Subsidiary. No such transactions are currently contemplated, and approval by the FDIC through the application process is required prior to any such transaction.
Based on a careful review of all available facts and information, including the investment limits under Hamlin's proposal, the Board has concluded that the proposed investment through a wholly-owned subsidiary in common stock of savings associations and bank holding companies does not pose a significant risk to the Bank Insurance Fund, and therefore, approval of the application, subject to the conditions in the Order, is warranted.
THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION