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Harleysville Savings Bank

FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: Harleysville Savings Bank Harleysville, Pennsylvania

Application for Consent to Engage as Principal Through a Wholly-Owned Subsidiary in Equity Investment Activities that May Not be Permissible for a Subsidiary of a National Bank

ORDER

The Federal Deposit Insurance Corporation (FDIC) has fully considered all available facts and information relevant to the application by Harleysville Savings Bank, Harleysville, Pennsylvania (Harleysville or the Bank), pursuant to Section 24 of the Federal Deposit Insurance Act, 12 U.S.C. 1831 a, and Part 362 of the FDIC's Rules and Regulations, for consent to indirectly invest in the common stock of bank holding companies, savings and loan associations, and savings and loan holding companies. The Bank's investment in these equities will be made through a subsidiary to be known as HARL, Inc. (the Subsidiary), which has not yet been established. The equity investment activities proposed by Harleysville may not be permissible for a subsidiary of a national bank. Harleysville also intends to invest, through the Subsidiary, in bank stock as permitted by section 362.4(b)(4)(ii). Bank management proposes that the Bank's aggregate investment in the Subsidiary will not exceed 15 percent of the Bank's Tier I capital. Further, it is Bank management's intention to limit investment in the stock of any one issuer to 5 percent of the issuer's outstanding shares. Management is aware of, and will comply with, the limitations on equity investments by savings banks as established by the Pennsylvania Banking Code of 1965.

Accordingly, it is hereby ORDERED, for the reasons set- forth in the attached Statement, that the application submitted by Harleysville for consent to invest in the common stock of bank holding companies, savings associations, and savings and loan holding companies, through the Subsidiary, be and hereby is approved, subject to the following conditions:

1. That the investment in the common stock be held indirectly through a single, wholly-owned subsidiary organized for the purpose of holding such investments;

2. The Bank shall limit its aggregate investment in the Subsidiary to 15 percent of the Bank's Tier 1 capital and neither the Bank nor any of its subsidiaries shall make any additional investment (including equity, debt, or extensions of credit) in the Subsidiary or originate any other transaction that is used to benefit the Subsidiary without the prior approval of the Regional Director of the New York Regional Office;

3. That neither the Bank nor the 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 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;

4. That the Bank maintains a "well capitalized" status pursuant to Part 325 of the FDIC's Rules and Regulations after deducting from its Tier 1 capital the appropriate capital charge for equity investments in nonfinancial companies, as reflected in the table shown in Section II.B. of Appendix A to Part 325, for its investment in the Subsidiary. This deduction shall be reflected on the appropriate schedule of the Bank's quarterly consolidated report of condition and income. The amount of capital as so determined will be used for the purposes of the Bank's assessment risk classification under 12 CFR Part 327 of the FDIC's Rules and Regulations, and its categorization as a "well capitalized," or "adequately capitalized" institution as defined in Part 325, provided that the capital deduction shall not be used for the purposes of determining whether the Bank is "critically undercapitalized;"

5. That the Bank obtain approval from the Pennsylvania Department of Banking to establish and operate the Subsidiary; and

6. That, in the event the facts and circumstances presented or otherwise known to the FDIC in connection with this request change significantly, the FDIC shall have the right to alter, suspend, or withdraw its approval.

Dated at Washington, D.C., this day of May 2002.

FEDERAL DEPOSIT INSURANCE CORPORATION

Michael J. Zamorski
Director
Division of Supervision


FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: Harleysville Savings Bank Harleysville, Pennsylvania

Application for Consent to Engage as Principal Through a Wholly-Owned Subsidiary in Equity Investment Activities that May Not be Permissible for a Subsidiary of a National Bank

STATEMENT

The Federal Deposit Insurance Corporation (FDIC) has fully considered all available facts and information relevant to the application by Harleysville Savings Bank, Harleysville, Pennsylvania (Harleysville or the Bank), a member of the Savings Association Insurance Fund (SAIF), pursuant to Section 24 of the Federal Deposit Insurance Act, 12 U.S.C. 1831a, and Part 362 of the FDIC's Rules and Regulations, for consent to indirectly invest in the common stock of bank holding companies, savings and loan associations, and savings and loan holding companies. The Bank's investment in these equities will be made through a subsidiary to be known as HARL, Inc. (the Subsidiary), which has not yet been established. The equity investment activities proposed by Harleysville may not be permissible for a subsidiary of a national bank. Harleysville also intends to invest, through the Subsidiary, in bank stock as permitted by section 362.4(b)(4)(ii). Bank management proposes that the Bank's aggregate investment in the Subsidiary will not exceed 15 percent of the Bank's Tier I capital. Further, it is Bank management's intention to limit investment in the stock of any one issuer to 5 percent of the issuer's outstanding shares. Management is aware of, and will comply with, the limitations on equity investments by savings banks as established by the Pennsylvania Banking Code of 1965 (Banking Code).

Section 504(b)(vi) of the Banking Code permits a savings bank to invest in preferred stock,. guaranteed stock, or common stock of a corporation or similar entity existing under the laws of the United States, any state, or the District of Columbia, subject to: the prudent man rule; a limit for the aggregate cost of all shares acquired of the lesser of 7.5 percent of the savings bank's assets or 75 percent of the savings bank's capital, surplus, and capital securities; a limit for the aggregate cost of all shares of one issuer of 0.2 percent of the book value of the savings bank's assets; and a limit for the aggregate number of shares of one issuer of 5 percent of the total number of the issuer's outstanding shares.

Investing in the common stock of bank holding companies, savings and loan associations, and savings and loan holding companies may not be permissible for a national bank or a subsidiary of a national bank. Neither insured state banks nor their subsidiaries may engage as principal in an activity prohibited for national 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.

As of December 31, 2001, Harleysville had total assets of $574 million, and it was "well capitalized" per Part 325 of the FDIC Rules and Regulations. The Bank has been managed in a conservative manner,-and its financial condition is sound. The management team that will be responsible for selecting the investments to be made by the Subsidiary is considered capable and competent. Management has indicated investments will be made in institutions that are in strong condition with solid earnings and that reflect a pattern for continued earnings performance.

Harleysville's investment in the Subsidiary will be limited to 15 percent of the Bank's Tier 1 capital. Additionally, the Bank must apply the appropriate capital charge for investments in nonfinancial companies, as set forth in the recently adopted amendments to Part 325, which became effective on April 1, 2002, and maintain a "well capitalized" position after applying the capital charge. This condition is being imposed to protect the deposit insurance funds from the market risk associated with the proposed equity investments.

The level and extent of equity investments proposed by Harleysville is considered reasonable, based on the Bank's financial strength and management's demonstrated overall conservative nature. The Bank's proposal does not appear to pose any significant risk to the deposit insurance funds.

In its application, Bank management indicated that, other than performing administrative functions, there would be no involvement by insiders or their related interests in the Subsidiary's activities. Also, the Bank is not expected to extend credit to the Subsidiary. Nonetheless, as a safeguard should there be insider involvement or consideration of an extension of credit by the Bank to the Subsidiary at some time in the future, conditions addressing these situations are being imposed in the Order approving the Bank's application. One condition requires the FDIC Regional Director's prior approval of transactions, such as extensions of credit, between the Bank and the Subsidiary. The other condition requires that any transactions, relating to the Subsidiary's activities, between the Bank or the Subsidiary and Bank insiders or their interests must be 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.

The Pennsylvania Department of Banking must approve the formation of the Subsidiary and the FDIC's approval Order contains a condition requiring that such approval be obtained.

Based on a careful review of all available facts and information, including the investment limits under Harleysville's proposal, the FDIC has concluded that the proposed investments through a wholly-owned subsidiary in common stock of bank holding companies, savings and loan associations, and savings and loan holding companies, do not pose a significant risk to the SAIF and, therefore, approval of the application, subject to the conditions in the Order, is warranted.

DIRECTOR
DIVISION OF SUPERVISION
FEDERAL DEPOSIT INSURANCE CORPORATION



Last Updated 03/24/2011 Legal@fdic.gov