Decisions on Bank Applications
First Savings Bank of Moore County, Inc., SSB
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: First Savings Bank of Moore County, Inc., SSB Southern Pines, North Carolina
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Continue to Engage as Principal in an Activity Which Is Not Permissible for 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. 1831a, and Part 362 of the FDIC's Rules and Regulations, 12 C.F.R. Part 362, relating to an application by First Savings Bank of Moore County, Inc., SSB, Southern Pines, North Carolina ("Bank"), for consent to continue to engage as principal in the activity of securing non-public deposit accounts for the amount of the deposits that exceed the FDIC insurance limitation with the aggregate amount of the pledged assets not to exceed $8.0 million. This represents an activity which is not pertmissible for a national bank.
The Board, having found that the Bank is in compliance with applicable capital standards and that the activity to be continued does not appear to pose, with certain conditions imposed, a significant risk to the applicable deposit insurance fund, although it does represent risk to the deposit insurance fund by increasing the cost of resolution, has concluded 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 the Bank for consent to continue to engage in an activity that is not permissible for a national bank be, and the same hereby is, approved, subject to the following conditions:
1. That the Bank may continue to pledge assets to secure the non-public deposit accounts which are collateralized as of the date of this Order but may not initiate any new activity on deposit accounts or increase the amount of security pledged on these accounts.
2. That the Bank shall continue to meet all applicable minimum capital standards.
3. That the activity shall be subject to a one-time reporting to the Regional Director (Supervision) of the FDIC's Atlanta Regional Office, and the report filed by the last day of the first month following this approval, shall contain, at a minimum, the:
(a) Name of individual deposit account holder;
(b) Amount of deposit;
(c) Identification of asset pledged;
(d) Amount of asset pledged;
(e) Copy of pledge agreement; and
(f) Verification that the Bank is accounting for the pledged assets in accordance with generally accepted accounting practices.
4. That the consent granted herein is based on the facts and circumstances presented or otherwise known to the FDIC in connection with this application. The Bank shall notify the FDIC of any significant change in facts or circumstances, including changes to items reported in paragraph 3. above, by the end of the month following such occurrences. If the facts and circumstances change significantly, the FDIC shall have the right to alter, suspend, or withdraw its approval.
5. That the consent granted herein shall be subordinate to any subsequent ruling, regulation or policy of the FDIC that may be applicable to this activity such that the Bank shall comply, as applicable, with the requirements of such ruling, regulation or policy irrespective of the approval contained herein.
Dated at Washington, D. C., this 17th day of December, 1996.
BY ORDER OF THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: First Savings Bank of Moore County, Inc., SSB Southern Pines, North Carolina
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Continue to Engage as Principal in an Activity Which Is Not Permissible for a National Bank
STATEMENT
Pursuant to the provisions of section 24 of the Federal Deposit Insurance Act ("FDI Act"), First Savings Bank of Moore County, Inc., SSB, Southern Pines, North Carolina ("Bank"), has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). The Bank requests the FDIC's consent to continue to collateralize the portion of certain non- public deposits that are not insured by the FDIC.
The activity of pledging assets to secure non-public deposits is not a permissible activity for 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. North Carolina state law allows state savings banks to pledge bank assets to secure non- public deposits.
The Bank began the activity of pledging assets at some point prior to the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"). Bank management states that the Bank engages in the activity to encourage new large deposits and to maintain current ones all at lower interest rates than those offered to others who do not obtain the security. In addition, the Bank has established written policies which provide that in no instance will securities be pledged for private deposits of directors, executive officers or principal shareholders of the Bank or its holding company, First Savings Bancorp, Inc.; however, it is permissible if the individual is acting as a trustee in the normal course of business.
The Bank has made application pursuant to Part 362 of the FDIC's Rules and Regulations and requests permission to continue the activity indefinitely at the current level of $8.0 million as of June 30, 1996.
The deposit accounts are collateralized by U.S. Treasury Notes held in safekeeping at the Federal Home Loan Bank of Atlanta. According to Bank management, the collateralization "agreement" is evidenced by a safekeeping receipt of the underlying assets held by the depositor and there is no separately executed agreement or contract. The depositor does not have physical possession of the underlying assets.
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 with Tier I leverage, Tier I Risk-based, and Total Risk-based capital ratios of 22.54 percent, 47.07 percent, and 47.58 percent, respectively, as of the September 30, 1996, call report data. The Bank is in overall sound condition and is satisfactorily managed.
The Board of Directors ("Board") of the FDIC has reviewed available information and has also taken into consideration the financial and managerial resources and future earnings prospects of the Bank. The Board also considered the risks associated with the activity of collateralizing deposits in excess of the FDIC deposit insurance limits and evaluated the specifics of the Bank's application dated May 20, 1996, and subsequent documentation.
The Board has considered the practice and has found it may represent a system-wide risk and that the practice has the potential to present both safety and soundness concerns and a significant risk or exposure to the deposit insurance fund (in that it increases the FDIC's cost of resolution) because the activity: provides the equivalent of 100 percent insurance on deposits; presents liquidity concerns and restricts borrowing capacity; increases the cost of liquidation and receivership, restricts marketing alternatives in the least-cost resolution and treats similar classes of depositors differently; puts national banks and weaker institutions at a competitive disadvantage in the acquisition of deposits; and presents the appearance of a conflict of interest and of a breach of fiduciary duties under certain circumstances.
While the FDIC has determined that engaging in the activity of pledging assets to secure deposits for the amount in excess of the FDIC deposit insurance limits could potentially present safety and soundness problems and a significant risk to the applicable deposit insurance fund, the Board is persuaded by the facts of this case that the Bank can fulfill its current pledge arrangements, which were allowable at the time the Bank entered into them, without presenting risk to the deposit insurance ftind provided certain limiting conditions are met.
Specifically, the approval provides that the Bank may continue to pledge assets to collateralize the accounts so collateralized as of the date of this approval but may not initiate any new activity nor increase the collateral pledged on any of the secured non-public deposit accounts. The Bank shall continue to meet the minimum applicable capital standards. The Bank shall evidence compliance with the requirements of this approval through a one-time report to the Regional Director (Supervision) of the FDIC's Atlanta Regional Office. due by the last day of the first month following the date of the attached ORDER. The Bank shall notify the FDIC of any significant change in facts or circumstances, including changes to items reported in paragraph 3 of the attached ORDER, by the end of the month following such occurrences. The FDIC shall have the right to alter, suspend, or withdraw its approval in the event the facts and circumstances presented in the application change significantly.
In addition, because the Board has determined that this activity may pose potential safety and soundness problems and may be a significant risk to the applicable deposit insurance fund, the Board is contemplating taking action which could either prohibit or impose conditions on this practice in the future. Therefore, without regard to the action taken with respect to this application, the Bank shall fully comply with any rule, regulation or policy that may be adopted by the FDIC subsequent to this approval.
Therefore, approval of the application, subject to the conditions in the ORDER, is warranted.
THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION