Decisions on Bank Applications
Bardwell Deposit Bank
FEDERAL DEPOSIT INSURANCE CORPORATION
RE: Bardwell Deposit Bank Bardwell, Kentucky
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 Bardwell Deposit Bank, Bardwell, Kentucky ("the Bank"). The Bank requests the FDIC's consent to transfer its interest in real property, including a leased grocery store and approximately two and one-half acres of land, located in Bardwell, Kentucky, to a wholly-owned subsidiary ("Subsidiary") which will be formed for the sole purpose of holding and managing the property.
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 Kentucky State Authority approved the transfer of the property from other real estate owned to other real estate investment on July 13, 1992.
The Bank has been engaged in this activity since 1990, when it acquired by deed in lieu of foreclosure the property, housing a grocery store and approximately two and one-half acres of adjacent land, located in Bardwell, Kentucky (population 809). The property is currently leased and the Bank has expressed no intention of conducting further real estate investment activities. Furthermore, no major additional expenditures in connection with the property are planned.
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 interest in the property is only 0.63% of the Bank's Tier 1 capital, and the Bank would continue to be "well capitalized" in the event its entire interest in the property were deducted.
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 in association with the continued holding of the real estate property and the risks associated with owning and leasing this particular property.
Real estate investment activities are 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 Bank Insurance Fund. Because of these concerns and other prudential reasons, certain limitations and restrictions will be imposed in an effort to mitigate the volatility and other risks associated with real estate investment activities, as well as to mitigate any potential conflicts of interests. In addition, certain corporate structural requirements to protect the bank from potential liability will be imposed.
Having found that the activity in question involves the retention of an investment that did not require FDIC review or consent at inception, but does now because of statutory revision; that the Bank's interest in the property is now and is expected in the future to represent a nominal portion of the Bank's capital; that the' Bank's financial condition and management are adequate; that the State authority authorizes the activity; that certain limitations and restrictions on real estate investment activities will be imposed to insulate the Bank from liability in connection with the activity; and, that the Bank is in compliance with applicable capital standards -- the FDIC concludes that the retention of the interest in the property does not pose a significant risk to the Bank Insurance Fund, and therefore may be and hereby is approved.
The Bank's indirect real estate investment activities in the wholly-owned Subsidiary shall be limited to those which are currently held, and the Bank shall not engage in any additional real estate investment activity or make any additional investment (including equity, debt, or extensions of credit to the Subsidiary or to third parties for investment in the Subsidiary) in the Subsidiary without the prior written consent of the FDIC; the Bank shall continue to meet all applicable capital standards; the Subsidiary shall be satisfactorily capitalized and separate and distinct in operations, maintain separate accounting and other corporate records, conduct separate board of directors meetings, maintain at least one outside director and management expertise capable of conducting activities in a safe and sound manner, and conduct business in such a way that customers of the Subsidiary know that the Subsidiary is a separate organization from the Bank; the Bank shall not engage, directly or indirectly through the Subsidiary, in any real estate investment activity or other transaction with insiders or their related interests without prior written consent of FDIC; 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 the Subsidiary shall be made in accordance with the restrictions of Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. S 371c and S 371c-1, to the same extent as though the Subsidiary was an affiliate of the Bank.
Finally, the FDIC notes that the foregoing approval is unique to this application, that it was significantly influenced by the bank's acquisition of the property prior to the effective date of Section 24(d), and that its view of de novo acquisition of such interest might well be different.
DIVISION OF SUPERVISION