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Bank of Cave City


RE: Bank of Cave City Cave City, Arkansas

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 Bank of Cave City, Cave City, Arkansas ("the Bank"). The Bank requests the FDIC's consent to transfer its interest in a medical office complex, located in Cave City, Arkansas, to a wholly-owned subsidiary, Cave City Properties, Inc. ("CCP").

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 Arkansas State Bank Department confirmed the Bank's authority to invest in the property in a letter to the Bank dated December 28, 1993.

The Bank has been engaged in this activity since early 1994, when it entered into a contract with a hospital to build a medical office complex on a tract of land the Bank acquired several years earlier. The land was originally purchased for relocation of the Bank's main office; however, the portion of land the medical office complex resides on was considered in excess of the Bank's needs by management. Construction of the 5,376 square foot, four unit medical office complex has been completed and the property is currently 75% leased. The Bank has expressed no intention of conducting further real estate investment activities. Furthermore, no 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 7.38% 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 resources, a historically competent management team, and promising 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 Bank's interest in the property is now and is expected in the future to represent a small portion of the Bank's capital; that the Bank's financial condition and management expertise is 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 CCP 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 CCP or to third parties for investment in CCP) in CCP without the prior written consent of the FDIC; the Bank shall continue to meet all applicable capital standards; CCP 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, contract with the Bank for any services on terms and conditions comparable to those available to or from independent entities, and conduct business in such a way that customers of CCP know that CCP is a separate organization from the Bank; the Bank shall not engage, directly or indirectly through CCP, 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 CCP 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 CCP 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.