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Cumberland County Bank


RE: Cumberland County Bank Crossville, Cumberland County, Tennessee

Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal in Real Estate Activities Which May Not Be Permissible for a Subsidiary of a National Bank


Pursuant to the provisions of section 24 of the Federal Deposit Insurance ("FDI") Act, Cumberland County Bank, Crossville, Tennessee ("Cumberland") has filed an application with the Federal Deposit Insurance Corporation ("Corporation"). The applicant requests the corporation's consent to continue to hold real estate for investment purposes indirectly through a tobe-established wholly owned subsidiary of the bank.

The activity of holding real estate investment properties may not be a permissible activity for a National bank or a subsidiary of 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. Tennessee State law places no restrictions on a real estate subsidiary's activities.

Since 1974, Cumberland has held real estate originally intended for a new main office location. Only a portion of the original site remains, and although it has long-term potential as a drive-up ATM facility, it is currently viewed as an investment. As Cumberland does not wish to divest of the real estate property not used by it for banking purposes, Cumberland requests consent from the FDIC to continue to engage as principal in the activity of holding the real estate property for investment purposes. Cumberland proposes to transfer the subject real estate property to a wholly owned subsidiary, which is to be formed for the specific purpose of holding the property.

The Corporation has reviewed available information and has also taken into consideration the financial and managerial resources and future earnings prospects of the institution associated with the continued holding of this real estate property and the risks associated with.. owning this particular property.

Real estate investment is 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 deposit insurance fund. Certain corporate structural requirements to protect the bank from potential liability are warranted. In addition, to ensure transactions between the bank and the subsidiary are safe and at arms length, statutory restrictions on such transactions will be imposed.

As prudential limitations and restrictions addressing the risks posed by real estate investment activities will be imposed, Cumberland's real estate investment activities will not pose significant risks to-the Bank Insurance Fund or present material safety and soundness concerns. As of June 30, 1995, Cumberland's investment in real estate investment property represented approximately 2.5% of the bank's Tier 1 capital and 0.18% of the bank's total assets. Cumberland is in compliance with applicable capital standards.

Based upon careful evaluation of all available facts and information, the Associate Director, acting under delegated authority, has concluded that approval of the application is warranted subject to the restrictions discussed below. These conditions are imposed for prudential reasons due to the volatility and other risks which are inherent in the subject real estate activity as well as to mitigate any potential insider conflicts of interest.

Cumberland shall notify the FDIC of any significant change in facts or circumstances, and the FDIC shall have the right to alter, suspend, or withdraw its approval upon receiving such notification. Cumberland shall not acquire any additional real estate investment property without prior approval of the FDIC. Cumberland shall continue to meet the applicable capital standards. The Subsidiary shall take necessary action to establish, and operate in a manner so as to ensure, a separate corporate existence in order to insulate Cumberland from potential liabilities. In addition, the transactions between the Bank and the Subsidiary will be subject to the limitations and restrictions of Section 23A and 23B of the Federal Reserve Act, 12 U.S.C. §371c and §371c-1, to the same extent as though the Subsidiary was an affiliate of the Bank as defined under Sections 23A and 23B.