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Decatur County Bank


RE: Decatur County Bank Decaturville, Tennessee

Application Pursuant to Section 24(d) of the Federal Deposit Insurance Act to Indirectly Continue an Activity That May Not Be Permissible for a National Bank


Pursuant to the provisions of section 24(d) of the Federal Deposit Insurance Act, an application has been filed with the FDIC by Decatur County Bank, Decaturville, Tennessee (Decatur). Decatur requests the FDIC's consent to continue to hold, via a wholly-owned subsidiary, Decatur County Bank Real Estate, Inc., five parcels of other real estate.

In general, real estate investments 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. The FDIC may not grant its consent unless the bank is in compliance with applicable capital standards and the FDIC determines that the activity poses no significant risk to the appropriate deposit insurance fund. State law authorizes the activity.

Decatur currently holds five parcels of other real estate composed of an old bank building, one commercial building, two houses and one vacant lot. All of the properties with the exception of the old bank building were acquired DPC and have been held for various periods from five to fifteen years. One house, the old bank building and the commercial building are currently vacant. The other residence has been rented for the past ten years.

The bank is requesting to continue holding through a wholly owned real estate subsidiary, Decatur County Bank Real Estate, Inc., the aforementioned properties. The subsidiary will hold, lease and attempt to sell the properties in an orderly manner. The bank has not specified which properties will be retained or divested and marketing times have not been established for the divestitures. Due to the length of time that the bank has already held the properties, approval of the application will be conditioned to a limited holding period and require a plan within 60 days of approval as the bank's intentions for each property including estimated marketing times.

Decatur meets the definition of "well capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations, and is in compliance with applicable capital standards. Decatur's investment in the subsidiary is less than 2% of its Tier 1 capital, and the bank would continue to be well capitalized in the event the entire investment were lost. The investment will be limited to those parcels currently held, and Decatur will discontinue this type of activity upon sale of the parcels. Decatur is in overall sound condition and is satisfactorily managed. Based on the foregoing, the FDIC has determined that retention of the investment does not present a significant risk to the deposit insurance fund.

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. Restrictions are imposed for prudential reasons due to the volatility and other risks which are inherent in the real estate activity. Such risks include the potential for improper transactions with insiders or their related interests. In addition certain corporate structural requirements to protect the bank from potential liability are imposed.

Having found that the activity in question did not require FDIC review or consent at inception but does now because of statutory revision; that the Bank's interest in real estate 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; and that the Bank is in compliance with applicable capital standards -the FDIC concludes that the retention of the interest in real estate does not pose a significant risk to the Bank Insurance Fund and therefore may be and hereby is approved subject to the following restrictions. The approval is subject to the following prudential limitations and restrictions in an effort to mitigate the volatility and other risks associated with real estate investment activities, as well to mitigate any potential conflicts of interests.

The Bank's real estate investments shall be limited to its current investment; the Bank shall continue to meet all applicable capital standards; the Bank shall submit a plan with respect to divestiture or retention of each investment; the Bank maintain an independent subsidiary structure and operations; the Bank shall ensure that the properties carry adequate hazard and liability insurance; the Bank shall obtain the FDIC's approval to continue to hold its interest in the real estate if it has not divested itself of all its interests by 12-31-97; the Bank's board of directors shall prohibit direct or indirect transactions involving insiders or their related interests in the real estate activity without the FDIC's prior written consent; and the FDIC shall have the right to alter, suspend or withdraw its approval if circumstances change significantly. In addition, transactions between Decatur and Decatur County Bank Real Estate, Inc. would be subject to Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. § 371c and § 371c-1, as if Decatur County Bank Real Estate, Inc. were an affiliate of the Bank as defined under Section 23A and 23B. Finally, the FDIC notes that the foregoing approval is unique to this application, that it was significantly influenced by the fact that the real estate acquisition by Decatur County Bank Real Estate, Inc. was prior to the effective date of Section 24(d), and that its view of de novo acquisition of such interest might well be different.