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Farmers and Merchants Bank


RE: Farmers and Merchants Bank Granite Quarry, North Carolina

Application Pursuant to Section 24 of the Federal Deposit Insurance Act to Indirectly Through a Wholly-Owned Subsidiary Continue to Engage as Principal in an Activity Which May Not Be Permissible for a Subsidiary of 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 ("FDIC") by Farmers and Merchants Bank, Granite Quarry, North Carolina ("F&M Bank"). The application requests the Corporation's consent to continue, through a wholly-owned subsidiary, to conduct an activity which may not be permissible for a subsidiary of a National bank. Namely, F&M Investment Company, Inc. ("FMIC") is engaging in the development and sale of a three-building nine-unit office park entitled F&M Business Park.

Investment in a subsidiary engaging in real estate for investment purposes is not expressly authorized for National banks. 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. The North Carolina State Authority may allow an investment in subsidiaries engaging in these type activities upon application; however, the State Authority may, at its discretion, limit or deny any investment in subsidiaries if it finds that such investment or activities would constitute an unsafe and unsound practice.

FMIC began operations in 1969 to lease office facilities to the parent, F&M Bank. In conjunction with that activity, it purchased a parcel of vacant real estate property adjacent to the main office building in the mid-1980's for the express purpose of expanding the main office facilities at some future date. In 1991, it was determined that the additional facilities would not be needed and the decision was made to develop the property into a business office park for resale. In January 1992, the North Carolina Commissioner of Banks approved FMIC's request to develop for resale this one parcel of property. FMIC does not intend to expand into additional real estate development activities; however, FMIC requests permission to hold the real estate while it continues to develop the planned nine-unit office complex and liquidate the properties in an orderly manner. Given the nature of the assets (real estate), a definitive sell-out period is not known; however, because the potential exists that this process may extend past the December 19, 1996 date for required divestiture (absent FDIC approval to continue), approval is requested to hold the real estate assets at the subsidiary level for the sole purpose of effecting an orderly liquidation.

If F&M Bank is not permitted to continue to hold the properties at the subsidiary level, the alternatives of §362.4(d) (5) (ii) require that, no later than December 19, 1996, either F&M Bank divest itself of FMIC or that FMIC divest/cease the activity; the alternatives could result in deep discounts to liquidate in order to effect compliance by the December 19, 1996 deadline.

F&M Bank, which meets the definition of "well capitalized" within the meaning of Part 325 of the FDIC Rules and Regulations, is in compliance with applicable capital standards. In addition, the level of the activity to be conducted and the manner in which F&M Bank proposes to continue the activity do not pose a significant risk to the applicable deposit insurance fund nor safety and soundness concerns.

Accordingly, based upon careful evaluation of all available facts and information, the Associate Director, acting on behalf of the Corporation under delegated authority, has concluded that the application should be approved. Such approval should not be construed as a determination that any particular activity is not permissible for a National bank or a subsidiary of a National bank, and any action by the Corporation on the application is taken without prejudice as to whether or not an application was needed.