Decisions on Bank Applications
The Farmers Savings Bank
FEDERAL DEPOSIT INSURANCE CORPORATION
RE: The Farmers Savings Bank Spencer, Ohio
Application Pursuant to Section 24 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 The Farmers Savings Bank, Spencer, Ohio (FSB). The bank requests FDIC consent to transfer a direct real estate investment to its proposed wholly-owned subsidiary, Farmers Savings Investment Company (FSIC), and for the subsidiary to retain 100 percent interest in the property located in Spencer, Ohio.
The property consists of 40 undeveloped acres. The property is owned by FSB and will be transferred immediately to FSIC. 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 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. Ohio banking statutes permit the holding of the subject real estate investment.
FSB does not engage in real estate activities beyond the currently held property, and bank management has indicated that FSB has no intention of further engaging in real estate activities.
The bank meets the definition of "Well Capitalized" in the FDIC's Rules and Regulations in 12 C.F.R. Section 325.103. Once title to the properties is transferred to FSIC, the property will represent 0.0002 percent of Tier 1 Capital. In connection with this application, the FDIC has also taken into consideration the financial and managerial resources and future earnings prospects of FSB.
Real estate investment is subject to a high degree of market risk and other specialized risks specific to real estate ownership and may 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.
As prudential limitations and restrictions addressing the risks posed by real estate investment activities will be imposed, FSIC's real estate investment activities do not constitute a significant risk to the Bank Insurance Fund or present material safety and soundness concerns.
Based upon careful evaluation of all available facts and information, the Acting Associate Director, acting under delegated authority, has concluded that approval of the application is appropriate subject to the restrictions discussed below. The following 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 interests or risks associated with transactions between FSB and FSIC.
That FSB immediately transfer ownership of the real estate investment to FSIC.
That FSB and FSIC shall take the necessary steps to operate FSIC in a manner which ensures a separate corporate existence as a majority-owned subsidiary that:
(a) is adequately capitalized,
(b) is separate and distinct in its operations from FSB's operations,
(c) maintains separate accounting and other corporate records,
(d) observes separate formalities such as separate board of directors' meetings,
(e) maintains a board of directors with management expertise capable of conducting activities in a safe and sound manner,
(f) contracts with FSB for any service on terms and conditions comparable to those available to or from independent entities, and
(g) conducts business pursuant to separate policies and procedures designed to inform FSB's customers and prospective customers of FSIC that FSIC is a separate organization from FSB, including the placement of specific language on any debt instrument or contract with a third party disclosing that FSB itself is not responsible for payment or performance.
That FSB's indirect real estate investment activities including:
(a) equity interests in FSIC,
(b) debt obligations of FSIC held by FSB,
(c) bank guarantees of debt obligations issued by FSIC, and
(d) extensions of credit or commitments of credit to FSIC or any third party for the purpose of making a direct investment in FSIC or making an investment in any investment in which FSIC has an interest, shall be limited to that which is currently held, plus the capitalization of FSIC.
That FSB and FSIC shall not engage in any transactions with insiders of FSB or their related interests which relate to FSIC's real estate investment activities without the prior written consent of the appropriate DOS Regional Director.
That FSB shall not condition any loan on the purchase of real estate from FSIC and that FSB shall not extend credit to any borrower to acquire real estate from FSIC unless:
(a) it is consistent with safe and sound banking practice and does not involve more than a normal degree of risk of repayment, and
(b) the credit is extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to FSB, as those prevailing at the time for comparable transactions.
That transactions between FSB and FSIC shall be made in accordance with the restrictions of Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. Sections 371c and 371c-1, to the same extent as though FSIC was an affiliate of FSB, with the exception that the amount and collateral limitations of Section 23A, shall not apply to loans made by FSB to facilitate the sale of the real estate investments held by FSIC, provided the loans:
(a) are consistent with safe and sound banking practices,
(b) do not present more than the normal degree of risk of repayment, and
(c) are extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to FSB, as those prevailing at the time for comparable transactions.
That consent is granted based on the facts and circumstances presented or otherwise known to the FDIC in connection with this request. FSB 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.
Finally, FDIC notes that the foregoing approval is unique to this application, that it was significantly influenced by FSB's acquisition of the subject real estate interest prior to the effective date of Section 24, and that its view of de novo acquisition of such interest might well be different.
ACTING ASSOCIATE DIRECTOR
DIVISION OF SUPERVISION