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Jackson Bank and Trust Company


RE: Jackson Bank and Trust Company Gainsboro, Jackson County, Tennessee

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


Pursuant to the provisions of Section 24 of the Federal Deposit Insurance Act (the "FDI Act), Jackson Bank and Trust Company, Gainsboro, Tennessee (the "Bank") has filed an application with the Federal Deposit Insurance Corporation (the "FDIC"). The Bank requests the FDIC's consent to continue to indirectly engage in real estate investment activities through Jackson Bank Properties, Inc., a de novo, wholly-owned subsidiary of the Bank (the "Subsidiary").

In general, 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. Subsidiaries of state chartered, FDIC-insured banks may not engage as principal in an activity prohibited to subsidiaries of national banks unless the parent state bank obtains consent from the FDIC. Under Section 24 of the FDI Act, the FDIC may not grant its consent unless the bank is in compliance with applicable capital standards and the FDIC determines that the activity presents no significant risk to the appropriate deposit insurance fund.. State law authorizes the activity. In addition, Tennessee statutes allow the retention of real estate not to exceed the bank's capital and surplus account.

The subject real estate activity involves the Bank's holding of two office buildings for investment purposes, both located in Gainsboro, Tennessee. The Bank acquired the "Montgomery Building", a property located adjacent to the bank's main office building, in June, 1992, with the anticipation that the building would be demolished and the site retained for future bank expansion. However, the property is now being leased on a shortterm basis, and the Bank no longer has any present intent to utilize the property for future expansion. A second building, the "ASC Building" was acquired in May, 1983, after the Bank initiated foreclosure action.. It also is being leased.

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.

The Bank meets the definition of "well capitalized" for purposes of the FDIC's regulations at 12 C.F.R. Part 325, and complies with applicable capital standards. As of June 30, 1996, the Bank's investment in real estate represented approximately 3.50 of the bank's Tier 1 capital and 0.030 of the Bank's total assets. The Bank is in compliance with applicable capital standards.

The Bank's real estate investment activities will be confined to those properties currently held.

Having found that the Bank's financial condition and management are adequate; that the state banking department authorizes the activity; and that the Bank complies with applicable capital standards, the FDIC concludes that, if certain restrictions addressing the risks associated with real estate investment activities are imposed, the retention of the interest in real estate does not present a significant risk to the Bank Insurance Fund. These restrictions are imposed for prudential reasons due to the volatility and the risks that are inherent in real estate activities in addition to mitigate any potential insider conflicts of interest.

The conditions imposed will require:

1. That the Bank and the subsidiary shall take the necessary actions to operate the subsidiary in a manner so as to ensure its separate corporate existence as a wholly-owned subsidiary that:

(a) is adequately capitalized,

(b) is physically separate and distinct in its operations from the operations of the Bank,

(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 one or more independent, knowledgeable outside directors and management expertise capable of conducting activities in a safe and sound manner,

(f) contracts with the Bank 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 customers and prospective customers of the subsidiary that the subsidiary is a separate organization from the Bank, including the placement of specific language on any debt instrument or contract with a third party disclosing that the Bank itself is not responsible for payment or performance;

2. That the Bank's indirect real estate investment activities, including equity interests, debt obligations of the subsidiary held by the Bank, Bank guarantees of debt obligations issued by the subsidiary, or Extensions of credit or commitments of credit to any third party for the purposes of making a direct investment in the subsidiary or making an investment in which the subsidiary has an interest, shall be limited to that which is currently held;

3. That the Bank shall continue to meet all applicable capital standards and the Bank's capital level will equal or exceed the level required for a "well capitalized" institution under 12 C.F.R. § 325.103(b)(1) after deducting the Bank's investments in its subsidiary, including: equity interests, debt obligations of the subsidiary that are held by the Bank, the Bank's guarantees of debt obligations issued by the subsidiary, extensions of credit or commitments of credit from the Bank to the subsidiary, and any extensions of credit to any third parties for the purpose of making a direct investment in any subsidiary or making an investment in any equity investment in real estate in which the subsidiary has an interest;

4. That, henceforth, notwithstanding the FDIC's regulations at 12 C.F.R. Parts 325 and 327, the Bank's capital category for purposes of Prompt Corrective Action and the Bank's risk-adjusted deposit insurance premium assessment shall be calculated based on the Bank's capital after deducting all of the Bank's investment in the subsidiary, including the categories of investment listed in paragraph 3 above, except that such deductions shall not be made when determining whether the Bank is "critically undercapitalized" as defined in the FDIC's regulations at 12 C.F.R. Part 325.

5. That the Bank and its subsidiary shall not engage in any transactions with insiders of the Bank or their related interests that relate to the subsidiary's real estate investment activities without the prior written consent of the appropriate DOS Regional Director;

6. That transactions between the Bank and the subsidiary be made in accordance with the restrictions of Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. §§ 371c and 371-c, to the same extent as though the subsidiary was an affiliate of the bank; and

7. That the consent granted herein is based on the facts and circumstances presented or otherwise known to the FDIC in connection with these requests. The applicant shall notify the FDIC of any significant change in facts or circumstances. If the facts or circumstances change significantly, the FDIC shall have the right to alter, suspend, or withdraw its approval.