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Laurel Savings Bank


IN RE: Laurel Savings Bank Allison Park, Pennsylvania

Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal in Real Estate Investment Activities through a Wholly-Owned Subsidiary that May Not be Permissible for a National Bank


Pursuant to the provisions of Section 24 of the Federal Deposit Insurance Act (FDI Act), Laurel Savings Bank, Allison Park, Pennsylvania (the bank), has filed an application with the Federal Deposit Insurance Corporation (FDIC). The bank requests the FDIC's consent to continue to indirectly engage in real estate investment activities through Laurel Financial Services Corp. (the subsidiary), a wholly-owned subsidiary of the bank.

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.

The bank is requesting to transfer a commercial office building into an inactive subsidiary, Laurel Financial Services Corp., previously organized for the sole purpose of holding, maintaining, and leasing the aforementioned property. The bank acquired the building in 1971, while chartered as a savings association, and used the building as bank premises until 1978. Since that time, the building has been leased as income 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.

The bank 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. The bank's investment in the subsidiary will be less than 1% of its Tier 1 capital, and the bank would continue to be well capitalized in the event the entire investment was lost. The bank is in sound condition and is satisfactorily managed. The real estate investment will be limited to the office building.

Having found that the activity in question involves the retention of an investment that 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 banking department authorizes the activity; and that the bank is in compliance 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 pose a significant risk to the Bank Insurance Fund, and therefore may be and hereby is approved subject to the following restrictions. These restrictions are imposed for prudential reasons due to the volatility and the risks which are inherent in real estate activities as well as to mitigate any potential insider conflicts of interest.

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 maintain an independent subsidiary structure and operations; the subsidiary shall not engage directly or indirectly with insiders or their related interests without the prior written consent of the FDIC; transactions between the bank and the subsidiary will be subject to Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. § 371c and § 371c-1, to the same extent as if the subsidiary were an affiliate of the bank as defined under Sections 23A and 23B, and the FDIC shall have the right to alter, suspend or withdraw its approval if circumstances change significantly.

Finally, the FDIC notes that the foregoing approval is unique to this application, that it was significantly influenced by the bank's acquisition of the property prior to the effective date of Section 24(d), and that its view of de novo acquisition of such interest might well be different.