Application Pursuant to Section 24 of the
Federal Deposit Insurance Act for Consent to Indirectly
Engage as Principal in Real Estate Activities 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, Owen Community Bank, s.b., Spencer, Indiana ("Bank") has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). The applicant requests the FDIC's consent to continue to engage as principal indirectly in real estate investment activities through its wholly-owned subsidiary BSF Incorporated ("Subsidiary") which was established for the purpose of purchasing large tracts of real estate, then subdividing and selling smaller tracts. The Subsidiary financed most sales through the use of Real Estate Sales Contracts (RESC) which resulted in the Subsidiary retaining title to the real estate. As of June 30, 1995, the Subsidiary held 47 RESC's with a book balance of $664,503, and subdivided land with a book balance of $188,385. These investments represented 27.2% of the Bank's Tier 1 equity capital. The Bank's equity investment in the Subsidiary stood at $701,129, which represented 22.3% of the Bank's Tier 1 equity capital.
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. 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 activity of the Subsidiary was permitted prior to May 2, 1994, as the Bank was then a federal savings and loan association operating pursuant to Office of Thrift Supervision regulations. Section 24 of the FDI Act became applicable when the Bank converted to an Indiana state chartered mutual savings bank as of May 2, 1994. Though the activity of the Subsidiary is generally not permitted by Indiana law, the Indiana Department of Financial Institutions conditioned its granting of the charter on the requirement that the Bank not invest directly or indirectly in any further real estate, and that it divest itself of its current holdings within 10 years of May 2, 1994. The Bank agreed to this condition.
In order to minimize the loss which could be incurred due to the quick sale of real estate and the discounted sale of RESC's, the Bank has requested that the FDIC consent to the Bank continuing to engage in the activity for 10 years. The Bank believes that it will take 10 years to sell the remaining tracts of land and to receive full payment under the RESC's. The Bank has stated that it will not purchase additional real estate for development and sale, and that the Subsidiary will operate under a plan of liquidation.
In connection with this application, the FDIC has reviewed available information and has also taken into consideration the financial and managerial resources and future earnings prospects of the Bank associated with the continued holding of real estate 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.
As limitations and restrictions addressing the risks posed by real estate investment activities will be imposed, the Bank's real estate investment activities will not pose significant risks to the Bank Insurance Fund or present material safety and soundness concerns. The Bank is in compliance with applicable capital standards.
Based upon careful evaluation of all available facts and information, the FDIC has concluded that approval of the application is warranted subject to the conditions discussed below. These 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.
The conditions imposed will require (1) that the Bank's indirect real estate investment activities (including equity, debt, or extensions of credit) in the wholly-owned Subsidiary shall be limited to that which is currently held, and that the Bank shall not engage in any additional real estate investment activity or make any additional investment in the Subsidiary without the prior written consent of the FDIC; (2) (a) that the Bank shall divest itself of all of its interest in the real estate activity within 10 years of May 2, 1994; (b) if the Bank has not divested itself of all of its interest in the real estate activity with 7 years, then the Bank shall submit to the FDIC a written divestiture plan describing the means by which the Bank shall comply with condition 2a above; (3) that the Bank shall continue to meet applicable capital levels prescribed by the Corporation. The minimum acceptable levels (after deduction of the investment in the subsidiary) will be a total risk based capital ratio of 10 percent or greater, a tier 1 risk based capital ratio of 6 percent or greater, and a tier 1 leverage ratio of 5 percent or greater; (4) the bank shall, on a quarterly basis, perform the capital adequacy calculations described in paragraph 3, and that in the event the Bank falls below the level specified in paragraph 3, the Bank shall notify the FDIC within 15 days and submit to the FDIC an acceptable plan for restoring capital to the level specified in paragraph 3; (5) that the Subsidiary shall: be satisfactorily capitalized, be separate and distinct in operations from the operations of the Bank, maintain separate accounting and other corporate records, conduct separate board of directors meetings, maintain a board of directors with one or more independent, knowledgeable outside directors, contract with the Bank for any services on terms and conditions comparable to those available to or from independent entities, and conduct 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; (6) that the Bank not engage directly or indirectly through the Subsidiary in real estate investment activity with insiders or their related interests without the prior written consent of the FDIC; (7) that transactions between the Bank and the Subsidiary shall be made in accordance with the restrictions of Section 23A and 23B of the Federal Reserve Act, 12 U.S.C. §371c and §371c-1, to the same extent as though the Subsidiary was an affiliate of the Bank as defined under Sections 23A and 23B; and (8) that the consent granted herein is based on the facts and circumstances presented or otherwise known to the FDIC in connection with this request. The Bank shall notify the FDIC of any significant change in facts or circumstances.