December 12, 1996
Board of Directors
Cumberland Bank
1000 Main Street
P.O. Box 410
Carthage, Tennessee 37030-0195
Members of the Board:
We have reviewed your request to indirectly continue activities through the bank's wholly-owned
subsidiary, Cumberland Mortgage Company (the "Subsidiary"), that may not be permissible for a
subsidiary of a national bank. The application, dated August 19, 1996, was filed pursuant to
Section 362.4(d)(4)(iii) of the Federal Deposit Insurance Corporation ("FDIC") Rules and
Regulations and was received by the FDIC's Memphis Regional Office on August 26, 1996.
For the reasons set forth in the attached Statement, your application was approved today, subject
to the following conditions:
1. That the Bank shall take the necessary actions to establish the Subsidiary, and operate
the Subsidiary in a manner so as to ensure that it has a separate corporate existence as
a majority owned subsidiary which:
(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 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 atom 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 in the Subsidiary, including equity
interests, debt obligations of the Subsidiary held by the Bank, Bank guarantees of debt
obligations issued by the Subsidiary, extensions of credit or commitments of credit
from the Bank to the Subsidiary, and any extensions or commitments of credit to any
third party for the purpose of making a direct investment in the Subsidiary or making
an investment in any investment in which the Subsidiary has an interest (defined
collectively as "Real Estate Investment"), shall be limited to not more than 10 percent
of Tier I capital. For purposes of this Order, Real Estate Investment shall not include
loans made by the Bank to finance bona fide sales of assets which meet the
requirements of paragraph 9(b) below,
3. That the Subsidiary shall divest of real estate investment properties by September 1,
1999;
4. That the Bank's capital level, after deducting all Real Estate Investments in the
Subsidiary, shall equal or exceed the level required for a "well capitalized" institution
pursuant to Part 325.103(b)(1) of the FDIC's Rules and Regulations;
5. The Bank shall, on a quarterly basis, perform the capital adequacy calculations
described in paragraph 4 above for the purpose of ascertaining its capital level, and
that, in the event the Bank falls below the level required for a "well capitalized"
institution pursuant to Part 325.103(b)(1) of the FDIC's Rules and Regulations, the
Bank shall notify the FDIC within 15 days and submit to the FDIC an acceptable plan
for restoring capital to a level required for a "well capitalized" institution;
6. That, henceforth, notwithstanding Parts 325 and 327 of the FDIC's Rules and
Regulations, 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 shall
be calculated based on the Bank's capital after deducting all Real Estate Investments,
except that such deductions shall not be made when determining whether the Bank is
"critically undercapitalized" as defined under Part 325;
7. That any extensions of credit to any third parties for the purpose of making a direct
investment in the Subsidiary, making an investment in any investment in which the
Subsidiary has an interest, or any acceptance of any debt obligation of or equity
interest in the Subsidiary as collateral security for a loan or extension of credit to any
third party by the Bank shall be clearly disclosed to the Bank's board of directors prior
to approval of the extension of credit and documented in the board's minutes;
8. That the Bank and Subsidiary shall not engage in any transactions with insiders of the
Bank or their related interests which relate to the Subsidiary's real estate investment
activities without the prior written consent of the appropriate Regional Director;
9. That the Bank shall:
(a) Not condition any loan on the purchase or rental of real estate from the Subsidiary,
and
(b) Not extend credit to any borrower to acquire real estate from the Subsidiary unless
it is consistent with safe and sound banking practice and does not involve more
than the normal degree of risk of repayment and the credit is extended on terms
and under circumstances, including credit standards, that are substantially the
same, or at least as favorable to the Bank, as those prevailing at the time for
comparable transactions;
10. 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.
Sect. 371c and Sect. 371c-1, to the same extent as though the Subsidiary were an affiliate of
the Bank as defined under Sections 23A and 23B, with the exception that the collateral
requirements of Section 23A shall not apply to existing loans. Furthermore, the
collateral and investment limitations of Section 23A shall not apply to loans made by
the Bank to finance bona fide sales of assets to third parties consistent with safe and
sound underwriting requirements contained in paragraph 9(b) above; and
11. 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 Bank shall
notify the FDIC of any significant change in facts or circumstances. If the facts and
circumstances change significantly, the FDIC shall have the night to alter, suspend, or
withdraw its approval.
Questions relating to this matter may be referred to Senior Examination Specialist D. Larry
Bowen or Review Examiner Thomas M. Parzinger the FDIC's Memphis Regional Office at
(901) 685-1603.
Sincerely,
Lawrence E. Morgan, Jr
Acting Associate Director
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Cumberland Bank
Carthage, Smith County, Tennessee
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for
Consent to Indirectly Continue to Engage as Principal Through a
Majority Owned Subsidiary in a Real Estate Activity
That May Not Be Permissible for a Subsidiary of a National Bank
STATEMENT
Pursuant to the provisions of section 24 of the Federal Deposit Insurance ("FDI") Act,
Cumberland Bank, Carthage, Tennessee (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 as principal through Cumberland Mortgage Company (the "Subsidiary"), a
majority owned subsidiary, to retain and develop real estate property acquired in 1988 until it is
able to divest of said property, but no later than September 1, 1999.
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, 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. Tennessee State law permits the holding of real estate
investment properties by savings banks and their subsidiaries.
The Bank proposes to complete the development of a sub-division of single family home
lots to be sold to contractors or individuals. The proposed project represents the final phase of a
three phase development project which the Subsidiary began in 1988.
The Bank meets the definition of "well capitalized" within the of Part 325 of the
FDIC's Rules and Regulations The Bank's proposed investment in and loans to the Subsidiary
represents 9.5 percent of the Bank's Tier I capital as of September 30, 1996, and the Bank would
continue to be "well capitalized" in the event its existing and proposed investment in and loans to
the Subsidiary were deducted from capital In connection with this application, the FDIC has also
taken into consideration the favorable financial and managerial resources and future earnings
prospects of the Bank.
Real estate investment is subject to a high degree of market risk and other specialized risks
specific to real estate ownership and mav 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.
Based upon careful evaluation of all available facts and information, the Acting Associate
Director, acting under delegated authority, has concluded that the Subsidiary's real estate
investment activities will not constitute a significant risk to the Bank Insurance Fund or present
material safety and soundness concerns and that approval of the application is appropriate subject
to the conditions 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
the Bank and the Subsidiary;
That the Bank shall take the necessary actions to establish the Subsidiary, and operate the
Subsidiary in a manner so as to ensure that it has a separate corporate existence as a majority
owned subsidiary which:
(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 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 iriform
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;
That the Bank's indirect real estate investment in the Subsidiary, including equity interests,
debt obligations of the Subsidiary held by the Bank, Bank guarantees of debt obligations
issued by the Subsidiary, extensions of credit or commitments of credit from the Bank to the
Subsidiary, and any extensions or commitments of credit to any third party for the purpose of
making a direct investment in the Subsidiary or making an investment in any investment in
which the Subsidiary has an interest (defined collectively as "Real Estate Investment"), shall
be limited to not more than 10 percent of Tier I capital. Real Estate Investment shall not
include loans made by the Bank to finance bona fide sales of assets if such loans are consistent
with safe and sound banking practice and do not involve more than the normal degree of risk
of repayment and the credit is extended on terms and under circumstances, including credit
standards, that are substantially the same, or at least as favorable to the Bank, as those
prevailing at the time for comparable transactions,
That the Subsidiary shall divest of real estate investment properties by September 1, 1999;
That the Bank's capital level, after deducting all Real Estate Investments in the Subsidiary,
shall equal or exceed the level required for a "well capitalized" institution pursuant to Part
325.103(b)(1) of the FDIC's Rules and Regulations;
The Bank shall, on a quarterly basis, perform the capital adequacy calculations described in
the paragraph above for the purpose of ascertaining its capital level, and that, in the event the
Bank falls below the level required for a "well capitalized" institution pursuant to Part
325.103(b)(1) of the FDIC's Rules and Regulations, the Bank shall notify the FDIC within 15
days and submit to the FDIC an acceptable plan for restoring capital to a level required for a
"well capitalized" institution;
That, henceforth, notwithstanding Parts 325 and 327 of the FDIC's Rules and Regulations, 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 shall be calculated based on the
Bank's capital after deducting all Real Estate Investments, except that such deductions shall
not be made when determining whether the Bank is "critically undercapitalized" as defined
under Part 325;
That any extensions of credit to any third parties for the purpose of making a direct
investment in the Subsidiary, making an investment in any investment in which the Subsidiary
has an interest, or any acceptance of any debt obligation of or equity interest in the Subsidiary
as collateral security for a loan or extension of credit to any third party by the Bank shall be
clearly disclosed to the Bank's board of directors prior to approval of the extension of credit
and documented in the board's minutes,
That the Bank and Subsidiary shall not engage in any transactions with insiders of the Bank or
their related interests which relate to the Subsidiary's real estate investment activities without
the prior written consent of the appropriate Regional Director;
That the Bank shall:
(a) Not condition any loan on the purchase or rental of real estate from the Subsidiary, and
(b) Not extend credit to any borrower to acquire real estate from the Subsidiary unless it is
consistent with safe and sound banking practice and does not involve more than the
normal degree of risk of repayment and the credit is extended on terms and under
circumstances, including credit standards, that are substantially the same, or at least as
favorable to the Bank, as those prevailing at the time for comparable transactions;
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. Sect. 371c and Sect. 371c-
1, to the same extent as though the Subsidiary were an affiliate of the Bank as defined under
Sections 23A and 23B, with the exception that the collateral requirements of Section 23A
shall not apply to existing loans. Furthermore, the collateral and investment limitations of
Section 23A shall not apply to loans made by the Bank to finance bona fide sales of assets to
third parties consistent with safe and sound underwriting requirements contained in (b) of the
paragraph above; and
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 Bank shall notify the
FDIC of any significant change in facts or circumstances. If the facts and circumstances
change significantly, the FDIC shall have the night 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 Subsidiary'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
