# O

+-----------------------------------------------------------------------+
| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
+-----------------------------------------------------------------------+

Washington, DC 20219

##### Corporate Decision #2004-12

April 3, 1997 **August 2004**

Mr. Robert G. Wall

President

The First National Bank

Conway Springs, Kansas 67031-0011

Re: Notification of Intent to Establish an Operating Subsidiary to
Manage the Bank's

Investment Portfolio and Acquire a Fifty Percent Interest in an
Insurance Agency

Application Control Number: 97‑MW‑08‑0011

Dear Mr. Wall:

This is in response to your February 12, 1997 letter on behalf of The
First National Bank. Conway Springs. Kansas (the "Bank"), concerning the
Bank\'s establishment of Norcon Resource Corporation (the "Operating
Subsidiary"). The Operating Subsidiary would manage the Bank's
investment portfolio and hold a non‑controlling, fifty percent interest
in an insurance agency. Based on the information and representations you
provided in your letter and subsequent telephone conversations with
National Bank Examiner Jill K. Kennard, it is our opinion the activities
of the Operating Subsidiary are legally permissible. Therefore, for the
reasons discussed below, the Bank's application is hereby approved.

#### I. Background

The Bank would own one hundred percent of the Operating Subsidiary,
which would be located in the Bank's main office at 124 West Spring
Avenue, Conway Springs, Kansas. As stated above, the purpose of the
Operating Subsidiary would be twofold. First, the Operating Subsidiary
would hold and manage the Bank's investment portfolio. Specifically, the
Operating Subsidiary would manage, invest, and reinvest cash, U.S.
government obligations, and other marketable securities in accordance
with the Bank's investment guidelines.

Second, the Operating Subsidiary would acquire and hold a
non‑controlling, fifty percent interest in an insurance agency. The Bank
presently owns one hundred percent of the assets of The Farmers
Insurance Agency, an independent insurance agency operating from the
Bank's branch in Norwich, Kansas.[^1] The Bank proposes to contribute
The Farmers

Insurance Agency's non-cash assets to the Operating Subsidiary. The
Operating Subsidiary would then contribute these assets to the Bennett
Agency, Inc. (the "Insurance Agency"), in exchange for fifty percent of
the Insurance Agency's common stock. The Insurance Agency is a Kanas
corporation located in Conway Springs and is currently wholly-owned by
an individual named Brad A. Bennett. After the consummation of the above
transaction, the Insurance Agency would be the successor to the Bank's
current insurance operations.

You indicate that the Bank's investment in the Insurance Agency would
enable it to decrease its expenses and enhance the insurance services
that it provides to its customers. For example, the Bank would be able
to reduce the resources that it presently commits to providing capital,
funding, and personnel for its own insurance operations. Furthermore,
some insurance companies will only deal with, and underwrite for,
insurance agencies of a certain size. By joining forces, the Bank and
Mr. Bennett would be able to attract larger underwriters and obtain more
competitive insurance rates for their customers. Finally, both the Bank
and its customers would be able to utilize and benefit from Mr.
Bennett's expertise in the insurance industry.

The Bank and Mr. Bennett have entered into a "Management Agreement" that
governs the relationship between the Insurance Agency and the Bank. The
Bank and Mr. Bennett have agreed to restrict the Insurance Agency's
operations to those activities that are permissible for national banks.
Specifically, the Management Agreement states that:

-   The Insurance Agency will not undertake any new activities that are
    not legally permissible for a corporation having a national bank as
    a shareholder;

-   The Insurance Agency's board of directors will consist of two
    individuals: Mr. Bennett and the Bank's Chief Executive Officer;

-   If more than twenty-five percent of Mr. Bennett's ownership of the
    Insurance Agency's stock changes, the Bank shall have the right of
    first refusal to buy Mr. Bennett's shares at an agreed upon price.
    If the Bank and Mr. Bennett are unable to agrteee upon a price, the
    Bank shall have the right to purchase the stock at a price
    determined by a team of appraisers; and

-   If either party wishes to terminate ownership in the Insurance
    Agency, the remaining stockholder shall have the right to purchase
    the other party's stock at an agreed upon price or, alternatively,
    at a price determined by a team of appraisers.

#### II. Discussion

A national bank may invest in an operating subsidiary if the parent bank
owns more than fifly percent of the voting interest in the
subsidiary.[^2] 61 Fed. Reg. 60,342 at 60,374 (1996) (to be codified at
12 C.F.R. § 5.34(d)). Because the Bank will own one hundred percent of
the Operating Subsidiary's stock, this requirement is satisfied.
Furthermore, a national bank may establish an operating subsidiary to
conduct activities that are part of, or incidental to, the business of
banking as well as other activities permissible for national banks or
their subsidiaries pursuant to other statutory authority. *Id*. (to be
codified at 12 C.F.R. § 5.34(b)). The Operating Subsidiary's proposed
activities are discussed below.

*A. Managing the Bank's Investment Porrfolio*

The National Bank Act expressly provides that a national bank may
purchase investment securities for its own account in accordance with
the OCC's limitations and restrictions,[^3] 12 U.S.C. § 24(Seventh).
Because a national bank clearly has the authority to hold and manage its
investment securities portfolio, a national bank's operating subsidiary
may also engage in these activities on behalf of the bank. Therefore,
the Operating Subsidiary's holding and managing of the Bank's investment
securities portfolio in accordance with the Bank's investment guidelines
would be within the power of a national bank pursuant to 12 U.S.C. §
24(Seventh) and 12 C.F.R. Part 1. *See* OCC Interpretive Letter No. 754,
\[Current Binder\] Fed. Banking L. Rep. (CCH) ¶ 81‑118 (Nov. 6, 1996);
OCC Interpretive Letter No. 745, \[Current Binder\] Fed. Banking L. Rep.
(CCH) ¶ 81‑110 (Aug. 27, 1996).

*B. Making a Non‑Controlling Investment in an Insurance Agency*

The Bank's proposal to purchase a fifty percent interest in the
Insurance Agency raises the issue of the authority of a national bank's
operating subsidiary to hold a non‑controlling interest in a
corporation. A recent OCC interpretive letter extensively analyzed the
authority of national banks pursuant to 12 U.S.C. § 24(Seventh) to own
stock and reviewed OCC precedents on the ownership of stock in amounts
less than that required for an operating subsidiary, *i.e.,*
non‑controlling stock investments. OCC Interpretive Letter No. 732,
\[1995- 1996 Transfer Binder\] Fed. Banking L. Rep. ¶ 81‑049 (May 10,
1996).[^4] That letter

concluded that ownership of a non‑controlling interest in a corporation
is permissible provided four standards, drawn from OCC precedents. are
satisfied.[^5] They are:

(1) The activities of the enterprise in which the investment is made
    must be limited to activities that are part of, or incidental to,
    the business of banking;

\(2\) The bank must be able to prevent the enterprise from engaging in
activities that do not meet the foregoing standard, or be able to
withdraw its investment;

> \(3\) The bank's loss exposure must be limited, as a legal and
> accounting matter, and the bank must not have open‑ended liability for
> the obligations of the enterprise; and
>
> \(4\) The investment must be convenient and useful to the bank in
> carrying out its business and not a mere passive investment unrelated
> to *that ban'\'s* banking business.

Each of these factors is discussed below and applied to your proposal.

1.  *The activities of the entity or enterprise in which the investment
    is made must be limited to activities that are part of,* *or
    incidental to, the business of banking.*

Our precedents on non‑controlling stock ownership have recognized that
the enterprise in which the bank takes an equity interest must confine
its activities to those that are part of, or incidental to, the conduct
of the banking business. *See, e.g.,* OCC Interpretive Letter No. 380,
\[1988‑89 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 85,604 n.8
(Dec. 29, 1986) (because a national bank can provide options clearing
services to customers, it can purchase stock in a corporation providing
options clearing services); Letter from Robert B. Serino, Deputy Chief
Counsel (Nov. 9, 1992) (because the operation of an ATM network is "a
fundamental part of the basic business of banking," an equity investment
in a corporation operating such a network is permissible).

The Insurance Agency would engage in general insurance agency activities
pursuant to 12 U.S.C. § 92. In response to operating subsidiary
notifications submitted by First Union Corporation, the OCC thoroughly
analyzed section 92 and concluded that a national bank insurance agency
selling insurance pursuant to the authority of section 92 should be
permitted the same marketing range and be able to use the same marketing
tools and facilities as are generally available for licensed insurance
agencies not affiliated with a bank, in the state or states in which the
bank agency operates. OCC Interpretive Letter No. 753, \[Current

Binder\] Fed. Banking L. Rep. (CCH) ¶ 81‑107 (Nov. 4. 1996) (the *"First
Union Letter").* The *First Union Letter* sets forth the following
general principles that define the scope of solicitation and sales
activities permissible for national banks pursuant to 12 U.S.C. §
92:[^6]

The agency located in the "place of 5,000" must, of course, be *bona
fide* . . . . Agents will be managed through the agency and the "place
of 5,000" will be the agency's business location for licensing purposes.
Each agency will be responsible for collecting commissions from
insurance carriers and paying commissions to its licensed sales staff.
The agency also generally will be responsible for processing insurance
applications, delivery of insurance policies, and collection of
premiums, where consistent with procedures of the relevant insurance
carriers. In addition, business records of the agency, including copies
of customer application and policy information, and licensing, customer
complaint, and other compliance records, will be available at the "place
of 5,000."

The bank agency and its agents may seek the same market range and use
the same marketing tools and facilities as generally available for a
licensed insurance agency, not affiliated with a bank, that is based in
the "place of 5,000." This will generally allow the following:

1\) Meetings with customers and solicitations and sales of insurance by
agents of the bank agency may take place at locations inside the "place
of 5,000" as well as at locations outside that "place," provided the
agents are managed and paid through the bank agency located in the
"place of 5,000" and use that location as their place of business for
licensing purposes. If an insurance company has adopted other procedures
for its nonbank agents, however, the bank agency may follow the same
procedures as other insurance agents selling the company's policies.

2\) Mailings to advertise and sell insurance may originate from inside
or outside of the "place of 5,000," and brochures, leaflets, and other
literature alerting potential customers to the bank's insurance
activities may be distributed from locations both inside and outside of
the "place of 5.000," including other branches of the same bank.
Personnel of bank branches outside of the "place of 5,000" also may make
referrals to the bank's insurance agency. Likewise, telephone and
cybermarketing may be used and the calls and messages need not originate
within the "place of 5,000."

3\) The bank may contract with third parties to assist the agency's
sales activities. For example, third parties might provide advertising
support, direct mail marketing services, telemarketing services,
payments processing, or other types of "back office" support.

*First Union Letter* (footnotes omitted).[^7]

The analysis and discussion set forth in the *First Union Letter* are
equally applicable to the Bank's notification and are hereby
incorporated by reference. By letter dated March 1, 1997, the Bank
represented that it will conduct the Insurance Agency's activities in
accordance with the principles set forth in the *First Union Letter.*
Thus, we conclude that the activities to be performed by the Insurance
Agency are activities that are part of, or incidental to, the business
of banking, and the first standard is satisfied.

2\. The bank must be able to prevent the enterprise from engaging in
activities that do not meet the foregoing standard, or be able to
withdraw its investment.

The activities of the enterprise in which a national bank may invest
must be part of, or incidental to, the business of banking not only at
the time the bank initially purchases stock, but for as long as the bank
has an ownership interest. However, noncontrolling shareholders in a
corporation do not ordinarily possess a veto power over corporate
activities as a matter of corporate law.

The provisions set forth in the Management Agreement assure that the
Insurance Agency will not engage in any activity that is not permissible
for a corporation having a national bank as a shareholder. Furthermore,
by having the Bank's chief executive officer be one of the two members
of the Insurance Agency's board of directors, the Bank will effectively
have veto power over any activities that are not permissible under this
standard. For these two reasons the Bank will be able to prevent the
Insurance Agency from engaging in any impermissible activity for as long
as it continues to own shares in the Insurance Agency. Thus, the second
standard is satisfied.

> *3. The bank\'s loss exposure must be limited and the bank must not
> have open‑ended liability for the obligations of the enterprise.*

A primary concern of the OCC is that national banks should not be
subjected to undue risk. Where an investing bank will not control the
operations of the entity in which the bank holds an interest, it is
important that a national bank's investment not expose it to unlimited
liability. Normally, this is not a concern when a national bank invests
in a corporation, for shareholders are not liable for the debts of the
corporation, provided proper corporate separateness is maintained. 1
William M. Fletcher, Fletcher Cyclopedia of the Law of Private
Corporations § 25 (perm. ed. rev. vol. 1990). In the present case, both
the

Operating Subsidiary and the Insurance Agency will be separate
corporations, with their own capital, directors, and officers.

Further, the Bank has advised that the appropriate treatment for its
investment in the Insurance Agency will be the equity method of
accounting. Under this method, unless the bank has extended a loan to
the entity, guaranteed any of its liabilities or has other financial
obligations to the entity, losses are generally limited to the amount of
the investment shown on the investor\'s books. *See generally,*
Accounting Principles Board, Op. 18, § 19 (1971).

Therefore, for both legal and accounting purposes, the Bank's potential
loss exposure should be limited to the amount of its investment. Because
that exposure would be quantifiable and controllable, the third standard
is satisfied.

> *4. The investment must be convenient or useful to the bank in
> carrying out its business and not a mere passive investment unrelated
> to that bank's banking business.*

A national bank's investment in an enterprise or entity must also
satisfy the requirement that the investment have a beneficial connection
to the *bank's* business. *i.e..* be convenient or useful to the
investing bank's business activities, and not constitute a mere passive
investment unrelated to that bank's banking business. Twelve U.S.C. §
24(Seventh) gives national banks incidental powers that are "necessary"
to carry on the business of banking. "Necessary" has been judicially
construed to mean "convenient or useful". *See Arnold Tours, Inc. v*.
*Camp,* 472 F.2d 427, 432 (1st Cir. 1972). The provision in 12 U.S.C. §
24(Seventh) relating to the purchase of stock, derived from section 16
of the Glass‑Steagall Act, was only intended to make it clear that
section 16 did not authorize speculative investments in stock. *See OCC*
Interpretive Letter No. 697, \[1995‑1996 Transfer Binder\] Fed. Banking
L. Rep. (CCH) ¶ 81‑013 (Nov. 15, 1995). Therefore, a consistent thread
running through our precedents concerning stock ownership is that it
must be convenient or useful to the bank in conducting *that* *bank's*
banking business. The investment must benefit or facilitate that
business and cannot be a mere passive or speculative investment. *See,
e.g.,* OCC Interpretive Letter No. 543, \[1990‑1991 Transfer Binder\]
Fed. Banking L. Rep. (CCH) ¶ 83,225 (Feb. 13, 1991); OCC Interpretive
Letter No. 427, \[1988‑1989 Transfer Binder\] Fed. Banking L. Rep. (CCH)
¶ 85,651 (May 9, 1988); OCC Interpretive Letter No. 421, \[1988‑1989
Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 85,645 (Mar. 14, 1988).

As set forth in the "Background" section, the Bank's investment in the
Insurance Agency would enable it to reduce the resources that it
currently devotes to its own insurance operations, such as providing
capital, funding, personnel, and training. Moreover, as a result of the
Bank's investment in the Insurance Agency, the Bank would be able to
continue offering insurance products to its customers and enhance the
services available to them. For example, the Insurance Agency would be
dealing with larger underwriters, and customers would also benefit from
Mr. Bennett's expertise in the insurance industry. It is simply more

economical for the Bank and Mr. Bennett to combine their resources.
Thus, the investment assists the Bank in efficiently and capably
offering insurance services to its customers.

For these reasons, the proposed investment is convenient and useful to
the Bank in carrying out its business and is not a mere passive
investment. Thus. the fourth standard is satisfied.

#### III. Conclusion

Based upon the information and representations you have provided, and
for the reasons discussed above, we conclude that the Bank may establish
the Operating Subsidiary to provide investment portfolio management
services for the Bank. Furthermore, the Operating Subsidiary may hold
directly a fifty percent interest in the Insurance Agency in the manner
and as described herein, provided:

(1) The Insurance Agency will engage only in activities that are part
    of, or incidental to, the business of banking;

> \(2\) The Bank will have veto power over any activities and major
> decisions of the Insurance Agency that are inconsistent with number
> one, or will withdraw from the Insurance Agency in the event it
> engages in an activity that is inconsistent with condition number one;
>
> \(3\) The Bank will account for the investment in the Insurance Agency
> under the equity method of accounting; and
>
> \(4\) The Insurance Agency will be subject to OCC supervision.
> regulation. and examination.

Please be advised that the conditions of this approval are deemed to be
"conditions imposed in writing by the agency in connection with the
granting of any application or other request" within the meaning of 12
U.S.C. § 1818.

If you have any questions, please contact National Bank Examiner Jill
Kennard at (816)-556 1860, or Madelynn R. Orr, Attorney, at (816)
556‑1870.

Sincerely,

**signed**

Julie L. Williams

Chief Counsel

[^1]: According to the 1990 decennial census, Conway Springs, Kansas,
    has a population of 1384 inhabitants and Norwich, Kansas, has a
    population of 455 inhabitants.

[^2]: A national bank may also invest in a corporation, limited
    liability company, or similar entity if the parent bank otherwise
    controls the subsidiary and no other party controls more than fifty
    percent of the voting (or similar type of controlling) interest of
    the subsidiary. 61 Fed. Reg. 60,342, at 60,374 (1996) (to be
    codified at 12 C.F.R. § 5.34(d)).

[^3]: The OCC's revised Investment Securities Regulation, 61 Fed. Reg.
    63,972 (1996) (to be codified at 12 C.F.R. Part 1), prescribes
    limitations and restrictions on a national bank's purchase of
    investment securities.

[^4]: *See also* OCC Interpretive Leter No. 697, \[1995-1996 Transfer
    Binder\] Fed. Banking L. Rep. ¶ 81-013 (Nov. 15, 1995).

[^5]: *See also* 12 C.F.R. § 5.36(b). National banks are permitted to
    make various types of equity investments pursuant to 12 U.S.C.
    § 24(Seventh) and other statutes.

[^6]: The OCC recognizes that solicitation and sales techniques can vary
    with the different marketing strategies employed by different banks
    and still be consistent with the general principles described in the
    *First Union Letter.*

[^7]: The *First Union Letter* does not address and is not intended to
    express any opinion on any state law preemption issues. The
    application of state law would be determined in accordance with
    recognized preemption standards. *See Barnett Bank of Marion County,
    N.A. v. Nelson,* 116 S. Ct. 1103 (1996), and the cases cited
    therein.