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| ## Comptroller of the Currency                                        |
|                                                                       |
| > **Administrator of National Banks**                                 |
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Central District Office

One Financial Place, Suite 2700

440 South LaSalle Street

Chicago, Illinois 60605

**Conditional Approval #709**

**November 2005**

October 25, 2005

Matthew St. Louis, Esq.

Mark Barnes, Esq.

Ice Miller

One American Square

Box 82001

Indianapolis, Indiana 46282-0200

Re: Application to Merge The First National Bank of Fremont into
American Heritage Banco, Inc. (OCC Application Control Number:
2005-WO-12-0017) and,

> Application by The First National Bank of Fremont for a fundamental
> change in its asset composition. (OCC Application Control Number:
> 2005-WO-12-0018)

Dear Messrs. St. Louis and Barnes:

This is to inform you that, as of the date of this letter, the Office of
the Comptroller of the Currency (OCC) approved the application by The
First National Bank of Fremont (Fremont) Fremont, Indiana, (Charter
Number 10718) to merge into its nonbank affiliate, American Heritage
Banco, Inc. (AHBI), under 12 U.S.C. § 215a-3 and 12 C.F.R. § 5.33(g)(5).
The OCC also did not object the sale of all the deposit liabilities and
substantially all the assets of The First National Bank of Fremont to
Farmers State Bank (Farmers) under 12 C.F.R. § 5.53.

##### I. BACKGROUND

On September 6, 2005, Fremont applied to the Office of the Comptroller
of the Currency ("OCC") for approval for a fundamental change in its
asset composition under 12 C.F.R. § 5.53. Fremont is an insured national
bank. The fundamental change in Fremont's asset composition will occur
as a result of Fremont's agreement to sell substantially all of its
liabilities and substantially all of its operating assets to Farmers
State Bank, LaGrange, Indiana (Farmers), an insured state commercial
bank, in a purchase and assumption transaction (Transaction). It is

planned that immediately after the Transaction, the insured status of
Fremont will be terminated under 12 U.S.C. § 1818(q).[^1]

On August 27, 2004, Fremont also applied to the OCC for approval for
Fremont to merge into (AHBI), after the consummation of the Transaction
and the termination of Fremont's status as an insured bank (the merger).
AHBI is the immediate parent, and the sole shareholder, of Fremont.[^2]
It is not a bank, and so it is a nonbank affiliate of Fremont. AHBI is
organized as an Indiana corporation. Its principal place of business is
in San Jose, Illinois. Fremont plans to consummate the merger
immediately after the consummation of the Transaction and the
termination of Fremont's status as an insured bank. Fremont hopes to
consummate the merger on the same day as the Transaction, but in any
event it will complete the merger as soon as possible thereafter. As a
result of the merger, Fremont's separate existence as a national bank
will end, and its charter will be terminated.

**II. DISCUSSION**

**A. The Fundamental Change in Asset Composition**

Fremont applied to the OCC for prior approval of a fundamental change in
its asset composition under 12 C.F.R. § 5.53.[^3] Under section
5.53(c)(1)(i), a national bank must obtain prior written approval of the
OCC before changing the composition of all, or substantially all of its
assets through sales or other dispositions. In the Transaction, Fremont
will sell all its deposits and substantially all of its operating
assets. Thus, it is clearly within the scope of section 5.53(c)(1)(i).
The principal purpose of adopting 12 C.F.R. § 5.53 was to address
supervisory concerns raised by so called "dormant" bank charters by
providing the OCC with regulatory oversight and a means to monitor them.

In the case of Fremont, Fremont plans to merge into its nonbank
affiliate parent immediately after the Transaction that would make
Fremont a "dormant" charter. Thus, OCC concerns over the continuation of
"dormant" charters are addressed. OCC approval of Fremont's application
would be consistent with the language and purpose of section 5.53. This
approval is therefore granted in part based on the representation that
the merger will occur immediately after the Transaction, or as soon as
possible thereafter, and to require Fremont to contact the OCC
immediately if the merger does not occur on or before November 3, 2005.

**B. The Merger**

In the merger, Fremont will be merged into AHBI, an Indiana corporation.
After the merger, AHBI will be the surviving entity, and the bank will
cease to exist. The merger is authorized under 12 U.S.C. § 215a-3.

Section 215a-3 authorizes a national bank to merge with a nonbank
subsidiary or affiliate: "Upon the approval of the Comptroller, a
national bank may merge with one or more of its nonbank subsidiaries or
affiliates."[^4] The statute does not limit its scope to mergers in
which the national bank is the surviving entity, and so a merger into a
nonbank affiliate is within its scope. Moreover, in the OCC's
implementing regulations (quoted below), the OCC has expressly taken the
position that mergers into a nonbank affiliate are covered. However, the
regulation limits these transactions to mergers involving a national
bank that is not an insured bank.

The OCC regulations implementing 12 U.S.C. § 215a-3 set forth
substantive and procedural requirements for the merger of an uninsured
national bank with its nonbank affiliate in which the nonbank affiliate
is the resulting entity. In particular, the regulation provides:

> "With the approval of the OCC, a national bank that is not an insured
> bank as defined in 12 U.S.C. 1813(h) may merge with one or more of its
> nonbank affiliates, with the nonbank affiliate as the resulting
> entity, in accordance with the provisions of this paragraph, provided
> that the law of the state or other jurisdiction under which the
> nonbank affiliate is organized allows the nonbank affiliate to engage
> in such mergers. In determining whether to approve the merger, the OCC
> shall consider the purpose of the transaction, its impact on the
> safety and soundness of the bank, and any effect on the bank's
> customers, and may deny the merger if it would have a negative effect
> in any such respect."

Section 12 C.F.R. § 5.33(g)(5)(i) of the regulation imposes additional
requirements that: (1) the bank comply with the procedures of 12 U.S.C.
§ 214a as if it were merging into a state bank, (2) the nonbank
affiliate follow the procedures for mergers of the law of its state of
organization, and (3) shareholders of the national bank who dissent from
the merger have the dissenters' rights set out in 12 U.S.C. § 214a, note
12 C.F.R. § 5.33(g)(5)(ii)-(v) for additional information.

The proposed merger is covered by, and meets the requirements of,
12 U.S.C. § 215a-3 and 12 C.F.R. § 5.33(g)(5). First, as discussed
above, Fremont's status as an insured bank will be terminated after the
Transaction, so that at the time of the merger, Fremont will not be an
insured bank. AHBI is a nonbank affiliate since it is not a bank and it
is the sole shareholder of Fremont, note 12 C.F.R. § 5.33(d)(5) &
5.33(d)(8) for the definitions of control and nonbank affiliate.

Second, the law under which AHBI is organized allows it to merge with
Fremont. AHBI is an Indiana corporation. Indiana permits its domestic
corporations to merge with any "other business entities" formed,
organized, or incorporated under the laws of Indiana or any other state,
or the United States, provided certain statutory requirements are
satisfied, note Ind. Code § 23-1-40-8(a) and (c). Indiana also has a
special procedure for mergers between a parent corporation and a
corporation that is at least 90% owned by the parent corporation, note
Ind. Code § 23-1-40-4. Therefore, the merger is permitted under Indiana
law.

Third, Fremont is complying with the procedures of 12 U.S.C. § 214a to
the extent applicable. Section 214a requires approval of the plan of
merger by a majority of the board, notice to shareholders of the
shareholders' meeting to vote on the merger by newspaper publication
(unless waived by all shareholders) and by actual notice by mail (unless
waived specifically by any shareholder), and approval by a vote of at
least two-thirds of each class of stock. The application contains
certified copies of the board of directors resolution approving the
merger and the shareholder resolution approving the merger and waiving
notice of the shareholder meeting by publication and by mail.

Fourth, AHBI is complying with the procedures for mergers by Indiana
corporations. Indiana requires procedural steps similar to section
214a's outlined above. The application contains certified copies of the
board of director's resolution approving the merger and the shareholder
resolution approving the merger and waiving notice of the shareholder
meeting by publication and by mail. AHBI will file the Articles of
Merger with the Indiana Secretary of State following the closing of the
Transaction, the receipt of OCC approval, and the issuance of the FDIC
termination order.

Fifth, because Fremont is wholly owned by AHBI, there will be no
dissenting shareholders, and so no issues relating to dissenters' rights
are present.

Sixth, under the OCC's regulations, in reviewing mergers under section
215a-3, the OCC considers the purpose of the transaction, its impact on
the safety and soundness of the bank, and any effect on the bank's
customers, and may deny the merger if it would have a negative effect in
any such respect. Provided the appropriate OCC units consider these
factors and determine they do not require the merger be denied, this
element in 12 C.F.R. § 5.33(g)(5) will be satisfied. In this regard, it
should be noted that after the Transaction, Fremont, having sold
substantially all its business to Farmers, would no longer be an
operating company. The merger is simply a means to terminate the
national bank charter. AHBI will continue with the remaining assets and
liabilities, including contingent liabilities, of Fremont. Moreover,
Earl McNaughton, the majority shareholder of AHBI, acknowledged AHBI's
obligation to satisfy such liabilities and represented that assets would
remain in AHBI for a sufficient period of time to satisfy these
liabilities.

In addition, the proposed merger is not subject to sections 23A and 23B
of the Federal Reserve Act, 12 U.S.C. §§ 371c & 371c-1. Under Regulation
W, the merger of an affiliate into a bank is considered the purchase of
an asset, and so a covered transaction, if the bank pays consideration
or if there are liabilities in the affiliate that become liabilities of
the bank, note 12 C.F.R. § 223.3(dd) for the definition of "purchase of
an asset". The same rationale could be used to treat the merger of the
bank into a nonbank affiliate as a sale of an asset under 12 U.S.C.
§ 371c-1. However, Regulation W does not address this point, and we
believe it is an implausible interpretation of the statute for it to
apply to a merger transaction that ends the bank's existence. First,
there is no bank to be in violation of the statute or to be protected by
it. Second, there is no transaction with the bank to which to apply the
statutory standard (the transaction must be on terms and conditions at
least as favorable to the bank as those in comparable transactions with
unaffiliated parties).

**III. CONCLUSION**

The request for approval for a fundamental change in asset composition
may be approved under 12 C.F.R. § 5.53. The proposed merger is legally
permissible under 12 U.S.C. § 215a-3. In particular, the approval is
based on Fremont's representation that the merger will occur shortly
after the Transaction and the termination of Fremont's status as an
insured bank. The application meets the various elements and legal
requirements of the statute and 12 C.F.R. § 5.33(g)(5). The OCC may
approve it, provided the appropriate OCC units consider the purpose of
the transaction, its impact on the safety and soundness of the bank, and
any effect on the bank's customers.

These approvals are subject to the following condition:

> If the merger does not occur within five (5) days after the
> Transaction, Fremont shall immediately notify the OCC and submit a
> plan to wind up its affairs and terminate its status as a national
> bank.

This condition of approval is a "condition 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. As such, the condition
is enforceable under 12 U.S.C. § 1818.

The OCC must be advised in writing in advance of the desired effective
date for the merger so that the OCC may issue the certification letter
for the merger. The OCC will issue a letter certifying consummation of
the merger when we receive the following:

1.  Written assurance from the Federal Deposit Insurance Corporation
    that Fremont is no longer insured.

2.  Fremont's bank charter and any OCC documents in the possession of
    Fremont.

3.  A copy of the final Certificate of merger filed with the Indiana
    Secretary of State.

This approval, and the activities and communications by OCC employees in
connection with the filing, do not constitute a contract, express or
implied, or any other obligation binding upon the OCC, the United
States, any agency or entity of the United States, or any officer or
employee of the United States, and do not affect the ability of the OCC
to exercise its supervisory, regulatory, and examination authorities
under applicable law and regulations. The foregoing may not be waived or
modified by any employee or agent of the OCC or the United States.

All correspondence and documents concerning this transaction should be
directed to the undersigned at (312) 360-8863.

Very truly yours,

/s/

David Rogers

Director for District Licensing

[^1]: Under section 1818(q), whenever the liabilities of an insured
    depository institution are assumed by another insured depository
    institution, the insured status of the institution whose liabilities
    are assumed "shall terminate on the receipt by the Corporation of
    satisfactory evidence of such assumption . . . . " 12 U.S.C.
    § 1818(q). The Federal Deposit Insurance Corporation ("FDIC")
    requires the assuming institution to certify to the FDIC that it has
    assumed the deposit liabilities and considers such certification
    satisfactory evidence. 12 C.F.R. § 307.1. On October 6, 2005, the
    FDIC confirmed that the insurance termination order would be
    prepared and ready for issuance after certification of the
    assumption of deposit liabilities.

[^2]: Management of Fremont has been unable to locate a stock ledger or
    other evidence in its records confirming AHBI's ownership of all of
    Fremont's stock. Under prior management, Fremont converted to a
    bank-bank holding company structure, at which time Fremont believes
    that all of its stock was acquired by AHBI. Fremont represents that
    it has undertaken a diligent search for its stock ledger or other
    evidence of stock ownership, and Fremont has not identified any
    evidence, which would cause it to believe that AHBI is not its sole
    shareholder.

[^3]: The OCC recently issued 12 C.F.R. § 5.53, and it became effective
    on October 1, 2004. *See* 69 Fed. Reg. 50293 (August 16, 2004).

[^4]: 12 U.S.C. § 215a-3(a), as added by section 1206 of the Financial
    Regulatory Relief and Economic Efficiency Act of 2000 (Title XII of
    the American Homeownership and Economic Opportunity Act of 2000),
    Pub. L. No. 106-569, 114 Stat. 2944, 3034 (December 27, 2000).
    Section 1206 was adopted in order to facilitate the ability of
    banking organizations to effect corporate restructuring between
    national banks and their subsidiaries and affiliates in the most
    efficient way possible, while preserving regulatory oversight by
    requiring OCC approval. *See* S. Rep. No. 106-11, 106^th^ Cong.,
    1^st^ Sess. 8 (1999).