BOARD OF GOVERNORS

Of" THE

FEDERAL RESERVE SYSTEM

WASHINGTON, C. C. 20551

J. VIRGIL MATTINGLY, JR.

GENERAL COUNSEL

March 30, 1995

Charles R. Haley

Executive Vice President

The Peoples Bank

P.O. Box 4250

Eatonton, GA 31024-4250

Dear Mr. Haley:

This is in response to your letter requesting certain interpretations

of Regulation O (12 C.F.R. Part 215). Your inquiry concerns ,[redacted]

the majority stockholder of The Peoples Bank, Eatonton, Georgia ("Bank"), and

her husband, [redacted] . Your letter indicates that the are[redacted]

executive officers of Bank, and that they currently have a number of loans from

Bank ("Existing Loans") that have been used for various purposes. The

Existing Loans total less than $100,000, and are secured by a first lien on the

[redacted] principal residence in Eatonton.

In your letter, you indicate that the [redacted] are planning to build a

second home in South Carolina, and ask whether it would be consistent with

Regulation O for Bank to provide financing for that transaction .while retaining

the Existing Loans. In particular, you ask whether Bank may make a loan to

both of the[redacted], jointly, or a loan to Mrs. [redacted] , individually, to finance

the proposed transaction. You also ask whether each of the [redacted] may

borrow, separately, up to $100,000 from Bank under Regulation O's provisions

for "other purpose" loans to executive officers. See 12 C.F.R. 215.5(c)(4).

Section 215.5(c)(2) of Regulation O provides that, under certain

conditions, a state member bank may extend credit to an executive officer "in 

any amount to finance or refinance the purchase, construction, maintenance, or

improvement of a residence of the executive officer". Section 215.5(c)(4)

provides that, in addition, a member bank may extend credit to an executive

officer "for any other purpose not specified in paragraphs (c)(l) through (c)(3)
of this section, if the aggregate amount of extensions of credit to that executive

officer under this paragraph does not exceed at any one time the higher of

2.5 percent of the bank’s capital and unimpaired surplus or $25,000, but in no

event more than $100,000." Staff understands that Bank’s capital and

unimpaired surplus exceeds $4,000,000. Hence, the limit on Bank’s "other

purpose" Ioans to any executive officer under section 215.5(c)(4) ("Other

Purpose Limit") is $100,000.

Staff has reviewed the facts and circumstances presented in your

letter in light of these regulatory provisions, and has concluded that, with

certain limitations, it would be consistent with Regulation O for Bank to

provide financing for the construction of the South Carolina residence while

retaining the Existing Loans. In particular, staff believes that, because the

aggregate amount of the Existing Loans is less than the Bank’s Other Purpose

Limit, the Existing Loans are authorized under section 215.5(c)(4) of

Regulation O. Hence, such loans are permissible under Regulation O, provided

that the other requirements of the rule (including requirements relating to terms

and creditworthiness) are satisfied. In addition, staff believes that the proposed

construction financing would be authorized under section 215.5(c)(2) of

Regulation O relating to residential mortgage Ioans, provided that the

requirements of that section (including requirements relating to security for the

loan and use and ownership of the property) are satisfied. Hence, the proposed

financing also would be permissible under Regulation O if the other

requirements of the rule (including requirements relating to terms and

creditworthiness and director approval) are met.1/ Staff further believes that

this financing may beprovided either through a joint loan to the [redacted] by

1/ In addition, staff notes that these transactions would continue to be

governed by general standards of safety and soundness, prohibitions against

fraud and abuse, and corporate fiduciary duties, as well as, in some

circumstances, other provisions of federal banking law such as section 23A of

the Federal Reserve Act (12 U.S.C. §371c).

a loan to one of the [redacted] so long as the specific arrangements would satisfy

the requirements of Regulation O referenced in this paragraph.

With respect to your additional question concerning compliance

with the Other Purpose Limit, staff believes that, in general, the aggregate

amount of loans that Bank may make to the [redacted] under section 215.5(c)(4)
of Regulation O is $100,000. By operation of Regulation O's tangible

economic benefit rule (12 C.F.R. 215.3(f)) and the Board's interpretations of

that rule, it is not the case that each of Mrs.[redacted] and Mr. [redacted] may 

borrow separately up to that limit. The tangible economic benefit rule provides

that "[a]n extension of credit is considered made to an insider to the extent that 

the proceeds are transferred to the insider or are used for the tangible economic 

benefit of the insider." 12 C.F.R. 215.3(f)(l). Staff believes that a loan to the

spouse of an insider generally will be considered made to the insider for

purposes of the tangible economic benefit rule. Accordingly, a loan made to

Mr. [redacted] generally will be treated as a loan also made to Mrs. [redacted] , and

vice versa, for purposes of Regulation O.

These opinions apply only with respect to the facts and

circumstances described above, and do not purport to address any other issue

that may be raised by the transactions in question. In addition, staff

understands that Bank's primary federal regulator is the Federal Deposit

Insurance Corporation ("FDIC"). Bank may wish to contact the FDIC for

confirmation of the opinions expressed herein.

I hope that this information is helpful, and apologize for the delay

in responding to your inquiries. If you have any further questions concerning

this matter, please contact Stephen Van Meter of my staff at (202) 452-3554.

Sincerely,

(signed)

J. Virgil Mattingly, Jr.

cc: Douglas Jones, Esq.