For immediate release

The Federal Reserve Board today announced its approval of the application by New Prague Bancshares, Inc., New Prague, Minnesota, to become a bank holding company by acquiring 100 percent of the voting shares of Community Security Bank, New Prague, Minnesota, a de novo bank. Attached is the Board's Order relating to this action.

New Prague Bancshares, Inc. New Prague, Minnesota Order Approving the Formation of a Bank Holding Company

New Prague Bancshares, Inc., New Prague, Minnesota ("Bancshares"), has requested the Board's approval under section 3 of the Bank Holding Company Act (12 U.S.C. § 1842) ("BHC Act") to become a bank holding company by acquiring all the voting shares of Community Security Bank ("Bank"), a de novo state chartered bank also in New Prague. Notice of the application, affording interested persons an opportunity to submit comments, has been published (62 Federal Register 31,821 (1997)). The time for filing comments has expired, and the Board has considered the application and all comments received in light of the factors set forth in section 3 (c) of the BHC Act. Bancshares is a newly formed nonoperating corporation that would acquire Bank, which is a de novo bank. The addition of a new bank in the relevant banking market would increase the number of alternative sources of banking products and services available to customers in the market and increase competition. The Board previously has stated that the promotion of competition through de novo entry is a positive consideration in an application under section 3 of the BHC Act.1 Accordingly, the Board concludes that consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of banking resources in any relevant banking market. The Board has carefully considered the financial and managerial resources and future prospects of Bancshares and Bank in light of all the facts of record. The Board received comments from a national bank that has a branch in New Prague ("Commenter") that contend that the demographic and economic characteristics of Bank's proposed trade area show insufficient demand to support another bank and that the projections by Bancshares for the Bank's deposits and income are exaggerated. Bancshares maintains that the ability of its organizers to raise approximately $2.8 million in capital from local area residents and businessmen and the fact that Bank has been formed and would be owned by local residents demonstrate a demand for the bank's services. Bancshares supports its projections with a business plan. Bancshares also notes that Bank would be located in a developing downtown area of New Prague and would be managed by an experienced chief executive officer and a board of directors composed of local residents. The Board also has considered the characteristics of the relevant market. The record shows that the population in Bank's proposed trade area has increased from 1990 to 1995.2 The Board also has reviewed the growth and success of other de novo banks in or near the Twin Cities MSA that were started within the last five years. Based on this review, the Board concludes that the projections offered by Bank are reasonable. In reviewing the financial and managerial factors, the Board also has considered Bank's capital level in relation to its projections. Bank appears to have sufficient capital to operate for a significant time at levels below the projections provided for Bank's pro forma operation. In addition, Bancshares does not intend to incur significant amounts of debt and appears to have the financial flexibility to act as a source of strength for Bank. The Board also notes that the Minnesota Commissioner of Commerce, after a review of the application, including the financial aspects of the proposal, granted Bank's state charter request on July 14, 1997. For these reasons and based on all the facts of record, the Board concludes that the record does not indicate that the proposal would adversely affect the safety and soundness of Bancshares or Bank. On this basis, the Board concludes that the financial factor and future prospects of Bancshares and Bank are consistent with approval.3 In evaluating the managerial resources, the Board has considered the experience of several of the organizers and reports of examination assessing their performance in other depository institutions. Based on all the facts of record, the Board concludes that the managerial resources,4 and the convenience and needs, and other supervisory factors the Board is required to consider under section 3 of the BHC Act also are consistent with approval of the proposal.5 Based on the foregoing and all the facts of record, the Board has determined that this application should be, and hereby is, approved. The Board's approval is expressly conditioned on compliance with all the commitments made by New Prague, including those made by the principals of New Prague, in connection with the application. For purposes of this action, the commitments and conditions relied on by the Board in reaching this decision are deemed to be conditions imposed in writing by the Board in connection with its findings and decision, and, as such, may be enforced in proceedings under applicable law. This transaction shall not be consummated before the fifteenth calendar day following the effective date of this order, or later than three months following the effective date of this order, and Bank shall be open for business within six months following the effective date of this order, unless such periods .are extended for good cause by the Board or by the Federal Reserve Bank of Minneapolis, acting pursuant to delegated authority.

By order of the Board of Governors,6 effective September 15, 1997. (signed) Jennifer J. Johnson Jennifer J. Johnson Deputy Secretary of the Board

Footnotes 1 See Wilson Bank Holding Company, 82 Federal Reserve Bulletin 568 (1996). 2 New Prague is a community on the southwestern edge of the Minneapolis-St. Paul Metropolitan Statistical Area ("Twin Cities MSA"). Bank's proposed trade area would encompass the area within approximately a seven-mile radius of New Prague. 3 Commenter argues that Bancshares's obligation under its shareholder agreement to redeem its stock adversely affects the bank holding company's permanent capital. Bancshares modified this provision so that Bancshares is not obligated to purchase any offered shares for which it has a right of first refusal. Under these circumstances, the bank holding company's stock is considered permanent capital and would be considered Tier 1 capital. 4 Commenter argues that allegations raised in pending litigation between Commenter and some of the organizers and directors of Bank and the fact that the lawsuit was not disclosed in the biographical information provided in the application reflect adversely on the managerial factor in this case. Commenter filed the lawsuit after these individuals left their employment with Commenter to form Bancshares and Bank. The litigation is in its preliminary stages, and no findings of wrongdoing on the part of the Bank's organizers and directors have been found. The Board previously has determined that its limited jurisdiction to review applications and notices under the specific factors in the BHC Act does not authorize the Board to adjudicate disputes between a commenter and an applicant that arise under state laws relating to corporate governance that may be enforced by the courts. The Board also notes that a copy of the lawsuit was included in the application. 5 Commenter maintains that certain contractual agreements in the proposal raise supervisory issues. Commenter argues, for example, that Bank's stock plan for its chief executive officer is a noncompete agreement that should have been disclosed in the application. The stock plan rewards the officer with additional compensation based on the performance of the bank but terminates payments if the officer directly or indirectly solicits business in competition with Bank. The stock option plan does not restrict the officer's ability to be employed by a competitor, but only terminates future bonus payments if he solicits business away from Bank. Commenter also contends that because shareholders have a right to transfer Bancshares stock to a trust, such trust may be deemed to be a "company" under the BHC Act. Shareholders proposing such transfers are responsible for complying with all applicable laws, and the Board has sufficient supervisory authority to address the transfer of shares to a trust that does not qualify for an exemption under the BHC Act. 6 Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Kelley, Phillips, and Meyer.

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1997 Orders on banking applications