Decisions on Bank Applications
Institution For Savings in Newburyport and its Vicinity
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Institution For Savings in Newburyport and its Vicinity Newburyport, Essex County, Massachusetts
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal Through a Majority-Owned Subsidiary in Investment Activities That May Not Be Permissible for a Subsidiary of a National Bank
ORDER
The Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") has fully considered all available facts and information relevant to Section 24 of the Federal Deposit Insurance Act, 12 U.S.C. § 1831a, and Part 362 of the FDIC's Rules and Regulations, relating to the application by Institution For Savings in Newburyport and its Vicinity, Newburyport, Essex County, Massachusetts ("ISN" or "the Bank"), for consent to indirectly retain through a wholly-owned subsidiary the stock of three bank holding companies that are not listed on national securities exchanges. This is an activity that may not be permissible for a subsidiary of a national bank. ISN has sought permission to continue to hold each of the stocks, and not to obtain additional unlisted securities. These investments are authorized by the Massachusetts General Laws. The Board has concluded that the application should be approved subject to certain conditions.
Accordingly, it is hereby ORDERED, for the reasons set forth in the attached Statement, that the application submitted by ISN for consent to retain the stock of First & Ocean Bancorp, Cambridge Bancorp, and Grand Bank Corporation, through a wholly-owned subsidiary, the 1820 Security Corporation, be and hereby is approved, subject to the following conditions:
(1) That the investment in the stock be held indirectly through a single, majority-owned subsidiary organized for the purpose of holding such investments;
(2) That neither ISN nor the majority-owned subsidiary may enter into any transaction with the Bank's executive officers, directors, principal shareholders, or related interests of such persons which relate to the majority-owned subsidiary's activities unless the transactions are on terms and conditions that are substantially the same as those prevailing at the time for comparable transactions with persons not affiliated with the Bank; and
(3) That in the event the facts and circumstances presented or otherwise known to the FDIC in connection with this request change significantly, the FDIC retains the ability to alter, suspend, or withdraw its approval.
Dated at Washington, D.C., this 10th day of August, 1999.
BY ORDER OF THE BOARD OF DIRECTORS
James D. LaPierre
Deputy Executive Secretary
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Institution For Savings in Newburyport and its Vicinity Newburyport, Essex County, Massachusetts
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal Through a Majority-Owned Subsidiary in Investment Activities 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 Act, the Institution For Savings in Newburyport and its Vicinity, Newburyport, Essex County, Massachusetts ("ISN" or "the Bank"), has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). ISN requests the FDIC's consent to retain indirectly through a wholly-owned subsidiary, the 1820 Security Corporation ("Subsidiary"), the stock of three bank holding companies that are not listed on a national securities exchange. The investment policy of ISN limits aggregate common stock positions to a maximum of 100 percent of the Bank's surplus. That policy provides for industry concentration limits of 20 percent of total stock holdings; however, bank stocks are exempted. Furthermore, the policy limits individual stock positions to 10 percent of total stock holdings. Management has stated that the stocks will be retained for dividend income and future price appreciation, and ISN is not seeking permission to obtain additional unlisted securities.
The activity of making investments in the stock of bank holding companies not listed on a national securities exchange may not be a permissible activity for a national bank or a subsidiary of a national bank. Neither insured state banks nor their subsidiaries may engage as principal in an activity prohibited to national banks unless consent has been obtained 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 funds.
On February 2, 1993, the Regional Director of the Boston Region approved ISN's Notice to invest in listed common or preferred stock or shares of an investment company. The Regional Director, acting under delegated authority, found that acquiring and retaining the listed stock and/or registered shares does not pose a significant risk to the Bank Insurance Fund. This approval was subject to limiting the maximum investment in listed and/or registered shares to 100 percent of Tier 1 capital and ISN following reasonable procedures to limit concentrations in listed stocks to provide for risk diversification.
Massachusetts law empowers a state-chartered bank to invest in the capital stock of a bank holding company. A Massachusetts-chartered bank is empowered to invest in the capital stock of a wholly-owned subsidiary corporation organized and operated solely for the purpose of performing functions that the bank itself is permitted to perform directly. Massachusetts law does not restrict the amount that may be invested in a banking company located in the New England states.
The purchase of any equity stock entails risks related to the loss of investment and price volatility. However, certain factors may lessen these risks.
As of December 31, 1998, ISN had total assets of $341 million. Its financial condition, future earnings prospects, and management are regarded as strong. ISN has a set of1hvestment guidelines to manage prudently the investment through its wholly-owned subsidiary. ISN meets the definition of "well-capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations.
Equity investing may be somewhat riskier than lending, but it requires the application of financial analysis, economic assessment, and business judgment similar to that required for lending. Subject to prudent supervision and judgment, investing in equity securities may not be unduly risky. ISN has successfully demonstrated its ability to manage the investment in these bank holding company stocks. The Bank's investment is small at approximately 1.7 percent of Tier 1 Capital. The Bank has held the stocks since 1987 at the latest, with one holding dating from 1907, and there is significant unrealized appreciation. ISN's application is limited to the stock of three bank holding companies with no future purchases contemplated. Such institutions are part of a highly regulated industry, which provides some investment quality assurance for unlisted shares of these financial-related corporations.
Management of ISN has indicated that they have no interest in any insider involvement with the bank holding companies. However, the FDIC is imposing a condition requiring that for any transactions of the Bank and the Subsidiary entered into with the Bank's executive officers, directors, principal shareholders, or related interests of such persons which relate to the Subsidiary, the terms and conditions of such transactions must be substantially the same as those prevailing at the time for comparable transactions with persons not affiliated with the Bank.
Based on a careful review of all available facts and information, including the stated intent of ISN, the Board has concluded that the proposed investments through a wholly-owned subsidiary in the common stock of First & Ocean Bancorp, Cambridge Bancorp, and Grand Bank Corporation do not pose a significant risk to the Bank Insurance Fund and, therefore, approval of the application subject to the conditions in the Order, is warranted.
THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION