Decisions on Bank Applications
Dedham Institution For Savings
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Dedham Institution For Savings Dedham, Norfolk 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 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 the Dedham Institution For Savings, Dedham, Norfolk County, Massachusetts (the Bank), for consent to invest indirectly through a wholly-owned subsidiary in equity pools. These equity pools, structured as limited partnerships, in turn invest in private equity funds that primarily focus on venture capital, buyouts, and capital restructuring financing. This is an activity that may not be permissible for a subsidiary of a national bank. These investments are authorized by the Massachusetts General Laws.
Accordingly, it is hereby ORDERED, for the reasons set forth in the attached Statement, that the application submitted by the Bank to make and retain investments in limited partnerships, through a wholly-owned subsidiary, Newco (Subsidiary), be and hereby is approved, subject to the following conditions:
That the investments be held indirectly through a single majority-owned subsidiary organized for the purpose of holding such investments;
The Bank shall conduct the activity in a majority-owned subsidiary which:
i. Meets applicable statutory or regulatory capital requirements and has sufficient operating capital in light of the normal obligations that are reasonably foreseeable for a business of its size and character within the industry;
ii. Maintains separate accounting and other business records;
iii. Observes separate business entity formalities such as separate board of directors' meetings;
iv. Conducts business pursuant to independent policies and procedures designed to inform customers and prospective customers of the Subsidiary that the Subsidiary is a separate organization from the Bank, and that the Bank is not responsible for and does not guarantee the obligations of the Subsidiary;
v. Has a current written business plan that is appropriate to the type and scope of business conducted by the Subsidiary; and
vi. Has qualified management and employees for the type of activity contemplated.
That the Bank maintain a "well-capitalized" status pursuant to Part 325 of the FDIC's Rules and Regulations after deducting from its Tier l Capital the investment in equity securities of the Subsidiary as well as the Bank's pro rata share of any retained earnings of the Subsidiary, provided that the capital deduction shall not be used for purposes of determining whether the Bank is '`critically undercapitalized," and that this deduction be reflected on the appropriate schedule of the Bank's Consolidated Reports of Condition and Income;
The Bank shall limit its indirect equity investment activity through the Subsidiary to $5,000,000;
The Bank shall not engage in any additional equity investment activity through or make any additional investment (including equity, debt, or extensions of credit) in the Subsidiary without the prior approval of the Regional Director of the FDIC;
That neither the Bank 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 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
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 12th day of July, 2000.
FEDERAL DEPOSIT INSURANCE CORPORATION
John M. Lane
Associate Director
Division of Supervision
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Dedham Institution For Savings Dedham, Norfolk 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
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 the Dedham Institution For Savings, Dedham, Norfolk County, Massachusetts (the Bank), for consent to invest indirectly through a wholly-owned subsidiary in equity pools. These equity pools, structured as limited partnerships, in turn invest in private equity funds that primarily focus on venture capital, buyouts, and capital restructuring financing. The Bank plans to invest a maximum of $5,000,000 and to diversify by limiting its investment in any single fund to $1,000,000. This is an activity that may not be permissible for a subsidiary of a national bank. These investments are authorized by the Massachusetts General Laws.
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.
The Bank will establish a new, wholly-owned subsidiary, Newco (Subsidiary), to conduct the activity. Furthermore, the Bank has agreed to operate Newco according to the core eligibility standards in § 362.4(c)(2) of the FDIC's Rules and Regulations. To provide prudent operational safeguards for the wholly-owned subsidiary, the FDIC's approval will incorporate the core eligibility standards.
On January 29, 1993, the Regional Director of the Boston Region approved the Bank'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 the Bank's Tier 1 capital.
The making of any equity investment entails risks related to the loss of investment and price volatility. However, certain factors may lessen these risks.
As of March 31, 2000, the Bank had total assets of $655 million. Its financial condition, future earnings prospects, and management are regarded as strong. The Bank has a set of investment guidelines to manage prudently the investment through its wholly-owned subsidiary. The Bank meets the definition of "well-capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations and continues to be "well-capitalized" after deducting from its Tier One capital its investment in equity securities and retained earnings of the Subsidiary. The Bank's proposed maximum investment represents 6.84 percent of Tier One Leverage capital or 0.76 percent of total assets as of March 31, 2000.
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. The Bank has successfully demonstrated its ability to manage its investments in equity securities.
Nevertheless, because of the nature of the Bank's proposed investment in equity pools, structured as limited partnerships and involving venture capital, buyouts, and capital restructuring financing, the FDIC is imposing a condition requiring the Bank to maintain a "well-capitalized" status under 12 C.F.R. Section 325.103 after deducting from its Tier 1 capital the investment in equity securities of the Subsidiary as well as the Bank's pro rata share of any retained earnings of the Subsidiary. However, the capital deduction shall not be used for purposes of determining whether the bank is "critically undercapitalized" under 12 C.F.R. Section 325.103. As such, the Bank must have a Tier 1 leverage capital ratio of not less than 5.0 percent, a Tier 1 risk-based capital ratio of not less than 6.0 percent, and a total risk-based capital ratio of not less than 10.0 percent after the required deduction. Also required is that such deduction be reflected on the appropriate schedule of the Bank's Consolidated Reports of Condition and Income.
These proposed investments are to be made through third parties, and the Bank does not contemplate any insider involvement in the proposed activity. 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.
The FDIC is also imposing a condition that the Bank or any of its subsidiaries may not extend credit to the Subsidiary or purchase any debt instruments issued by the Subsidiary. Prior to any such transaction, approval by the FDIC through the application process is required.
Based on a careful review of all available facts and information, the Associate Director has concluded that the proposed investments 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.
ASSOCIATE DIRECTOR
DIVISION OF SUPERVISION
FEDERAL DEPOSIT INSURANCE CORPORATION