FEDERAL DEPOSIT INSURANCE CORPORATION
RE: First County Bank Stamford, Connecticut
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal in Real Estate Activities Which May Not Be Permissible for a Subsidiary of a National Bank
Pursuant to the provisions of Section 24 of the Federal Deposit Insurance Act, First County Bank, Stamford, Connecticut ("the Bank") has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). The applicant requests the FDIC's consent to continue to engage as principal indirectly in real estate investment activities through its wholly-owned subsidiary SSB Corporation ("SSB").
The activity of holding real estate investment properties may not be a permissible activity for a national bank or a subsidiary of a national bank. State chartered FDIC-insured banks may not engage as principal in an activity prohibited to nationally chartered banks unless they obtain consent 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 fund.
SSB is the managing general partner in Davenport Ridge Associates (DRA), a partnership with a local real estate developer established in 1982 to acquire 68 acres of land in Stamford, Connecticut for subdivision into 41 residential building lots. A total of 24 homes have been built and sold. Seventeen building lots remain. Newly constructed homes occupy 2 of the 17 remaining lots. The Bank's investment in SSB is a cumulative loss of $2,218,026 as of September 30, 1995. The Bank has extended a loan to SSB, which has a current balance, including accrued but uncollected interest, of $3,657,328. The Bank has extended a $4,500,000 revolving line of credit to DRA, which had a balance of $3,560,237 as of September 30, 1995. The Bank has established a specific reserve for losses related to its investment in the project of $2,791,024. All of these items aggregate to a net loss exposure, before consolidating entries, of $4,426,541, which represents 14.4 percent of the Bank's Tier 1 equity capital.
The Bank desires to complete the construction and sale of single family homes on the remaining building lots. The revolving credit facility provided by the Bank will be used to fund the completion of the project. The Bank anticipates that it will take five years to completely divest of its assets related to DRA. The Bank does not intend to make any additional investments in real estate.
In connection with this application, the FDIC has reviewed available information and has also taken into consideration the financial and managerial resources and future earnings prospects of the Bank associated with the continued holding of real estate property.
Real estate investment is subject to a high degree of market risk and other specialized risks specific to real estate ownership and may also be of questionable benefit in the diversification of a financial institution's portfolio of assets. Due to these risks, real estate investment activities appear suitable to a financial institution only on a very limited scale and under restrictive conditions designed to control the various risks posed to the financial institution and the deposit insurance fund.
As limitations and restrictions addressing the risks posed by real estate investment activities will be imposed, the Bank's real estate investment activities, which are presently confined to the build out and divestiture of a single real estate project, will not pose significant risks to the Bank Insurance Fund or present material safety and soundness concerns. The Bank is in compliance with applicable capital standards.
Based upon careful evaluation of all available facts and information, the FDIC has concluded that approval of the application is warranted subject to the conditions discussed below. These conditions are imposed for prudential reasons due to the volatility and other risks which are inherent in real estate activities in general, as well as to mitigate any potential insider conflicts of interests, and thus ameliorate any risk to the fund.
The conditions imposed will require: (1) that the Bank's indirect real estate investments, including equity interests, debt obligations of SSB held by the Bank, Bank guarantees of debt obligations issued by SSB, extensions of credit or commitments of credit from the Bank to SSB, and any extensions of credit to any third parties for the purpose of making a direct investment in SSB or making an investment in any investment in which SSB has an interest (defined collectively as "Real Estate Investments") shall be limited to that which is currently held, plus any additional funding which can be provided under the existing $4.5 million Bank credit facility; (2) that the Bank must continue to meet applicable capital standards as prescribed by the FDIC. The FDIC shall require that the Bank's capital level, after deducting the Bank's Real Estate Investments, equal or exceed the level required for a "well capitalized" institution pursuant to Part 325.103(b)(1) of the FDIC's Rules and Regulations; (3) that the Bank shall, on a quarterly basis, perform the capital adequacy calculations described in paragraph 2 for the purpose of ascertaining its capital level, and that in the event the Bank falls below the level required for a "well capitalized" institution pursuant to Part 325.103(b)(1) of the FDIC's Rules and Regulations, the Bank shall notify the FDIC within 15 days and submit to the FDIC an acceptable plan for restoring capital to a level required for a "well capitalized" institution; (4) that the Bank shall divest itself of the Real Estate Investments within five years of the date of this approval letter; (5) that if the Bank has not divested itself of the Real Estate Investments within three years of the date of this approval letter, then the Bank shall submit to the FDIC a written divestiture plan detailing the means by which the Bank will comply with the five year divestiture period above; (6) that SSB shall: be adequately capitalized, be separate and distinct in operations from the operations of the Bank, maintain separate accounting and other corporate records, conduct separate board of directors meetings, maintain a board of directors with one or more independent, knowledgeable outside directors, contract with the Bank for any services on terms and conditions comparable to those available to or from independent entities, and conduct business pursuant to separate policies and procedures designed to inform customers and prospective customers of SSB that it is a separate organization from the Bank, including the placement of specific language on any debt instrument or contract with a third party disclosing that the Bank itself is not responsible for payment or performance; (7) that the Bank shall not engage directly or indirectly through SSB in real estate investment activity or other transactions with insiders or their related interest without the prior written consent of the FDIC; (8) that future transactions between the Bank and SSB shall be made in accordance with the restrictions of Sections 23A and 23B of the Federal Reserve Act, to the same extent as though SSB were an affiliate of the Bank, except that the collateral requirements and investment limitations of Section 23A shall not apply to loans made by the Bank to facilitate sale of the real estate investments held by SSB, provided that the loans are consistent with safe and sound banking practices, do not present more than the normal degree of risk of repayment, and the credit is extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions; (9) that the Bank shall not condition any loan on the purchase of real estate from SSB; (10) that the Bank shall not extend credit to any borrower to acquire real estate from SSB unless it is consistent with safe and sound banking practice, does not involve more than the normal degree of risk of repayment, and the credit is extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions; (11) that the Bank shall not purchase real estate from SSB in its trust capacity unless expressly authorized by the trust instrument, court order, or state law, and; (12) that the consent granted is based on the facts and circumstances presented or known to the FDIC, and that the Bank shall notify the FDIC of any significant change in facts or circumstances. The FDIC's action is conditioned upon its ability to alter, suspend, or withdraw its approval in the event the facts and circumstances presented in the application change significantly.
DIVISION OF SUPERVISION