RE: Springfield Institution for Savings Springfield, Massachusetts
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, the Springfield Institution for Savings, Springfield, Massachusetts, ("Springfield") 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 subsidiaries Newgate Corporation ("Newgate"), Colebrook Corporation ("Colebrook"), and Sherman Street Corporation ("Sherman").
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.
Since 1972, Springfield has been engaged, indirectly as principal, in real estate investment activities through multiple subsidiaries. Those remaining wholly-owned subsidiaries which own interests in real estate, exclusive of bank premises, are Newgate, Colebrook, and Sherman Street. In turn, these subsidiaries own real estate either directly, or indirectly through ownership interests in limited partnerships.
The real estate investments held by Newgate are: the East Windsor Connecticut Industrial Park; the West Bridgewater Distribution/Office Facility; the Brookdale Drive industrial land; a 14.5 percent interest in the Sunchase Limited Partnership, which owns an apartment complex in Knoxville, Tennessee; a 25 percent interest in the Capital Drive Limited Partnership, which owns a commercial/office building located in Springfield, Massachusetts; the Southmeadow Shopping Center; and the Pearl Street convenience store.
Colebrook owns a series of second tier subsidiaries which in turn own real estate either directly, or through interests in limited partnerships. Colebrook has the following subsidiaries: Colebrook-Salisbury Corporation, which owns a 50 percent interest in Francoline Colebrook Partnership, which owns three residential lots in Salisbury, Connecticut; Colebrook-Riverdale Corporation, which owns a private roadway; Colebrook-Waltham Corporation, which owns a 12.5 percent interest in Waltham Medical Associates Limited Partnership, which owns an office building located in Waltham, Massachusetts; Colebrook-Westor Corporation, which owns a 1 percent interest in Westor Limited Partnership and a 50 percent interest in Westor Corporation which owns a 98 percent interest in Westor Limited Partnership, which owns a shopping center located in Brockton, Massachusetts; Colebrook-Diamond Corporation, which owns a manufacturing facility located on 37 acres in Springfield, Massachusetts; Colebrook-Woodcrest Corporation, which owns a 50 percent interest in Wiljon Partnership, which owns three commercial lots located in Wilbraham, Massachusetts; Colebrook-Leominster Corporation, which owns a 50 percent interest in North Central Technology Park Associates, which owns an industrial building and 26.1 acres of adjacent land in Leominster, Massachusetts; Overlook, Inc., which owns a 99 percent interest in Chester Commons, a limited partnership which owns a 15 unit low income housing complex located in Chester, Massachusetts; and Barnes Hillman, Inc., which owns a 50 percent interest in Hillman Associate's Properties ("Hillman").
Springfield has adopted a Plan of Divestment which projects the complete divestiture of all real estate owned by Newgate, Colebrook, and Sherman Street by December 31,1997, except the investment in the Chester Commons Limited Partnership, which Springfield intends to retain in order to take advantage of certain income tax credits which may be available. Springfield does not intend to engage as principal in any additional real estate investment, either directly or indirectly through a wholly-owned subsidiary.
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 Springfield 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, Springfield's real estate investment activities, which are presently confined to the divestiture of assets and the retention of a low income housing development, will not pose significant risks to the Bank Insurance Fund or present material safety and soundness concerns. Springfield 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 Springfield's indirect real estate investments, including equity interests, debt obligations of the Subsidiaries held by the Bank, Bank guarantees of debt obligations issued by the Subsidiaries, extensions of credit or commitments of credit from the Bank to the Subsidiaries, and any extensions of credit to any third parties for the purpose of making a direct investment in the Subsidiaries or making an investment in any investment in which the Subsidiaries have an interest (defined collectively as "Real Estate Investments") shall be limited to that which is currently held, and that the Bank shall not make any additional real estate investments without the consent of the FDIC; (2) that Springfield must continue to meet applicable capital standards as prescribed by the FDIC. The FDIC shall require that Springfield'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 Springfield shall, on a quarterly basis, perform the capital adequacy calculations described above for the purpose of ascertaining its capital level, and that in the event Springfield falls below the level required for a "well capitalized" institution pursuant to Part 325.103(b)(1) of the FDIC's Rules and Regulations, it 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 Springfield shall completely divest itself of its indirect real estate holdings, except for the investment in the limited partnership, Chester Commons, by December 31, 1997; (5) that Springfield shall divest of Colebrook's interest in the Chester Commons limited partnership within two years of the expiration of the holding period required to realize the tax credits. If Springfield has not divested of this interest within one year of such expiration, then Springfield shall submit to the FDIC a written divestiture plan describing the means by which Springfield will comply with the two year limitation; (6) that Newgate Corporation, Colebrook Corporation, and Sherman Street Corporation shall: be adequately capitalized, be separate and distinct in operations from the operations of Springfield, 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 Springfield 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 the subsidiaries that the subsidiaries are separate organizations from Springfield, 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 Springfield, and Newgate Corporation, Colebrook Corporation, and Sherman Street Corporation shall not engage directly or indirectly in real estate activities or other transactions with insiders or their related interests without the prior written consent of the FDIC; (8) that future transactions between the Bank and Newgate Corporation, Colebrook Corporation, and Sherman Street Corporation shall be made in accordance with the restrictions of Sections 23A and 23B of the Federal Reserve Act, to the same extent as though the subsidiaries were affiliates 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 the subsidiaries, 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 its subsidiaries engaged in real estate investment; (10) that the Bank shall not extend credit to any borrower to acquire real estate from its subsidiaries engaged in real estate investment 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 consent granted is based on the facts and circumstances presented or known to the FDIC, and that Springfield 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 change significantly.