Decisions on Bank Applications
Danvers Savings Bank
FEDERAL DEPOSIT INSURANCE CORPORATION
RE: Danvers Savings Bank Danvers, 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, Danvers Savings Bank, Danvers, Massachusetts, ("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 subsidiaries Conant Ventures, Inc. (Conant), Amesbury Ventures, Inc. (Amesbury), and Peabody Ventures II, Inc. (Peabody), collectively referred to in this Statement as "the Subsidiaries".
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.
Conant is a direct, wholly-owned subsidiary of the Bank, and also owns 100 percent of the common stock of Amesbury and Peabody. Amesbury holds an interest in a joint venture which has invested in a 64 unit condominium complex in Amesbury, Massachusetts known as Bartlett's Reach. Fifty of the Bartlett's Reach units have been sold. Construction on the remaining 14 units is to be completed and they are to be sold. The Bank has stated that this can be accomplished on or before December 31, 1997. Peabody held an interest in a joint venture which had invested in a parcel of land which the joint venture was to subdivide into 114 lots for single family home construction. As of September 30, 1995, 9 finished lots remain to be sold. The Bank anticipates that these 9 lots will be sold, and the venture will be closed on or before March 31, 1996. Peabody became the sole owner of this joint venture after a settlement agreement was reached with the joint venture partner in 1991. The Bank's interest in these two real estate projects includes its equity interest in the Subsidiaries, direct loans to the Subsidiaries, and loans extended to the joint ventures themselves. These assets totaled $3,712,696 as of September 30, 1995 and represented 21.8 percent of the Bank's Tier 1 equity capital. The Bank may extend additional funds under a construction loan extended to the Amesbury joint venture, which has been capped at $900,000. The Bank does not intend to make any additional direct or indirect 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 winding down two real estate joint ventures, both of which are almost complete, 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:
That the Bank'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, plus any additional funding which can be provided under the existing $900,000 Bank construction loan to the Amesbury joint venture;
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;
That the Bank 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 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;
That the Bank shall divest itself of the Real Estate Investments on or before December 31, 1997;
That the Subsidiaries 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 boards of directors meetings; maintain boards of directors each 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 the Subsidiaries that they are separate organizations 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;
That the Bank shall not engage directly or indirectly through the Subsidiaries in real estate investment activity or other transactions with insiders or their related interest without the prior written consent of the FDIC;
That future transactions between the Bank and the Subsidiaries 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;
That the Bank shall not condition any loan on the purchase of real estate from the Subsidiaries;
That the Bank shall not extend credit to any borrower to acquire real estate from the Subsidiaries 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; and,
That the consent granted herein 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