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InterWest Savings Bank


RE: InterWest Savings Bank Oak Harbor, Washington

Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Directly 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, InterWest Savings Bank, Oak Harbor, Washington, ("the Bank") has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). The Bank holds title to a tract of land in Mount Vernon, Washington and is responsible for remediation of environmental damage resulting from former municipal dump sites contained on this land. The Bank requests the FDIC's consent to develop the tract into residential lots with clean soil excavated as a by-product of this activity used to cap environmental contamination at the former municipal dump sites. The property would then be liquidated through individual lot sales. The Bank does not intend to engage in further real estate activities after its involvement in this development is concluded.

The Bank currently holds this tract of land as other real estate taken for debts previously contracted. In view of the extensive remediation and development activity proposed for this property, however, its status as other real estate is inconsistent with normal liquidation efforts, and the Bank will be required and has committed to. conduct site development and liquidation activities through a subsidiary.

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 a bank is in compliance with applicable capital standards and the FDIC determines that the activity poses no significant risk to the deposit insurance fund.

The 82 acre tract was acquired in 1978 but site development was postponed due to adverse market conditions. Subsequent sale to an unrelated third party was rescinded in 1991 after the purchasers became uncomfortable with the likelihood of increased costs and construction delays resulting from environmental contamination on approximately one acre of this land that was used as two dump sites from the 1940's through the 1960's. The Bank and the city agreed to share remediation costs and the State Department of Ecology has approved the clean-up plan. The city has issued preliminary land use and site permits. The proposed site development plan appears to offer a cost efficient approach to capping toxic waste sites with clean, environmentally compatible soil and, at the same time, appears to allow the Bank an opportunity to convert a non-earning asset into a profitable investment. Only modest expenditures are anticipated to prepare individual building sites, and it is estimated that all sites can be marketed over a three-year period.

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 institution 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 prudential limitations and restrictions addressing the risks posed by real estate investment activities will be imposed, the proposed development plan 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 and the Bank's anticipated maximum total investment in the activity amounts to a modest 3.4% of its Tier 1 capital at September 30, 1995.

Based upon careful evaluation of all available facts and information, the FDIC has concluded that approval of the application is warranted subject to the restrictions discussed below. These conditions are imposed for prudential reasons due to the volatility and other risks which are inherent in the subject real estate activity, as well as to mitigate any potential insider conflicts of interests.

The Bank shall establish a wholly-owned subsidiary and conduct all real estate investment activities through this subsidiary;

The Bank's indirect real estate investment, including equity interests, debt obligations of the subsidiary held by the Bank, Bank guarantees of debt obligations issued by the subsidiary, extensions of credit or commitments of credit from the Bank to the subsidiary, and any extensions of credit to any third parties for the purpose of making a direct investment in the subsidiary or making an investment in any investment in which the subsidiary has an interest (defined collectively as "Real Estate Investments") shall be limited to $2,900,000, and that the Bank shall not engage in any additional real estate investment activity or make any additional investment in the subsidiary beyond this amount without the prior written consent of the FDIC;

The Bank shall, within 90 days, provide the FDIC with a feasibility study to be performed by an independent, outside party. should specifically address the feasibility of subdividing the property into residential lots and subsequent sale of the lots over a three-year time period.

The Bank shall continue to meet applicable capital standards prescribed by the Corporation. The minimum acceptable levels (after deduction of the investment in the subsidiary) will be a Total risk based capital ratio of 10 percent or greater, a Tier 1 risk based capital ratio of 6 percent or greater, and a Tier 1 leverage capital ratio of 5 percent or greater;

The Bank shall, on a quarterly basis, perform the capital adequacy calculations described above, and in the event the Bank falls below the level described above, the Bank shall notify the FDIC within 15 days and submit to the FDIC an acceptable plan for restoring capital above the prescribed minimums;

The Bank shall completely divest itself of all of its interest in the real estate within five years;

If the Bank has not divested itself of its interest within three years, then the Bank shall submit to the FDIC a written divestiture plan describing the means by which the Bank shall comply with the five-year divestiture time frame;

The subsidiary 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, conduct business pursuant to separate policies and procedures designed to inform customers and prospective customers of the subsidiary that the subsidiary is a separate organization from the Bank;

The Bank shall not engage directly or indirectly through the subsidiary in real estate investment activity with insiders or their related interests without the prior written consent of the FDIC;

All transactions between the Bank and the subsidiary, which are entered into after the date of the approval letter, shall be made in accordance with the restrictions of Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. 371c and 371c-1, to the same extent as though the subsidiary was an affiliate of the bank as defined under Sections 23A and 23B with the exception that the collateral requirement and investment limitation shall not apply to third party financing provided by the Bank to finance the sale of the real estate investments so long as the credit is consistent with safe and sound banking practice, does not involve more than a normal degree of risk, 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;

The Bank shall not condition any loan on the purchase of real estate either directly, or through the proposed wholly-owned subsidiary, or condition any loan on investment in such subsidiary;

The Bank shall be prohibited from making third party loans to finance the sale of real estate investments unless such loans are made consistent with safe and sound banking practice, do -not involve more than a normal 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 consent granted herein is based on the facts and circumstances presented or otherwise known to the FDIC in connection with this request. The Bank shall notify the FDIC of any significant change in facts or circumstances. The FDIC shall have the right to alter, suspend, or withdraw its approval in the event the facts and circumstances presented in the application change significantly.