Decisions on Bank Applications
Liberty Bank
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Liberty Bank Middletown, Connecticut
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal Through a Wholly-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 the application by the Liberty Bank, Middletown, Connecticut, ("Bank"), pursuant to Section 24 of the Federal Deposit Insurance Act, 12 U.S.C. § 1831 a, and Part 362 of the FDIC's Rules and Regulations, for consent to indirectly acquire through a wholly-owned subsidiary, ("the Subsidiary"), a $50,000 limited partnership interest in Middletown Hotel Associates Limited Partnership ("Partnership").
Accordingly, it is hereby ORDERED, for the reasons set forth in the attached Statement, that the application submitted by the Bank for consent to invest indirectly, through the Subsidiary, $50,000 in limited partnership interests is hereby approved, subject to the following conditions:
1. That the investments be held indirectly through a single wholly-owned subsidiary of the Bank organized for the purpose of holding such investments;
2. The Subsidiary is a corporation that:
i. Meets applicable statutory or regulatory capital requirements and has sufficient operating capital appropriate 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; and
iv. Conducts business pursuant to independent policies and procedures designed to inform third parties 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;
3. The Bank shall limit its indirect equity investment activity through the Subsidiary to the $50,000 limited partnership investment and neither the Bank nor any of its subsidiaries shall make any additional investment (including equity, debt, or extensions of credit) in the Subsidiary or originate any other transaction that is used to benefit the Subsidiary without the prior approval of the Regional Director of the Boston Regional Office. However, the Bank is not required to get prior approval for its proposed $500,000 participation in the $8,060,000 hotel construction and development loan. Also, neither the Bank or any of its subsidiaries shall be prohibited from extending credit to a third party who may do business with the Partnership so long as the transactions are carried out on terms and conditions that are substantially similar to those prevailing at the time of comparable transactions with parties not doing business with the Partnership;
4. Neither the Bank nor the Subsidiary may enter into any transaction with the Partnership in which the Subsidiary has invested; or 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,
5. In the event the facts and circumstances presented or otherwise known to the FDIC in connection with this request change significantly, the FDIC shall have the right to alter, suspend, or withdraw its approval.
Dated at Washington, D.C., this day of May 2002.
FEDERAL DEPOSIT INSURANCE CORPORATION
Michael J. Zamorski
Director
Division of Supervision
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Liberty Bank Middletown, Connecticut
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal Through a Wholly-Owned Subsidiary in Investment Activities That May Not Be Permissible for a Subsidiary of a National Bank
STATEMENT
Pursuant to the provisions of Section 24 of the Federal Deposit Insurance Act, Liberty Bank, Middletown, Connecticut ("Bank"), has filed an application with the Federal Deposit Insurance Corporation ("FDIC"), requesting the FDIC's consent to indirectly invest $50,000 through a wholly-owned subsidiary, ("the Subsidiary"), in Middletown Hotel Associates Limited Partnership ("Partnership"). The single-purpose partnership will develop, finance, construct, operate and own a full service hotel in Middletown, Connecticut. The Bank's indirect limited partnership investment will represent 0.02 percent of its Tier I capital as of December 31, 2001, and equal to 1.49% of the total limited partnership shares. This investment may not be permissible for a subsidiary of a national bank. The Bank also plans to participate in an $8,060,000 construction and development loan for the hotel, in the amount of $500,000.
As of December 31, 2001, the Bank had total assets of $1,937,000,000. Its financial condition, future earnings prospects, and management are regarded as satisfactory. The Bank meets the definition of "well-capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations.
Neither insured state banks nor their subsidiaries may engage as principal in an activity prohibited for 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.
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 inequity securities may not be unduly risky.
In granting its consent, the FDIC is imposing a condition that neither the Bank nor any of its subsidiaries may extend credit to the Subsidiary, purchase any debt instruments issued by the Subsidiary, or originate any other transaction that is used to benefit the Subsidiary without the prior written approval of the FDIC's Regional Director of the Boston Regional Office. This does not prohibit the Bank or any of its subsidiaries from extending credit to a third party who may do business with the Partnership so long as the transactions are carried out on terms and conditions that are substantially similar to those prevailing at the time for comparable transactions with entities other than the Partnership.
In order to ensure prudent operational safeguards, the Subsidiary should be operated in a manner to ensure corporate separation between it and the Bank. This is to provide reasonable assurance that the assets of the Bank will not be subject to liability from a party seeking to hold the Bank responsible for the actions of the Subsidiary. Accordingly, the FDIC finds it appropriate to impose separateness conditions. Also, in order to prevent potential abuses, the FDIC is imposing a condition that transactions between the Bank or the Subsidiary and any of the Bank's insiders or their related interests must be on an arm's length basis.
The final order does not require that the Bank deduct its investment in the Subsidiary from Tier 1 capital. It is the FDIC's opinion that given the overall circumstances including the amount of the investment, the passive nature of the investment, and the fact that the investment takes the form of a limited partnership interest that is indirectly held by a subsidiary that will maintain corporate separateness from the Bank, it is not necessary to impose a capital deduction in this instance to protect the deposit insurance fund from significant risk. Part 325 of the FDIC's regulations provides that the FDIC Board of Directors, acting directly, may, in exceptional cases and after a review of the proposed activity, permit a lower capital deduction for investments approved by the Board of Directors under section 24 of the FDI Act. The FDIC views this proposed investment as "exceptional" and concludes that, based on the above reasons, the Bank should not be required to make a capital deduction for this investment.
Based on a careful review of all available facts and information, including the investment limits within the Bank's proposal, the FDIC has concluded that the proposed investment does 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.
DIRECTOR
DIVISION OF SUPERVISION
FEDERAL DEPOSIT INSURANCE CORPORATION