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The Norwich Savings Society


RE: The Norwich Savings Society Norwich, Connecticut

Application Pursuant to Section 24 of the Federal Deposit Insurance Act to Indirectly Continue Activity That May Not Be Permissible for a National Bank


Pursuant to the provisions of Section 24 of the Federal Deposit Insurance Act, an application has been filed with the Federal Deposit Insurance Corporation by The Norwich Savings Society, Norwich, Connecticut (the Bank). The Bank requests FDIC consent to allow its wholly-owned subsidiary, Norwich Equities Corporation (Subsidiary), to retain its 50% joint venture interest in realty property located in Dayville, Connecticut, until it is able to divest of said property, but in no event later than December 31, 1998. The property is known as Bell Park Square (Bell Park) and is described as a small strip shopping center located in Dayville, Connecticut.

In general, real estate investment may not be a permissible activity for a national bank or a subsidiary of a national bank. Subsidiaries of state chartered, FDIC-insured banks may not engage as principal in an activity prohibited to subsidiaries of 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. Connecticut banking statutes permit the holding of subject real estate investment.

The Bank, through Subsidiary, invested in Bell Park in 1988 as a joint venture with one of the bank's most prominent customers. At the time, the bank was considering locating a branch office in Dayville and the board felt that the joint venture option was an attractive alternative to a direct investment in additional premises. The venture has operated profitably since. The Bank and Subsidiary have made reasonable efforts to sell Bell Park; however, the current real estate market is such that near term divestiture would likely result in a capital loss. Subsidiary does not engage in real estate activities beyond Bell Park and bank management has indicated that the Bank has no intention of engaging in real estate activities once Bell Park is liquidated. The Bank meets the definition of "Well capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations. The Bank's consolidated investment in the subsidiary represents 0.82% of the Bank's Tier 1 capital as of June 30, 1996, and the Bank would continue to be "Well capitalized" in the event its entire subsidiary investment were deducted from capital. In connection with this application, the FDIC has also taken into consideration the favorable financial and managerial resources and future earnings prospects of the Bank.

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, Subsidiary's real estate investment activities will not constitute a significant risk to the Bank Insurance Fund or present material safety and soundness concerns.

Based upon careful evaluation of all available facts and information, the Acting Associate Director, acting under delegated authority, has concluded that approval of the application is appropriate subject to the restrictions discussed below. The following 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 or risks associated with transactions between the Bank and Subsidiary:

That the Bank and Subsidiary shall take the necessary steps to operate the subsidiary in a manner so as to ensure a separate corporate existence as a majority-owned subsidiary which:

(a) is adequately capitalized,

(b) is separate and distinct in its operations from the operations of the Bank,

(c) maintains separate accounting and other corporate records, (d) observes separate formalities such as separate board of directors' meetings,

(e) maintains a board of directors with management expertise capable of conducting activities'in a safe and sound manner,

(f) contracts with the Bank for any service on terms and conditions comparable to those available to or from independent entities, and

(g) conducts 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, 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's indirect real estate investment activities, 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 to any third party 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 that which is currently held;

That Subsidiary shall divest of all property currently held by December 31, 1998;

That the Bank and Subsidiary shall not engage in any transactions with insiders of the Bank or their related interests which relate to the subsidiary's real estate investment activities without the prior written consent of the appropriate DOS Regional Director;

That the Bank shall not condition any loan on the purchase of real estate from the subsidiary engaging in real estate investment activities and that the Bank shall not extend credit to any borrower to acquire real estate from the subsidiary unless it is consistent with safe and sound banking practice and does not involve more than a 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 transactions between the Bank and Subsidiary shall be made in accordance with the restrictions of Section 23A and 23B of the Federal Reserve Act, 12 U.S.C. 371c and 371c-1, to the same extent as though Subsidiary was an affiliate of the bank, except that the amount and collateral limitations of Section 23A shall not apply to loans made by the Bank to facilitate the sale of the real estate investments held by the subsidiary, provided 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; and,

That consent is granted 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, and the FDIC shall have the right to alter, suspend, or withdraw its approval.

Finally, FDIC notes that the foregoing approval is unique to this application, that it was significantly influenced by Subsidiary's acquisition of the subject real estate interest prior to the effective date of Section 24, and that its view of de novo acquisition of such interest might well be different.