Decisions on Bank Applications
Norwood Cooperative Bank
FEDERAL DEPOSIT INSURANCE CORPORATION
RE: Norwood Cooperative Bank Norwood, Massachusetts
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 Norwood Cooperative Bank, Norwood, Massachusetts (Bank). The Bank request's FDIC's consent to allow its wholly-owned subsidiary, Broad Park Realty Corporation (BPRC), to retain its 32 town-house condominiums and four undeveloped residential building lots located in North Attleboro, Massachusetts, until it is able to settle a pending lawsuit and divestiture can be completed. The properties will be 100 percent owned by BPRC.
In general, real estate investments 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. Massachusetts banking statutes permit the holding this type of real estate investment in an amount up to 2 percent of the bank's total deposits.
The only other real estate activities engaged in by BPRC are low income housing projects which are permissible under Section 362.3(2) of the FDIC's Rules and Regulations and, when aggregated with subject real estate activities, are well within the State's 2 percent limitation, at 1.21 percent of the Bank's total deposits. The Bank's management has indicated that the Bank has no intention of engaging in any other real estate activities once the properties are liquidated. The Bank has been unable to sell the properties because of a pending legal dispute with the North Attleboro Electric Department (NAED); however, it is expected that a settlement agreement will be executed by February, 1997 and a divestiture plan can then be implemented.
The Bank meets the definition of "well capitalized" within the meaning of the FDIC's regulations in 12 C.F.R. Part 325.103. The Bank's consolidated investment in the subsidiary represents 8.85 percent of Norwood's Tier 1 capital as of September 30, 1996. In connection with this application, the FDIC has 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, BPRC's real estate investment activities will not constitute a significant risk to the Bank Insurance Fund.
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 interest or risks associated with transactions between Norwood and BPRC:
(1) The Bank shall transfer ownership of the real estate investments in OCCP to BPRC immediately.
(2) The Bank shall take the necessary steps to operate BPRC in a manner so as to ensure a separate corporate existence as a majority-owned subsidiary that:
(a) is adequately capitalized;
(b) is separate and distinct in its operations from the Bank's operations;
(c) maintains separate accounting and other corporate records;
(d) observes separate formalities such as holding 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 be 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 real estate subsidiary that it 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.
(3) For purposes of this Order "real estate investment activities" shall mean the town-house condominiums and undeveloped lots and include the Bank's equity investment in BPRC, any debt or guarantees of debt issued by BPRC held by the Bank, any extensions of credit or commitments of credit from the Bank to BPRC and any extension of credit or commitment of credit to any third party for the purpose of making a direct investment in BPRC or making an investment in any investment in which BPRC has an interest. However, extensionsofcredit to BPRC or other funding relating to BPRC's investment in low income housing projects which are permissible under Section 362.3(b)(2) of the FDIC's Rules and Regulations shall not be included within the meaning of "real estate investment activities".
(4) The transactions between the Bank and BPRC will be made in accordance with the restrictions of 23 A and B of the Federal Reserve Act, to the same extent as though BPRC was a bank affiliate, except that
(a) the amount and collateral limitations of Section 23A shall not apply to loans made to BPRC as long as the loans are consistent with safe and sound underwriting standards; and
(b) 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 BPRC 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 the 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.
(5) The Bank and BPRC shall not engage in any transactions with insiders of the bank or their related interests without the prior written consent of the appropriate DOS Regional Director.
(6) The Bank shall not condition any loan on the purchase of real estate from BPRC and that the bank shall not extend credit to any borrower to acquire real estate from BPRC 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.
(7) BPRC shall divest of the real estate investments currently held, other than the qualified low-income housing investments, by June 30, 1999.
(8) 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 circumstance, 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 Norwood'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.
ACTING ASSOCIATE DIRECTOR
DIVISION OF SUPERVISION