Decisions on Bank Applications
Savings Bank of Manchester
FEDERAL DEPOSIT INSURANCE CORPORATION
RE: Savings Bank of Manchester Manchester, 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 Savings Bank of Manchester, Manchester, Connecticut. The Bank requests FDIC consent to allow its wholly-owned subsidiary, SBM Limited (SBM), to retain its five real estate properties until it is able to divest of those real estate properties, but in no event later than April 30, 2001. The five properties consist of residential lots. All properties are, or will be, 100 percent owned by SBM.
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 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 the subject real estate investments.
The Bank does not engage in real estate activities beyond the subject properties and management has indicated that the Bank has no intention of engaging in real estate activities once the properties are divested. The Bank has made reasonable efforts to sell the above described properties; however, the current real estate market is such that near-term divestiture would likely result in losses.
The Bank meets the definition of "Well Capitalized" in the FDIC's Rules and Regulations in 12 C.F.R. Section 325.103. The total investment could represent up to nine percent of the Bank's Tier 1 Capital. In connection with this application, the FDIC has also taken into consideration the 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 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. SBM'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 SBM.
That the Bank and SBM shall take the necessary steps to operate SBM in a manner that ensures a separate corporate existence as a majority-owned subsidiary that:
(a) is adequately capitalized,
(b) is physically 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 one or more independent, knowledgeable outside directors and 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 the Bank's customers and prospective customers of SBM that SBM 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.
(2) That the Bank's indirect real estate investments shall be limited to 10 percent of Tier I Capital, including:
(a) equity interests in SBM,
(b) debt obligations of SBM held by the Bank,
(c) bank guaranties of debt obligations issued by SBM, and
(d) extensions of credit or commitments of credit to SBM or to any third party for the purpose of making a direct investment in SBM or making an investment in any investment in which SBM has an interest, specifically including extensions of credit or commitments of credit to third parties to finance completion of the development projects identified in connection with this application.
The Bank shall not engage in any additional real estate activity or make any additional investment in SBM beyond the 10 percent limit without the prior written consent of the FDIC, with the exception of loans to finance bona fide sales of real estate extended in accordance with provision (9) below.
(3 ) That any extensions of credit to any third parties for the purpose of making a direct investment in SBM, or making an investment in any other investment in which SBM has an interest, or any acceptance of any debt obligation of or equity interest in SBM as collateral security for a loan or extension of credit to any third party by Bank shall be clearly disclosed to Bank's board of directors prior to approval of the extension of credit and documented in the board's minutes, and shall be consistent with safe and sound banking practices and not involve more than the normal degree of risk of repayment.
(4) That full divestiture of the real estate investment activity is accomplished on or before April 30, 2001.
(5) That if the Bank has not divested itself of the real estate investments held by SBM by December 31, 1999, the Bank shall submit a written divestiture plan within 30 days describing the means by which it shall comply with the above condition.
(6) That the Bank's capital level, after deducting the real estate investment in SBM, shall 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, and the Bank shall, on a quarterly basis, perform this calculation 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, 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.
(7) That, henceforth, notwithstanding Parts 325 and 327 of the FDIC's Rules and Regulations, 12 C.F.R. Parts 325 and 327, the Bank's capital category for purposes of prompt corrective action and the Bank's risk-adjusted deposit insurance premium shall be calculated based on the Bank's capital after deducting its investment in SBM, except that such deductions shall not be made when determining whether the Bank is "critically undercapitalized" as defined under Part 325.
(8) That the Bank not condition any loan on the purchase of real estate from SBM.
(9) That the Bank shall not extend credit to any borrower to acquire real estate from SBM unless:
(a) it is consistent with safe and sound banking practice,
(b) does not involve more than a normal risk of repayment, and
(c) 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.
(10) That transactions between the Bank and SBM 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 SBM were an affiliate of the Bank, except that the collateral limitations of Section 23A shall not apply to loans made by the Bank to SBM or to third parties to finance completion of the development projects identified in connection with this application. Additionally, the collateral and amount limits of Section 23A shall not apply to loans made by the Bank to finance the bona fide sale of real estate held by SBM consistent with provision (9).
(11) That the Bank and SBM shall not engage in any transactions with insiders of the Bank or their related interests which relate to SBM's real estate activities without the prior written consent of the appropriate Regional Director, and
(12) That consent be 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 that the FDIC shall have the right to alter, suspend, or withdraw its approval.
ACTING ASSOCIATE DIRECTOR
DIVISION OF SUPERVISION