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The Troy Savings Bank


RE: The Troy Savings Bank Troy, New York

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 Troy Savings Bank, Troy, New York (the Bank). The Bank requests FDIC consent to allow its wholly-owned subsidiaries, TS Capital Corp. (TSCC) and 32 Second Street Corp. (32SSC), to retain its investments, including a limited partnership interest, in realty property located in the State of New York, for purposes of divestiture of those real estate investments in a timely manner, but no later than December 31, 1999. The real estate investments consist of a 25% limited partnership interest in Washington Apartment Associates (WAA), which owns 22 unsold condominium units and is held by TSCC, and the direct ownership of one condominium unit by 32SSC, all part of a 44-unit building in downtown Albany, New York.

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. New York banking statutes permit the holding of subject real estate investment.

The Bank and subsidiaries have made reasonable efforts to sell the remaining realty; however, the current state of the condominium market and the lack of divestiture provisions in the partnership agreement have contributed to the lack of success to date. The Bank does not engage in real estate activities beyond the interests in WAA through TSCC and 32SSC. Bank management has indicated that it has no intention of engaging in real estate activities once these holdings are 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 subsidiaries, including the extension of credit to WAA, represents 1.75% of the Bank's Tier 1 capital as of October 31, 1996, and the Bank would continue to be "Well capitalized" in the event its entire investment in the subsidiaries 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, the subsidiaries' 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, TSCC, 32SSC, and WAA:

That the Bank shall take the necessary steps to operate TSCC and 32SSC in a manner so as to ensure their separate corporate existence as majority-owned subsidiaries that:

(a) are adequately capitalized,

(b) are separate and distinct in their operations from the operations of the Bank, and from each other,

(c) maintain separate accounting and other corporate records,

(d) observe separate formalities such as separate boards of directors' meetings,

(e) maintain boards of directors with management expertise capable of conducting activities in a safe and sound manner,

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

(g) conduct business pursuant to separate policies and procedures designed to inform customers and prospective customers of the subsidiaries that the subsidiaries are separate organizations 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 TSCC, 32SSC, and WAA held by the Bank, Bank guarantees of debt obligations issued by the subsidiaries, extensions of credit or commitments of credit to TSCC, 32SSC, and WAA or to any third party for the purpose of making a direct investment in the subsidiaries or WAA, or making an investment in any investment in which TSCC, 32SSC, or WAA has an interest shall be limited to that which is currently held;

That full divestiture of the real estate investment activities of TSCC and 32SSC be accomplished on or before December 31, 1999;

That the Bank shall not condition any loan on the purchase of real estate from TSCC, 32SSC, or WAA, and that the Bank, TSCC, and 32SSC shall not extend credit to any borrower to acquire real estate from the subsidiaries or WAA unless it is consistent with safe and sound banking practices 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 all future transactions between the Bank, TSCC, 32SSC, and WAA 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 the subsidiaries and WAA were affiliates 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 subsidiaries or WAA, 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;

That the Bank, TSCC, and 32SSC shall not engage in any transactions with insiders of the Bank or their related interests which relate to the subsidiaries' or WAA's real estate investment activities without the prior written consent of the appropriate DOS Regional Director; 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 subsidiaries' 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.