Decisions on Bank Applications
United Savings Bank
April 29, 1997
Board of Directors
United Savings Bank
Broad Street and Passyunk Avenue
Philadelphia, Pennsylvania 19148
Members of the Board:
We have reviewed your request to indirectly engage in real estate investment activities through the bank's wholly-owned subsidiary, Sentry Service Corporation ("SSC"), that may not be permissible for a subsidiary of a national bank. The application, dated November 27, 1996, was filed pursuant to Section 362.4(d)(4)(iii) of the Federal Deposit Insurance Corporation ("FDIC") Rules and Regulations and was received in the FDIC New York Regional Office December 13, 1996.
For the reasons set forth in the attached Statement, your application was approved today subject to the following conditions:
(1) That the Bank immediately transfer title to the realty known as the South Beach property to SSC, including all lots whether or not development has commenced, and that the Bank and SSC shall take the necessary to steps to operate SSC in a manner which ensures a separate corporate existence by requiring SSC to:
(a) be adequately capitalized;
(b) be physically separate and distinct in its operations from the operations of the bank;
(c) maintain separate accounting and other corporate records;
(d) observe such formalities as holding separate board of directors' meetings;
(e) maintain 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) 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 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.
(2) That the Bank's indirect real estate investment in SSC, including equity interests, debt obligations of SSC held by the Bank, Bank guaranties of debt obligations issued by SSC, extensions of credit or commitments of credit to SSC or to any third party for the purpose of making a direct investment in SSC or making an investment in any investment in which SSC has an interest, shall be limited to that held subsequent to the transfer of the realty known as the South Beach property to SSC, unless the prior written consent of the appropriate DOS Regional Director is obtained;
(3) That full divestiture of the real estate investment activity in the South Beach property be accomplished on or before December 31, 2001;
(4) That if the Bank has not divested itself of the realty held by SSC by December 31, 1999, the Bank shall submit a written divestiture plan describing the means by which it shall comply with the above condition;
(5) That the Bank's capital level, after deducting the real estate investment in SSC, 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;
(6) 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 SSC, except that such deductions shall not be made when determining whether the Bank is "critically undercapitalized" as defined under Part 325;
(7) That the Bank not condition any loan on the purchase of real estate from SSC;
(8) That all transactions between the Bank and SSC 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 SSC were an affi1iate of the Bank, except that the amount and collateral limitations of Section 23A shall not apply to the existing line of credit from the Bank to SSC, and 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 SSC, 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;
(9) That the Bank and SSC shall not engage in any transactions with insiders of the Bank or their related interests which relate to SSC's real estate investment activities without the prior written consent of the appropriate FDIC DOS Regional Director; and,
(10) 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.
The approval of this application is made with the explicit understanding that in the conduct of this activity, the Bank will at all times remain in compliance with state law. The Bank is aware of the need to obtain an extension from the Pennsylvania Department of Banking prior to the expiration of the authorized five-year development period which began when development of the subject property commenced. Questions relating to this matter may be referred to Assistant Regional Director Michael J. Piracci or Review Examiner William S. Cain in the New York Regional Office at (212) 704-1468.
Sincerely,
Steven K. Scholzen
Acting Associate Director
FEDERAL DEPOSIT INSURANCE CORPORATION
RE: United Savings Bank Philadelphia, Pennsylvania
Application Pursuant to Section 24 of the Federal Deposit Insurance Act to Indirectly Engage as Principal Through a Majority Owned Subsidiary in Real Estate Activity 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, an application has been filed with the Federal Deposit Insurance Corporation by United Savings Bank, Philadelphia, Pennsylvania ("the Bank"). The Bank requests FDIC consent to allow its wholly-owned subsidiary, Sentry Service Corporation ("SSC"), to engage as principal in an activity that may not be permissible for a subsidiary of a national bank.
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. Pennsylvania State law permits the holding of subject real estate investment.
The Bank proposes to continue development of a subdivision located in Lower Township, New Jersey, originally acquired in 1993 through deed-in-lieu of foreclosure. Through its subsidiary, the Bank has constructed and sold five townhouses on individual lots of the development, and also completed two model homes. All construction with the exception of.the model homes has been performed only on a pre-sold basis, and Bank management seeks consent to continue this activity. Seventy-one lots remain unsold. Management is not seeking approval to engage in any other real estate activity other than the construction of townhomes on the subject property that are pre-sold to qualified purchasers. Management has committed to the SSC having no more than a total of ten townhouse units completed or under construction at any one time. Management is also willing to consider sale of the lots in bulk, and believes that its continued development of the property will enhance interest from potential outside purchasers.
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 SSC will represent approximately 17.8% of the Bank's Tier 1 capital as of December 31, 1996, after the transfer of title to the undeveloped lots from the Bank to SSC. In the event that the entire investment in SSC were deducted from capital, the Bank would continue to be "well-capitalized". 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 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 SSC.
That the Bank immediately transfer title to the realty known as the South Beach property to SSC, including all lots whether or not development has commenced, and that the Bank and SSC shall take the necessary to steps to operate SSC in a manner which ensures a separate corporate existence by requiring SSC to:
(a) be adequately capitalized;
(b) be physically separate and distinct in its operations from the operations of the bank;
(c) maintain separate accounting and other corporate records;
(d) observe such formalities as holding separate board of directors' meetings;
(e) maintain 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) 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 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.
That the Bank's indirect real estate investment in SSC, including equity interests, debt obligations of SSC held by the Bank, Bank guaranties of debt obligations issued by SSC, extensions of credit or commitments of credit to SSC or to any third party for the purpose of making a direct investment in SSC or making an investment in any investment in which SSC has an interest, shall be limited to that held subsequent to the transfer of the realty known as the South Beach property to SSC, unless the prior written consent of the appropriate DOS Regional Director is obtained;
That full divestiture of the real estate investment activity in the South Beach property be accomplished on or before December 31, 2001;
That if the Bank has not divested itself of the realty held by SSC by December 31, 1999, the Bank shall submit a written divestiture plan describing the means by which it shall comply with the above condition;
That the Bank's capital level, after deducting the real estate investment in SSC, 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;
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 SSC, except that such deductions shall not be made when determining whether the Bank is "critically undercapitalized" as defined under Part 325;
That the Bank not condition any loan on the purchase of real estate from SSC;
That all transactions between the Bank and SSC 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 SSC were an affiliate of the Bank, except that the amount and collateral limitations of Section 23A shall not apply to the existing line of credit from the Bank to SSC, and 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 SSC, 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 and SSC shall not engage in any transactions with insiders of the Bank or their related interests which relate to SSC's real estate investment activities without the prior written consent of the appropriate FDIC 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.
For the reasons outlined above, including the imposition of conditions, the FDIC has concluded that the retention of the interest in real estate and the continuation of the real estate development activity does not pose a significant risk to the Bank Insurance Fund, provided the conditions are observed, and therefore approval of the application, subject to such conditions, is warranted.
ACTING ASSOCIATE DIRECTOR
DIVISION OF SUPERVISION