A Connecticut Bank bets on downtown revival.

It was an empty, trash-strewn lot that inspired a banker to start a revival of downtown Danbury, Conn.

Once the "Hat Capital o America," Danbury, despite years of effort, had failed to hold back blight.

But Charles F. Frosch, president of Union Savings Bank, sparked a turnaround by spending $8 million in surplus profits to buy and redevelop the third-of-an-acre lot and an adjoining, 27,000-square-foot building.

The moribund storefront building, enlarged and redeveloped at a cost of $3 million, will have its grand opening Wednesday as, appropriately enough, a rehabilitation annex for Danbury Hospital.

Mr. Frosch hopes to snip the ribbon for his other development, the $3.5 million Union Savings Galleria being built on the formerly empty lot, in November.

Gamble Paying Off

The Galleria will have 26,000 square feet of retail and class A office space. Building it was the gamble that's finally drawing other investors to downtown Danbury.

"We knew we were taking a risk, but we had to do it," says Mr. Frosch. "There were plans to build a municipal parking garage, but there weren't any private activities -- and we hoped to be the spur for others.

"The city's been trying to revive Main Street since the flood of 1955, but those efforts were never well funded or coordinated, and they never went anywhere very fast."

In 1955, hats and hatmaking were on the wane. The final blow came when John F. Kennedy showed up hatless for his presidential inauguration.

As Danbury's dominant industry disappeared, Main Street retailers started losing business to the strip malls multiplying outside town.

The empty lot opposite Union Savings seemed destined to stay empty for a long time. "It was a terrible eyesore," says Mr. Frosch. "Taking an initiative to redevelop it seemed like a nice way to mark the 129th anniversary we would have in 1991."

The board was hesitant, asking if Mr. Frosch was trying to turn Union Savings, a mutual thrift, into a real estate operation. Connecticut law allowed mutuals to buy real estate, but the board was well aware that real estate speculation had destroyed many of the state's banks.

Commitment to Community

Fortunately for Danbury (pop. 60,000), Mr. Frosch had the strong support of Union's chairman, Thomas R. Nolan.

"So," says Mr. Frosch, "I told the board that we weren't seeking profits, that making something of that empty lot was part of our commitment, as a mutual, to help the community -- and that we would hopefully break even in five to 10 years. "

Mr. Frosch says it always was the plan to sell the properties -- even before the Federal Deposit Insurance Corporation Improvement Act, passed after Union bought the properties, required Union to sell them, the properties by December 1996 -- but Mr. Frosch says he will not part with them at fire-sale prices.

In the meantime, the rehab annex will draw up to 500 people a day to downtown Danbury, Mr. Frosch says. None of the office or retail space at the three-story Galleria rented -- but that doesn't worry Mr. Frosch.

"We knew it would take a while," Mr. Frosch says. "The marching orders we gave the Realtor specify out-of-town tenants. We don't want to just shuffle around Danbury tenants. We want a net gain for the town."

Union Savings also has stepped up to the plate of affordable housing, providing $1.1 million in financing for a portion of the 35 affordable units a developer has built on municipally owned land.

Mr. Frosch hopes the loan will help Union earn an "outstanding" Community Reinvestment Act rating from its next exam.

Though its present grade is "satisfactory." Mr. Frosch maintains that a greater emphasis on documentation would have easily yielded the top mark.

While Union's CRA efforts might have struck the examiners as subtle, signs of Main Street renewal -- trendy restaurants, rebuilt sidewalks, herringbone esplanades and new -- abound.

Union Savings also is thriving, though though return on assets through the first quarter is below the 0.89% posted for yearend 1992. But the real estate investments are not to blame.

"They might be costing us us about $ 100.000 in what we'd be earning at 3% if they were in short term investments, and that's insignificant for us," Mr. Frosch says.

Strong Position

Rather, it was a $1.3 million federal prepayment penalty that skewed first-quarter ROA, and the bank should post a 1% ROA for yearend 1993, Mr. Frosch says.

Warren Heller, president of Veribanc, Wakefield, Mass., agrees that Union was in not imperiled by its real estate ventures.

"Their total capital risk ratio is very healthy, and they've got loan loss reserves of $6.6 million for total problem loans of $10.1 million, so even if they charged off all of them, they'd be $4.5 million over reserve, which would mean an equity hit of 7% -- and that's not threatening." Union has a loan portfolio totaling $328 million, with $313 million being residential mortgages. Involving the bank in commercial real estate development has been an interesting experience, says Mr. Frosch, an executive at one of the Big Six accounting firms before turning to banking back in 1976.

A Taste of Reality

"Trying to do a lot of ordinary things, like applying for permits, made us appreciate what real developers have to go through."

There was also the unpleasant surprise of a "deep pocket" demands from the owner of the building beside the Galleria. Alleging that heavy equipment had damaged his foundation, the owner "was probably thinking lawsuit, so we just bought the building instead. We paid $319,000, we'll spend $20,000 or $30,000 to fix up the facade, and sell it.

"It was appraised at $370,000, so we should be all right."

Surmounting unexpected hurdles is the purpose of the rehab annex. Half a floor features, among other realities of daily life, a gas pump, a vehicle, a kitchen and a sidewalk with a curb and varying surfaces. Mr. Frosch seems pleased with the building he built for his tenant, but he's modest about the role that his redevelopment played in the revival.

Was it the spark?

"It had a lot to do with it," Mr. Frosch says. "It's easier to sell the government on financing if the private sector is already involved.

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