FEDERAL DEPOSIT INSURANCE CORPORATION
RE: Queens County Savings Bank
New York City (Flushing), New York
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to
Indirectly Engage as Principal Through a Majority-Owned Subsidiary in a 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
("FDIC") by the Queens County Savings Bank, New York City (Flushing), New York
(the "Bank"). The Bank requests FDIC consent to allow its to-be-formed
wholly-owned subsidiary (the "Subsidiary") to acquire real estate investment
property in exchange for a parking lot currently owned by the Bank as premises.
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 this type of real estate and the conducting of
this type of activity.
The Bank meets the definition of "well-capitalized" within the meaning of the
FDIC's regulations at 12 C.F.R 325, and otherwise qualifies as an eligible depository
institution under Part 362 of the FDIC's rules and regulations. The Bank continues to be
"well-capitalized" in the event the entire investment, up to $10.5 million, in
the Subsidiary is 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.
A business plan appropriate to the type and scope of business of the Subsidiary was
provided with the application. The specific activity described in the Bank's application
is to acquire, through a tax-free exchange, an
unidentified real estate investment property through a majority-owned subsidiary. The
to-be-acquired real estate property would be received in exchange for a parking lot owned
by the Bank. The parking lot adjacent to the Bank's main office, is currently held as bank
premises. The Bank has entered into a contract to sell the parking lot for $8.25 million;
the current book value is $1.25 million. -To avoid a taxable gain, the Bank is proposing a
tax-free exchange for the to-be-identified parcel (or parcels) of real property of like
value.
The Bank has not identified the to-be-acquired property; however, the Bank intends to
acquire either a multi-family building, a mixed-use property, or another parking facility.
The Bank expects the property to generate income substantially greater than the income
received from the parking lot, which currently only generates income as a nighttime
parking facility. Since the property has not yet been identified, its value could exceed
$8.25 million. However, management will not acquire a property with a fair market value in
excess of $10.5 million (or 6.51 percent of the Bank's December 31, 1998 Tier 1 capital).
An experienced property management company will be engaged to manage the real estate
property. The acquired property would be monitored on a quarterly basis with monthly
financial statements prepared and reviewed by an in-house, committee. The Bank does not
contemplate any real estate development activity in connection with the proposed real
estate investment activity.
As a traditional corporate ownership structure would not allow the Bank to achieve a
tax-free exchange, the Bank proposes to indirectly hold the property for investment
through a majority-owned subsidiary organized as a limited liability company (LLC).
Generally, courts recognize corporations and LLCs as legal entities separate from their
shareholders and members. However, there are occasions when courts pierce the corporate
veil and hold a shareholder/owner liable for the debts of a subsidiary entity. The FDIC
has developed criteria to strike a reasonable balance between the costs associated with
separating a subsidiary from the parent bank and the benefit of gaining reasonable
assurance that the bank's assets will not be subject to liability from a creditor of the
subsidiary or from some other person seeking to hold the parent liable because of
something the subsidiary has done or not done.
Effective January 1, 1999, the FDIC adopted "eligible subsidiary" criteria
when amending Part 362 to provide expedited processing for real estate and securities
underwriting activities when conducted through a majority-owned-subsidiary that is a
corporation. The eligible subsidiary criteria are intended to establish corporate
separateness. However, the FDIC declined to establish standardized objective separation
criteria for LLCs in its recent amendments to Part 362. The preamble to the revised
regulation explains~that the basis for excluding LLCs (and limited liability partnerships)
from the notice procedure is that these entities are relatively new business forms and,
consequently, there is little definitive case law guidance concerning the liability
protection they offer.
Among the unresolved issues is the question of how to structure the management of these
forms of organization to afford the same level of separateness provided by the corporate
form under the FDIC's eligible subsidiary criteria. Upon review of these criteria in the
context of an LLC form of business, the only criterion from the eligible subsidiary
standards that cannot be applied to an LLC subsidiary without modification is the
requirement that the subsidiary have a board of directors, a majority of whom are neither
officers nor employees of the bank. An LLC does not have a board of directors; it is
designed to allow the member investors to directly participate in the management of the
organization. However, just as the FDIC, on a case-by-case basis, has not required
corporate subsidiaries, engaging in activities that have relatively lower risk to have a
board of directors a majority of which is composed of outside directors, this criterion
may not be necessary for a subsidiary operating in LLC form depending on the activities
involved. Alternatively, in appropriate circumstances, professional managers could be
hired by the LLC to perform the same independent role. In situations posing sufficient
risk that a more separate board of directors is deemed crucial to separate the subsidiary
from the bank, a corporate subsidiary could be required.
In order to establish sufficient separateness between the Bank and its Subsidiary, the
FDIC is requiring that the LLC subsidiary meet certain standards of an eligible
subsidiary, as defined under Part 362. The Bank does not meet all of the Part 362 notice
criteria for the de minimis notice procedure
that would exempt the Subsidiary from certain of the eligible subsidiary standards.
However, in this instance the FDIC has determined that, under the circumstances of the
subject proposal, those three standards need not be met in order for this activity-not to
present a significant risk to the deposit insurance fund.
To ensure the Bank is adequately protected from liability, the FDIC is also requiring
that the Bank submit to the FDIC acceptable Articles of organization for the Subsidiary,
as filed and published in accordance with New York state law, as well as the Subsidiary's
operating agreement. A proper LLC operating agreement needs to specifically set forth the
rights, powers, and responsibilities of its members, managers, employees, and agents.
Further, the operating agreement should negate any apparent authority that the members
would have to act on behalf of the LLC in the absence of a limiting agreement. An
operating agreement is not binding on parties who may deal with the LLC; only the Articles
that are filed and published are binding on third parties. That is why it is so important
that the Articles contain clear statements that the Bank will not be liable for any
obligations of the LLC and that there are no exceptions to that limited liability.
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 Board of
Directors 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 the Bank and the Subsidiary:
1. That the Bank shall be required to conduct real estate investment activities in a
majority-owned subsidiary which:
a) is adequately capitalized,
b) maintains separate accounting and other corporate records,
c) observes separate business formalities under its operating agreement, such as
separate members' meetings,
d) conducts 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,
e) owns and operates only property obtained in the proposed exchange transaction,
f) has a business plan that is appropriate to the type and scope of business of the
subsidiary, and
g) maintains management expertise capable of conducting activities in a safe and sound
manner;
2. That the Bank shall maintain a "well-capitalized" status pursuant to Part
325 of the FDIC's rules and regulations after deducting from its Tier 1 capital the equity
investment in the Subsidiary as well as any pro-rata share of any retained earnings of the
Subsidiary, provided that the capital deduction shall not be used for purposes of
determining whether the Bank is "critically undercapitalized," and that this
deduction shall be reflected on the appropriate schedule of the Bank's Consolidated
Reports of Condition and Income;
3. The Bank's investment in real estate activities shall not exceed $10,500,000;
4. That extensions of credit from the Bank to the Subsidiary, any debt securities
issued by the Subsidiary held by the Bank, the acceptance by the Bank of securities issued
by the Subsidiary as collateral for an extension of credit to any person or company, and
any extension of credit by the Bank to any third party for the benefit of the Subsidiary,
shall not exceed 10 percent of its Tier 1 capital, or 20 percent of its.Tier 1 capital in
the aggregate,,for all majority-owned subsidiaries conducting real estate investment
activities. This does not include the bank's equity investment in the Subsidiary,
extensions of credit by the Bank to finance sales of assets by the Subsidiary which do not
involve more than normal risk of repayment and are extended on terms that are
substantially similar to comparable transactions with unaffiliated parties, or extensions
of credit by the bank to the Subsidiary that are fully collateralized by government
securities or segregated deposits in the Bank;
5. That the Bank shall be prohibited from making an extension of credit to or on behalf
of the Subsidiary unless such transaction is secured at the time of the transaction by
collateral having a market value equal to at least: a) 100 percent of the amount of the
transaction if the collateral is composed of (1) obligations of the United States or its
agencies, (2) obligations fully guaranteed by the United States or its agencies as to
principal and interest, (3) notes, drafts, bills of exchange or bankers acceptances that
are eligible for rediscount or purchase by a Federal Reserve Bank, or (4) a segregated,
earmarked deposit account with the bank, b) 110 percent of the amount of the transaction
if the collateral is composed of obligations of any State or political subdivision of any
state, 120 percent of the amount of the transaction if the collateral is composed of other
debt instruments, including receivables, or 130 percent of the amount of the transaction
if the collateral is composed of stock, leases, or other real or personal property.
The Bank may not release collateral prior to proportional payment of the extension of
credit; however, collateral may be substituted if there is no diminution of collateral
coverage;
6. That the Bank is prohibited from purchasing an asset from the Subsidiary
which: a) has been classified as "Substandard," "Doubtful,"
"Loss," or "other loans especially mentioned" in the most recent
report of examination of the Bank; b) is in nonaccrual status, c) whose principal or
interest payments are more than 30 days past due, or d) whose terms have been renegotiated
or compromised due to the deteriorating financial condition of the obligor;
7. That the Bank or the Subsidiary shall not extend credit to finance the sale of
assets by the Subsidiary unless it is consistent with safe and sound banking practices,
does not involve more than a normal risk of repayment, and 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;
8. That the Bank or the Subsidiary shall not engage in any transactions with insiders
of the Bank or their related interests which relate to the Subsidiary's real estate
investment activities without the prior written consent of the Regional Director (Division
of Supervision) of the New York Regional Office ("Regional Director");
9. That the Bank or the Subsidiary shall not condition any transaction on the purchase
of real estate or use of a service by the other;
10. That the Bank shall submit to the Regional Director acceptable Articles of
Organization for the Subsidiary (a limited liability company),., as filed and published in
accordance with New York state law, as well as the Subsidiary's operating agreement;
11. That the Bank's real estate activities shall be limited to the types of activities
described in the Bank's application;
12. That the Bank shall notify the Regional Director when the real estate investment
property to be acquired is identified; and
13. 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 BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Corporation
Office of the Executive Secretary
April 8, 1999
Board of Directors Queens County Savings Bank
38-25 Main Street
New York City (Flushing), New York 11354
Dear Board Members:
At its meeting held on April 8, 1999, the Board of Directors ("Board") of the
Federal Deposit Insurance Corporation ("FDIC") reviewed the application for
consent to indirectly engage in activities through a wholly-owned, to-be-organized
subsidiary ("the Subsidiary") that may not be permissible for a subsidiary of a
national bank filed by Queens County Savings Bank, New York City (Flushing), New York
("the Bank"), pursuant to the regulations of the FDIC at 12 C.F.R. §
362.4(d)(4)(iii), which application was accepted as complete on December 29, 1998.
For reasons set forth in the attached Statement, the Bank's application was approved,
subject to the following conditions:
1. That the Bank shall be required to conduct real estate investment activities in a
majority-owned subsidiary which:
a. is adequately capitalized,
b.maintains separate accounting and other corporate records,
c.observes separate business formalities under its operating agreement, such as
separate members' meetings,
d.conducts 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,
e.owns and operates only property obtained in the proposed exchange transaction,
f. has a business plan that is appropriate to the type and scope of business of the
subsidiary, and
g. maintains management expertise capable of conducting activities in a safe and sound
manner;
2. That the Bank shall maintain a "well-capitalized" status pursuant to Part
325 of the FDIC's rules and ,regulations after deducting from its Tier 1 capital the
equity investment in the Subsidiary as well as any pro-rata share of any..'retained
earnings of the Subsidiary, provided that the capital deduction shall not be used for
purposes of determining whether the Bank is "critically undercapitalized," and
that this deduction shall be reflected on the appropriate schedule of the Bank's
Consolidated Reports of Condition and Income;
3. The Bank's investment in real estate activities shall not exceed $10,500,000;
4. That extensions of credit from the Bank to the Subsidiary, any debt securities
issued by the Subsidiary held by the Bank, the acceptance by Bank of securities issued by
the Subsidiary as collateral for an extension of credit to any person or company, and any
extension of credit by the Bank to any third party for the benefit of the Subsidiary,
shall not exceed 10 percent of its Tier 1 capital, or 20 percent of its Tier 1 capital in
the aggregate, for all majority-owned subsidiaries conducting real estate investment
activities. This does not include the Bank's equity investment in the Subsidiary,
extensions of credit by the Bank to finance sales of assets by the Subsidiary which do not
involve more than normal risk of repayment and are extended on terms that are
substantially similar to comparable transactions with unaffiliated parties, or extensions
of credit by the Bank to the Subsidiary that are fully collateralized by government
securities or segregated deposits in the Bank;
5. That the Bank shall be prohibited from making an extension of credit to or on behalf
of the Subsidiary unless such transaction is secured at the time of the transaction by
collateral having a market value equal to at least:
a. 100 percent of the amount of the transaction if the collateral is composed of (1)
obligations of the United States or its agencies, (2) obligations fully guaranteed by the
United States or its agencies as to principal and interest, (3) notes, drafts, bills of
exchange, or bankers acceptances that are eligible for rediscount or purchase by the
Federal Reserve Bank, or (4) a segregated, earmarked deposit account with the bank;
b. 110 percent of the amount of the transaction if the collateral is composed of
obligations of any state or political subdivision of any state,
c. 120 percent of the amount of the transaction if the collateral is composed of other
debt instruments, including receivables, or
d. 130 percent of the amount of the transaction if the collateral is composed of stock,
leases, or other real or personal property.
The Bank may not release collateral prior to proportional payment of the extension of
credit; however, collateral may be substituted if there is no diminution of collateral
coverage;
6. That the Bank is prohibited from purchasing an asset from the Subsidiary which: a.
has been classified as "Substandard," "Doubtful," "Loss," or
"other loans especially mentioned" in the most recent report of examination of
the Bank, b. is in nonaccrual status, c. whose principal or interest payments are more
than 30 days past due, or d. whose terms have been renegotiated or compromised due to the
deteriorating financial condit~ion of the obligor;
7. That the Bank or the Subsidiary shall not extend credit to finance the sale of
assets by the Subsidiary unless it is consistent with safe and sound banking practices,
does not involve more than a normal risk of repayment, and 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;
8. That the Bank or the Subsidiary shall not engage in any transactions with insiders
of the Bank or their related interests which relate to the Subsidiary's real estate
investment activities without the prior written consent of the Regional Director (Division
of Supervision) of the New York Regional Office ("Regional Director");
9. That the Bank or the Subsidiary shall not condition any transaction on the purchase
of real estate or use of a service by the other;
10. That the Bank shall submit to the Regional Director acceptable Articles of
Organization for the Subsidiary (a limited liability company), as filed and published in
accordance with New York state law, as well as the Subsidiary's operating agreement;
11. That the Bank's real estate activities shall be limited to the types of activities
described in the Bank's application;
12. That the Bank shall notify the Regional Director when the real estate investment
property to be acquired is identified; and
13. 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.
Questions relating to this matter may be referred to Assistant Regional Director Edwin
H. Lloyd or Case Manager Examiner Kenneth M. Egan in the New York Regional office at (212)
7041200.
Sincerely,
Robert E. Feldman
Executive Secretary
