Decisions on Bank Applications
Liberty Bank, SSB
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Liberty Bank, SSB
Austin, Texas
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to
Indirectly Engage as Principal through a Wholly-Owned Subsidiary in Investment Activities
That May Not be Permissible for a Subsidiary of a National Bank
ORDER
The undersigned, acting under delegated authority, has fully considered all available facts and information relevant to Section 24 of the Federal Deposit Insurance Act, 12 U.S.C. § 1831a, and Part 362 of the FDIC's Rules and Regulations, relating to the application by Liberty Bank, SSB, Austin, Texas (Bank), for consent to indirectly engage in real estate investment activities through a proposed wholly-owned subsidiary, Liberty Investments, Inc. (Subsidiary), to be formed for the purpose of investing, as a limited partner, in a limited partnership that will lease a historic hotel in Houston, Texas. The hotel is being renovated and the Bank is desirous of utilizing certain Historic Rehabilitation Tax Credits (HTCs) that will be generated as a result of this renovation. This is an activity that may not be permissible for a subsidiary of a national bank. The Division of Supervision has concluded that the application should be approved subject to certain conditions.
Accordingly, it is hereby ORDERED, for the reasons set forth in the attached Statement, that the application submitted by the Bank for consent to engage in real estate investment activities through the Subsidiary be, and hereby is, approved, subject to the following conditions:
(1) The investment in the limited partnership which will engage in real estate activities will be held indirectly through a single, wholly-owned subsidiary organized for the purpose of holding such investment;
(2) The Subsidiary will be a corporation that:
(a) Meets applicable statutory or regulatory capital requirements and has sufficient operating capital in light of the normal obligations that are reasonably foreseeable for a business of its size and character within the industry;
(b) Maintains separate accounting and other business records;
(c) Observes separate business entity formalities such as separate board of directors' meetings; and
(d) Conducts business pursuant to independent policies and procedures designed to inform third parties that the Subsidiary is a separate organization from the Bank, and that the Bank is not responsible for and does not guarantee the obligations of the Subsidiary;
(3) The Bank will consider the level of its Tier 1 capital and, upon calculating the amount of each quarterly investment in the Subsidiary, will make certain that the Bank's aggregate investment in the Subsidiary, including the investment to be made that quarter, will be no more than 10 percent of the Bank's Tier 1 capital at the time the investment is made;
(4) That the Bank maintains a "well capitalized" status pursuant to Part 325 of the FDIC's Rules and Regulations after deducting from its Tier 1 capital the appropriate capital charge for equity investments in nonfinancial companies, as reflected in the table shown in Section II.B. of Appendix A to Part 325, for its investment, through the Subsidiary, in the limited partnership. While the section of Part 325 pertaining to capital charges for nonfinancial equity investments does not become effective until April 1, 2002, should the Bank make an investment, through the Subsidiary, in the limited partnership prior to that date, the Bank will apply the capital charge as of the date of the investment;
(5) That, without the prior written approval of the FDIC's Regional Director of the Dallas Region, neither the Bank nor any of its subsidiaries may extend credit to the Subsidiary, purchase any debt instruments issued by the Subsidiary, or originate any other transaction that is used to benefit the Subsidiary;
(6) That neither the Bank nor the Subsidiary may enter into any other transaction with the limited partnership in which the Subsidiary has invested or enter into any transaction with the Bank's executive officers, directors, principal shareholders, or related interests of such persons which relate to the Subsidiary's activities or the activities of the limited partnership in which the Subsidiary has invested unless the transactions are on terms and conditions that are substantially the same as those prevailing at the time for comparable transactions with entities other than the limited partnership;
(7) The Subsidiary will not make any investment in the limited partnership until such time as the HTCs are determined to be in conformance with governing IRS guidelines;
(8) The Subsidiary will not make any investment in the limited partnership until such time as the guarantees of the Bank's principal shareholders, John W. Adams and Jeffrey A. Smith, to reimburse the Bank for the amount, if any, by which the Subsidiary's investment in the limited partnership exceeds the amount of the HTCs realized by the Bank are executed;
(9) That any required application to the State Authority regarding the proposed limited partner investment activities be approved prior to initiation of such activity; and
(10) In the event the facts and circumstances presented or otherwise known to the FDIC in connection with this request change significantly, the FDIC retains the ability to alter, suspend, or withdraw its approval.
Dated at Washington D.C. this __________ day of March 2002.
BY ORDER OF THE ASSOCIATE DIRECTOR OF THE DIVISION OF SUPERVISION
____________________________________
John M. Lane
Associate Director
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Liberty Bank, SSB
Austin, Texas
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to
Indirectly Engage as Principal through a Wholly-Owned Subsidiary in Investment Activities
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, Liberty Bank SSB, Austin, Texas (Bank) has filed an application with the Federal Deposit Insurance Corporation (FDIC). The Bank has applied for consent to indirectly engage in real estate investment activities through a proposed wholly-owned subsidiary, Liberty Investments, Inc. (Subsidiary), to be formed for the purpose of investing, as a limited partner, in a limited partnership that will lease a historic building in Houston, Texas. The historic building is the Sam Houston Hotel, which is currently being renovated by its owner. The Bank is desirous of utilizing certain Historic Rehabilitation Tax Credits (HTCs) that will be generated as a result of this renovation. The Bank's Subsidiary will be a 99 percent limited partner in Sam Houston Hotel II LP, a new limited partnership that will lease the hotel (the actual operation of the hotel will be managed by a third party under a long-term contract). The Bank proposes to invest, through the Subsidiary, up to 10 percent of its Tier 1 capital in the limited partnership.
The owner of the hotel will elect to pass along the HTCs to the limited partnership. Currently, the amount of HTCs to be generated by the renovation of the hotel is estimated at $1,640,000, so the Subsidiary's share of the HTCs (99 percent) would be approximately $1,623,600. The Subsidiary's aggregate investment in the limited partnership will be in an amount equal to 85 percent of the value of the HTCs to be utilized by the Bank. However, as noted above, the Bank is limiting its investment to 10 percent of its Tier 1 capital. Based on year-end 2001 balances, the Bank's investment would be limited to $1,209,400. That amount of investment would result in the Bank realizing HTCs of $1,422,824 ($1,209,400 divided by 85 percent). Thus, in return for an aggregate investment of $1,209,400, the Subsidiary would generate, for the Bank, a $1,422,824 reduction in the Bank's tax liability. The Subsidiary will make its investment in the limited partnership in increments at quarterly intervals over the next few years, coinciding with the Bank's quarterly filing of its estimated tax liability. Likewise, the Bank's investment in the Subsidiary will be made in quarterly increments.
Section 47 of the Internal Revenue Code provides for a federal income tax credit of 20 percent of the qualified rehabilitation expenditures with respect to the rehabilitation of a certified historic structure. The amount of HTCs to be generated by the renovation of the Sam Houston hotel will not be finally determined until such time as all renovations are complete and the hotel is ready for occupancy, which is expected to occur in the spring of 2002. In December 2001, qualified rehabilitation expenses were estimated at $8,200,000, resulting in the projected HTCs of $1,640,000 (20 percent of $8,200,000) noted above.
The Bank's principal shareholders, John W. Adams and Jeffrey A. Smith, have pledged to guarantee to reimburse the Bank for the amount, if any, by which the investment in the limited partnership exceeds the economic value of the HTCs realized by the Bank.
Neither insured state banks nor their subsidiaries may engage as principal in an activity prohibited to national banks unless consent has been obtained 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 funds.
The Bank is in compliance with applicable capital standards and it is believed that the proposed activity does not pose significant risk to the deposit insurance funds, provided certain conditions are imposed. The FDIC is requiring that the Bank's investment in the limited partnership be held indirectly through the Subsidiary and that the Subsidiary meets certain criteria that will ensure corporate separation between it and the Bank. This is to provide reasonable assurance that the assets of the Bank will be protected from a party seeking to hold the Bank responsible for the liabilities of the Subsidiary.
As noted above, the Bank's aggregate investment, through the Subsidiary, in the limited partnership is being limited to no more than 10 percent of its Tier 1 capital. Additionally, the Bank is being required to apply the appropriate capital charge for investments in nonfinancial companies, as set forth in the recently-adopted amendments to Part 325, and to maintain a "well capitalized" position after applying the capital charge. The amendments to Part 325 do not become effective until April 1, 2002, but the Bank is being required to apply the appropriate capital charge to any investment made, through the Subsidiary, in the limited partnership prior to that date.
Also, customary conditions imposed in real estate investment activity cases are being imposed for safety and soundness reasons. These conditions address: the organization and operation of the Subsidiary; transactions between the Bank and the Subsidiary; transactions between the Bank or Subsidiary and the limited partnership; and transactions between the Bank or Subsidiary and Bank insiders where the transactions relate to activities of the Subsidiary or the limited partnership.
Further, the Subsidiary is prohibited from making any investment in the limited partnership until: the HTCs are determined to be in conformance with governing IRS guidelines; the Bank's principal shareholders execute guarantees to reimburse the Bank for the amount, if any, by which the investment in the limited partnership exceeds the economic value of the HTCs realized by the Bank; and any applications filed with the State Authority that relate to the proposed activity are approved.
Based on a careful review of all available facts and information, including the stated intent of the Bank, the FDIC has concluded that the proposed investment through a wholly-owned subsidiary does not pose a significant risk to the Bank Insurance Fund, and, therefore, approval of the application subject to the conditions in the Order is warranted.