Decisions on Bank Applications
FEDERAL DEPOSIT INSURANCE CORPORATION
RE: Magyar Savings-Bank New Brunswick, New Jersey
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal in Real Estate Activities Which May Not Be Permissible for a Subsidiary of a National Bank
Pursuant to the provisions of Section 24 of the Federal Deposit Insurance Act, Magyar Savings Bank, New Brunswick, New Jersey (the 'Bank'), has filed an application with the Federal Deposit Insurance Corporation ('FDIC'). The Bank requests the FDIC's consent to continue to hold until no later than September 1, 1999, through a wholly-owned subsidiary, property which is adjacent to the Bank's main office and which is currently leased to a third party for use as a parking lot.
The activity of holding real estate investment properties for lease to third parties 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. The New Jersey Administrative Code and the New Jersey Statutes Annotated permit a state bank's subsidiary to hold real estate investments.
At various times during the period from October 1972 until June 1987, the Bank acquired a total of seven building lots which comprise a rectangular tract of land located directly adjacent to the rear of the Bank's main office parking lot. It was the Bank's intent to use the lots for the possible future expansion of the parking lot or, alternately, the construction of a small building to house accounting or administration offices. Upon acquiring the lots, the Bank used them for public and private parking.
In 1992, a neighborhood resident filed a complaint alleging that use of the property for parking violated the zoning ordinance. An engineering study ordered by the Bank reflected that the costs of improvements required in order to apply for use variance were excessive. As a result, the Bank's board of directors decided to clcse the lots and sell the property.
However, City of New Brunswick officials urged the Bank to . continue to make the property available for parking and indicated that, if such were done, a certificate of prior non-conforming use would be issued without extensive improvements being required.
On September 1, 1993, the Bank entered into a written ground lease agreement with a third party. The lease, which specifies that the property may only be used as a parking lot, expires on August 31, 1998. The tenant has the option of purchasing the land at any time during the term of the lease at a specified price.
The Bank was a state savings and loan association when it acquired the property and when it entered into the lease. The Bank converted to a state savings bank on December 16, 1993.
The Bank currently holds the real estate directly, but proposes to transfer the property to its wholly-owned subsidiary, Magyar Service Corporation (the 'Subsidiary"). The Subsidiary will hold the property until not later than September 1, 1999, which gives the Bank one year after the date the lease terminates to sell the property, if the tenant does not exercise its option to purchase. The Subsidiary will engage in no activities other than to hold the parking lot property.
The Bank meets the definition of 'well capitalized' within the meaning of Part 325 of the FDIC's Rules and Regulations, and is in compliance with applicable capital standards. The Bank's investment in the Subsidiary will be just slightly over one percent of its Tier 1 capital, and the Bank would continue to be well capitalized in the event the entire investment were lost. The investment will be limited to the parking lot property. The Bank is in overall sound condition and is satisfactorily managed.
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.
The FDIC has considered the risks associated with real estate investment activities and the risks associated with owning and leasing the particular property to be held by the Subsidiary. The FDIC has reviewed available information and has taken into consideration the financial and managerial resources of the Bank. Specifics of the Bank's application, including the level of the real estate investment in relation to capital and assets, the absence of any plans for additional investment and the length of time the investment is to be held, were evaluated.
Based upon careful evaluation of all available facts and information, the FDIC has concluded that the proposed retention of the Bank's interest in real estate does not pose a significant risk to the Bank Insurance Fund and that approval of the application is warranted subject to the conditions discussed below. These conditions are imposed for prudential reasons due to the volatility and other risks which are inherent in real estate activities in general.
The Bank's indirect real estate investment activity in the Subsidiary shall be limited to the amount of the real estate investment currently on the Bank's books; the Subsidiary shall divest of the investment no later than September 1, 1999; the Bank shall not engage in any additional real estate investment activities in the Subsidiary without prior written consent of the FDIC; the Subsidiary shall be adequately capitalized, be separate and distinct in its operations from those of the Bank, maintain separate accounting and other corporate records, have separate board of directors meetings and conduct business pursuant to separate policies and procedures designed to inform customers that the Subsidiary is a separate organization from the Bank; the Bank shall continue to meet all applicable capital standards; the Bank shall not engage, directly or indirectly, in any real estate investment activity with insiders or their related interests without prior written consent of the FDIC; and the FDIC shall have the right to alter, suspend or withdraw its approval if circumstances change significantly. In addition, transactions between the Bank and the Subsidiary shall be made in accordance with the restrictions of Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. S 371c and S 371c-1, to the same extent as though the subsidiaries were affiliates of the Bank as defined under Sections 23A and 23B.
ACTING ASSOCIATE DIRECTOR
DIVISION OF SUPERVISION