Re: CityBank Lynnwood, Snohomish County, Washington
Application for Consent to Conduct an Activity through a Subsidiary that
may not be Permissible for a National Bank or its Subsidiary
The Board of Directors ("Board") of the Federal Deposit Insurance Corporation
("FDIC") has fully considered all available facts and information relevant to
section 24 of the Federal Deposit Insurance Act, 12 U.S.C. section 1831 a, and part 362 of
the FDIC's rules and regulations, relating to the application by CityBank, Lynnwood,
Washington ("Bank"), for consent to conduct an activity through its
majority-owned subsidiary, Diligenz, Inc. ("Diligenz"). These activities may not
be permissible for a national bank or its subsidiary due to the volume of transactions
conducted with nonbank clients.
The Board, having found that the Bank is in compliance with applicable capital standards
and that the activity does not appear to pose a significant risk to the applicable deposit
insurance fund, has concluded the application should be approved.
Accordingly, it is hereby ORDERED, for the reasons set forth in the
attached Statement, that the application submitted by the Bank for consent to conduct an
activity through its subsidiary that may not be permissible for a national bank or its
subsidiary, be and the same hereby is approved, subject to the following conditions:
(1) That the Bank's investment in Diligenz be limited to 20 percent of the Bank's Tier
1 capital (as defined in section 362.4 of the FDIC's rules and regulations).
(2) That transactions between the Bank (including its executive officers, directors,
principal shareholders, and their related interests) and Diligenz remain on terms and
conditions that are substantially the same as those prevailing at the time for comparable
transactions with persons not affiliated with the Bank.
(3) That CityBank and Diligenz continue to take steps to ensure they are separate
corporate entities. To address legal and reputational risks, Diligenz must
i) Meet applicable statutory and regulatory capital requirements and have sufficient
operating capital in light of the normal obligations that are reasonably foreseeable for a
business of its size and character within the industry;
ii) be physically separate and distinct in its operations from the operations of the Bank,
provided that this requirement shall not be construed to prohibit the Bank and its
subsidiary from sharing the same facility if the area
where the subsidiary conducts business with the public is clearly distinct from the area
where customers of the Bank conduct business with the Bank;
iii) maintain separate accounting and other business records;
iv) observe separate business entity formalities such as separate board of directors'
v) have a chief executive officer of the subsidiary who is not an employee of the Bank;
vi) conduct business pursuant to independent policies and procedures designed to inform
its customers and prospective customers 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;
vii) maintain qualified management and employees for the type and activity contemplated,
including all licenses and memberships, and comply with industry standards;
viii) have a current written business plan that is appropriate to the type and scope of
business conducted by the subsidiary; and
ix) establish policies and procedures to ensure adequate computer, audit and accounting
systems, internal risk management controls, and the necessary operational and managerial
infrastructure to implement the business plan.
(4) That the Bank comply with the risk-based and leverage capital treatment for equity
investments in nonfinancial companies contained in the FDIC's regulatory capital
requirements (12 C.F.R. Part 325), as they may from time to time be amended. The Bank is
exempted from those sections of 12 C.F.R. Part 325 that would require it to apply a
capital charge to its investment in Diligenz if the investment were less than 15 percent
of the Bank's Tier 1 capital. Should CityBank increase its investment in Diligenz to an
amount greater than or equal to 15 percent of Tier 1 capital, it will have to comply with
the higher capital charge requirements that 12 C.F.R. Part 325 imposes on portions of
nonfinancial equity investments that are greater than or equal to 15 percent of a bank's
Tier 1 capital. The Bank must include all of its nonfinancial equity investments
(including Diligenz) when calculating its aggregate capital deduction for purposes of
regulatory capital requirements.
(5) That the consent granted herein is based on the facts and circumstances presented or
otherwise known to the FDIC in connection with this application. The applicant shall
notify the FDIC of any significant change in facts or circumstances. The FDIC's action is
conditioned on its ability to alter, suspend, or withdraw its approval in the event the
facts and circumstances presented in the application change significantly.
Dated at Washington, D.C., this 10th day of December, 2001.
BY ORDER OF THE BOARD OF DIRECTORS
Robert E. Feldman
FEDERAL DEPOSIT INSURANCE CORPORATION
Re: CityBank Lynnwood, Snohomish County, Washington
Application for Consent to Conduct an Activity Through a Subsidiary That May Not Be
Permissible for a National Bank or its Subsidiary
Pursuant to the provisions of section 24 of the Federal Deposit Insurance Act
("FDI Act") and part 362 of the Corporation's rules and regulations, an
application has been filed with the Federal Deposit Insurance Corporation
("FDIC") by CityBank, Lynnwood, Washington ("Bank"). The application
requests the FDIC's consent to continue engaging in the activities of its majority-owned
subsidiary, Diligenz, Inc. ("Diligenz"). These activities may not be permissible
for a national bank.
The subsidiary provides lien searches, lien recordation, and other services via the
Internet, regular mail, fax, and telephone. To facilitate the search and retrieval
services, Diligenz maintains and periodically updates its database of Uniform Commercial
Code ("UCC") documentation. The database is an assembly of the various states'
electronic UCC and other public records and is expected to include all 50 states in the
near future. Services provided to the Bank and other financial institutions now
approximate 67 percent of Diligenz's revenues, while the remainder is attributable to
nonbank companies, attorneys, and others. Diligenz will continue targeting these nonbank
customers through its marketing and business development strategies.
Article 9 of the UCC, which governs secured lending transactions, was significantly
revised as of July 2001. Bank management believes the revisions will present significant
The Bank's earnings and capital remained strong while absorbing start-up costs associated
with Diligenz. The bank's return on assets ratio was reported at 3.02, 3.26, and 3.53
percent in 1998, 1999, and 2000, respectively, and the subsidiary was profitable in the
third quarter. The Bank's Tier 1 capital ratio as of September 30, 2001, was 20.49
percent, which meets the definition of "well capitalized" set forth in part 325
of the FDIC's Rules and Regulations. The level of activity to be conducted and the manner
in which the subsidiary will conduct the activity do not appear to pose a significant risk
to the applicable deposit insurance fund.
The Washington State Department of Financial Institutions approved the investment in
Diligenz, subject to the approval of the FDIC under section 24 and subject to the
limitations of the Revised Code of Washington. The Revised Code of Washington limits the
amount of funds banks can invest in corporations or other entities to ten percent of total
assets and fifty percent of the net worth of the Bank. As of March 31, 2001, the
subsidiary's book value approximated $5,160,000, which represented 0.91 percent of the
Bank's total assets and 4.60 percent of Tier 1 capital. Bank management has no plans for
future investment in the subsidiary; however, management also committed that any future
investments will be fully collateralized and will not exceed 20 percent of the Bank's Tier
The FDIC has not previously considered the activities of the Bank's subsidiary.
Technological, data transmission, and processing risks may be presented by the
subsidiary's activities. However, Diligenz has taken precautions to limit these risks.
Diligenz is protected by written customer releases limiting any potential lawsuit damages
to ten times the filing fee. Disclaimers in customer agreements and the Internet site
indicate that Diligenz is not responsible for the accuracy of the information contained in
the reports provided to customers. Diligenz does not underwrite lien search insurance nor
does it provide guarantees. Additionally, Diligenz maintains errors and omissions coverage
to protect the company in the event of a successful lawsuit.
The FDIC is presently amending its regulatory capital requirements in 12 C.F.R. Part 325
regarding the capital treatment for equity investments in nonfinancial companies. The new
capital treatment, if adopted, will apply to equity investments made under section 24 of
the FDI Act in nonfinancial companies and will be effective April 1, 2002. While the rule
does not apply to companies that engage solely in banking and financial activities, it
does apply to companies that engage in any nonfinancial activities. However, the proposed
rule allows the Board of Directors to permit capital deductions lower than those specified
in the rule on the investments up to 15 percent of a bank's Tier 1 capital. Diligenz
derives approximately 33 percent of its revenues from nonbank lenders and legal
professionals and it plans to continue to service these groups; therefore, absent a
determination that its activities are financial, CityBank's investment in Diligenz will
continue to be covered by the rule. However, the Board of Directors has determined, based
on a careful evaluation of the risks, that no deduction is required for that portion of
the investment that is less than 15 percent of the bank's Tier 1 capital.
CityBank's current investment in Diligenz is $5.2 million, which represents 4.60 percent
of CityBank's Tier 1 capital. Should CityBank increase its investment in Diligenz above
the 15 percent threshold, CityBank will have to comply with the higher capital charges
that the rule would impose for that amount in excess of 15 percent.
The investment in Diligenz does not pose a significant risk to the Bank Insurance Fund.
Accordingly, based upon careful evaluation of all available facts and information, the
Board has concluded that the application should be approved, subject to the conditions
stated in the Order.
THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION