Application Pursuant to Section 24(d) of the Federal Deposit Insurance Act to Indirectly Continue Activity That May Not Be Permissible for a National Bank
Pursuant to the provisions of section 24 of the Federal Deposit Insurance Act ("FDI Act") and Part 362 of the Federal Deposit Insurance Corporation ("FDIC") Rules and Regulations, an application has been filed with the FDIC by Cathay Bank, Los Angeles, California (the "Applicant"). The Applicant requests the FDIC's consent for its wholly-owned subsidiary, Cathay Investment Company (the "Subsidiary") to retain its investment in a small seven-unit retail shopping center, located in Garden Grove, California (the "Property").
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 appropriate deposit insurance fund. The California Financial Code permits holding of real estate investments up to 1000 of total shareholders' equity.
The Subsidiary acquired the Property in 1988 at which time six of its seven units were leased. Currently, only half of the available space is leased and the Property's income and market value have decreased dramatically. The Property is the Subsidiary's sole real estate holding, and the Applicant has expressed no intention of conducting further real estate investment activities through the Subsidiary. The Applicant and the Subsidiary do not plan any major additional expenditures in connection with the Property.
The Applicant plans to indirectly hold the Property until it can be marketed without loss. Currently, the market for small shopping centers is reported to be saturated, and near-term divestiture under such conditions would almost certainly result in further loss. Absorption analysis prepared for the Applicant indicates that full occupancy conditions are likely to occur during 1997.
The Applicant is in compliance with applicable capital standards. The book value of the real estate investment is nominal, representing less than 20 per cent of the Applicant's tier 1 capital, and the Applicant would continue to meet its capital standards even if its investment in the Subsidiary were deducted. In connection with this application, the FDIC has taken into consideration the financial and managerial resources and future earnings prospects of the Applicant associated with the Subsidiary's retention of its interest in the Property, as well as the risks associated with owning and leasing the Property.
Having found that the activity in question did not require FDIC review when the Subsidiary acquired the Property; that the Property is now and is expected in the future to represent a nominal portion of the Applicant's capital; that the Applicant's financial condition and management are satisfactory; that the State Authority authorizes the activity; that the Subsidiary's retention of the Property until more favorable market conditions develop may avoid loss to the Applicant; and that the Applicant is in compliance with applicable capital standards -- the FDIC concludes that the Subsidiary's retention of the Property for a period not to exceed five years does not pose a significant risk to the Bank Insurance Fund and therefore may be and hereby is approved subject to the following restrictions.
The Applicant 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 upon receiving such notification. In addition, transactions between the Applicant and the Subsidiary that would be covered transactions for purposes of Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. §§ 371c and 371-c, if the Subsidiary were an affiliate of the Applicant under Sections 23A and 23B, shall not exceed the amount limitations and shall be made in accordance with the other restrictions of Sections 23A and 23B to the same extent as though the Subsidiary were an affiliate of the Applicant.
Finally, the FDIC notes that the foregoing approval is unique to this application, that it was significantly influenced by the Subsidiary's acquisition of the Property prior to the effective date of Section 24(d), and that its view of a de novo acquisition of such property might well be different.