Decisions on Bank Applications
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Cathay Bank Los Angeles, Los Angeles County, California
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal in Real Estate Investment Activities through a Wholly-Owned Subsidiary that May Not be Permissible for a National Bank
Pursuant to the provisions of Section 24 of the Federal Deposit Insurance Act (FDI Act), Cathay Bank, Los Angeles, Los Angeles County, California (the bank), has filed an application with the Federal Deposit Insurance Corporation (FDIC). The bank requests the FDIC's consent to continue to indirectly engage in real estate investment activities through Cathay Investment Company (the subsidiary), a wholly-owned subsidiary of the bank.
In general, real estate investments 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. The FDIC may not grant its consent 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. State law authorizes the activity.
The bank is requesting permission to continue to engage in a real estate investment activity in its wholly-owned subsidiary. The real estate investment activity consists of owning a shopping center in Tustin, Orange County, California. The property was purchased in 1989.
Investing in real estate contains several inherent risks 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 in 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 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 approximately 3 percent of its Tier 1 capital, and the bank would continue to be well capitalized in the event the entire investment was lost. Recent actions by management have improved the condition the bank. The real estate investment activity will be limited to the shopping center.
Having found that the activity in question involves the retention of an investment that did not require FDIC review or consent at inception, but does now because of statutory revision; that the bank's interest in real estate is now and is expected in the future to represent a nominal portion of the bank's capital; that the bank's financial condition and management are adequate; that the state banking department authorizes the activity; and that the bank is in compliance with applicable capital standards -the FDIC concludes that, if certain restrictions addressing the risks associated with real estate investment activities are imposed, the retention of the interest in real estate does not pose a significant risk to the Bank Insurance Fund, and therefore may be and hereby is approved subject to the following restrictions. These restrictions are imposed for prudent reasons due to the volatility and the risks which are inherent in real estate activities as well as to mitigate any potential insider conflicts of interest.
The conditions imposed will require:
That the activity be continued in the wholly-owned subsidiary and that the subsidiary shall:
(A) be adequately capitalized,
(B) be preserved separate and distinct in its operations from the operations of the bank,
(C) maintain separate accounting and other corporate records,
(D) observe separate formalities such as separate board of directors' meetings,
(E) maintain a board of directors with one or more independent, knowledgeable outside directors and management expertise capable of conducting activities in a safe and sound manner,
(F) contract with the bank for any service on terms and conditions comparable to those available to or from independent entities, and
(G) conduct business pursuant to separate policies and procedures designed to inform customers and prospective customers of CIC that CIC is a separate organization from the bank, including the placement of specific language on any debt instrument or contract with the third party disclosing that the bank itself is not responsible for payments or performance;
That the Bank's indirect real estate investment activities in the wholly-owned subsidiary shall be limited to those which are currently held;
That the Bank shall divest of the property within three years of the date of this approval letter;
That if the property has not been divested within two years of the date of this approval letter, then the Bank shall submit to the FDIC a written divestiture plan detailing the means by which the Bank shall comply with the three year divestiture period above;
That the Bank shall submit quarterly progress reports to the Regional Director of the San Francisco Regional Office. The reports shall contain the current status of efforts to sell the property, including details of any offers; a list of the current tenants and lease terms; and, a copy of quarterly income and expenses for the property. The reports shall be submitted no later than 30 days following each calendar quarter;
That the Bank shall, on a quarterly basis, perform capital adequacy calculations, and in the event the Bank falls below the level required for a "well capitalized" institution pursuant to section 325.103(b)(1) of the FDIC's Rules and Regulations, the Bank shall notify the FDIC within 15 days and submit to the FDIC an acceptable plan for restoring capital to a level required for a "well capitalized" institution;
That the Bank shall not engage, directly or indirectly, in any real estate investment activity with insiders or their related-interest without prior written consent of the FDIC;
That future transactions between the Bank and the subsidiary shall be made in accordance with the restrictions of Section 23A and 23B of the Federal Reserve Act, 12 U.S.C. 371c and 371c-1, to the same extent as though the subsidiary was an affiliate of the bank, except that the collateral limitations of Section 23A shall not apply to loans made by the Bank to facilitate the sale of the real estate investments held by the subsidiary, provided the loans are consistent with safe and sound banking practices, do not present more than the normal degree of risk of repayment, and the credit 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; and
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 approval.
DIVISION OF SUPERVISION