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RE: County Bank Merced, California

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, the County Bank, Merced, California, ("the Bank") has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). The Bank requests the FDIC's consent to continue to engage as principal indirectly in real estate investment activities through its wholly-owned subsidiary, Merced Area Investment and Development Co. ("MAID") which was established for the purpose of investing in real estate. MAID presently is in the process of developing three residential subdivisions located in the Bank's market area and requests permission to liquidate these properties within a five year period.

Holding real estate investment properties may not be a permissible activity for a national bank or a subsidiary of a national bank. State chartered FDIC-insured banks may not engage as principal in an activity prohibited to nationally chartered banks unless' they obtain consent from the FDIC. Consent may not be granted unless a bank is in compliance with applicable capital standards and the FDIC determines that the activity poses no significant risk to the deposit insurance fund.

MAID was established in 1987 to develop residential building sites and previously participated with local builders in joint ventures to construct pre-sold or speculation homes. Beginning in 1991, however, real estate development activities were acutely impacted by adverse market forces which resulted in significant asset and operating losses. The Bank proposes to terminate real estate activities but requests liquidation of the properties beyond the December 19, 1996 divestiture deadline to maximize sales values. The Bank anticipates a combination of bulk land sales in the largest but least developed project, individual lot sales in its smallest project, and combined individual and bulk sales in a partially developed project. Due to improving market conditions, it is estimated that the least developed project can be liquidated in a year with other projects requiring a two to five year liquidation period.

In connection with this application, the FDIC has reviewed available information and has also taken into consideration the financial and managerial resources and future earnings prospects of the institution associated with the continued holding of real estate property.

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.

As prudential limitations and restrictions addressing the risks posed by real estate investment activities will be imposed, MAID's real estate investment activities will not pose significant risks to the Bank Insurance Fund or present material safety and soundness concerns. The Bank is in compliance with applicable capital standards. While the Bank's investment in MAID approximated onequarter of its Tier 1 capital at June 30, 1995, no further material investment is likely and the anticipated liquidation activities will significantly reduce the level of the Bank's real estate investment.

Based upon careful evaluation of all available facts and information, the FDIC has concluded that approval of the application is warranted subject to the restrictions discussed below. These conditions are imposed for prudential reasons due to the volatility and other risks which are inherent in the subject real estate activity, as well as to mitigate any potential insider conflicts of interests.

The Bank's indirect real estate investment activities (including equity, debt, or extensions of credit) in MAID shall be limited to that which is currently held, and the Bank shall not engage in any additional real estate investment activity or make any additional investment in MAID without the prior written consent of the FDIC. The Bank shall continue to meet applicable capital standards prescribed by the Corporation. The minimum acceptable levels (after deduction of the investment in the subsidiary) will be a total risk based capital ratio of 10 percent or greater, a tier 1 risk based capital ratio of 6 percent or greater, and a tier 1 leverage capital ratio of 5 percent or greater. The Bank shall, on a quarterly basis, perform the capital adequacy calculations described above, and in the event the Bank falls below those levels, the Bank shall notify the FDIC within 15 days and submit to the FDIC an acceptable plan for restoring capital to a level above the prescribed minimums. The Bank shall completely divest itself of all of its interest in the real estate within five years. If the Bank has not divested itself of its interest within three years, then the Bank shall submit to the FDIC a written divestiture plan describing the means by which the Bank shall comply with the divestiture limitation.

The subsidiary shall: be satisfactorily capitalized, be separate and distinct in operations from the operations of the Bank, maintain separate accounting and other corporate records, conduct separate board of directors meetings, maintain a board of directors with one or more independent, knowledgeable outside directors, contract with the Bank for any services on terms and conditions comparable to those available to or from independent entities, and conduct business pursuant to separate policies and procedures designed to inform customers and prospective customers of the subsidiary that the subsidiary is a separate organization from the Bank. The Bank shall not engage directly or indirectly through the subsidiary in real estate investment activity with insiders or their related interests without the prior written consent of the FDIC. All transactions between the Bank and the subsidiary, which are entered into after the date of the approval letter, shall be made in accordance with the restrictions of Sections 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 as defined under Sections 23A and 23B, with the exception that the 10 percent and 20 percent limitations shall not apply and the collateral requirement shall not apply to third party financing provided by the Bank to finance the sale of the real estate investments. The Bank is prohibited from making third party loans to finance the sale of real estate investments unless the loans are consistent with safe and sound banking practice, do not involve 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. Further, the Bank's bias should be towards obtaining financing for the sale of real estate investments from a third party, and when financing is provided by the Bank, the reasons that providing such financing is in the best interest of the Bank shall be fully discussed by the Bank's board of directors and documented in the board minutes.

The consent granted herein is 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. The FDIC shall have the right to alter, suspend, or withdraw its approval in the event the facts and circumstances presented in the application change significantly.