Decisions on Bank Applications
North County Bank
January 7, 1997
Board of Directors
North County Bank
444 S. Escondido Boulevard
Escondido, California 92046-2990
Members of the Board:
We have reviewed your request to indirectly continue activities through the bank's wholly- owned subsidiary, North County Joint Venture - I, Inc. (NCJV), that may not be permissible for a subsidiary of a national bank. The application, dated September 30, 1996, was filed pursuant to Section 362.4(d)(4)(iii) of the Federal Deposit Insurance Corporation (FDIC) Rules and Regulations.
For the reasons set forth in the attached Statement, your application was approved today, subject to the following conditions:
That NCB transfer ownership of the real estate investment to NCJV immediately;
That NCB and NCJV shall take the necessary steps to operate the subsidiary in a manner which ensures a separate corporate existence as a majority-owned subsidiary that:
(a) is adequately capitalized,
(b) is separate and distinct in its operations from NCB's operations,
(c) maintains separate accounting and other corporate records,
(d) observes separate formalities such as separate board of directors' meetings,
(e) maintains a board of directors with management expertise capable of conducting activities in a safe and sound manner,
(f) contracts with the bank for any service on terms and conditions comparable to those available to or from independent entities, and
(g) conducts business pursuant to separate policies and procedures designed to inform NCB's customers and prospective customers of NCJV that the subsidiary is a separate organization from NCB, including the placement of specific language on any debt instrument or contract with a third party disclosing that the bank itself is not responsible for payment or performance.
That NCB's indirect real estate investment activities shall be limited to that which is currency held directly, including:
(a) equity interests,
(b) debt obligations of NCJV held by NCB,
(c) bank guarantees of debt obligations issued by NCJV, and
(d) extensions of credit or commitments of credit to any third party for the purpose of making a direct investment in NCJV or making an investment in any investment in which NCJV has an interest.
That NCJV shall divest of all property held by December 31, 1998.
That NCB and NCJV shall not engage in any transactions with insiders of NCB or their related interests which relate to NCJV's real estate investment activities without the prior written consent of the appropriate DOS Regional Director.
That NCB shall not condition any loan on the purchase of real estate from the subsidiary engaging in real estate investment activities and shall not extend credit to any borrower to acquire real estate from NCJV unless:
(a) it is consistent with safe and sound banking practice and does not involve more than a normal degree of risk of repayment, and
(b) the credit is extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to NCB, as those prevailing at the time for comparable transactions.
That transactions between NCB and NCJV shall be made in accordance with the restrictions of Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. Sections 37lc and 371c-l, to the same extent as though NCJV was an affiliate of NCB.
That consent is granted based on the facts and circumstances presented or otherwise known to the FDIC in connection with this request. NCB 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.
Questions relating to this matter may be referred to Assistant Regional Director J. Richard Mayher or Review Examiner Mark Rapier in the San Francisco Regional Office at (415) 546-1810.
Sincerely,
Lawrence E. Morgan, Jr.
Acting Associate Director
FEDERAL DEPOSIT INSURANCE CORPORATION
RE: North County Bank Escondido, California
Application Pursuant to Section 24 of the Federal Deposit Insurance Act to Indirectly Continue Activity That May Not Be Permissible for a National Bank
STATEMENT
Pursuant to the provisions of Section 24 of the Federal Deposit Insurance Act, an application has been filed with the Federal Deposit Insurance Corporation by North County Bank, Escondido, California (NCB). The bank requests FDIC consent to transfer a direct real estate investment to its wholly-owned subsidiary, North County Joint Venture - I, Inc. (NCJV), and for the subsidiary to retain 100 percent interest in the property located in Bonsall, California, until it is able to divest of said property, but in no event later than December 31, 1998. The property is a 15 lot residential development. Only one lot remains unsold.
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 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. California banking statutes permit the holding of subject real estate investment.
The bank invested in the subject residential development in 1988. The residential development originally consisted of 15 lots. One lot remains to be divested. The bank plans to transfer the investment to NCJV. The bank has made reasonable effort to divest of the property; however, the current real estate market is such that near term divestiture would likely result in a loss. Bank management has indicated that the bank has no intention of engaging in real estate activities once the remaining lot is liquidated. The bank meets the definition of "Well Capitalized" in the FDIC's Rules and Regulations in 12 C.F.R. Section 325.103. The book value of the subject property was reduced to zero in 1996.
Real estate investment is subject to a high degree of market risk and other specialized risks specific to real estate ownership and may 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. In connection with this application, the FDIC has also taken into consideration the financial and managerial resources and future earnings prospects of the bank.
As prudential limitations and restrictions addressing the risks posed by real estate investment activities will be imposed, the subsidiary's real estate investment activities will not constitute a significant risk to the Bank Insurance Fund or present material safety and soundness concerns.
Based upon careful evaluation of all available facts and information, the Acting Associate Director, acting under delegated authority, has concluded that approval of the application is appropriate subject to the restrictions discussed below. The following 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 or risks associated with transactions between the bank and the subsidiary:
That NCB transfer ownership of the real estate investment to NCJV immediately;
That NCB and NCJV shall take the necessary steps to operate the subsidiary in a manner which ensures a separate corporate existence as a majority-owned subsidiary that:
(a) is adequately capitalized,
(b) is separate and distinct in its operations from NCB's operations,
(c) maintains separate accounting and other corporate records,
(d) observes separate formalities such as separate board of directors' meetings,
(e) maintains a board of directors with management expertise capable of conducting activities in a safe and sound manner,
(f) contracts with the bank for any service on terms and conditions comparable to those available to or from independent entities, and
(g) conducts business pursuant to separate policies and procedures designed to inform NCB's customers and prospective customers of NCJV that the subsidiary is a separate organization from NCB, including the placement of specific language on any debt instrument or contract with a third party disclosing that the bank itself is not responsible for payment or performance.
That NCB's indirect real estate investment activities shall be limited to that which is currently held directly, including:
(a) equity interests,
(b) debt obligations,of NCJV held by NCB,
(c) bank guarantees of debt obligations issued by NCJV, and
(d) extensions of credit or commitments of credit to any third party for the purpose of making a direct investment in NCJV or making an investment in any investment in which NCJV has an interest.
That NCW shall divest of all property held by December 31, 1998.
That NCB and NCJV shall not engage in any transactions with insiders of NCB or their related interests which relate to NCJV's real estate investment activities without the prior written consent of the appropriate DOS Regional Director.
That NCB shall not condition any loan on the purchase of real estate from the subsidiary engaging in real estate investment activities and shall not extend credit to any borrower to acquire real estate from NCJV unless:
(a) it is consistent with safe and sound banking practice and does not involve more than a normal degree of risk of repayment, and
(b) the credit is extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to NCB, as those prevailing at the time for comparable transactions.
That transactions between NCB and NCJV shall be made in accordance with the restrictions of Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. Sections 371c and 37lc-1, to the same extent as though NCJV was an affiliate of NCB.
That consent is granted based on the facts and circumstances presented or otherwise known to the FDIC in connection with this request. NCB 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.
Finally, FDIC notes that the foregoing approval is unique to this application, that it was significantly influenced by NCJV's acquisition of the subject real estate interest prior to the effective date of Section 24, and that its view of de novo acquisition of such interest might well be different.
ACTING ASSOCIATE DIRECTOR
DIVISION OF SUPERVISION