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Part 347
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Bank of Agriculture & Commerce

January 23, 1997

Board of Directors
Bank of Agriculture & Commerce
2021 West March Lane
Stockton, California 95267

Members of the Board:

We have reviewed your request to indirectly continue real estate investment activities through the bank's wholly-owned subsidiary, BAC Service Corporation (BACSC), that may not be permissible for subsidiary of a national bank. The application, dated October 21, 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 BAC transfer ownership of the real estate investments to BACSC immediately.

That BAC and BACSC shall take the necessary steps to operate BACSC 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 BAC'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 BAC 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 BAC's customers and prospective customers of BACSC that BACSC is a separate organization from BAC, including the placement of specific language on any debt instrument or contract with a third party disclosing that BAC itself is not responsible for payment or performance.

That BAC's indirect real estate investment activities shall be limited to that which is currently held, subsequent to adequate capitalization, and including:

(a) equity interests,

(b) debt obligations of BACSC held by BAC,

(c) bank guarantees of debt obligations issued by BACSC, and

(d) extensions of credit or commitments of credit to BACSC or any tlurd party for the purpose of making a direct investment in BACSC or making an investment in any investment in which BACSC has an interest, in addition to the proposed capitalization of BACSC.

That BACSC shall divest of all property currently held by December 31, 1998.

That BAC and BACSC shall not engage in any transactions with insiders of BAC or their related interests which relate to BACSC's real estate investment activities without the prior written consent of the appropriate DOS Regional Director.

That BAC 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 BACSC 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 BAC, as those prevailing at the time for comparable transactions.

That transactions between BAC and BACSC 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 371c-1, to the same extent as though BACSC was an affiliate of BAC. With the exceptions that the amount and collateral limitations of Section 23A shall not apply to loans made by BAC to facilitate the sale of the real estate investments held by BACSC, provided the loans:

(a) are consistent with safe and sound banking practices,

(b) do not present more than the normal degree of risk of repayment, and

(c) are extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to BAC, as those prevailing at the time for comparable transactions.

That consent is granted based on the facts and circumstances presented or otherwise known to the FDIC in connection with this request. BAC 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 Donald L. Pfeiffer or Review Examiner William Donnell in the San Francisco Regional Office at (415) 546-1810.

Sincerely,

Lawrence E. Morgan, Jr.
Acting Associate Director


FEDERAL DEPOSIT INSURANCE CORPORATION

RE: Bank of Agriculture & Commerce Stockton, 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 Bank of Agriculture & Commerce, Stockton, California (BAC). The bank requests FDIC consent to transfer two direct real estate investments to its wholly-owned subsidiary, BAC Service Corporation (BACSC), and for the subsidiary to retain 100 percent interest in the two real estate projects located in Oakdale, California and Murphys, California, respectively, until it is able to divest of those real estate properties, but in no event later than December 31, 1998.

The two properties consist of two commercial and seven residential lots. The properties are owned by BAC and will be transferred, upon approval, to BACSC.

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 the subject real estate investments.

BAC does not engage in real estate activities beyond the currently held properties, and bank management has indicated that BAC has no intention of engaging in real estate activities once the subject properties are liquidated. BAC has made reasonable efforts to sell the above described properties; however, the current real estate market is such that near-term divestiture would likely result in losses.

The bank meets the definition of "Well Capitalized" in the FDIC's Rules and Regulations in 12 C.F.R. Section 325.103. Once title to the properties is transferred to BACSC, the properties will represent 4.62 percent of Tier 1 Capital. In connection with this application, the FDIC has also taken into consideration the financial and managerial resources and future earnings prospects of BAC.

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.

As prudential limitations and restrictions addressing the risks posed by real estate investment activities will be imposed, BACSC'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 BAC and BACSC.

That BAC transfer ownership of the real estate investments to BACSC immediately.

That BAC and BACSC shall take the necessary steps to operate BACSC 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 BAC'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 BAC 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 BAC's customers and prospective customers of BACSC that BACSC is a separate organization from BAC, including the placement of specific language on any debt instrument or contract with a third party disclosing that BAC itself is not responsible for payment or performance.

That BAC's indirect real estate investment activities shall be limited to that which is currently held, including adequate capitalization, and including:

(a) equity interests,

(b) debt obligations of BACSC held by BAC,

(c) bank guarantees of debt obligations issued by BACSC, and

(d) extensions of credit or commitments of credit to BACSC or any third party for the purpose of making a direct investment in BACSC or making an investment in any investment in which BACSC has an interest, in addition to the proposed capitalization of BACSC.

That BACSC shall divest of all property currently held by December 31, 1998.

That BAC and BACSC shall not engage in any transactions with insiders of BAC or their related interests which relate to BACSC's real estate investment activities without the prior written consent of the appropriate DOS Regional Director.

That BAC shall not condition any loan on the purchase of real estate from BACSC engaging in real estate investment activities and shall not extend credit to any borrower to acquire real estate from BACSC 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 BAC, as those prevailing at the time for comparable transactions.

That transactions between BAC and BACSC 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 BACSC was an affiliate of BAC. With the exceptions that the amount and collateral limitations of Section 23A shall not apply to loans made by BAC to facilitate the sale of the real estate investments held by BACSC, provided the loans:

(a) are consistent with safe and sound banking practices,

(b) do not present more than the normal degree of risk of repayment, and

(c) are extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to BAC, as those prevailing at the time for comparable transactions.

That consent is granted based on the facts and circumstances presented or otherwise known to the FDIC in connection with this request. BAC 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 BAC'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



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