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Commerce Security Bank

November 13, 1996

Board of Directors
Commerce Security Bank
Post Office Box 16279
Sacramento, California 93755-6279

Members of the Board:

We have reviewed your request to indirectly continue activities through the bank's wholly-owned subsidiary, CSB ("Subsidiary"), that may not be permissible for a subsidiary of a national bank. The application, dated July 15, 1996, was filed pursuant to Section 362.4(d)(4)(iii) of the Federal Deposit Insurance Corporation (FDIC) Rules and Regulations and was received in the FDIC San Francisco Regional Office July 23, 1996, with additional required documentation received August 13, 1996.

For the reasons set forth in the attached Statement, your application was approved today, subject to the following conditions:

(1) That the Bank and Subsidiary shall take the necessary steps to operate the Subsidiary in a manner so as to ensure a separate corporate existence as a majority-owned subsidiary which:

(a) is adequately capitalized;

(b) is separate and distinct in its operations from the operations of the Bank;

(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 and management with 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 customers and prospective customers of the Subsidiary that the Subsidiary is a separate organization from the Bank, 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,

(2) That the Bank's indirect real estate investment activities, including equity interests, debt obligations of the Subsidiary held by the Bank, Bank guarantees of debt obligations issued by the Subsidiary, extensions of credit or commitments of credit to any third party for the purpose of holding a direct investment in the Subsidiary or making an investment in any investment in which the Subsidiary has an interest shall be limited to that which is currently held;

(3) That the Subsidiary shall divest of the property by December 31, 1998;

(4) That the Bank and Subsidiary shall not engage in any transactions with insiders of the Bank or their related interests which relate to the Subsidiary's real estate investment activities without the prior written consent of the appropriate DOS Regional Director;

(5) That the Bank shall not condition any loan on the purchase of real estate from the Subsidiary engaging in real estate investment activities and that the Bank shall not extend credit to any borrower to acquire real estate from the Subsidiary unless it is consistent with safe and sound banking practice and does not involve more than a 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;

(6) That transactions between the Bank and the Subsidiary shall be made in accordance with the restrictions of sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. Sect. 371c and Sect. 371c-1, to the same extent as though the Subsidiary were an affiliate of the Bank, except that the amount and collateral limitations of section 23A shall not apply to loans made by the Bank to facilitate the sale of the real estate investment held by the Subsidiary, provided the loans are consistent with safe and sound 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,

(7) That 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, and the FDIC shall have the right to alter, suspend, or withdraw its approval.

Should you have any questions regarding this matter, please contact Regional Director George Masa in our San Francisco Regional Office of the Division of Supervision at (415) 546-1810.

Sincerely,

Jesse G. Snyder
Acting Associate Director


FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: Commerce Security Bank Sacramento, 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 ("FDIC") by Commerce Security Bank, Sacramento, California (the "Bank"). The Bank requests FDIC consent to allow its wholly-owned subsidiary, CSB Ventures ("Subsidiary"), to retain its 75 percent partnership interest in realty property, until it is able to divest of said property, but in no event later than December 31, 1998. The property is a parcel of unimproved commercial property located in Sacramento, California.

In general, real estate investment activity 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 deposit insurance fund. California banking statutes permit the holding of subject real estate investment.

The Bank and Subsidiary have made reasonable efforts to sell the property; however, the current real estate market is such that near term divestiture would likely result in a capital loss. Subsidiary does not engage in real estate activities beyond this property and Bank management has indicated that the Bank has no intention of engaging in real estate activities once the property is liquidated.

The Bank meets the definition of "well capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations. The Bank's consolidated investment in the subsidiary represents 5.03 percent of the Bank's Tier I leverage capital as of June 30, 1996, and the Bank would continue to be "well capitalized" in the event its entire subsidiary investment was deducted from capital. In connection with this application, the FDIC has taken into consideration the financial and managerial resources and future earnings prospects of the Bank.

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, 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 Subsidiary:

That the Bank and Subsidiary shall take the necessary steps to operate the Subsidiary in a manner so as to ensure a separate corporate existence as a majority-owned subsidiary which:

(a) is adequately capitalized;

(b) is separate and distinct in its operations from the operations of the Bank,

(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 and management with 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 customers and prospective customers of the Subsidiary that the Subsidiary is a separate organization from the Bank, 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 the Bank's indirect real estate investment activities, including equity interests, debt obligations of the Subsidiary held by the Bank, Bank guarantees of debt obligations issued by the Subsidiary, extensions of credit or commitments of credit to any third party for the purpose of malting a direct investment in the Subsidiary or making an investment in any investment in which the Subsidiary has an interest shall be limited to that which is currently held;

That the Subsidiary shall divest of the property by December 31, 1998;

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

That the Bank shall not condition any loan on the purchase of real estate from the Subsidiary engaging in real estate investment activities and that the Bank shall not extend credit to any borrower to acquire real estate from the Subsidiary unless it is consistent with safe and sound banking practice and does not involve more than a 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,

That transactions between the Bank and the Subsidiary shall be made in accordance with the restrictions of sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. Sect. 371c and Sect. 371c-1, to the same extent as though the Subsidiary were an affiliate of the Bank, except that the amount and collateral limitations of section 23A shall not apply to loans made by the Bank to facilitate the sale of the real estate investment held by the Subsidiary, provided the loans are consistent with safe and sound 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 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, and the FDIC shall have the right to alter, suspend, or withdraw its approval

Finally, the FDIC notes that the foregoing approval is unique to this application, that it was significantly influenced by Subsidiary'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



Last Updated 03/24/2011 Legal@fdic.gov