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Yosemite Bank

FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: Yosemite Bank Mariposa, California

Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Continue to Indirectly Engage as Principal Through a Majority-Owned Subsidiary in Real Estate Investment Activities That May Not Be Permissible for a Subsidiary of a National Bank

ORDER

The Board of Directors of the Federal Deposit Insurance Corporation ("FDIC")has fully considered all available facts and information relevant to section 24 of the Federal Deposit Insurance Act, 12 U.S.C. 1831a, and Part 362 of the FDIC's Rules and Regulations, relating to an application by Yosemite Bank, Mariposa, California (the "Bank"), for consent to continue to indirectly engage as principal through YBRE Corporation (the "Subsidiary"), a wholly owned subsidiary, in activities that may not be permissible for a subsidiary of a national bank. The Board of Directors, having found that the Bank is in compliance with applicable capital standards, and that the activity to be continued does not appear to pose, with certain conditions imposed, a significant risk to the applicable deposit insurance fund, has concluded the application should be approved subject to certain conditions.

Accordingly, it is hereby ORDERED, for the reasons set forth in the attached Statement, that the application submitted by the Bank for consent to continue to indirectly engage as principal through a majority-owned Subsidiary in activities that may not be permissible for a subsidiary of a national bank be and the same hereby is approved, subject to the following conditions:

1. That the Bank and the Subsidiary shall take the necessary actions 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 physically 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 with one or more independent, knowledgeable outside directors and 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 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 within ninety (90) days from the date of this Order, the Bank shall submit a plan to the FDIC to reduce the level of Real Estate Investments, as defined below, to not more than 20 percent of Tier 1 capital of the Bank in the aggregate, within five (5) years;

3. That the Bank's real estate activities shall be limited to the types of activities described in the Bank's application, and any new type of real estate investment activity planned to be conducted by the Subsidiary must first be approved under the application procedures of Part 362;

4. That the Bank shall provide a progress report to the Regional Director of the FDIC's Division of Supervision on an annual basis that indicates the extent of the Bank's efforts to reduce its real estate investment activities to comply with the 20 percent of Tier 1 capital approval limitation;

5. That the Bank's capital level, after deducting all Real Estate Investments in the Subsidiary, shall equal or exceed the level required for a "well capitalized" institution pursuant to section 325.103(b)(1) of the FDIC's Rules and Regulations;

6. The Bank shall, on a quarterly basis, perform the capital adequacy calculations described above for the purpose of ascertaining its capital level, and that 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;

7. That once the Bank's level of Real Estate Investment has been reduced to 20 percent, or below, of its Tier 1 capital, the Bank shall commence providing an investment plan to the Regional Director of the FDIC's Division of Supervision on an annual basis that indicates the extent of the Bank's planned investment in the Subsidiary, and the manner in which concentration and diversification of risk issues within the Subsidiary will be addressed. If the Regional Director has not objected to the plan within 45 days, the Bank may proceed within the parameters of paragraphs (2), (3), and (5) ;

8. That henceforth, notwithstanding Parts 325 and 327 of the FDIC's Rules and Regulations, 12 C.F.R. Parts 325 and 327, the Bank's capital category for purposes of Prompt Corrective Action and the Bank's risk-adjusted deposit insurance premium shall be calculated based on the Bank's capital after deducting all Real Estate Investments, except that such deductions shall not be made when determining whether the Bank is "critically undercapitalized" as defined under Part 325;

9. That the Bank shall not:

(a) condition any loan on the purchase of real estate from the Subsidiary, or

(b) extend credit to any borrower to acquire real estate from the Subsidiary unless it is consistent with safe and sound banking practices and does 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 other comparable transactions;

10. That transactions relating to the Bank's indirect real estate activities shall comport 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 were an affiliate of the Bank as defined under sections 23A and 23B, except that the Bank's total investment in real estate shall not be subject to the 10 percent limit on covered transactions with one affiliate. In addition, End Loans, defined below, shall not:

(a) be subject to the 130 percent collateral margin requirement of section 23A, or

(b) be subject to the 10 percent or 20 percent aggregate limits on covered transactions in section 23A;

11. That the Bank shall not engage directly, or indirectly through its Subsidiary, in any activity or transaction relating to the Bank's real estate investments which involve insiders or their related interests without the prior written consent of the Regional Director of the FDIC's Division of Supervision;

12. That before the consummation of a transaction between the Subsidiary and any of the Bank's customers, any potential conflicts of interest be identified, be appropriately resolved, and be clearly disclosed to the board of directors and documented in the board's minutes; and

13. 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. If the facts and circumstances change significantly, the FDIC shall have the right to alter, suspend, or withdraw its approval.

Definitions. Except as otherwise set forth in this Order, capitalized terms used herein shall have the meaning set forth below:

(a) "Real Estate Investment" means the Bank's investment in the subsidiaries, including equity interests in the subsidiaries, debt obligations of the subsidiaries held by the Bank, Bank guarantees of debt obligations issued by the subsidiary and held by others, extensions of credit or commitments of credit from the Bank to the subsidiary, and any extension of credit to any third parties for the purpose of making a direct investment in the subsidiary or an investment in any real estate asset in which the subsidiary has an interest. However, Real Estate Investment shall not include End Loans.

(b) "End Loan" means any loan made by the Bank to a third party for the purpose of financing a bona fide sale of a subsidiary asset and which meets the requirements of paragraph 9(b) of this Order.

(c) "New Real Estate Investment Activity" means any real estate investment activity other than that conducted by the Bank and its Subsidiary, as described in the application dated January 27, 1994. The real estate activities described in the application as being conducted by the Bank and its Subsidiary are as follows: land acquisition, site development, and construction of residential housing units in the Bank's trade area.

Dated at Washington, D. C., this 16th day of January, 1996.

BY ORDER OF THE BOARD OF DIRECTORS


FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: Yosemite Bank Mariposa, California

Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Continue to Indirectly Engage as Principal Through a Majority-Owned Subsidiary in Real Estate Investment Activities That May Not Be Permissible for a Subsidiary of a National Bank

STATEMENT

Pursuant to the provisions of section 24 of the Federal Deposit Insurance ("FDI") Act, Yosemite Bank, Mariposa, 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 as principal in real estate investment activities through YBRE Corporation (the "Subsidiary"), a wholly owned subsidiary of the Bank, which owns and develops real estate properties held for investment purposes.

The activity of 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 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 state law permits the holding of real estate investment properties by commercial banks, and their subsidiaries.

Since 1987, the Subsidiary has purchased raw land for the purpose of the development of low to moderate income single family homes in their immediate market area. The Bank intends to continue real estate investment activities related to residential real estate development, when both the community and the Bank benefit from the transaction, and the acquisition is within the parameters of internal policies and state law.

Investments in real estate, at any stage of the development process or even completed properties, can be generally characterized as quite risky in that there is a high degree of variability or uncertainty of returns on invested funds. The cyclical downturn in the real estate market in the late 1980's and early 1990's, and the impact of that downturn on financial institutions, provides an illustration of the market risk presented by real estate investment. In addition to the high degree of variability, real estate investments possess many risks that, while not entirely unique, are not readily comparable to typical equity investments (e.g., common stock). Real estate markets are for the most part localized, investments are normally not securitized, financial information flow is often poor, and the market is generally not very liquid.

Real estate investment risk is higher than that for most traditional bank assets, such as loans or debt securities. Real estate investment can increase interest rate risk; optimum investment periods are typically long-term; real estate is relatively lacking in liquidity; and real estate is subject to specialized risks such as environmental liability. In addition, real estate investment is of questionable benefit in the diversification of a financial institution's portfolio of assets. The experience and expertise of management is a critical factor and there is much anecdotal evidence to suggest that the lack of adequate management creates a significant level of risk of loss.

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.

The Board of Directors ("Board") of the FDIC has reviewed available information and has also taken into consideration the financial and managerial resources and future earnings prospects of the Bank. The Board also considered the risks associated with real estate investment activities and the risks associated with the development of residential properties.

In determining if a significant risk to the deposit insurance fund exists in the proposal, the Board evaluated the specifics of the Bank's application. In evaluating a section 24 real estate activity application, the Board considers the types of real estate investment activity proposed to determine if any activity is unsuitable for an insured depository institution. The Board reviewed the proposed subsidiary structure and its management policies and practices to determine if the Bank is adequately protected from litigation risk. Capital adequacy is analyzed to ensure the bank first devotes sufficient capital to its more traditional banking activities. Capital adequacy is determined by the bank's "consolidated" and "bank only" leverage and risk-based capital ratios, with all investments in real estate investment subsidiaries excluded from capital in the "bank only" capital calculation.

Limitations on investment in a subsidiary engaged in real estate investment activity are evaluated in order to assure that the maximum risk exposure is nominal. Policies relating to extensions of credit to third parties for subsidiary-related transactions are evaluated to determine if they protect the bank from concentrations of risk. The bank's policies on engaging in transactions in which insiders are involved are reviewed to determine if they protect the bank from potential insider abuse. A bank's policies relating to the conditioning of loans on the purchase of real estate from a subsidiary and the extending of credit by the bank to third parties for the purpose of acquiring real estate from its subsidiary are reviewed to determine if they prevent undesirable tying relationships and to determine if they are adequate to ensure that sound credit underwriting is maintained. Having reviewed these areas, the Board is imposing conditions 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 interest and to reduce risk to the deposit insurance fund.

As of October 31, 1995, the Bank's investment in the Subsidiary represented approximately 32.60 percent of the Bank's Tier 1 capital and 3.09 percent of the Bank's total assets. The Bank states in its application that its investment in the Subsidiary will be limited to 80 percent of the its equity capital; however, this level is well above acceptable risk standards. Additionally, the Bank indicates that they will continue to invest in residential real estate. Due to the risks associated with real estate investment activities, it is prudent to limit a bank's overall investment in real estate to a level which does not present concentration and/or diversification risks. The Board has determined that it is appropriate to limit the investment in real estate activities to 20 percent of Tier 1 capital in the aggregate. Before permitting the Bank to engage in additional real estate investment activities, the Board shall require that the Bank's investment not represent more than 20 percent of Tier 1 capital in the aggregate. In order to ensure the Bank's capital is sufficient to support both traditional banking activities and real estate investment activities, the Board will also require that the Bank's capital, after deducting the Bank's aggregate investment, including the proposed investment, in the Subsidiary, equal or exceed the level required for a "well capitalized" institution pursuant to section 325.103(b)(1) of the FDIC's Rules and Regulations before providing consent for the Bank to make additional real estate related investments. Additionally, the Board will require a plan within ninety (90) days to reduce the level of investment to the above 20 percent level within five (5) years.

In order to promote the concept that real estate investment activities should be conducted in a separately and adequately capitalized subsidiary and to ensure that the appropriate deposit insurance fund is adequately compensated for, and sufficiently protected from, additional risk in the event that "bank only" capital levels fall below "well capitalized" levels, the Bank's capital category for purposes of Prompt Corrective Action will be determined, and the Bank's risk-adjusted deposit insurance premium will be assessed, based on "bank only" capital ratios, except for the purposes of determining if the Bank is "critically undercapitalized". As of October 31, 1995, if the total amount of the investment is subtracted from capital, the Bank would remain "well capitalized".

In order to protect the corporate veil between the subsidiary and parent, thus mitigating litigation risks, the Board will require that the Bank take the necessary actions to establish a majority-owned subsidiary which is adequately capitalized; physically separate and distinct in its operations from the operations of the Bank; maintains separate accounting and other corporate records; observes separate formalities such as separate board of directors' meetings; maintains 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; contracts with the Subsidiary for, any service on terms and conditions comparable to those available to or from independent entities, and 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.

Given the high risk present in real estate investment activities, the Board has also imposed a condition requiring 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 to the same extent as though the Subsidiary were an affiliate of the Bank as defined under sections 23A and 23B, with the exception that the 10 percent limitation on covered transactions with one affiliate shall not apply, and the collateral requirements and investment limitations of section 23A shall not apply to loans made by the Bank to finance bona fide sales of assets to third parties provided any such loans are consistent with safe and sound banking practices, do not involve more than the normal degree of risk of repayment, and the loans are 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. Any such loans made by the Bank will be reviewed by examiners at each regular safety and soundness examination conducted by the FDIC.

For the reasons outlined above, including the imposition of conditions, the Board of Directors has concluded that the retention of interest in real estate does not pose a significant risk to the Bank Insurance Fund, provided certain conditions are observed, and therefore, approval of the application, subject to conditions in the Order, is warranted.

THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION



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