Decisions on Bank Applications
Kerman State Bank
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Kerman State Bank Kerman, Fresno County, California
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal in Real Estate Investment Activities through a Wholly-Owned Subsidiary that May Not be Permissible for a National Bank
Pursuant to the provisions of section 24 of the Federal Deposit Insurance Act (FDI Act), Kerman State Bank, Fresno County, 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 in real estate investment activities through Ker Vest (the "Subsidiary"), a wholly-owned subsidiary of the Bank until these activities can be divested in a safe and sound manner.
In general, real estate investments 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. The FDIC may not grant its consent unless the bank is in compliance with applicable capital standards and the FDIC determines that the activity poses no significant risk to the appropriate deposit insurance fund. State law authorizes the activity.
The real estate investment activity consists of owning developed and undeveloped land in Merced, Fresno County, California. The properties were purchased in 1990.
Investing in real estate contains several inherent risks 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 in 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 Bank meets the definition of "well capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations, and is in compliance with applicable capital standards. The Bank's investment in the subsidiary will not exceed 20 percent of its Tier 1 capital, and the bank would continue to be "well capitalized" in the event the entire investment was lost.
Having found that the activity in question involves the retention of an investment that did not require FDIC review or consent at inception, but does now because of statutory revision; that the Bank's financial condition and management are adequate; that the State banking department authorizes the activity; and that the Bank is in compliance with applicable capital standards -- the FDIC concludes that, if certain restrictions addressing the risks associated with real estate investment activities are imposed, the retention of the interest in real estate pending divestiture does not pose a significant risk to the Bank Insurance Fund, and therefore may be and hereby is approved subject to the following restrictions. These restrictions are imposed for prudential reasons due to the volatility and the risks which are inherent in real estate activities as well as to mitigate any potential insider conflicts of interest.
The conditions imposed will require:
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 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;
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 making a direct investment in the subsidiary or making an investment in any investment in which the subsidiary has an interest (defined collectively as "Real Estate Investments") shall be limited to that which is currently held. Further, that the Bank shall neither purchase additional real property nor make further investments in the subsidiary which would raise its equity interest to more than 20 percent of Tier 1 capital;
That the subsidiary shall divest of both properties by December 31, 2000;
That if the properties have not been divested of by December 31, 1998, then the Bank shall submit to the FDIC a written plan detailing the means by which the Bank shall comply with the divestiture period above;
That the Bank and its 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, and that the Bank and the subsidiary 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 future 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. 371c and 371c-1, to the same extent as though the subsidiary was an affiliate of the bank, except that the investment limitations to one subsidiary under Section 23A shall not apply. In addition, the collateral limitations of Section 23A shall not apply to loans made by the Bank to facilitate the sale of the real estate investments held by the subsidiary, provided the loans are consistent with safe and sound banking practices, do not present 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; and
That consent is granted 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.
DIVISION OF SUPERVISION