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San Joaquin Bank


RE: San Joaquin Bank Bakersfield, California

Application Pursuant to Section 24(d) of the Federal Deposit Insurance Act to Indirectly Continue Activity That May Not Be Permissible for a National Bank


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 San Joaquin Bank, Bakersfield, California (the "Bank"). The Bank requests the FDIC's consent to continue a real estate investment activity through its wholly-owned subsidiary, Kern Island Company (the "Subsidiary"). 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 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. The California Financial Code permits holding of real estate investments up to 100% of total shareholders' equity.

The Subsidiary holds a 5% general interest in a partnership which owns a qualified low-income housing project and the Bank holds a 95% limited partnership interest in the same.partnership. The housing project was acquired in 1992 for settlement in lieu of foreclosure and the Bank did not assume liability on the underlying mortgage debt of the project. The Subsidiary is involved in only one other real estate venture and has filed an acceptable plan for its divestiture.

Ownership interest in the housing project must be retained for at least fifteen years to allow the Bank to receive tax credits arising from the qualified low-income status of the housing project. Near-term divestiture of the property would result in a significant loss and financial data reflect near break-even operations with positive cash flows. The property is adequately insured. The Bank plans to hold this investment to obtain tax credits accruing from ownership of the housing project as well as to meet an important community need.

In connection with this application, the FDIC has also taken into consideration the favorable financial and managerial resources and future earnings prospects of the institution associated with the continued holding of this housing project. The Bank is in compliance with applicable capital standards. On a combined basis, the Bank's and the Subsidiary's investment in the partnership amounts to about 6% of the Bank's Tier 1 capital. The Bank would continue to meet capital standards even if the investment in the Subsidiary were deducted.

Based upon careful evaluation of all available facts and information and the nature of the activity, for the reasons discussed above, the Associate Director, acting under delegated authority, has concluded that the activities to be conducted do not pose a significant risk to the Bank Insurance Fund and therefore may be and-hereby are approved subject to the following restrictions. The Bank shall notify the FDIC of any significant change in facts or circumstances including, among other things, if the percentage of the Bank's Tier 1 capital invested in the housing project reaches ten percent. If the facts or circumstances change significantly, the FDIC shall have the right to alter, suspend, or withdraw its approval. In addition, transactions between the Bank, the Subsidiary, and the Partnership that would be covered transactions for the purposes of Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. SS 371c and 371-c, if the Subsidiary and the Partnership were affiliates of the Bank under Sections 23A and 23B, shall not exceed the amount limitations and shall be made in accordance with other restrictions of Section 23A and 23B to the same extent as though the Partnership and the Subsidiary were an affiliate of the Bank. Finally, the Bank must notify the FDIC of its intent with regard to disposition of this property once the holding period required to realize the tax benefits has expired.

The FDIC specifically notes that its consent action is unique to this case, that it was significantly influenced by acquisition pre-section 24 and that its view of a de novo, request for such activity might well be different.