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Visalia Community Bank


RE: Visalia Community Bank Visalia, 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


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 Visalia Community Bank, Visalia, California (VCB). The bank requests FDIC consent to allow its wholly-owned subsidiary, Vicom Land Development Corporation (Vicom), to retain its three real estate properties which are located in Visalia, California, until it is able to divest of those real estate properties, but in no event later than December 19, 2002.

Vicom retains a 62.15 percent equity interest in one property which consists of 80.8 acres of land intended for development as single family residential homes. The other two properties include one commercial lot and eight residential lots. These two properties are 100 percent owned by Vicom.

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.

VCB does not engage in real estate activities beyond the currently held properties, and bank management has indicated that VCB has no intention of engaging in real estate activities once the subject properties are liquidated. VCB 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.

VCB meets the definition of "Well Capitalized" in the FDIC's Rules and Regulations in 12 C.F.R. Section 325.103. The properties represent 28 percent of VCB's 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 VCB. Under VCB's divestiture plan, at year-end 1998, VCB's remaining investment in Vicom will constitute less than 10 percent of VCB's Tier 1 Capital.

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 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, Vicom'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 VCB and Vicom. Additionally, the conditions for approval of subject application will supersede requirements in the Memorandum of Understanding dealing with reduction in the level of investment in real estate.

That VCB and Vicom shall take the necessary steps to operate Vicom in a manner which ensures a separate corporate existence as a majority-owned subsidiary that:

(a) is adequately capitalized,

(b) is physically separate and distinct in its operations from VCB'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 VCB 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 VCB's customers and prospective customers of Vicom that Vicom is a separate organization from VCB, including the placement of specific language on any debt instrument or contract with a third party disclosing that VCB itself is not responsible for payment or performance.

That VCB's indirect real estate investment activities, with the exception of purchasing two acres to accommodate divestiture of Stonebridge IV, shall be limited to that which is currently held including:

(a) equity interests in Vicom,

(b) debt obligations of Vicom held by VCB,

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

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

That Vicom shall divest of the CPPC and Stonebridge III investments by December 19, 1998.

That the real estate investment known as Stonebridge IV be reduced through proceeds received from the sale and other partnership distributions to $1,303,600 by December 31, 1997.

That Vicom shall divest of the Stonebridge IV investment by December 19, 2002.

That VCB shall submit quarterly Progress Reports to the appropriate DOS Regional Director until divestiture of the investments is complete. The report shall contain the current status of efforts to sell subject properties, including details of any offers, anticipated gain or loss, and the book value of each project. The reports shall be submitted no later than 30 days following each calendar quarter.

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

That VCB shall not condition any loan on the purchase of real estate from Vicom.

That future transactions between VCB and Vicom 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 Vicom was an affiliate of VCB, with the exceptions that the amount and collateral limitations of Section 23A shall not apply to loans made by VCB to facilitate the sale of the real estate investments held by Vicom, 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 VCB, 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. VCB 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 VCB'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.