April 29, 1997
Board of Directors
Sacramento Commercial Bank
525 J Street
P.O. Box 862
Sacramento, California 95812-0862
Members of the Board:
We have reviewed your request to indirectly continue real estate investment activities through the
bank's wholly-owned subsidiary, SCB Investment Company (SCBIC), that may not be permissible
for a subsidiary of a national bank. The application, dated December 16, 1996, was filed pursuant
to Section 362.4(d)(4)(iii) of the Federal Deposit Insurance Corporation (FDIC) Rules and
Regulations.
For the reasons set forth in the attached Statement, your application was approved today, subject
to the following conditions:
That SCB and SCBIC shall take the necessary steps to operate SCBIC 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 SCB'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 SCB 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
infonn SCB's customers and prospective customers of SCBIC that SCBIC is a
separate organization from SCB, including the placement of specific language
on any debt instrument or contract with a third party disclosing that SCB itself
is not responsible for payment or performance.
That SCB's indirect real estate investment activities shall be limited to that which is
currently held including:
(a) equity interests in SCBIC,
(b) debt obligations of SCBIC held by SCB,
(c) bank guarantees of debt obligations issued by SCBIC, and
(d) extensions of credit or commitments of credit to SCBIC or any third party for
the purpose of making a direct investment in SCBIC or making an investment in
any investment in which SCBIC has an interest.
That SCBIC shall divest of all property currently held by December 31, 1998.
That SCB and SCBIC shall not engage in any transactions with insiders of SCB or their
related interests which relate to SCBIC's real estate investment activities without the
prior written consent of the appropriate DOS Regional Director.
That SCB shall not condition any loan on the purchase of real estate from any
subsidiary.
That transactions between SCB and SCBIC 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 SCBIC was an affiliate of SCB, with the
exceptions that the amount and collateral limitations of Section 23A shall not apply to
loans made by SCB to facilitate the sale of the real estate investments held by SCBIC,
(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 SCB, 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. SCB 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.
Questions relating to this matter may be referred to Assistant Regional Director Donald L
Pfeiffer or Case Manager Bonnie Krelling in the San Francisco Regional Office at
(415) 546-1810.
Sincerely,
Steven K. Scholzen
Acting Associate Director
FEDERAL DEPOSIT INSURANCE CORPORATION
RE: Sacramento Commercial 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 by Sacramento Commercial Bank,
Sacramento, California (SCB). The bank requests FDIC consent to allow its wholly-owned subsidiary,
SCB Investment Company (SCBIC), to retain its two real estate properties which are located in Dixon,
California and Merced, California, until it is able to divest of those real estate properties, but in no event
later than December 31, 1998.
SCBIC retains a 50 percent equity interest in the Merced property which consists of 176 acres of
land intended for development as single and multi-family residential lots and a small commercial site. The
Dixon property is 100 percent owned by SCBIC and consists of 3.62 acres of unimproved commercial
property.
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
sigificant risk to the deposit insurance fund. California banking statutes permit the holding of the subject
real estate investments.
SCB does not engage in real estate activities beyond the currently held properties, and bank
management has indicated that SCB has no intention of engaging in real estate activities once the subject
properties are liquidated. SCB 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.
The bank meets the definition of "Well Capitalized" in the FDIC's Rules and Regulations in 12
C. F. R. Section 325.103. The properties represent 1. 93 percent of SCB's Tier I Capital. In connection
with this application, the FDIC has also taken into consideration the financial and managerial resources
and future earnings prospects of SCB.
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 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
will be imposed, SCBIC's real estate investment activities will not constitute a significant risk to
activities will not consititute 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's 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 SCB and
SCBIC.
That SCB and SCBIC shall take the necessary steps to operate SCBIC 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 SCB'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 SCB 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 SCB's
customers and prospective customers of SCBIC that SCBIC is a separate organization from
SCB, including the placement of specific language on any debt instrument or contract with a
third party disclosing that SCB itself is not responsible for payment or performance.
That SCB's indirect real estate investment activities shall be limited to that which is currently held
including:
(a) equity interests in SCBIC,
(b) debt obligations of SCBIC held by SCB,
(c) bank guarantees of debt obligations issued by SCBIC, and
(d) extensions of credit or commitments of credit to SCBIC or any third party for the purpose of
making a direct investment in SCBIC or making an investment in any investment in which
SCBIC has an interest.
That SCBIC shall divest of all property currently held by December 31, 1998.
That SCB and SCBIC shall not engage in any transactions with insiders of SCB or their related
interests which relate to SCBIC's real estate investment activities without the prior written consent
of the appropriate DOS Regional Director.
That SCB shall not condition any loan on the purchase of real estate from any subsidiary.
That transactions between SCB and SCBIC 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 SCBIC was an affiliate of SCB, with the exceptions that the amount and
collateral limitations of Section 23A shall not apply to loans made by SCB to facilitate the sale of
the real estate investments held by SCBIC, 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 SCB, 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. SCB 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 SCB'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
