98-1

June 24, 1998

Re: __________ – Proposed Sale of Shares to ________

Dear Mr. ________:

This responds to your letter of June 3, 1998.

In your letter you asked whether ________ would be required to obtain approval to acquire control of ________ (the “Bank”) pursuant to Financial Code Section 700, et seq., if he acquired either 140,000 shares or 156,000 shares of the Bank’s common stock.

As discussed below, it is possible that ________ needs no approval under Financial Code Section 700, et seq., to make either of the proposed acquisitions. However, it would be necessary for the Bank to obtain a permit pursuant to Financial Code Section 690, et seq., prior to offering or selling the shares to ________.

You state that the shares to be acquired by ________ are part of the, “274,908 shares of Bank stock held in trust for ________.” We understand that the 274,908 shares (the “Surrendered Shares”) to which you refer are shares that ________ surrendered to the Bank in exercise of his dissenter’s rights under 12 U.S.C. Section 214a(b) at the time the Bank converted from a national to a state charter.

It appears that the Bank regards the Surrendered Shares to be issued and outstanding shares held by the Bank in trust for ________. However, we have seen no document by which ________ agreed that the Bank hold the Surrendered Shares in trust for him. Further, we are aware of no law which makes a bank that results from a conversion the trustee of shares surrendered by a dissenting shareholder.

You represent that the Bank has 1,550,600 shares of common stock outstanding. This figure is apparently based on counting the Surrendered Shares as outstanding. In view of the uncertain status of the Surrendered Shares, the percentage of the Bank’s shares that would be owned by ________ if he were to make the proposed acquisitions is not entirely clear. Accordingly, for purposes of this response, we will not count the Surrendered Shares as being presently outstanding shares of the Bank.

If the Surrendered Shares are not viewed as outstanding, and based on the figures you provided, if ________ acquired 140,000 shares, he would own approximately 9.9% of the Bank’s outstanding shares,n1 and if ________ acquired 156,000 shares, he would own approximately 10.9% of the Bank’s outstanding shares.n2 In addition, if ________ acquired either 140,000 shares or 156,000 shares, both ________ and ________ would own more shares of the Bank’s common stock than ________.n3

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n1 1,550,600 shares less, 274,908 Surrendered Shares, plus 140,000 shares to be issued to ________ = 1,415,692 shares outstanding, of which the 140,000 shares to be issued to ________ would be 9.9%.

n2 1,550,600 shares, less 274,908 Surrendered Shares, plus 156,000 shares to be issued to ________ = 1,431,692 shares outstanding, of which the 156,000 shares to be issued to ________ would be 10.9%.

n3 The attachment to your letter indicates that ________ owns 15.1496 percent of the Bank’s outstanding shares and ________ owns 12.2175 percent of the Bank’s outstanding shares. Based on your representation that the Bank has 1,550,600 shares outstanding, it appears that ________ holds approximately 234,900 of the Bank’s outstanding shares (.151496 x 1,550,600) and that ________ owns approximately 189,445 shares of the Bank’s outstanding stock (.122175 x 1,550,600).

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The circumstances suggest that ________ may not need approval under Financial Code Section 700, et seq., to make either of the proposed acquisitions. Financial Code Section 701(c) provides that no person shall acquire control of a bank without the approval of the Commissioner of Financial Institutions. For purposes of Section 701, “control” is defined in Financial Code Section 700(b) as follows:

“(b) ‘Control’ means possession, direct or indirect, of the power:

(1) To vote 25 percent or more of any class of the voting securities issued by a person; or

(2) To direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract (other than a commercial contract for goods or nonmanagement services), or otherwise; provided, however, that no individual shall be deemed to control a person solely on account of being a director, officer, or employee of such person.

For purposes of paragraph (2) of this subdivision, a person who, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10 percent or more of the then outstanding voting securities issued by another person is presumed to control such other person.

For purposes of this article, the commissioner may determine whether a person in fact controls another person.”

Under Section 700(b), a person who owns between 10 and 25 percent of the bank’s common stock is presumed to control the bank. However, the presumption is rebuttable. With respect to a person (the “first person”) who owns between 10 and 25 percent of the outstanding shares of a bank, we generally consider the presumption of control to be rebutted if a second person holds more shares of the bank than the first person and the second person actually exercises his or her power to control.

You have not addressed the issue of whether either ________ or ________ exercises his power to direct the management and policies of the Bank. However, if either does, we would ordinarily consider the presumption of control as to ________ to have been rebutted, if he acquired between 10 percent and 25 percent of the Bank’s outstanding shares and held fewer shares than ________ or ________. In that case, ________ would not require approval pursuant to Financial Code Section 701(c). In addition, no presumption of control would arise if ________ acquired fewer than 10 percent of the Bank’s outstanding shares.

However, Financial Code Section 700, et seq., aside, regulatory approval of the proposed transaction is required. As we advised you at our meeting with the Bank’s Board of Directors on May 4, 1998, the Bank must obtain a permit under Financial Code Section 690, et seq., before it offers or sells the Surrendered Shares. In our view, the proposed transactions constitute an offer and sale by the Bank of its shares. Under Financial Code Section 691, no bank may either offer or sell any security issued by it unless the Commissioner has issued a permit authorizing such sale. Accordingly, the Bank must obtain a permit under Financial Code Section 690, et seq., before it offers or sells the Surrendered Shares to ________ or anyone else.

If you have any questions concerning this matter, please feel free to contact me.

Very truly yours,

CONRAD W. HEWITT
Commissioner of Financial Institutions

By

THOMAS M. LOUGHRAN
Senior Counsel

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