November 4, 2005

Re: ________ Bank – Stock Split and Related Matters

Dear Mr. ________:

This responds to your letter dated October 24, 2005, in which you ask that the referenced stock-split application submitted by your firm on September 22, 2005, be approved. The application was approved on October 26, 2005, and an approval letter and permit has been mailed to your office to the attention of Mr. ________.

This letter addresses the more fundamental issues regarding stock splits raised by your letter. The standard the Commissioner is to follow in determining whether or not to grant an application for a permit to effect a stock split, as set forth in Financial Code Section 693, is as follows: If the Commissioner finds that the proposal is fair, just, and equitable, he is to issue a permit; if he finds otherwise, he is to deny the application for a permit. Our present administrative guideline is that the resulting share price from the stock split will not be regarded as unduly low so long as the book value and expected market value are not less than $5 per share.

The way we apply our current standard, when making the determination that the resulting per share value is not unduly low, is to first look to the book value per share, the market value per share over the prior year, and the current trading price. After adjusting those measures to reflect the proposed stock split, if each indicator of value is $5 or more, we will normally find the proposal to be fair, just and equitable. However, when the resulting book value or market value per share falls below $5, we will not approve the application.

In your letter, you question the “regulatory foundation” of the Department of Financial Institutions’ (“Department”) informal policy of requiring that all indicators of per share value equal or exceed $5. We have considered your arguments with respect to book value per share and we have modified our policy as follows. Rather than immediately disapprove an application when the resulting book value falls below $5, we have instituted a “greater scrutiny” standard. In such instances, in addition to our analysis of the current and historical trading values, we will consider the most recent CAMELS ratings of the institution, the length of time it will take, at the current earnings level, for the book value to rise to $5, and we will consider the ratio of book value to market value, and then compare that ratio to the ratios of similar sized institutions. If the trading price is considered adequate (in light of the CAMELS component and composite ratings) and the projected earnings performance will bring the book value to $5 per share within a reasonable period, then the proposal may be considered fair, just and equitable.

If you have any questions regarding this matter, please do not hesitate to call me.

Very truly yours,


Staff Counsel


October 24, 2005

Via Facsimile

Mr. Brian Yuen

Acting Commissioner/Division of Examinations

California Department of Financial Institutions

300 South Spring Street, Suite 15513

Los Angeles, CA 90013-1204

Re: ________ Stock Split Application

Dear Brian:

The following discussion relates to the application (Application) of ________ Bank (Bank) with the Department of Financial Institutions (DFI) for a stock permit which would enable the Bank to split its outstanding common stock on a two-for-one basis to shareholders of record on September 30, 2005 and distribute the split shares on October 31, 2005.


On September 15, 2005 the Board of Directors the Bank approved a two-for-one stock split of the Bank’s outstanding common stock. Prior to passing the resolution, the Bank consulted investment bankers to evaluate the market impact of such a stock split. The Board also considered the Bank’s capital position, its current regulatory standing, access to capital markets and possible impact on trading volumes. Following the adoption of a resolution approving the stock split, the Bank issued a press release dated September 15, announcing the stock split subject to regulatory approval (a copy of which is attached).

On September 22, 2005 this firm filed the Application seeking issuance of a stock permit pursuant to Section 691 of the California Financial Code (Code) to split the Bank’s shares in a two-for-one stock split. Attached is a copy of the application as filed. On October 20, 2005, in a conversation between DFI counsel Paul Creighton and ________ of this firm, we were informed of an informal “policy” of the DFI by which such applications are denied if the resultant per share book value of the applicant would be less than $5.00. While we were not told that the Application has been denied, we were asked to revise the proposed split so that the per share book value following the split would be consistent with the “policy.” The purpose of this letter is to request that the Application be approved even if the post-split per share is less than $5.00. We submit that there are no sound policy reasons to deny the application.

No Statutory or Regulatory Foundation for DFI “Policy”

Initially we wish to inform you that the foundations for the “policy” are neither statutorily based in the Code nor located in the California Code of Regulation. Moreover, in searching the DFI website, we were unable to locate any reference to the “policy.” In fact, despite our active representation of numerous state chartered banks over many years, the above referenced conversation between Mr. Creighton and _________ was the first knowledge that anyone in our firm had concerning the existence of the “policy” concerning post-split book value limitations. Nor were the Bank’s management or its outside auditors or investment bankers aware of the “policy.” We raise this particular issue since we believe that the appropriate location for “bright line” requirements in considering applications to the DFI is in either the Code or in written regulations of the DFI. To maintain secret “bright line” policies is contrary to good regulatory process and does not give the regulated entity fair understanding of its rights and responsibilities.

No Legitimate Policy Concerns Raised by the Application

On October 24, 2005, 1 contacted Ken Sayre-Peterson to determine the background and enforcement of the “policy” on post-split book value. He informed me that this has been an informal policy of the DFI for many years dating back to retired DFI General Counsel James Carrig. He also stated that the underlying premise of the “policy” is that the DFI wished to avoid having its regulated entities become “penny stocks” and that Mr. Carrig decided to adopt a policy which to some extent mirrored a similar policy of the California Department of Corporations. Mr. Sayre-Peterson confirmed that the “policy” has never formally been promulgated as a regulation nor has the DFI taken any steps to validate its premise. He also agreed that, since the “policy” is an informal one, it does not bind the Commissioner to adhere to it in every case and confirmed that an applicant can submit offsetting factors that could lead the DFI to issue the stock permit despite the “policy.”

The Bank’s Stock is not a Penny Stock

As demonstrated by Attachment A to the Application, the Bank’s stock is not and, following the split, will not be a “penny stock.” In fact, recently the Bank’s stock has traded as high as $30 and is currently trading in the mid-$20s. These trading multiples represent approximately 3 times book value and, based on trading multiples reported by Carpenter & Company, are in line with levels reported for peer community banks, which as of September 30 were averaging 2.66 times book value. Thus, it is unlikely that a stock market adjustment affecting bank stocks generally would disproportionately effect the Bank’s stock or cause it to become a “penny stock.” Assuming that the Bank’s post-split pricing multiples reflect the stock split, it can be assumed that the trading will settle at one-half of the current price, thus resulting in trading at $12.50 plus or minus per share. This is not a “penny stock” price.

No Safety and Soundness Consideration for the Application

The Bank is a “well capitalized,” “well managed” institution that has a current composite CAMELS rating of “1.” The Bank’s total capital ratio is 14.68% and its Tier 1 risk based capital ratio is 13.47%. There is nothing to suggest that the Bank’s performance will suffer if the Application is granted. Moreover, the Bank has consistently demonstrated that its access to capital in the market is exemplary. Acting under DFI stock permits since the initial offering of its stock, the Bank has had three follow-on offerings raising $8.25 million, $12.5 million and $20 million respectively. The purpose of the stock split is to provide more liquidity in the Bank’s stock and to promote active trading of its stock. This would not adversely affect the Bank or its regulatory standing. To the contrary, an active market in the Bank’s stock will positively influence the Bank’s overall performance in response to the expectations of its shareholders.

Negative Impact of Denial of Application

Although the Bank’s press release announcing the proposed stock split explicitly stated that the split was subject to regulatory approval, the Bank has significant concerns that, given the lapse of time since the announcement and the expected upcoming distribution date of October 31, the Bank’s shareholders will react very negatively to a subsequent announcement that the Application has been denied or modified. Such an announcement will send an unjustified message to the marketplace that there are regulatory misgivings with respect to the Bank which is simply not the case. Had the Bank been aware of the “policy” or had the DFI informed the Bank of its policy before a full month had lapsed from filing the Application, the Bank would have had time to address the issues by revising the level of the split to, say, a three-for-two split. However, now with only one week before the distribution is scheduled to take place, such mitigation is not realistically possible. In fact the practical limitations of calling a Board meeting, issuing a press release contradicting the prior release and working with the stock transfer agent to issue a revised level of stock is virtually impossible. The Bank submits that these factors should be considered by the DFI in making a decision to permit the proposed stock split even if the DFI believes that it should preserve its “policy.”


We submit that the Application should be approved as submitted and that the approval should be forthcoming on a timely basis allowing for distribution of the split shares on October 31. We believe that the “policy” is at best a guide for the DFI not an enforceable regulatory or legal requirement. We also believe that the reasons for the “policy” are not present in the Application and thus should not be applied to this case. The Bank assures the DFI that, had it been aware of the “policy,” it would have complied even if it disagreed with the “policy.” However, given the stealth nature of the “policy,” the Bank should not be penalized for its lack of knowledge or for its failure to comply with an unpublished, informal ” policy.” Please let me know if there are additional materials that we can provide to you. Thank you for your cooperation.

Sincerely yours,

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Last updated: Jun 27, 2019 @ 2:55 pm