BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WasHINGTON, DC 20551

April 2, 2013

Eloy U. Ortega

Chief Executive Officer
The Bank of Santa Barbara
12 East Figueroa Street
Santa Barbara, CA 93101

Dear Mr. Ortega:

This is in response to your letter dated October 11, 2012, on behalf of
The Bank of Santa Barbara (“Bank”) and the Hutton-Parker Foundation
(“Foundation”), both of Santa Barbara, California, requesting relief from a
passivity commitment that the Foundation made to the Board in connection with
the Foundation’s acquisition of approximately 16 percent of Bank’s outstanding
voting shares when Bank recapitalized in 2009.' The passivity commitment at
issue restricts the type and extent of financial relationships the Foundation may
have with Bank and its affiliates to $500,000 in deposit accounts, subject to certain
conditions.

You seek partial relief from the Foundation’s commitment limiting
financial transactions between the Foundation and Bank. Specifically, you seek an
exception from the commitment that would allow the Foundation to guarantee a
loan that Bank plans to make to the Ensemble Theatre Company of Santa Barbara.
You represent that the loan is on market terms, is non-exclusive, and was
negotiated on an arms’ length basis. You also state that the amount of the
guarantee would be de minimis, representing less than one percent of the Bank’s
total loan portfolio and less than one percent of the Foundation’s total assets.

' Due to events occurring subsequent to the capitalization, the Foundation’s interest in
Bank has increased to 17.21 percent.


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For purposes of the BHC Act, a company has control over another
company if the first company (i) directly or indirectly or acting through one or
more other persons owns, controls, or has power to vote 25 percent or more of any
class of voting securities of the other company; (ii) controls in any manner the
election of a majority of the directors of the other company; or (iii) directly or
indirectly exercises a controlling influence over the management or policies of the
other company.” The Board’s Regulation Y also sets forth a set of rebuttable
presumptions of control, none of which is implicated here.? The proposed
transaction raises the question of whether the Foundation could be considered to
exercise a controlling influence over Bank’s management or policies by virtue of
the requested relief.

On September 22, 2008, the Board issued its policy statement on
equity investments in banks and bank holding companies (“Policy Statement”),’ in
which the Board noted that not all business relationships — even when
accompanied by a material investment by a noncontrolling minority investor —
provide the investor a controlling influence over the management or policies of the
banking organization. Accordingly, the Board has allowed business relationships
that were quantitatively limited or qualitatively nonmaterial, particularly in
situations where an investor’s voting securities percentage in the banking
organization was closer to 10 percent than 25 percent.’ The Policy Statement notes
that the Board will review business relationships on a case-by-case basis within the
context of the other elements of the investment structure and, in that review, will
pay particular attention to the size of the proposed business relationships and to
whether the proposed business relationships would be on market terms, non-
exclusive, and terminable without penalty by the banking organization.°

The proposed transaction between Bank and Foundation is a one-time
set-price transaction, negotiated at arms’ length and on market terms, that would be
limited to a five-year period and would be de minimis when compared with Bank’s
total loan portfolio and Foundation’s total assets. Given the type and size of the
proposed transaction, it does not appear that either Foundation or Bank would

? 12 U.S.C. § 1841(a)(2); 12 CFR 225.2(e).
3 See 12 CFR 225.31(d).

* See Board press release dated September 22, 2008, at
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080922b1 pdf.

> 12 CFR 225.144(c)(4)(i).
6 Id.



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become economically dependent on, or subject to influence because of, this
transaction. No other facts or circumstances of the relationship with Foundation or
Bank would change. All other passivity commitments made by Foundation at the
time of its initial investment in Bank would remain in full force and effect,
including the commitment that Foundation would not attempt to exercise a
controlling influence over the management or policies of Bank.

Based on all the facts of record, the Director of the Division of
Banking Supervision and Regulation, acting pursuant to authority delegated by the
Board under section 265.7(a)(2) of the Board’s Rules Regarding Delegation of
Authority,’ and after consulting with the General Counsel, has determined that
granting the exception would not affect the determination that the Foundation does
not exercise a controlling influence over Bank. The Director has, therefore,
granted the requested exception to the commitments for the limited purpose of
permitting Foundation’s guarantee of the proposed loan to be made by Bank to
Theatre Company. The passivity commitments made by the Foundation remain in
force for all other purposes.

This determination is based on the facts and representations presented
in your October 11, 2012, letter and in subsequent communications with the Board.
Any material changes in those facts and representations could result in a different
conclusion and should be reported immediately to Board staff.

Very truly yours,

MV) rqardt ING rede
Margare> McCloskey Shanks
Deputy Secretary of the Board

cc: Mr. Ken Binning, Vice President
Federal Reserve Bank of San Francisco

712 CFR 265.7(a)(2).