<PAGE>
As filed with the Securities and Exchange Commission on November 27, 1996.
Registration No. 333-16951
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
PRE-EFFECTIVE AMENDMENT NO.1
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
BSM BANCORP
(Exact name of registrant as specified in charter)
<TABLE>
<CAPTION>
<S> <C> <C>
CALIFORNIA 6712 77-0442667
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
BANK OF SANTA MARIA
2739 SANTA MARIA WAY
SANTA MARIA, CALIFORNIA 93455
(805) 937-8551
(Address, including zip code, and telephone number,
including area code, or registrant's principal executive offices)
----------------------------------
Mr. William A. Hares
President and Chief Executive Officer
Bank of Santa Maria
2739 Santa Maria Way
Santa Maria, California 93455
(805) 937-8551
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
----------------------------------
With a copy to:
Loren P. Hansen, Esq.
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, California 92660
(714) 851-8070
----------------------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable following the effective date of this Registration Statement.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO OFFERING PRICE AGGREGATE AMOUNT OF
BE REGISTERED AMOUNT BEING REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE(1)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, no par value 2,973,339 shares (2) $15.50 $46,086,755 $13,964.29
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
- --------------------
(1) The proposed maximum offering price and proposed maximum aggregate
offering price reflect the market price and market value of the
common stock of the Bank to be converted and exchanged in
connection with the reorganization described in the Written Consent
Statement/Prospectus, calculated pursuant to Section 6(b) of the
Securities Act of 1933, as amended, and Rule 457(f)(2) under the
Securities Act of 1933, as amended, based on the average bid and
asked price of Bank Common Stock on November 22, 1996.
(2) Based on approximate number of shares to be issued in respect to
the same number of outstanding shares of common stock of Bank of
Santa Maria (the "Bank"). The proposed maximum offering price and
proposed maximum aggregate offering price are estimated solely in
order to determine the registration fee.
<PAGE>
BSM BANCORP
Cross Reference Sheet
Pursuant to Rule 501(b) of Regulation S-K
<TABLE>
<CAPTION>
INFORMATION STATEMENT/PROSPECTUS
ITEM AND CAPTION OF FORM S-4 CAPTION OF LOCATION
---------------------------- --------------------------------
<S> <C> <C>
A. INFORMATION ABOUT THE
TRANSACTION
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus............. Facing Page of Registration Statement; Cross
Reference Sheet; Outside Front Cover Page of
Written Consent Statement/Prospectus
2. Inside Front and Outside
Back Cover Page of
Prospectus........................... Inside Front Cover Page; Available Information;
Table of Contents
3. Risk Factors, Ratio of
Earnings to Fixed Charges
and Other Information................ SUMMARY OF WRITTEN CONSENT STATEMENT/ PROSPECTUS;
SOLICITATION OF WRITTEN CONSENTS; INFORMATION
REGARDING THE BUSINESS AND PROPERTIES OF THE HOLDING
COMPANY; BANK HOLDING COMPANY REORGANIZATION;
COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY
COMMON STOCK AND BANK COMMON STOCK
4. Terms of the Transaction............. SUMMARY OF WRITTEN CONSENT STATEMENT/PROSPECTUS;
COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY
COMMON STOCK AND BANK COMMON STOCK; SOLICITATION
OF WRITTEN CONSENTS
5. Pro Forma Financial
Information.......................... Not Applicable
6. Material Contacts with the
Company Being Acquired............... BANK HOLDING COMPANY REORGANIZATION
7. Additional Information
Required for Reoffering by
Persons and Parties Deemed
to be Underwriters................... Not Applicable
8. Interests of Named Experts
and Counsel.......................... EXPERTS; LEGAL MATTERS
9. Disclosure of Commission
Position on Indem-
nification for Securities
Act Liabilities...................... COMMISSION'S POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
B. INFORMATION ABOUT THE
REGISTRANT
10. Information with Respect
to S-3 Registrant Not Applicable
<PAGE>
11. Incorporation of Certain Information
by Reference......................... Not Applicable
12. Information with Respect to
S-2 or S-3 Registrant................ Not Applicable
13. Incorporation of Certain
Information by Reference............. Not Applicable
14. Information with Respect to
Registrants Other Than S-3
or S-2 Registrants................... INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE
HOLDING COMPANY; SUPERVISION AND REGULATION OF THE HOLDING
COMPANY AND THE BANK - Holding Company, Effect of
Governmental Policies and Recent Legislation; RESTRICTIONS
ON TRANSFERS OF FUNDS TO THE HOLDING COMPANY BY THE BANK;
MARKET PRICE OF AND DIVIDENDS ON HOLDING COMPANY COMMON STOCK
AND BANK COMMON STOCK
C. INFORMATION ABOUT THE
COMPANY BEING ACQUIRED
15. Information with Respect to
S-3 Companies........................ Not Applicable
16. Information with Respect to
S-2 or S-3 Companies................. Not Applicable
17. Information with Respect to
Companies Other Than S-2 or
S-3 Companies........................ MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE BANK; INFORMATION CONCERNING
THE BUSINESS AND PROPERTIES OF THE BANK; SUPERVISION AND
REGULATION OF THE HOLDING COMPANY AND THE BANK - The Bank; Effect
of Governmental Policies and Recent Legislation; RESTRICTIONS
ON TRANSFERS OF FUNDS TO THE HOLDING COMPANY BY THE BANK;
MARKET PRICE OF AND DIVIDENDS ON HOLDING COMPANY AND BANK
COMMON STOCK; INDEX TO FINANCIAL STATEMENTS
18. Information if Proxies,
Consents or Authorizations
are to be Solicited.................. Written Consent Statement/Prospectus Cover Page; SUMMARY OF
WRITTEN CONSENT STATEMENT/PROSPECTUS; BANK HOLDING COMPANY
REORGANIZATION - Organizational Transactions; SOLICITATION OF
WRITTEN CONSENTS - Record Date and Persons Entitled to Give
Written Consent; Written Consent and Revocability of Written
Consents; Security Ownership of Certain Beneficial Owners and
Management; BANK HOLDING COMPANY REORGANIZATION - Terms of the
Merger Agreement; Dissenting Shareholders' Rights;
INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE
HOLDING COMPANY - Management; Employees
<PAGE>
19. Information if Proxies,
Consents or Authorizations
are not to be Solicited or
in an Exchange Offering.............. Not Applicable
20. Indemnification of
Directors and Officers............... Part II
21. Exhibits and Financial
Statement Schedules.................. Part II
22. Undertakings......................... Part II
</TABLE>
<PAGE>
DRAFT TRANSMITTAL LETTER
WRITTEN CONSENT STATEMENT FOR APPROVAL OF
PLAN OF REORGANIZATION AND MERGER AGREEMENT
IN CONNECTION WITH THE FORMATION OF HOLDING COMPANY
AND APPROVAL OF BSM BANCORP 1996 STOCK OPTION PLAN
February 1, 1997
Dear Shareholder:
The enclosed Written Consent Statement/Prospectus is provided by the Board of
Directors of Bank of Santa Maria in connection with the solicitation of
consent of our shareholders for approval of the formation of a bank holding
company for Bank of Santa Maria. Upon approval of the Plan of Reorganization
and Merger Agreement, Bank of Santa Maria will become a subsidiary of the
newly formed holding company, BSM Bancorp. Written consents for approval of
this action are being solicited from all shareholders of the Bank.
Banking has changed dramatically over the past 18 years since we first
started Bank of Santa Maria. In order to take full advantage of the changes
in the banking environment the Bank must continue to evolve and grow. We
believe establishing a holding company will give us a broader range of
options with respect to access to additional capital, possibilities for
expansion of the branch system and expanded abilities in the financial
services area, as well as other business activities. For these reasons, the
Board of Directors has unanimously approved the proposal to form a bank
holding company and recommends that you vote in favor of this proposal.
The enclosed Written Consent Statement/Prospectus is also provided by the
Board of Directors in connection with the solicitation of consent of our
shareholders as prospective shareholders of the holding company, for approval
of the BSM Bancorp 1996 Stock Option Plan (the "1996 Plan"). Written
consents for approval of this action are also being solicited from all
shareholders of the Bank as prospective shareholders of the holding company.
We are asking all of the Bank's shareholders to consider and vote upon
approval of the Plan of Reorganization and Merger Agreement ("Merger
Agreement") entered into as of November 20, 1996, by the Bank of Santa Maria,
BSM Bancorp and BSM Merger Company, a California corporation. This Merger
Agreement provides for the merger of BSM Merger Company with and into the
Bank, as a result of which the bank surviving the merger, Bank of Santa
Maria, will be the wholly-owned subsidiary of BSM Bancorp. We are also
asking that all of the Bank's shareholders, as prospective shareholders of
the holding company, to consider and vote upon approval of the 1996 Plan.
<PAGE>
February 1, 1997
Page 2
BSM Bancorp is a newly-formed California corporation, organized at the
direction of the Bank's Board of Directors for the purpose of becoming a bank
holding company. In accordance with the Merger Agreement, as more fully
described in the attached Written Consent Statement/Prospectus, BSM Bancorp
will acquire all of the outstanding shares of the Bank by issuing, subject to
certain limitations, common stock in BSM Bancorp to each of the Bank's
shareholders, in exchange for all of the outstanding shares of Bank of Santa
Maria's common stock. After this exchange you will have the same number of
shares in BSM Bancorp as you have in the Bank.
It is important to note that your stock in the Bancorp will have a value
equal to the value of your stock in the Bank and therefore the exchange will
take place without any recognition of gain or loss for federal income tax
purposes. It is equally important to inform you that no changes in the Bank's
directors, officers, or other personnel are contemplated as a result of the
formation of the bank holding company. Additionally, after formation of the
bank holding company, the Bank of Santa Maria will continue its present
business and operations under the name of Bank of Santa Maria.
The new 1996 Plan is intended to replace the Bank's 1988 Stock Option Plan.
The 1996 Plan would reserve 892,001 shares or 30% of the issued and
outstanding Common Stock of BSM Bancorp. In addition, the 1996 Plan would
allow for the granting of options to directors, officers, employees, as well
as consultants, advisors and others having a business relationship with BSM
Bancorp and Bank of Santa Maria by attracting and retaining competent
managerial personnel, added incentive for high levels of performance and for
unusual efforts to increase the earnings of BSM Bancorp and Bank of Santa
Maria. The terms and conditions of the 1996 Plan are described in the
Written Consent Statement/Prospectus.
Section 902 and 903 of the California Corporations Code require the approval
of the Plan of Reorganization and Merger Agreement by a majority of the
outstanding shares of common stock of the Bank. Section 603 of the
Corporations Code and Section 2.8 of Article II of the Bylaws of the Bank
authorize the Bank to obtain the necessary shareholder approvals by written
consent without a meeting. Pursuant to SEC rules because certain documents
are incorporated by reference, the Bank will be able to effect the proposed
Merger Agreement after 20 business days have elapsed from the date the
Written Consent Statements are sent to shareholders, following all necessary
regulatory agency approvals.
You are urged to read the attached documents carefully as they contain the
terms of the merger, facts concerning the business, results of operations,
financial condition and properties of both BSM Bancorp and Bank of Santa
Maria. It is very important that your shares be represented because the
affirmative vote of a majority of the outstanding shares of Bank of Santa
Maria is required to approve the Merger Agreement and the 1996 Plan. It is
therefore essential that all shareholders vote.
<PAGE>
February 1, 1997
Page 3
You are urged to fill in, date, sign and mail the enclosed Written Consent
form in the enclosed self-addressed postage prepaid envelope.
It is expected that the enclosed Written Consent Statement/Prospectus and
accompanying Consent form will be mailed or delivered to shareholders of the
Bank on or after February 1, 1997. We hope that the Written Consent
Statement/Prospectus will answer any questions you may have concerning the
proposed formation of the bank holding company. If you have any questions,
concerning this Written Consent Statement/Prospectus or the accompanying
proxy, or if you need any help voting your shares, please telephone Mr. F.
Dean Fletcher of Bank of Santa Maria at (805) 937-8551.
Your interest and participation are appreciated.
Sincerely,
William A. Hares A.J. Diani
President and Chief Executive Officer Chairman of the Board
Directors:
_____________________________ _____________________________
Armand R. Acosta Toshiharu Nishino
_____________________________ _____________________________
Richard E. Adam Joseph Sesto, Jr.
_____________________________ _____________________________
Fred L. Crandall, Jr. William L. Snelling
_____________________________ _____________________________
Roger A. Ikola Mitsuo Taniguchi
_____________________________
Joseph F. Ziemba
<PAGE>
SOLICITATION OF WRITTEN CONSENTS TO APPROVE
THE PLAN OF REORGANIZATION AND MERGER AGREEMENT
PROVIDING FOR THE FORMATION OF A BANK HOLDING COMPANY,
AND TO APPROVE THE 1996 STOCK OPTION PLAN
OF THE PROPOSED BANK HOLDING COMPANY
PROSPECTUS
OF
BSM BANCORP
-----------
WRITTEN CONSENT STATEMENT
OF
BANK OF SANTA MARIA
-----------
2,973,339 SHARES OF BSM BANCORP COMMON STOCK
This Written Consent Statement/Prospectus is being furnished to the
shareholders of Bank of Santa Maria (the "Bank") in connection with the
solicitation of Written Consents by the Board of Directors of the Bank for
the approval of the Plan of Reorganization and Merger Agreement (the "Merger
Agreement") in connection with the acquisition of the Bank by BSM Bancorp
(the "Holding Company") in which the Bank shall become a wholly-owned
subsidiary of the Holding Company. In addition, this Written Consent
Statement/Prospectus is being furnished to Bank Shareholders to consider and
vote upon, as prospective shareholders of the Holding Company, the Holding
Company's 1996 Stock Option Plan (the "1996 Plan") that would reserve 192,001
shares of the unissued Common Stock of the Holding Company as described in
this Written Consent Statement/Prospectus that was approved by the Holding
Company's Board of Directors, subject to the approval of the California
Commissioner of Corporations and the holders of a majority of the issued and
outstanding shares of the Bank as prospective shareholders of the Holding
Company. This Registration Statement is not registering any shares reserved
for issuance under the 1996 Plan.
The Holding Company, a California corporation, has filed this Prospectus
of BSM Bancorp and Written Consent Statement of Bank of Santa Maria
(collectively the "Written Consent Statement/Prospectus") with the Securities
and Exchange Commission (the "Commission") as part of a Registration
Statement on Form S-4 (the "Registration Statement"), pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), for the purpose of
registering thereunder up to 2,973,339 shares of the Holding Company's common
stock, no par value ("Holding Company Common Stock"), in connection with the
acquisition of the Bank, a California state-chartered banking corporation, by
the Holding Company through a merger (the "Merger") of BSM Merger Company (the
"Merger Corp."), a wholly-owned subsidiary of the Holding Company, with and
into the Bank, as a result of which the Bank surviving the Merger, Bank of
Santa Maria (the "Surviving Bank"), shall become the wholly-owned subsidiary
of the Holding Company and the Bank's shareholders will receive for their
Bank Common Stock, no par value ("Bank Common Stock"), an equal number of
shares of Holding Company Common Stock (the "Reorganization").
This Written Consent Statement/Prospectus also serves as the Prospectus of
the Holding Company under the Securities Act with respect to the issuance of up
to 2,973,339 shares of Holding Company Common Stock pursuant to the Merger
Agreement more fully described herein whereby the Surviving Bank will become a
wholly-owned subsidiary of the Holding Company.
As a result of the Merger, the Holding Company will, (subject to certain
limitations described elsewhere in this Written Consent Statement/Prospectus and
in the Merger Agreement), issue Holding Company Common Stock to each of the Bank
Shareholders in exchange for all of the outstanding
1
<PAGE>
shares of Bank Common Stock. See "BANK HOLDING COMPANY REORGANIZATION," and the
text of the Merger Agreement which is attached hereto as Annex I to this Written
Consent Statement/Prospectus and is hereby incorporated by reference and made a
part hereof.
The consummation of the proposed Reorganization is subject to the receipt
of the requisite approvals of applicable regulatory agencies and the
shareholders of both the Holding Company and the Bank as well as the fulfillment
of certain other conditions, as more fully described in this Written Consent
Statement/Prospectus. See "BANK HOLDING COMPANY REORGANIZATION - Terms of the
Merger Agreement; Conditions to the Merger, Termination of Merger Agreement; -
Regulatory Approvals," herein. The 1996 Plan is subject to the receipt of the
requisite approvals of applicable regulatory agencies and the shareholders of
the Bank as prospective shareholders of the Holding Company. See "APPROVAL OF
THE BSM BANCORP 1996 STOCK OPTION PLAN."
This Written Consent Statement/Prospectus is being first mailed or
delivered to shareholders of the Bank on or about ____________________, 1997.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS WRITTEN CONSENT STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS WRITTEN CONSENT STATEMENT/PROSPECTUS IS _________________, 1997
2
<PAGE>
AVAILABLE INFORMATION
No person has been authorized to give any information or to make any
representation not contained in or incorporated by reference in this Written
Consent Statement/Prospectus, and, if given or made, such information or
representation not contained herein must not be relied upon as having been
authorized by the Holding Company or the Bank. This Written Consent
Statement/Prospectus does not constitute an offer to sell, or the solicitation
of an offer to purchase, any of the securities offered by this Written Consent
Statement/Prospectus, or the solicitation of Written Consents, in any
jurisdiction to or from any person to or from whom it is unlawful to make such
offer or solicitation of an offer, or consent solicitation in such jurisdiction.
Neither the delivery of this Written Consent Statement/Prospectus nor the
issuance or sale of any securities hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Holding Company or the Bank since the date hereof or that the information herein
is correct as of any time subsequent to the date hereof.
The Holding Company is a newly formed corporation organized at the
direction of the Bank's Board of Directors for the purpose of acquiring
voting control of the Bank and thereby becoming a bank holding company. For
further information with respect to the Reorganization, reference is made to
the Merger Agreement which is incorporated by reference herewith is attached
as Annex I, as a newly formed corporation, the Holding Company has not been
subject to the requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and there is currently no public market for its
common stock. However upon consummation the Reorganization, the Holding
Company will become subject to the information, reporting and proxy
solicitation requirements pursuant to Section 15(d) of the Exchange Act and
filings thereby required to be made with the Commission will be available for
inspection and copying at the offices of the Commission set forth below. The
Holding Company will most likely become subject to the information, reporting
and proxy solicitation requirements of Section 13(a) of the Exchange Act
pursuant to Section 12(g) of the Exchange Act, and the Company will most
likely file a registration statement under the Exchange Act in 1998.
The Bank is subject to the information, reporting and proxy solicitation
requirements of the Exchange Act, and in accordance therewith files reports and
other information with the Federal Deposit Insurance Corporation (the "FDIC").
Such reports and other information can be inspected and copied at the public
reference facilities for the Registrations and Disclosure Division maintained by
the FDIC at 550 17th Street, Room F-643, Washington, D.C. 20429, telephone
number (202) 393-8400, and by contacting Mr. F. Dean Fletcher, Executive Vice
President of the Bank, at Bank of Santa Maria, 2739 Santa Maria Way, Santa
Maria, California 93455, telephone number (805) 937-8551.
This Written Consent Statement/Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to the Holding Company and the securities offered hereby, reference
is made to the Registration Statement, including the exhibits filed therewith.
Statements contained herein concerning the provisions of documents filed with
the Registration Statement as exhibits are necessarily summaries of such
documents and such statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission. Copies of the
Registration Statement, including exhibits, may be obtained from the Commission
upon payment of a prescribed fee, or may be examined without charge at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the following regional offices
of the Commission: 75 Park Place, Room 1228, New York, New York 10007 and Room
3190, Kluczynski, Federal Building, 230 South, Dearborn Street, Chicago,
Illinois 60604.
The SEC also maintains a Web Site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at HTTP://www.sec.gov.
3
<PAGE>
TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION.........................................................3
SUMMARY OF WRITTEN CONSENT STATEMENT/PROSPECTUS...............................7
BANK HOLDING COMPANY REORGANIZATION.......................................7
PARTIES TO THE MERGER AGREEMENT......................................7
RIGHTS OF DISSENTING SHAREHOLDERS....................................8
RECORD DATE..........................................................8
CONSENT REQUIRED.....................................................8
THE REORGANIZATION...................................................8
REASONS FOR THE REORGANIZATION.......................................9
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY...................9
INTERESTS OF CERTAIN PERSONS IN THE MERGER..........................9
CONDITIONS TO THE REORGANIZATION AND REGULATORY APPROVALS...........10
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.............................11
WRITTEN CONSENTS....................................................11
RECOMMENDATIONS.....................................................11
BSM BANCORP 1996 STOCK OPTION PLAN.......................................11
SUMMARY OF THE 1996 PLAN............................................11
CONSENT REQUIRED....................................................12
SELECTED FINANCIAL DATA......................................................13
SOLICITATION OF WRITTEN CONSENTS.............................................16
WRITTEN CONSENT AND REVOCABILITY OF WRITTEN CONSENTS.....................16
RECORD DATE AND PERSONS ENTITLED TO GIVE WRITTEN CONSENTS................16
COST OF SOLICITATIONS OF WRITTEN CONSENTS................................17
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........17
BANK HOLDING COMPANY REORGANIZATION..........................................19
GENERAL..................................................................19
REASONS FOR REORGANIZATION...............................................19
ORGANIZATIONAL TRANSACTIONS..............................................20
TERMS OF THE MERGER AGREEMENT............................................21
CONVERSION..........................................................21
EFFECTIVE TIME OF THE MERGER........................................21
INTERESTS OF CERTAIN PERSONS IN THE MERGER..........................21
EMPLOYEE BENEFITS...................................................22
CONDITIONS TO THE MERGER............................................22
TERMINATION OF MERGER AGREEMENT.....................................22
EXCHANGE OF SHARE CERTIFICATES...........................................23
COSTS OF REORGANIZATION..................................................23
REGULATORY APPROVALS.....................................................23
DISSENTING SHAREHOLDERS' RIGHTS..........................................24
ACCOUNTING TREATMENT.....................................................24
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................24
RESTRICTIONS ON AFFILIATES...............................................25
RECOMMENDATIONS..........................................................26
CAPITALIZATION...........................................................26
4
<PAGE>
COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK
AND BANK COMMON STOCK.......................................................27
BANK COMMON STOCK........................................................27
HOLDING COMPANY COMMON STOCK.............................................27
COMPARISON OF BANK COMMON STOCK AND HOLDING COMPANY COMMON STOCK.........29
ASSESSABILITY.......................................................29
CLASSIFICATION OF BOARD OF DIRECTORS.....................................30
VOTING RIGHTS............................................................30
NUMBER OF DIRECTORS......................................................30
DIVIDEND RESTRICTIONS...............................................31
DISSENTERS' RIGHTS..................................................31
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY...........................32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE BANK...........................................37
INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE HOLDING
COMPANY.....................................................................46
ORGANIZATION.............................................................46
BUSINESS.................................................................46
MANAGEMENT...............................................................47
EMPLOYEES................................................................47
PROPERTIES...............................................................47
LEGAL PROCEEDINGS........................................................47
INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE BANK...............47
GENERAL..................................................................47
ACQUISITION OF TEMPLETON NATIONAL BANK...................................47
ACQUISITION OF CITIZENS BANK OF PASO ROBLES, N.A.........................47
ACQUISITION OF EL CAMINO NATIONAL BANK...................................47
SERVICES.................................................................48
EMPLOYEES................................................................49
PROPERTIES...............................................................49
LEGAL PROCEEDINGS........................................................50
SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK...............50
THE HOLDING COMPANY......................................................50
THE BANK.................................................................51
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION...................53
OTHER ITEMS.........................................................57
CAPITAL ADEQUACY GUIDELINES.........................................58
SAFETY AND SOUNDNESS STANDARDS......................................59
PREMIUMS FOR DEPOSIT INSURANCE......................................59
INTERSTATE BANKING AND BRANCHING....................................60
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS............61
CHANGES IN ACCOUNTING PRINCIPLES....................................62
OTHER REGULATIONS AND POLICIES......................................64
RESTRICTIONS ON TRANSFERS OF FUNDS TO THE HOLDING COMPANY BY THE BANK........65
5
<PAGE>
MARKET PRICE OF AND DIVIDENDS ON HOLDING COMPANY COMMON STOCK
AND BANK COMMON STOCK.......................................................66
MARKET INFORMATION.......................................................66
SHAREHOLDERS.............................................................67
DIVIDENDS................................................................67
DIRECTORS AND EXECUTIVE OFFICERS OF THE HOLDING COMPANY AND THE BANK.........69
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS REGARDING
BANK OF SANTA MARIA......................................................75
APPROVAL OF BSM BANCORP 1996 STOCK OPTION PLAN...............................76
INTRODUCTION.............................................................76
SUMMARY OF PLAN..........................................................76
COMPARISON TO THE BANK OF SANTA MARIA 1988 STOCK OPTION PLAN.............78
FEDERAL INCOME TAX CONSEQUENCES..........................................78
COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES......79
EXPERTS......................................................................80
LEGAL MATTERS................................................................80
ANNUAL REPORT................................................................80
INDEX TO FINANCIAL STATEMENTS................................................
6
<PAGE>
SUMMARY OF WRITTEN CONSENT STATEMENT/PROSPECTUS
The following is a summary of certain information contained elsewhere in
this Written Consent Statement/Prospectus, and is intended to assist
shareholders in their review of this Written Consent Statement/Prospectus. This
summary does not purport to be complete and is qualified in its entirety by
reference to the full text of the more detailed Written Consent
Statement/Prospectus, the annexes and the exhibits thereto, and the documents
referred to herein and therein. Each Bank shareholder is urged to read this
Written Consent Statement/Prospectus and the annexes hereto in their entirety
and with care.
BANK HOLDING COMPANY REORGANIZATION
PARTIES TO THE MERGER AGREEMENT. . . The Holding Company is a California
corporation, and, subject to the
consummation of the Reorganization,
including the approval of the Holding
Company's Application to the Board of
Governors of the Federal Reserve
System, will acquire 100% of the
outstanding shares of the Bank, and
will be registered as a bank holding
company under the Bank Holding
Company Act of 1956, as amended. The
principal executive office of the
Holding Company is located at 2739
Santa Maria Way, Santa Maria,
California 93455, telephone number
(805) 937-8551. Upon consummation of
the Reorganization, the Holding
Company's business will be to act as
a bank holding company for Bank of
Santa Maria, the bank surviving the
Merger. See "BANK HOLDING COMPANY
REORGANIZATION" and "INFORMATION
CONCERNING THE BUSINESS AND
PROPERTIES OF THE HOLDING COMPANY",
herein.
The Bank is a California
state-chartered bank. The principal
executive office of the Bank is
located at 2739 Santa Maria Way,
Santa Maria, California 93455,
telephone number (805) 937-8551. The
Bank's principal business is that of
an independent commercial bank. The
Bank provides a wide range of banking
services to primarily small and
medium sized businesses and
individuals in Santa Barbara County
and in the California Central Coast
area. See "BANK HOLDING COMPANY
REORGANIZATION" and "INFORMATION
CONCERNING THE BUSINESS AND
PROPERTIES OF THE BANK."
The Merger Corp. is a California
corporation organized by the
Directors of the Bank as a
wholly-owned subsidiary of the
Holding Company. The
7
<PAGE>
Merger Corp.'s principal purpose is
to merge with the Bank in order to
facilitate the Holding Company's
acquisition of the Bank. See "BANK
HOLDING COMPANY REORGANIZATION -
ORGANIZATIONAL TRANSACTIONS."
RIGHTS OF DISSENTING SHAREHOLDERS . . Bank shareholders do not have
dissenters' rights with respect to
the Merger.
RECORD DATE . . . . . . . . . . . . . January 29, 1997 (the "Record
Date").
CONSENT REQUIRED. . . . . . . . . . . The affirmative consent of the
holders of a majority of the issued
and outstanding shares of Bank Common
Stock entitled to vote (the "Required
Vote") is required to approve the
Reorganization Proposal. A copy of
the Merger Agreement is attached to
this Written Consent
Statement/Prospectus as Annex I. See
"SOLICITATION OF WRITTEN CONSENTS -
WRITTEN CONSENT AND REVOCABILITY OF
WRITTEN CONSENTS."
The affirmative vote of a majority of
the outstanding shares of the Merger
Corp. and the and the Holding Company
entitled to vote are also required
for approval of the Reorganization
Proposal. See "BANK HOLDING COMPANY
REORGANIZATION - TERMS OF THE MERGER
AGREEMENT; CONDITIONS TO THE MERGER."
THE REORGANIZATION. . . . . . . . . . The Merger Agreement provides for the
acquisition of the Bank by the
Holding Company by means of the
Merger. Upon consummation of the
Merger, the Merger Corp. will be
merged with and into the Bank under
the charter of the Bank and the
separate corporate existence of the
Merger Corp. will cease. As a result
of the Merger, the surviving entity
will continue to be known as "Bank of
Santa Maria" and will continue the
Bank's current business and
operations as a California
state-chartered bank in essentially
the same manner as it was conducted
prior to the Reorganization. Each
share of Bank Common Stock
outstanding immediately prior to the
Merger will, on and after the
consummation of the Merger,
automatically represent one share of
Holding Company Common Stock. Upon
consummation of the Merger, all of
the Surviving Bank's common stock
will be owned by the Holding Company.
See "BANK HOLDING COMPANY
REORGANIZATION -
8
<PAGE>
GENERAL; TERMS OF THE MERGER
AGREEMENT; CONVERSION."
REASONS FOR THE REORGANIZATION. . . . In the opinion of the Bank's Board of
Directors, the bank holding company
structure will permit greater
flexibility in responding to evolving
changes in the banking and financial
services industries and meeting the
competition of other financial
institutions. The Board of Directors
of the Bank believes that the
Reorganization will provide Bank
Shareholders with the opportunity to
own a business entity which will
provide greater operating and
financial flexibility and will permit
expansion into a broader range of
financial services and other business
activities. The Holding Company
anticipates that during the initial
months following the consummation of
the Reorganization, its principal
business and activity will be to
serve as the bank holding company for
the Surviving Bank. See "BANK
HOLDING COMPANY REORGANIZATION -
REASONS FOR REORGANIZATION."
RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY. . . . . . . . . . . The Holding Company's Articles of
Incorporation and Bylaws contain
certain provisions not contained in
the Articles of Incorporation or
Bylaws of the Bank relating to the
Board of Directors and certain
business combinations, all of which
may be deemed to have "anti-takeover"
effects. If and when the Holding
Company becomes a "listed
corporation" (i.e., outstanding
shares listed on an exchange or
NASDAQ) and has at least 800
holders of its equity securities,
(i) the Board of Directors will be
divided into 3 classes, and the
members of each class shall be
elected for a term of three (3)
years, (ii) the affirmative vote
of at least 66 2/3% of the Holding
Company's outstanding shares will
be required to approve certain
"Business Combinations" involving
a "Related Person," (iii) the
affirmative vote of at least
66 2/3 of the Holding Company's
outstanding shares will be
required to approve or amend
certain provisions of the Articles
of Incorporation, including
provisions limiting voting rights,
approval relating to certain
business combinations, number and
classification of lenders and
other items.
INTERESTS OF CERTAIN PERSONS IN
THE MERGER . . . . . . . . . . . . . The Reorganization will not have any
substantive effect on the operation
or management of the Surviving Bank
which will continue to have the same
directors, officers, management
personnel, assets and operating
policies as the Bank had prior to the
Reorganization. Upon consummation of
the Reorganization, the Holding
Company will have the same directors
and executive officers as the Holding
Company had prior to consummation of
the Reorganization. See "BANK HOLDING
COMPANY REORGANIZATION - TERMS OF THE
MERGER AGREEMENT - INTERESTS OF
CERTAIN PERSONS IN THE MERGER", and
"INFORMATION CONCERNING THE BUSINESS
AND PROPERTIES OF THE HOLDING COMPANY
- MANAGEMENT."
As of the Record Date, the Bank's
directors, executive officers and
their affiliates beneficially owned,
in the aggregate, approximately 24.8%
of the Bank's outstanding shares
entitled to vote for the approval of
the Merger Agreement. The Holding
Company has one shareholder, also a
director and executive officer of the
Bank, who beneficially owns 100% of
the Holding Company's common stock,
who intends to vote such shares in
favor of approval of the Merger
Agreement. Following consummation of
the Reorganization,
9
<PAGE>
the Holding Company will repurchase
such shares of the Holding Company
Common Stock. See "SOLICITATION OF
WRITTEN CONSENTS - SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT"; and "BANK HOLDING
COMPANY REORGANIZATION -
ORGANIZATIONAL TRANSACTIONS." The
affirmative consent of a majority of
the outstanding shares of Bank Common
Stock and Holding Company Common
Stock, respectively, are required to
approve the Merger Agreement. See
"SOLICITATION OF WRITTEN CONSENTS";
and "BANK HOLDING COMPANY
REORGANIZATION - TERMS OF THE MERGER
AGREEMENT; CONDITIONS TO THE MERGER",
herein.
CONDITIONS TO THE REORGANIZATION
AND REGULATORY APPROVALS . . . . . . In addition to approval of the Merger
Agreement by the Board of Directors
and the shareholders of the Bank, the
Merger Corp. and the Holding Company,
consummation of the Reorganization
will require the prior approval, on
terms satisfactory to the Bank, the
Merger Corp. and the Holding Company,
of certain regulatory agencies,
including the Board of Governors of
the Federal Reserve System ("Federal
Reserve Board"), the Federal Deposit
Insurance Corporation ("FDIC"), and
the California Superintendent of
Banks (the "Superintendent").
Management of the Bank is not aware
of any circumstances which would lead
it to believe that such agencies will
not approve the Merger and the
Reorganization. Even if such
approvals are obtained, the Board of
Directors of the Bank, the Holding
Company or the Merger Corp. may,
under certain circumstances,
terminate the Merger Agreement. See
"BANK HOLDING COMPANY REORGANIZATION
- REGULATORY APPROVALS."
An application for prior approval of
the Holding Company to acquire the
Bank was filed by the Holding Company
with the Federal Reserve Board on
December 18, 1996. An application
(the "Merger Application") for prior
approval of the Merger was filed with
the FDIC on December 2, 1996. An
application (the "State Application")
for an acquisition of control was
filed with the Superintendent on
December 2, 1996, and the State
Application was approved by the
Superintendent on December 20, 1996.
10
<PAGE>
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES . . . . . . . . . . . . The Reorganization is conditioned
upon receipt of a ruling from the
Internal Revenue Service or an
opinion to the effect, among other
things, that no gain or loss will be
recognized by Bank Shareholders upon
the exchange of their common stock
solely for Holding Company Common
Stock. The Bank, the Holding Company
or the Merger Corp. may terminate the
Merger Agreement in the event a
favorable ruling from the Internal
Revenue Service is not received or a
favorable opinion of counsel with
respect to the tax effect of the
reorganization is not received. See
"BANK HOLDING COMPANY REORGANIZATION
- CERTAIN FEDERAL INCOME TAX
CONSEQUENCES."
WRITTEN CONSENTS. . . . . . . . . . . The enclosed Written Consent is being
solicited by the Board of Directors
of the Bank. Each share of the Bank
Common Stock represented by a
properly executed Written Consent
will, unless such Written Consent has
been previously revoked, be voted in
accordance with the instructions
indicated on such Written Consent.
Any Written Consent may be revoked at
any time prior to the receipt of
sufficient written consents to
approve the Reorganization and not
before 20 business days after the
Written Consent Statement/Prospectus
is sent to the Bank's shareholders.
See "SOLICITATION OF WRITTEN
CONSENTS."
RECOMMENDATIONS . . . . . . . . . . . On November 12, 1996, the Board of
Directors of the Bank approved the
Merger Agreement and the
Reorganization and determined that
the transactions contemplated by the
Merger Agreement were in the best
interests of the Bank and its
shareholders and recommended that
such shareholders approve the Merger
Agreement. See "BANK HOLDING COMPANY
REORGANIZATION - RECOMMENDATIONS."
BSM BANCORP 1996 STOCK OPTION PLAN
SUMMARY OF THE 1996 PLAN . . . . . . The 1996 Plan proposes to reserve
892,001 shares of Common Stock of the
Holding Company for issuance pursuant
to the exercise of options. The 1996
Plan is designed to replace the
Bank's 1988 Stock Option Plan, which
will expire in 1998, with certain
changes, including (i) an increase
in the number of shares subject to
the 1996 Plan, (ii) the exercise of
options with not only cash but also
a promissory note or by applying the
appreciated value of the shares
being surrendered to payment of the
exercise price, (iii) the granting
of options to business associates
in addition to directors, officers
and employees, (iv) a minimum
vesting at least 20% per year, and
(v) the ability to exercise vested
options under certain conditions,
if terminated for cause as more
fully described in this Written
Consent Statement/Prospectus. See
"APPROVAL OF BSM BANCORP 1996 STOCK
OPTION PLAN."
11
<PAGE>
CONSENT REQUIRED. . . . . . . . . . . The affirmative consent of a majority
of the outstanding shares of the Bank,
as prospective shareholders of the
Holding Company entitled to vote are
also required for approval of the BSM
Bancorp 1996 Stock Option Plan. See
"APPROVAL OF BSM BANCORP 1996 STOCK
OPTION PLAN."
12
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected financial data for the Bank as of and
for each of the five years in the period ended December 31, 1995 and as of and
for the nine months ended September 30, 1996 and 1995. The data as of and for
each of the five years in the period ended December 31, 1995 is derived from
audited financial statements of the Bank and the notes thereto. The data at
September 30, 1996 and for the nine months ended September 30, 1995 and 1996 is
derived from the unaudited financial statements of the Bank. In the opinion of
management, such unaudited financial statements have been prepared on the same
basis as the audited financial statements, and include all adjustments, which
consist solely of normal recurring accruals, necessary for a fair statement of
the results for the unaudited interim periods. Results for the nine months
ended September 30, 1996 should not be considered necessarily indicative of the
results to be expected for the full year. The information below is qualified in
its entirety by the detailed information and financial statements included
elsewhere herein, and should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS",
"SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK", and the
financial statements of the Bank and notes thereto included elsewhere in this
Written Consent Statement/Prospectus.
13
<PAGE>
SELECTED FINANCIAL DATA OF BANK OF SANTA MARIA
<TABLE>
<CAPTION>
At, or for the
Nine Months
ended As of and for the Years Ended December 31,
-----------------------------------------------------------------------------------
(In Thousands, unless noted otherwise) 9/30/96 9/30/95 1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY STATEMENT OF INCOME DATA
Interest income $ 15,885 $ 15,293 $ 20,429 $ 17,606 $ 16,690 $ 18,510 $ 19,410
Interest expense 5,313 4,513 6,181 4,816 4,875 6,590 8,881
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest before loan loss provision 10,572 10,780 14,248 12,790 11,815 11,920 10,529
Provision for loan losses 0 315 700 250 602 1,089 542
Non-interest income 2,232 1,978 2,592 2,358 2,460 2,308 1,966
Non-interest expense 8,329 8,398 11,112 10,808 10,307 9,879 9,139
----------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings before income taxes 4,475 4,044 5,028 4,090 3,366 3,260 2,814
Provision for income taxes 1,721 1,553 1,879 1,529 1,246 1,247 944
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 2,754 $ 2,492 $ 3,149 $ 2,561 $ 2,120 $ 2,013 $ 1,870
----------- ---------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ---------- ----------
SUMMARY BALANCE SHEET DATA
Net loans $ 161,896 $ 148,212 $ 148,692 $ 146,534 $ 145,767 $ 155,118 $ 150,930
Allowance for loan losses 2,580 2,208 2,537 2,228 2,254 2,415 2,043
Investment securities:
Taxable 75,367 46,969 59,281 50,312 36,225 32,762 35,695
Non-taxable 11,629 15,424 11,257 7,058 9,293 3,161 2,411
Earning assets 258,816 227,132 235,194 216,261 206,991 199,904 191,475
Total assets 294,132 254,194 263,577 244,135 231,128 224,675 214,382
Interest-bearing deposits 204,385 173,010 176,388 168,447 161,086 162,679 162,464
Total deposits 262,632 227,433 234,054 218,595 209,278 204,808 196,266
Stockholders' equity 29,330 26,761 27,504 23,974 20,437 18,372 16,453
PER SHARE DATE
Net income(1) $ 0.98 $ 0.91 $ 1.15 $ 0.96 $ 0.81 $ 0.78 $ 0.75
Book value(2) $ 10.61 $ 9.76 $ 10.01 $ 8.96 $ 8.13 $ 7.34 $ 6.59
Cash dividends declared(3) $ 0.35 $ 0.11 $ 0.11 $ 0.10 $ 0.06 $ 0.06 $ 0.06
Weighted average shares outstanding
used in earnings per share 2,800 2,749 2,748 2,667 2,603 2,565 2,495
(In Thousands, unless noted otherwise)
SELECTED FINANCIAL RATIOS
Return on average equity(6) 12.94% 13.12% 12.16% 11.38% 10.91% 11.43% 12.09%
Return on average assets(6) 1.34% 1.35% 1.26% 1.08% 0.94% 0.93% 0.92%
Net interest spread(7) 5.10% 5.92% 5.74% 5.55% 5.38% 5.20% 5.51%
Net interest margin(7) 5.91% 6.67% 6.53% 6.15% 5.97% 5.95% 5.40%
Leverage capital ratio 9.49% 10.58% 10.72% 9.83% 8.80% 8.34% 7.53%
Tier 1 capital ratio 14.65% 13.49% 13.66% 13.51% 10.80% 9.05% 7.57%
Risk-based capital ratio 15.90% 14.62% 14.89% 14.76% 12.02% 10.38% 10.10%
Nonperforming loans to total loans(4) 0.79% 0.30% 0.22% 0.91% 1.76% 3.25% 0.89%
Nonperforming assets to total assets(5) 0.91% 0.68% 0.61% 1.19% 1.99% 2.53% 0.63%
Net charge-offs to average net loans(6) 0.16% 0.28% 0.27% 0.19% 0.52% 0.48% 0.11%
Average equity to average total assets 10.36% 10.27% 10.38% 9.51% 8.65% 8.11% 7.61%
Total interest expenses to interest
income 33.45% 29.51% 30.26% 27.35% 29.21% 35.60% 45.75%
Gross loans to deposits 62.63% 66.14% 64.61% 68.05% 70.73% 76.92% 77.94%
Net income to average daily total
deposits(6) 15.06% 15.12% 14.19% 12.02% 10.42% 10.18% 9.52%
</TABLE>
(1) Net income per share represents net income for the specified period divided
by the weighted average number of shares outstanding during the specified
period plus shares issuable upon the assumed exercise of outstanding common
stock options.
(2) Book value per share is defined as total shareholders equity divided by the
number of common shares actually outstanding as of the defined date.
14
<PAGE>
(3) Cash dividends declared have not been restated for shares issued in
conjunction with subsequent acquisitions. The figure is the amount per
share reported as of the declaration date.
(4) Non-performing loans consist of loans on non-accrual, restructured loans and
all loans past due 90 days or more. All restructured loans listed were
performing according to the terms as modified and were not included in the
non-accrual loan figures provided.
(5) Non-performing assets consist of loans on non-accrual, all restructured
loans, loans past due 90 days or more and OREO. All restructured loans
listed were performing according to the terms as modified and were not
included in the non-accrual loan figures provided.
(6) Operating ratios for the nine month period have been annualized.
(7) Average earning assets consist of securities, Fed funds and net loans.
15
<PAGE>
SOLICITATION OF WRITTEN CONSENTS
This Written Consent Statement/Prospectus is furnished in connection with
the solicitation of Written Consents for approval of the Merger Agreement
providing for the merger of BSM Merger Company (the "Merger Corp.") with and
into the Bank, as a result of which the Bank will be the wholly-owned subsidiary
of BSM Bancorp. In addition, this Written Consent Statement/Prospectus is also
furnished in connection with the solicitation of Written Consents of
shareholders of the Bank as prospective shareholders of the Holding Company for
approval of the BSM Bancorp 1996 Stock Option Plan (the "1996 Plan").
WRITTEN CONSENT AND REVOCABILITY OF WRITTEN CONSENTS
A form of Written Consent is enclosed. Written Consents are being
solicited from all shareholders of the Bank. Sections 902 and 903 of the
California Corporations Code require the approval of the Merger Agreement and
the 1993 Plan by a majority of the outstanding shares of Common Stock of the
Bank. Section 603 of the Corporations Code and Section 2.8 of Article II of the
Bylaws of the Bank authorize the Bank to obtain the necessary shareholder
approvals by written consent without a meeting. Pursuant to SEC rules, because
certain documents are incorporated by reference, the proposal will be deemed
approved after twenty (20) business days have elapsed from the date the Written
Consents are sent to shareholders if sufficient Written Consents, and all
necessary regulatory approvals, are received.
Shareholders of the Bank are requested to complete, sign and date the
accompanying Written Consent form and return it to the Bank as soon as possible.
Any shareholder may revoke his or her Written Consent at any time prior to
receipt by the Bank of the number of Written Consents required to authorize the
approval of the Merger Agreement. To effect a revocation prior to that time, a
shareholder must file a written instrument revoking such shareholder's Written
Consent with the Secretary of the Bank. Any shareholder who signs and returns
the Written Consent form but does not indicate a choice thereon will be deemed
to have consented to the Reorganization and Merger Agreement and the 1996 Plan.
THE BANK MUST RECEIVE WRITTEN CONSENTS REPRESENTING A MAJORITY OF THE
OUTSTANDING SHARES OF THE BANK'S COMMON STOCK FOR APPROVAL OF THE MERGER
AGREEMENT AND THE 1996 PLAN.
RECORD DATE AND PERSONS ENTITLED TO GIVE WRITTEN CONSENTS
There were issued and outstanding 2,973,339 shares of the Bank's Common
Stock at the close of business on January 29, 1997, which has been set as the
Record Date for the purpose of determining the shareholders entitled to consent
to the proposed amendment to the Articles of Incorporation. The Bank has no
other class of stock outstanding. Consent to the Merger Agreement and the 1996
Plan may be given by any person in whose name shares of Common Stock stand on
the books of the Bank as of the Record Date, or by his or her duly authorized
agent.
Each holder of Bank Common Stock will be entitled to one vote for each
share of Bank Common Stock standing in his or her name on the books of the Bank
as of the Record Date.
A majority of the outstanding shares of Bank Common Stock entitled to vote
shall constitute a quorum. Under the Bank's Articles of Incorporation, the
Reorganization Proposal requires the affirmative vote of a majority of the
outstanding shares of Bank Common Stock. In addition, approval
16
<PAGE>
of the 1996 Plan requires the affirmative vote of a majority of the outstanding
shares of Bank Common Stock as proposed to be exchanged for Holding Company
Common Stock. Accordingly, abstentions from voting will have the effect of a
vote "AGAINST" the Reorganization Proposal.
If you hold your Bank Common Stock in "street name" and you fail to
instruct your broker or nominee as to how to vote your Bank Common Stock, you
broker or nominee MAY NOT, pursuant to applicable stock exchange rules, vote
your Bank Common Stock with respect to the Reorganization Proposal.
COST OF SOLICITATIONS OF WRITTEN CONSENTS
This Written Consent Statement/Prospectus is made on behalf of the Board of
Directors of the Bank and the Company, and the Bank will bear the costs of
solicitation. The expense of preparing, assembling, printing and mailing this
Written Consent Statement/Prospectus and the materials used in this solicitation
of Written Consents also will be borne by the Bank. It is contemplated that
Written Consents will be solicited principally through the mail, but directors,
officers and regular employees of the Bank may solicit Written Consents
personally or by telephone. Although there is no formal agreement to do so, the
Bank may reimburse banks, brokerage houses and other custodians, nominees and
fiduciaries for their reasonable expenses in forwarding these proxy materials to
their principals. The Bank does not intend to utilize the services of other
individuals or entities not employed by or affiliated with the Bank in
connection with the solicitation of Written Consents.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Management of the Bank does not know of any person who owns beneficially or
of record more than 5% of the Bank's outstanding common stock. The following
table sets forth certain information as of January 18, 1997 concerning the
beneficial ownership of the Bank's outstanding common stock by each of the
directors of the Bank and by all directors and executive officers of the Bank as
a group. Management is not aware of any change in control of the Bank or of any
arrangement which may, at a subsequent date, result in a change of control of
the Bank.
As used throughout this Written Consent Statement/Prospectus, the term
"executive officer" means the President and Chief Executive Officer of the Bank,
the Executive Vice President/Chief Financial Officer of the Bank, the Executive
Vice President/Loan Administrator of the Bank, and the Executive Vice
President/Branch Manager of the Bank's Santa Maria Way office. Neither the
Chairman of the Board nor the Secretary of the Bank are treated as executive
officers.
17
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT OF PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER AND TITLE BENEFICIAL OWNERSHIP(1) CLASS(2)
- -------------- -------------------------- ----------------------- ----------
<S> <C> <C> <C>
Common Armand R. Acosta, Director 22,220(3) .7%
Common Richard E. Adam, Director 98,734(3) 3.3%
Common Fred L. Crandall, Jr., Director 80,176(3) 2.9%
Common A.J. Diani, Director and Chairman 84,588(3) 2.8%
Common William A. Hares, President/CEO 42,021(4) 1.4%
Common Roger A. Ikola, Director 73,148(3) 2.5%
Common Toshiharu Nishino, Director 90,674(3) 3.0%
Common Joseph Sesto, Jr., Director 12,000(3) .4%
Common William L. Snelling, Director and
Secretary 79,140(3) 2.7%
Common Mitsuo Taniguchi, Director 72,524(3) 2.4%
Common Joseph F. Ziemba, Director 44,956(3) 1.5%
Common All Directors and Executive
Officers (14 in number) 749,797(5) 24.8%
</TABLE>
- ----------------------
(1) Beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship,
or otherwise has or shares: (a) voting power, which includes the power to
vote, or to direct the voting of such security; and/or (b) investment power
which includes the power to dispose, or to direct the disposition of such
security. Beneficial owner also includes any person who has the right to
acquire beneficial ownership of such security as defined above within 60
days of the filing date.
(2) Shares subject to option held by directors and executive officers that were
exercisable within 60 days after January 18, 1997 ("vested"), are treated as
issued and outstanding for the purpose of computing the percentage of class
owned by such person (or group) but not for the purpose of computing the
percentage of class owned by any other individual person.
(3) Includes 2,000 vested shares from the 1988 stock option plan.
(4) Includes 13,500 vested shares from the 1978 stock option plan, 2,000
from the 1988 stock option plan, and 6,448 shares that Mr. Hares has
investment powers.
(5) Includes 9,500 vested shares, 16,700 shares owned directly and
29,864 shares whose voting powers can be exercised by the executive
officers not listed individually.
18
<PAGE>
BANK HOLDING COMPANY REORGANIZATION
GENERAL
The Board of Directors of the Bank has unanimously approved the formation
of a holding company, to be known as BSM Bancorp, for the Bank, by means of
the Merger pursuant to the terms and conditions of the Merger Agreement
described herein and unanimously recommends that shareholders of the Bank
vote to approve the Reorganization Proposal. A copy of the Merger Agreement
is attached hereto as Annex I. The following discussion of the
Reorganization Proposal is a summary only and does not purport to be a
complete description and is qualified in its entirety by reference to the
complete Merger Agreement.
At the Effective Time of the Merger (defined below), the Merger Corp.
will be merged with and into the Bank, with the Bank as the Surviving Bank,
as a result of which each outstanding share of Bank Common Stock shall be
converted into Holding Company Common Stock on a one-for-one basis. As a
result of the Merger, the current Bank Shareholders will become the sole
shareholders of the Holding Company and the Holding Company will become the
sole shareholder of the Surviving Bank. Upon consummation of the
Reorganization, the Surviving Bank will continue the Bank's present business
and operations under the name "Bank of Santa Maria", as a wholly-owned
subsidiary of the Holding Company and under the Articles of Incorporation and
Bylaws of the Bank. The consolidated capitalization, assets, liabilities,
income and financial statements of the Holding Company immediately following
the Reorganization will be substantially the same as those of the Bank
immediately prior to the consummation of the Reorganization. See "BANK
HOLDING COMPANY REORGANIZATION - CAPITALIZATION."
REASONS FOR REORGANIZATION
In the opinion of the Bank's Board of Directors, the bank holding company
structure will permit greater flexibility in responding to evolving changes
in the banking and financial services industries and meeting the competition
of other financial institutions. The Bank's Board of Directors believes that
a bank holding company is an entity which can provide greater operating and
financial flexibility and will permit expansion into a broader range of
financial services and other business activities.
Management of the Bank believes that a bank holding company will permit
Bank shareholders to participate in the ownership of a more flexible entity
for financing and growth within the banking and financial services
industries. A bank holding company may provide more alternatives in the
raising of funds required by the Bank or by the Holding Company under
changing conditions in financial and monetary markets. For example, if a
subsidiary bank required additional capital, the bank holding company might
raise funds by relying on its own borrowing ability without having to go to
the equity market. At present the Holding Company has no plans, arrangements
or commitments to borrow any funds if the Merger Agreement is approved.
Furthermore, upon consummation of the Reorganization and until such time as
the Holding Company receives income in the form of dividends from the
Surviving Bank, the Holding Company is not expected to be able to rely on its
own borrowing ability to raise funds as it will not have any significant
assets, other than its investment in the Surviving Bank, to support such
borrowing.
Flexibility in financing also will be provided by the Holding Company's
authorized capitalization of 50,000,000 shares of Holding Company Common
Stock, no par value, and 25,000,000 shares of Holding Company Preferred
Stock, no par value. If the Reorganization Proposal is approved, up to
2,973,339 shares of Holding Company Common Stock will be issued to the
shareholders of the
19
<PAGE>
Bank, up to 160,400 shares of Holding Company Common Stock may be issued
pursuant to outstanding stock option grants and up to 731,601 shares will be
available for future grants issued under the Holding Company's Stock Option
Plan, leaving 46,134,660 shares of authorized but unissued Holding Company
Common Stock. These shares will be available for issuance from time to time
to raise additional capital (such as in connection with a subsequent offering
following the Reorganization, as discussed above), for acquisitions or for
any other corporate purposes and, to the extent authorized by law, may be
issued without further action by the Holding Company's shareholders.
The Reorganization will also provide certain flexibility for acquiring or
establishing other banking operations. For example, in the event an
opportunity for the acquisition of another bank were to develop, it might be
desirable to maintain the separate existence of the other bank after the
acquisition rather than merging it into the Surviving Bank. The existence of
a bank holding company would allow such an acquisition. However, except for
the acquisition of the Bank described herein, at this time the Holding
Company does not have any specific plans, arrangements or commitments to
acquire or establish any such banking operations.
It is also anticipated that the new corporate structure can be used
advantageously to engage in other financially oriented activities, either
directly, or indirectly through newly formed subsidiaries or by acquiring
companies already established in such fields. Such activities currently are
limited to activities permissible under the Federal Bank Holding Company Act
of 1956, as amended (the "BHC Act"). Neither the Bank nor the Holding
Company is currently engaged in any specific discussions relating to
acquisitions nor do they anticipate engaging in any such discussions in the
immediate future. However, should the Surviving Bank or the Holding Company
be presented with an acquisition opportunity within their market areas,
either or both the Surviving Bank and the Holding Company expects to make a
determination whether or not to and the manner in which it should pursue such
opportunity, although this may require the prior approval or consent of the
Federal Reserve Board and/or the Superintendent. See "SUPERVISION AND
REGULATION OF THE HOLDING COMPANY AND THE BANK - THE HOLDING COMPANY."
Management of the Bank believes that the Reorganization will enhance the
Bank's ability to satisfy ever changing and expanding needs of present
customers for banking and banking-related services and to continue to attract
new customers for financial services. The recommended corporate form will
better suit expansion into new areas of service than would the existing
structure.
The Holding Company anticipates that during the initial months following
the consummation of the Reorganization, the principal business and activity
of the Holding Company will be to serve as the bank holding company for the
Surviving Bank.
ORGANIZATIONAL TRANSACTIONS
At the direction of the Board of Directors of the Bank, the Holding
Company was incorporated under the laws of the State of California on
November 12, 1996 for the purpose of becoming a bank holding company by
acquiring all of the outstanding Bank Common Stock. Mr. William A. Hares, by
purchasing 150 shares of Holding Company Common Stock at $10.00 per share,
providing the Holding Company's initial capitalization of $1,500. See "BANK
HOLDING COMPANY REORGANIZATION - REGULATORY APPROVALS."
Upon consummation of the Merger, these 150 shares of Holding Company
Common Stock will be repurchased by the Holding Company for the same
aggregate sum of $1,500 and cancelled. The obligation of the Holding Company
to repurchase said shares and the obligation of Mr. Hares to resell
20
<PAGE>
those shares to the Holding Company is set forth in the "BSM Bancorp
Stockholder Agreement" attached to this Written Consent Statement/Prospectus
as Annex II.
At the direction of the Board of Directors of the Bank, the Merger Corp.
was incorporated under the laws of the State of California on November 12,
1996 for the purpose of merging with the Bank in order to facilitate the
Holding Company's acquisition of the Bank. In order to capitalize the Merger
Corp., the Merger Corp. will issue 100 shares of common stock of the Merger
Corp. (the "Merger Corp. Common Stock") to the Holding Company for $1,000.
Prior to the Effective Time of the Merger, the Holding Company will be the
sole shareholder of the Merger Corp. Upon consummation of the Merger, these
100 shares of Merger Corp. Common Stock will be converted into Surviving Bank
Common Stock.
TERMS OF THE MERGER AGREEMENT
CONVERSION. At the Effective Time of the Merger (defined below), the
shares of common stock of the Bank, Merger Corp. and Holding Company, parties
to the Merger Agreement, shall be converted and exchanged as described herein.
Each share of Bank Common Stock issued and outstanding immediately prior
to the Effective Time of the Merger will, at the Effective Time of the
Merger, automatically become and be converted into the right to receive, at
the election of the shareholder, one share of Holding Company Common Stock.
Each share of Merger Corp. Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger will, on and after the
Effective Time of the Merger, be converted into one (1) share of Bank Common
Stock and, as a result, at the Effective Time of the Merger, all of the
common stock of the Surviving Bank will be owned by the Holding Company.
Each share of Holding Company Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger will, at the Effective
Time of the Merger, be repurchased by the Holding Company.
At the Effective Time of the Merger, the Bank shareholders will be the
shareholders of the Holding Company. As shareholders of the Holding Company,
they will have essentially the same rights to govern the Holding Company's
activities as they have with respect to the Bank; however, as shareholders of
the Holding Company, they will not be entitled to vote on matters requiring
the approval of Bank shareholders. Shareholders of the Holding Company will
be entitled to vote with respect to matters affecting the Holding Company
which will own 100% of the Surviving Bank. A discussion of those rights is
contained in the section entitled "COMPARISON OF BANK COMMON STOCK AND
HOLDING COMPANY COMMON STOCK."
EFFECTIVE TIME OF THE MERGER. The Merger will be effective at the time
the Merger Agreement is filed in the office of the Secretary of State of
California (the "Effective Time of the Merger"). The Effective Time of the
Merger will not occur until (i) all requisite board of directors,
shareholders and regulatory approvals and consents for the Merger and the
Reorganization are obtained; (ii) the expiration of any applicable waiting
periods under the BHC Act and the Bank Merger Act; and (iii) the satisfaction
of all of the requirements of law and conditions specified in the Merger
Agreement. There is no date by which the Effective Time of the Merger must
occur.
INTERESTS OF CERTAIN PERSONS IN THE MERGER. The Merger Agreement
provides that the directors of the Bank immediately prior to the Effective
Time of the Merger will be directors of the Surviving
21
<PAGE>
Bank. Additionally, the officers and other employees of the Bank immediately
prior to the Effective Time of the Merger will all be employed in
substantially the same capacities by the Surviving Bank.
EMPLOYEE BENEFITS. Upon consummation of the Reorganization, the Bank's
Stock Option Plan (the "Plan") will be terminated and a new Stock Option Plan
of the Holding Company (the "1996 Plan") will be established. Stock options
with respect to shares of Bank Common Stock granted under the Plan and
outstanding prior to consummation of the Reorganization will automatically
become options to purchase the same number of shares of Holding Company
Common Stock upon identical terms and conditions, subject to such
modifications as contained in the 1996 Plan, and for an identical price. The
Holding Company will assume all of the Bank's obligations with respect to
such outstanding options.
The 1996 Plan proposes to reserve 892,001 shares of Common Stock of the
Holding Company for issuance pursuant to the exercise of options. The 1996
Plan is designed to replace the Bank's 1988 Stock Option Plan, which will
expire in 1998, with certain changes, including (i) an increase in the number
of shares subject to the 1996 Plan, (ii) the exercise of options with not
only cash but also a promissory note or by applying the appreciated value of
the shares being surrendered to payment of the exercise price, (iii) the
granting of options to business associates in addition to directors, officers
and employees, (iv) a minimum voting of at least 20% per year, and (v) the
ability to exercise vested options under certain conditions if employee is
terminated for cause as more fully described in this Written Consent
Statement/Prospectus. See "APPROVAL OF BSM BANCORP 1996 STOCK OPTION PLAN."
All other employee benefits and benefit plans of the Bank in effect
immediately prior to the Effective Time of the Merger will be unchanged by
the Reorganization, except that any plan which refers to Bank Common Stock
will, following consummation of the Reorganization, be deemed to refer
instead to Holding Company Common Stock and will become the employee benefits
and benefit plans solely of the Surviving Bank.
CONDITIONS TO THE MERGER. The obligations of each of the parties to the
Merger Agreement to consummate the Merger are subject to the satisfaction, on
or before the Effective Time of the Merger, of the following conditions (i)
approval of the terms of the Reorganization Proposal including the Merger
Agreement, by the shareholders of the Bank owning at least a majority of the
capital stock of the Bank; (ii) approval of the Merger Agreement by a
majority of the outstanding shares of the Holding Company and the Merger
Corp.; (iii) approval by a majority of the Board of Directors of both the
Bank and the Merger Corp. of the Merger Agreement; (iv) approval of the
Merger Agreement by the Holding Company; (v) all consents and approvals
prescribed by law, including, without limitation, the approval of the Federal
Reserve Board, the FDIC and the Superintendent, for the consummation of the
Merger and Reorganization; and (vi) all other requirements prescribed by law
which are necessary for the consummation of the Merger and Reorganization
including, but not limited to, the expiration of any applicable waiting
periods under the Bank Merger Act and the BHC Act. The Merger Agreement does
not provide for an outside closing date for the transactions contemplated
herein.
The directors of the Bank, the Merger Corp. and the Holding Company have
unanimously approved the Reorganization Proposal. The Holding Company has
filed an application for prior approval to become a bank holding company
pursuant to Section 3(a)(1) of the BHC Act with the Federal Reserve Board and
an application to acquire control of the Bank under Section 700 of the
California Financial Code with the Superintendent. In addition, the Bank and
the Merger Corp. have filed applications for approval of the Merger with the
FDIC and the Superintendent. See "BANK HOLDING COMPANY REORGANIZATION -
REGULATORY APPROVALS."
TERMINATION OF MERGER AGREEMENT. The Merger Agreement may be terminated
before the Effective Time of the Merger if (i) the number of shares voting
against the Reorganization Proposal is such that the Board of Directors of
the Bank determines that it is inadvisable to consummate the Merger or
Reorganization and the Board of Directors of the Bank determines that it is
inadvisable to consummate the Merger or Reorganization; (iii) any action,
consent or approval, governmental or otherwise, necessary to permit the
Surviving Bank to conduct all or any part of the business activities of the
Bank prior to the Effective Time of the Merger, shall not have been obtained;
or (iv) for any other reason the consummation of the Merger and
Reorganization is inadvisable in the opinion of the Board of Directors of the
Bank, the Merger Corp. or the Holding Company. Although not indicated in the
Merger Agreement, the Board of Directors believes that it will give strong
consideration to terminating the Merger Agreement if more than 25% of the
outstanding shares of the Bank vote against the Merger. If the holders of a
majority of the outstanding shares of Bank Common Stock fail to approve the
Reorganization Proposal, or the
22
<PAGE>
transaction is otherwise terminated, as provided above, then the business of
the Bank would continue to operate under the ownership of its existing
shareholders.
No assurances can be given as to when or if all conditions will be
satisfied.
EXCHANGE OF SHARE CERTIFICATES
As soon as practicable after consummation of the Reorganization, the
Holding Company will mail to each holder of record of Bank Common Stock
immediately prior to the Effective Time of the Merger, a letter of
transmittal which is to be used by each such Bank Shareholder to return to
the Holding Company the stock certificates representing Bank Common Stock
owned by him or her, which certificates should be duly endorsed in blank by
such Bank Shareholder. As soon as practicable after receiving such
certificates from a Bank Shareholder, together with the duly executed letter
of transmittal and any other items specified by the letter of transmittal,
the Holding Company will deliver to such Bank Shareholder new certificates
evidencing the appropriate number of shares of Holding Company Common Stock.
If the new certificates are to be delivered to a person other than the
record holder of the certificates of Bank Common Stock surrendered in
exchange therefor (i) the certificate so surrendered must be properly
endorsed or accompanied by appropriate stock powers and otherwise be in
proper form for transfer; (ii) the transfer must otherwise be proper; and
(iii) the person requesting the transfer must pay to the Holding Company any
transfer or other taxes payable by reason of the transfer or must establish
to the satisfaction of the Holding Company that such taxes have been paid or
are not required to be paid.
COSTS OF REORGANIZATION
The costs of the Reorganization are estimated at approximately $100,000.
If the Reorganization is consummated, the costs of the Reorganization will be
assumed and paid, to the extent properly allocated, by the Holding Company,
the Bank and/or the Surviving Bank. In the event the Reorganization is not
consummated, such costs as have been incurred, including the cost of organizing
the Holding Company and the Merger Corp., will be assumed and paid by the Bank.
REGULATORY APPROVALS
Federal and California law and regulations provide that certain
acquisition transactions, such as the Reorganization, may not be consummated
unless approved in advance by applicable regulatory authorities. The Merger
Agreement provides that the Holding Company, the Bank and the Merger Corp.
shall proceed expeditiously and cooperate fully in the procurement of any
consents and approvals and in the taking of any other action and the
satisfaction of all requirements, prescribed by law or otherwise, necessary
for consummation of the Merger, including the preparation and submission of
applications required to be filed with the FDIC, the Superintendent and the
Federal Reserve Board. Receipt of all requisite regulatory approvals and
consents is a condition precedent to the consummation of the Merger and the
Reorganization. See "BANK HOLDING COMPANY REORGANIZATION - TERMS OF THE
MERGER AGREEMENT - CONDITIONS TO THE MERGER."
An application for prior approval of the Holding Company to acquire the
Bank was a filed with the Federal Reserve Board on December 18, 1996. An
application for prior approval of the Merger was filed with the FDIC on
December 2, 1996. An Application for prior approval of the Merger was filed
23
<PAGE>
with the Superintendent on December 2, 1996, and such application was
approved by the Superintendent on December 20, 1996. There can be no
assurances that the required approvals will be obtained, or as to conditions
or timing of such approvals.
Although neither the Holding Company nor the Bank is aware of any reason
why the requisite approvals of and consents to the Merger and Reorganization
would not be granted, there can be no assurance such approvals and consents
will be obtained or that, if obtained, such approvals and consents will not
include conditions which would be of a type that would relieve the Holding
Company, the Bank or the Merger Corp. from their obligation to consummate the
Merger and Reorganization. See "BANK HOLDING COMPANY REORGANIZATION - TERMS
OF THE MERGER AGREEMENT - CONDITIONS TO THE MERGER" AND "- TERMINATION OF
MERGER AGREEMENT."
DISSENTING SHAREHOLDERS' RIGHTS
Pursuant to the provisions of California law, shareholders of the Bank
will not have dissenting rights in the Merger.
ACCOUNTING TREATMENT
Because the Merger is a reorganization with no change in ownership
interests, the consolidated financial statements of the Holding Company and
the financial statements of the Surviving Bank will retain the former bases
of accounting of the Bank and will be presented substantially identical to
the Bank's financial statements prior to the Reorganization.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion, which is the opinion of Vavrinek, Trine, Day &
Co., is limited to certain federal income tax consequences of the proposed
Reorganization and does not discuss state, local or foreign tax consequences
or all of the tax consequences that might be relevant to shareholders of the
Bank entitled to special tax treatment.
In the opinion of Vavrinek, Trine, Day & Co., the Bank's certified public
accountants, the proposed Merger will qualify for federal income tax purposes
as a reorganization within the meaning of Section 368 of the Internal Revenue
Code of 1986, as amended (the "Code"). This opinion is conditioned upon the
accuracy of various representations made to counsel and certain assumptions
made by counsel. The assumptions include, among others, the assumption that
there is no, and through the Effective Time of the Merger there will be no,
plan or intention on the part of shareholders of the Bank who own one percent
(1%) or more of Bank Common Stock and, to the best knowledge of the
management of the Bank, the Merger Corp. and the Holding Company, there is
no, and through the Effective Time of the Merger there will be no, plan or
intention on the part of the remaining shareholders of the Bank to sell or
otherwise dispose of the Holding Company Common Stock to be received in the
Merger. The opinion is based on current law and assumes that the Merger is
consummated as described herein. Neither this summary nor the opinion of
Vavrinek, Trine, Day and Co. is binding on the IRS and no ruling from the IRS
has been sought or will be sought with respect to such tax consequences.
Based upon the qualification of the Merger as a reorganization within the
meaning of Section 368 of the Code:
(a) No gain or loss will be recognized by the Bank, the Merger Corp. or
the Holding Company as a result of the Merger;
24
<PAGE>
(b) No gain or loss will be recognized by the shareholders of the Bank
upon receipt of the Holding Company Common Stock in exchange for their shares
of Bank Common Stock pursuant to the Merger;
(c) The basis of the Holding Company Common Stock received by the
shareholders of the Bank pursuant to the Merger will be the same as the basis
of the shares of Bank Common Stock surrendered in exchange therefor;
(d) The holding period of the Holding Company Common Stock received by
shareholders of the Bank pursuant to the Merger will include the holding
period of the Bank Common Stock surrendered in exchange therefor, provided
that such Bank Common Stock is held as a capital asset on the date of
consummation of the Merger;
(e) A holder of an outstanding option granted under the Bank's Stock
Option Plans will not recognize income, gain or loss solely as a result of
the assumption of the Bank's Stock Option Plans by the Holding Company.
(f) The assumption by the Holding Company of outstanding incentive stock
options granted under the Bank's Stock Option Plans will not be deemed a
modification of the option under Section 424(h) of the Code.
THE BANK'S SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER INCLUDING TAX RETURN REPORTING
REQUIREMENTS AND THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER APPLICABLE TAX LAWS.
RESTRICTIONS ON AFFILIATES
The obligation of the Bank and the Holding Company to consummate the
Reorganization is subject to the condition that each person who is an
"affiliate" of the Bank for purposes of Rule 145 promulgated under the
Securities Act, execute and deliver a letter to the effect that, among other
things; (i) such person will not dispose of any shares of Holding Company
Common Stock to be received by him pursuant to the Merger Agreement (a) in
violation of the Securities Act or the rules and regulations of the SEC
promulgated thereunder (and, accordingly, that any public offering or sale of
such shares will require either registration under the Securities Act or
compliance with the resale provision of Rule 145 or the availability of
another exemption from the registration requirements of the Securities Act),
or (b) prior to such time as financial results covering at least 30 days of
postmerger combined operations have been published; and (ii) such person
consents to the placing of a legend on the certificate evidencing such shares
referring to the issuance of such shares in a transaction to which Rule 145
is applicable and to the giving of stop-transfer instructions to the Holding
Company's transfer agent with respect to such certificates.
For purposes of Rule 145, affiliates include the Bank's directors and
executive officers. According to Rule 145, the affiliates will be restricted
in their ability to resell their stock. These restrictions include the
limitation, subject to certain exceptions, that not more than one percent
(1%) of the total number of Holding Company shares outstanding be sold for
the account of any affiliate in any three month period.
25
<PAGE>
RECOMMENDATIONS
The Bank's Board of Directors has carefully reviewed the Reorganization
Proposal and believes that, for the reasons set forth in this Written Consent
Statement/Prospectus, the proposed Reorganization, is fair to and in the best
interests of the Bank and the Bank's shareholders. On November 12, 1996, the
Bank's Board of Directors unanimously approved the Merger Agreement and the
Reorganization and unanimously recommended that the Bank's shareholders
consent to the Merger Agreement.
CAPITALIZATION
If the Reorganization had been consummated and the Holding Company had
owned all the common stock of the Surviving Bank prior to September 30, 1996,
the financial condition and results of operations of the Holding Company and
the Bank would have been the same in all material respects as that shown in
the Bank's financial statements included in Bank's 1995 Annual Report to
Shareholders.
The following table sets forth the actual capitalization of the Bank at
September 30, 1996, the proposed capitalization of the Merger Corp. and the
Holding Company immediately prior to consummation of the Reorganization, and
the pro forma capitalization of the Surviving Bank and the Holding Company on
a consolidated basis to reflect the consummation of the Reorganization.
<TABLE>
<CAPTION>
BANK OF BSM MERGER BSM BANCORP AND
SANTA MARIA COMPANY (1) BSM BANCORP(2) BANK OF SANTA MARIA
----------- ------------ -------------- -------------------
<S> <C> <C> <C> <C>
Shareholders' Equity
Common Stock $ 8,649,998 $ 1,000 $ 1,500 $ 8,649,998
Undivided Profits 20,679,614 0 0 20,679,614
----------- --------- ---------- -----------
Total $29,329,612 $ 1,000 $ 1,500 $29,329,612
----------- --------- ---------- -----------
----------- --------- ---------- -----------
Share Data:
Common Stock
Authorized 25,000,000 1,000,000 50,000,000 50,000,000
Outstanding 2,764,261 100 150 2,764,261
Par Value No Par No Par No Par No Par
Preferred Stock
Authorized None None None 25,000,000
Outstanding N\A N/A None None
</TABLE>
- -------------------
(1) Funds to capitalize the Merger Corp. will be obtained by issuing
100 shares of common stock to the Holding Company for $1,000. Upon
consummation of the Merger, these 100 shares of Merger Corp. Common
Stock will be converted into Surviving Bank Common Stock.
(2) Funds to capitalize the Holding Company have been obtained by
issuing 150 shares of common stock to Mr. William A. Hares for
$1,500. Upon consummation of the Reorganization, and pursuant to
a written agreement, these will be repurchased for $1,500 and
cancelled by the Holding Company.
26
<PAGE>
COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING
COMPANY COMMON STOCK AND BANK COMMON STOCK
The Bank is a California banking corporation organized under the laws of
the State of California, and the rights of Bank Shareholders are governed by
the California Financial Code, the California Corporations Code (the
"Corporations Code"), the Articles of Incorporation of the Bank (the "Bank
Articles"), and the bylaws of the Bank, as amended (the "Bank Bylaws"). Upon
consummation of the Reorganization, the Bank Shareholders will become
shareholders of the Holding Company ("Holding Company Shareholders"). As
shareholders of the Holding Company, the rights of the then former Bank
Shareholders will be governed by Division 1, Chapters 1 - 23 of the
Corporations Code, other applicable California statutes, the Articles of
Incorporation of the Holding Company (the "Holding Company Articles"), and
the bylaws of the Holding Company (the "Holding Company Bylaws").
BANK COMMON STOCK
The Bank is authorized by its Articles of Incorporation, as amended, to
issue 25,000,000 shares of Bank Common Stock, without par value. At
September 30, 1996, 2,764,261 shares of Bank Common Stock were issued and
outstanding. Holders of Bank Common Stock are entitled to one vote, in person
or by proxy, for each share of Bank Common Stock held of record in the
shareholder's name on the books of the Bank as of the record date on any
matter submitted to the vote of the shareholders, except that in connection
with the election of directors, the shares may be voted cumulatively. Each
share of Bank Common Stock has the same rights, privileges and preferences as
every other share and will share equally in the Bank's net assets upon
liquidation or dissolution. The Bank Common Stock has no preemptive,
conversion or redemption rights or sinking fund provisions and all the shares
offered hereby will, when issued, be fully paid. Shares of Bank Common Stock
are subject to assessment by the Bank upon order of the Superintendent for
the purpose of correcting an impairment of contributed capital in the manner
and to the extent provided in Division 1 of the California Financial Code.
See "COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND
BANK COMMON STOCK - ASSESSABILITY."
California law prohibits a California state-chartered bank from lending
on the security of its own stock.
Shareholders are entitled to dividends when, as and if declared by the
Bank's Board of Directors out of funds legally available therefor (and after
satisfaction of the prior rights of holders of outstanding preferred stock,
if any) subject to certain restrictions on payment of dividends imposed by
the California Financial Code and other applicable regulatory limitations.
See "COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND
BANK COMMON STOCK - DIVIDEND RESTRICTIONS."
The transfer agent and registrar for the Bank Common Stock is U.S. Stock
Transfer Corporation.
HOLDING COMPANY COMMON STOCK
The Holding Company is authorized by its Articles of Incorporation to
issue 50,000,000 shares of Holding Company Common Stock, without par value,
and 25,000,000 shares of Holding Company Preferred Stock, without par value.
As of the date hereof, 150 shares of Holding Company Common Stock were
issued and outstanding. Holders of Holding Company Common Stock will be
entitled to
27
<PAGE>
one vote, in person or by proxy, for each share of Holding Company Common
Stock held of record in the shareholder's name on the books of the Holding
Company as of the record date on any matter submitted to the vote of the
shareholders, except that in connection with the election of directors, and
until the Holding Company is considered to be a "listed corporation" as
provided in Corporations Code Section 310.5, the shares may be voted
cumulatively. However, the Holding Company's Articles of Incorporation
provide there will be no cumulative voting for the election of directors if
and when the Holding Company becomes a "listed corporation" (i.e.,
outstanding shares listed on the New York or American Stock Exchange or
outstanding securities designated as qualified for trading as a national
market security on the National Association of Securities Dealers Automatic
Quotation System and has at least 800 holders of its equity securities; the
Bank currently approximately 2,000 holders of its securities). The Holding
Company has no plans at this time to become a "listed corporation", and such
determination is dependent upon recommendations of the Holding Company's
advisors, which are dependent on several factors, including the price of the
Holding Company's common stock and its overall level of capitalization.
The Holding Company's Articles of Incorporation provide that the Board
of Directors will be divided into three classes, with any class having a term
of three years, if and when the Holding Company becomes a "listed
corporation" (as defined in the previous paragraph). Upon the Holding
Company becoming a "listed corporation," the Board of Directors of the
Holding Company will be divided into three classes, each of which shall
contain approximately one-third of the whole number of the members of the
Board. The members of each class shall be elected for a term of three years,
with the terms of office of all members of one class expiring each year so
that approximately one-third of the total number of directors are elected
each year. The Holding Company's Articles of Incorporation also provide that
any vacancy occurring in the Board, including a vacancy created by an
increase in the number of directors, shall be filled by a vote of two-thirds
of the directors then in office and any director so chosen shall hold office
for a term expiring at the annual meeting of stockholders at which the term
of the class to which the director has been chosen expires. The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a stockholder group to fully
use its voting power to gain control of the Board of Directors without
consent of the incumbent Board of Directors of the Holding Company.
The Articles of Incorporation of the Holding Company also require the
approval of the holders of at least 66-2/3% of the Holding Company's
outstanding shares of voting stock to approve certain "Business Combinations"
(as defined therein) involving a "Related Person" (as defined therein) except
in cases where the proposed transaction has been approved in advance by a
majority of those members of the Holding Company's Board of Directors who are
unaffiliated with the Related Person and were directors prior to the time
when the Related Person became a Related Person. The term "Related Person"
is defined to include any individual, corporation, partnership or other
entity (other than the Bank or its subsidiary) which owns beneficially or
controls, directly or indirectly, 10% or more of the outstanding shares of
voting stock of the Holding Company or an affiliate of such person or entity.
This proposed provision of the Articles of Incorporation applies to any
"Business Combination," which is defined to include: (i) any merger or
consolidation of the Holding Company with or into any Related Person; (ii)
any sale, lease, exchange, mortgage, transfer, or other disposition of 25% or
more of the assets of the Holding Company or combined assets of the Holding
Company and its subsidiaries to a Related Person; (iii) any merger or
consolidation of a Related Person with or into the Holding Company or a
subsidiary of the Holding Company; (iv) any sale, lease, exchange, transfer,
or other disposition of 25% or more of the assets of a Related Person to the
Holding Company or a subsidiary of the Holding Company; (v) the issuance of
any securities of the Holding Company or a subsidiary of the Holding Company
to a Related Person; (vi) the acquisition by the Holding Company or a
subsidiary of the Holding Company of any securities of a Related Person;
(vii) any reclassification of common stock of the Holding Company or any
recapitalization involving the common stock of the Holding Company; or (viii)
any agreement or other arrangement providing for any of the foregoing.
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Under California law, absent this proposed provision, business
combinations, including mergers, consolidations and sales of substantially
all of the assets of a corporation must, subject to certain exceptions, be
approved by the vote of the holders of a majority of the outstanding shares
of common stock of the Holding Company and any other affected class of stock.
The increased stockholder vote required to approve a business combination
may have the effect of foreclosing mergers and other business combinations
which a majority of stockholders deem desirable and place the power to
prevent such a merger or combination in the hands of a minority of
stockholders.
Each share of Holding Company Stock has the same rights, privileges and
preferences as every other share and will share equally in the Holding
Company's net assets upon liquidation of dissolution. Holding Company Common
Stock will have no preemptive, conversion or redemption rights or sinking
fund provisions and all of the issued and outstanding shares of Holding
Company Common Stock, when issued, will be fully paid and nonassessable. The
Holding Company's Articles of Incorporation also provide that amendments to
the Holding Company's Articles of Incorporation must be approved by a
majority vote of its Board of Directors and also by a majority of the
outstanding shares of its voting stock, provided, however, that an
affirmative vote of at least 66-2/3% of the outstanding voting stock entitled
to vote (after giving effect to the provision limiting voting rights) is
required to amend or repeal certain provisions of the Articles of
Incorporation, including the provision limiting voting rights, the provisions
relating to approval of certain business combinations, the number and
classification of directors, director and officer indemnification by the
Holding Company and amendment of the Holding Company's Bylaws and Articles of
Incorporation. The Holding Company's Bylaws may be amended by its Board of
Directors, or by a vote of 66-2/3% of the total votes eligible to be voted at
a duly constituted meeting of stockholders. See "COMPARISON OF THE RIGHTS OF
HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK -
ASSESSABILITY."
Shareholders are entitled to dividends when, as and if declared by the
Holding Company's Board of Directors out of funds legally available therefor
(and after satisfaction of the prior rights of holders of outstanding
preferred stock, if any (subject to certain restrictions on payment of
dividends imposed by the General Corporation Law of California. See
"COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK
COMMON STOCK - DIVIDEND RESTRICTIONS."
Following consummation of the Reorganization, the transfer agent and
registrar for the Holding Company Common Stock will be U.S. Stock Transfer
Corporation.
COMPARISON OF BANK COMMON STOCK AND HOLDING COMPANY COMMON STOCK
ASSESSABILITY. As a California state-chartered bank, the Bank's Common
Stock is subject to assessment pursuant to the provisions of Division 1 of
the California Financial Code. Section 662 of Division 1 of the California
Financial Code provides that when a bank's contributed capital is "impaired"
(when the retained earnings deficit is in excess of 40% of contributed
capital), the Superintendent shall order the bank to restore its capital
impairment within 60 days of the issuance of such an order. If the
contributed capital is not restored by other means, the bank's board is
required to levy and collect an assessment on its outstanding common shares
pursuant to Section 423 of the California Corporations Code. The date the
bank levies the assessment must be within 60 days after the Superintendent's
order and the resolutions levying the assessment of the common stock must fix
a date not more than 60 days after the date of the adoption of the assessment
resolution on which the assessment is payable (the "Payable Date"); fix a
date not less than 30 nor more than 60 days from the Payable Date on which
such assessment becomes delinquent if not paid
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(the "Delinquency Date"); fix a date not less than 15 nor more than 60 days
from the Delinquency Date for the sale of the delinquent shares (the "Sale
Date"); and fix the hour and place of sale.
If an assessment is levied, the shareholders of the bank are required to
pay the assessment on a pro rata basis determined by the number of shares
held by each shareholder. If a shareholder has not paid the amount of the
assessment by the Delinquency Date, the shareholder may, prior to the Sale
Date, redeem his shares by paying the amount of the assessment together with
a penalty of 5% of the amount of the assessment on such shares. If a
particular shareholder fails or refuses to pay such shareholder's pro rata
portion of the assessment, the assessed shares may be sold by the bank in
satisfaction of the assessment and penalties thereon. The shareholders are
not subject to personal liability for payment of such an assessment. The
bank's only remedy for the collection of any such assessment is the sale of
the shares as described above or, in the event no such sale can be
consummated, forfeiture of such shares.
Holding Company Common Stock is not assessable. Under applicable
regulatory policies, however, holding companies of federally insured
financial institutions such as the Bank are required to serve as a "source of
strength" for their insured subsidiaries. As a practical matter, this may
result in the Holding Company being required by regulatory order or directive
to contribute additional capital to the Bank, to guarantee certain Bank
obligations or to take other actions requiring the investment of Holding
Company capital or resources for the Bank's benefit.
CLASSIFICATION OF BOARD OF DIRECTORS
The Bank's Articles of Incorporation does not permit the Bank Board of
Directors to be divided into classes with any class having a term of office
of longer than one year. Each director of the Bank must be elected annually.
However, the Holding Company's Articles of Incorporation and Bylaws provide
for its Board of Directors to be divided into classes with any class having a
term of two or three years, if and when the Holding Company becomes a "listed
corporation".
VOTING RIGHTS
In addition to the description of voting rights contained in "COMPARISON
OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON
STOCK - BANK COMMON STOCK" and "- HOLDING COMPANY COMMON STOCK", the Bank may
amend its Articles of Incorporation or Bylaws to eliminate cumulative voting
if and when the Bank becomes a "listed corporation" (as defined above).
NUMBER OF DIRECTORS
Although the Corporations Code does not require the Holding Company or
the Bank to maintain any specific range of number of directors, the number of
directors of the Holding Company and the Bank may not be less than a stated
minimum nor more than a stated maximum (which in no case shall be greater
than two times the stated minimum minus one) with the exact number of
directors to be fixed, within the limits specified. The Bank Bylaws
currently provide that the number of directors on the Bank Board of Directors
may not be fewer than eight nor more than fourteen, and the current number of
members on the Bank's Board of Directors has been fixed at eleven. The
Holding Company Bylaws currently provide that the number of directors on the
Holding Company Board of Directors may not be fewer than nine nor more than
seventeen, and the current number of members on the Holding Company's Board
of Directors has been fixed at eleven.
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DIVIDEND RESTRICTIONS. Since the Bank is a state-charted bank, its
ability to pay dividends or make distributions to its shareholders is subject
to restrictions set forth in the California Financial Code. The California
Financial Code provides that neither a bank nor any majority-owned subsidiary
of a bank may make a distribution to its shareholders in an amount which
exceeds the lesser of (i) the bank's retained earnings; or (ii) the bank's
net income for its last three fiscal years, less the amount of any
distributions made by the bank or by any majority-owned subsidiary of a bank
may, with the prior approval of the Superintendent, make a distribution to
the shareholders of the bank in an amount not exceeding the greatest of (i)
its retained earnings; (ii) its net income for its last fiscal year; or (iii)
stockholders' equity of a bank is inadequate or that the making of a
distribution by a bank would be unsafe our unsound, the Superintendent may
order the bank to refrain from making a proposed distribution.
The ability of the Holding Company to pay cash dividends is limited by
the provisions of Section 500 of the California Corporations Code, which
prohibits the payment of dividends unless (i) the retained earnings of the
corporation immediately prior to the distribution exceeds the amount of the
distribution; (ii) the assets of the corporation exceed 11/4 times its
liabilities; or (iii) the current assets of the corporation exceed its
current liabilities, but if the average pre-tax earnings of the corporation
before interest expense for the two years preceding the distribution was less
than the average interest expense of the corporation for those years, the
current assets of the corporation must exceed 11/4 times its current
liabilities.
DISSENTERS' RIGHTS. Pursuant to the General Corporation Law of
California, holders of Holding Company Common Stock would be entitled,
subject to the provisions of Chapter 13, to dissenters' rights in connection
with any transaction which constitutes a reorganization (as defined in
Section 181 of the California Corporations Code). However, pursuant to the
California Financial Code, shareholders of Bank Common Stock are not entitled
to dissenters' rights in connection with any transactions between two banking
institutions which constitutes a reorganization (as defined in Section 181 of
the California Corporations Code) where the Bank is the corporation surviving
such transaction, even if dissenters' rights were otherwise available
pursuant to Chapter 13. Therefore, no dissenters' rights will apply to the
Reorganization.
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RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of California
and Federal law and regulations and California corporate law, as well as the
Articles of Incorporation and Bylaws of the Holding Company, relating to stock
ownership and transfers, the Board of Directors and business combinations, all
of which may be deemed to have "anti-takeover" effects. The description of
these provisions is necessarily general and reference should be made to the
actual law and regulations and to the Articles of Incorporation and Bylaws of
the Holding Company. See "ADDITIONAL INFORMATION" as to how to obtain a copy of
these documents.
CALIFORNIA AND FEDERAL BANKING LAW
The Federal Change in Bank Control Act of 1978 prohibits a person or group
of persons "acting in concert" from acquiring "control" of a bank holding
company unless the Federal Reserve Bank (the "FRB") has been given 60 days'
prior written notice of such proposed acquisition and within that time period
the FRB has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made prior to the expiration of the
disapproval period if the FRB issues written notice of its intent not to
disapprove the action. Under a rebuttable presumption established by the FRB,
the acquisition of more than 10% of a class of voting stock of a bank with a
class of securities registered under Section 12 of the Securities Exchange Act
of 1934, as amended (such as the Common Stock), would, under the circumstances
set forth in the presumption, constitute the acquisition of control.
Under the California Financial Code, no person shall, directly or
indirectly, acquire control of a California licensed bank or a bank holding
company unless the Superintendent has approved such acquisition of control. A
person would be deemed to have acquired control of the Holding Company under
this state law if such person, directly or indirectly, has the power (i) to vote
25% or more of the voting power of the Holding Company or (ii) to direct or
cause the direction of the management and policies of the Holding Company. For
purposes of this law, a person who directly or indirectly owns or controls 10%
or more of the Common Stock would be presumed to control the Holding Company.
In addition, any "company" would be required to obtain the approval of the
FRB under the Holding Company Holding Company Act of 1956, as amended (the "BHC
Act"), before acquiring 25% (5% in the case of an acquiror that is, or is deemed
to be, a bank holding company) or more of the outstanding Common Stock of, or
such lesser number of shares as constitute control over, the Holding Company.
ANTI-TAKEOVER PROVISIONS IN HOLDING COMPANY'S ARTICLES OF INCORPORATION
The Holding Company's Articles of Incorporation contain certain provisions
that deal with matters of corporate governance and certain rights of
shareholders. The
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following discussion is a general summary of the Holding Company's Articles of
Incorporation and regulatory provisions relating to stock ownership and
transfer, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These proposed provisions
may have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors but which individual Holding Company
stockholders may deem to be in their best interest or in which stockholders may
receive a substantial premium for their shares over then current market prices.
As a result, shareholders who might desire to participate in such a transaction
may not have an opportunity to do so. Such provisions will also render the
removal of incumbent Board of Directors or management of the Holding Company
more difficult. Any provision requiring more than a majority vote by the
Holding Company's stockholders may only be effective for a two year period from
its effective date, unless renewed by the Board of Directors and the
stockholders. The following description of certain of the amendments to the
Articles of Incorporation of the Holding Company is necessarily general, and
reference should be made in each case to such Articles of Incorporation, which
is contained as an exhibit to the Holding Company's registration statement. See
"ADDITIONAL INFORMATION" as to how to obtain a copy of these documents.
BOARD OF DIRECTORS. When the Holding Company becomes a "listed
corporation", as defined in "COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING
COMPANY COMMON STOCK AND BANK COMMON STOCK - HOLDING COMPANY COMMON STOCK," the
Board of Directors of the Holding Company will be divided into three classes,
each of which shall contain approximately one-third of the whole number of the
members of the Board. The members of each class shall be elected for a term of
three years, with the terms of office of all members of one class expiring each
year so that approximately one-third of the total number of directors are
elected each year. The effect of a vacancy on the Board of Directors is also
described in "COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON
STOCK AND BANK COMMON STOCK - HOLDING COMPANY COMMON STOCK." The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a stockholder group to fully use
its voting power to gain control of the Board of Directors without consent of
the incumbent Board of Directors of the Holding Company.
CUMULATIVE VOTING AND SPECIAL MEETINGS. if the Holding Company becomes a
"listed corporation,"the Articles of Incorporation do not provide for cumulative
voting for any purpose, as described in "COMPARISON OF THE RIGHTS OF HOLDERS OF
HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK - HOLDING COMPANY COMMON
STOCK."
AUTHORIZED SHARES. The Articles of Incorporation authorize the issuance of
50,000,000 shares of Common Stock and 25,000,000 shares of preferred stock. The
shares of Common Stock and preferred stock were authorized in an amount greater
than that to be issued in the Reorganization to provide the Holding Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions,
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financings, acquisitions, stock dividends, stock splits and the exercise of
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Holding Company. The Board of Directors
also has sole authority to determine the terms of any one or more series of
preferred stock, including voting rights, conversion rates, and liquidation
preferences. As a result of the ability to fix voting rights for a series of
preferred stock, the Board has the power, to the extent consistent with its
fiduciary duties to issue a series of preferred stock to persons friendly to
management in order to attempt to block a tender offer, merger or other
transaction by which a third party seeks control of the Holding Company, and
thereby assist members of management to retain their positions. The Holding
Company's Board has no present plans for the issuance of additional shares,
other than the issuance of shares of Common Stock upon exercise of stock
options.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATION WITH PRINCIPAL
STOCKHOLDERS. The Articles of Incorporation require the approval of the holders
of at least 66-2/3% of the Holding Company's outstanding shares of voting stock
to approve certain "Business Combinations" (as defined in therein) involving a
"Related Person" (as defined therein) except in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Holding Company's Board of Directors who are unaffiliated with the Related
Person and were directors prior to the time when the Related Person became a
Related Person, as described more fully in "COMPARISON OF THE RIGHTS OF HOLDERS
OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK - HOLDING COMPANY COMMON
STOCK."
Under California law, absent this proposed provision, business
combinations, including mergers, consolidations and sales of substantially all
of the assets of a corporation must, subject to certain exceptions, be approved
by the vote of the holders of a majority of the outstanding shares of common
stock of the Holding Company and any other affected class of stock. The
increased stockholder vote required to approve a business combination may have
the effect of foreclosing mergers and other business combinations which a
majority of stockholders deem desirable and place the power to prevent such a
merger or combination in the hands of a minority of stockholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. The Holding Company's
Articles of Incorporation must be approved by a majority vote of its Board of
Directors and also by a majority of the outstanding shares of its voting stock,
provided, however, that an affirmative vote of at least 66-2/3% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Articles of Incorporation, including the provision limiting voting rights, the
provisions relating to approval of certain business combinations, the number and
classification of directors, director and officer indemnification by the Holding
Company and amendment of the Holding Company's Bylaws and Articles of
Incorporation, as described in "COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING
COMPANY COMMON STOCK AND BANK COMMON
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STOCK - HOLDING COMPANY COMMON STOCK." The Holding Company's Bylaws may be
amended by its Board of Directors, or by a vote of 66-2/3% of the total votes
eligible to be voted at a duly constituted meeting of stockholders.
STOCKHOLDER NOMINATIONS AND PROPOSALS. The Bylaws of the Holding Company
require a stockholder who intends to nominate a candidate for election to the
Board of Directors to give not less than 10 days' advance notice to the
Secretary of the Holding Company. The Articles of Incorporation provide that a
stockholder who desires to raise new business to provide certain information to
the Holding Company concerning the nature of the new business, the stockholder
and the stockholder's interest in the business matter. Similarly, a stockholder
wishing to nominate any person for election as a director must provide the
Holding Company with certain information concerning the nominee and the
proposing stockholder.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF THE HOLDING COMPANY'S ARTICLES
OF INCORPORATION. The Board of Directors of the Holding Company believes that
the provisions described above are prudent and will reduce the Holding Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by its Board of Directors. The Board of
Directors believes these provisions are in the best interest of the Holding
Company and its stockholders. In the judgment of the Board of Directors, the
Holding Company's Board will be in the best position to determine the true value
of the Holding Company and to negotiate more effectively for what may be in the
best interest of its stockholders. Accordingly, the Board of Directors believes
that it is in the best interest of the Holding Company and its stockholders to
encourage potential acquirors to negotiate directly with the Board of Directors
of the Holding Company and that these provisions will encourage such
negotiations and discourage hostile takeover attempts. It is also the view of
the Board of Directors that these provisions should not discourage persons from
proposing a merger or other transaction at a price reflective of the true value
of the Holding Company and which is in the best interest of all stockholders.
Attempts to acquire control of financial institutions have recently become
increasingly common. Takeover attempts which have not been negotiated with and
approved by the Board of Directors present to stockholders the risks of a
takeover on terms which may be less favorable than might otherwise be available.
A transaction which is negotiated and approved by the Board of Directors, on the
other hand, can be carefully planned and undertaken at an opportune time in
order to obtain maximum value of the Holding Company and its stockholders, with
due consideration given to matters such as the management and business of the
acquiring corporation and maximum strategic development of the Holding Company's
assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it to incur great expense. Although a
tender offer or other takeover attempt may be made at a price substantially
above the current market prices, such offers are sometimes made for less than
all of the outstanding shares of a target company. As a result, stockholders
may be presented with the
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alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an enterprise which is under
different management and whose objectives may not be similar to those of the
remaining stockholders. The concentration of control, which could result from a
tender offer or other takeover attempt, could also deprive the Holding Company's
remaining stockholders of benefits of certain protective provisions of the
Exchange Act, if the number of beneficial owners became less than the 300
thereby allowing for Exchange Act deregistration.
Despite the belief of the Holding Company as to the benefits to
stockholders of these provisions of the Holding Company's Articles of
Incorporation, these provisions may also have the effect of discouraging a
future takeover attempt which would not be approved by the Holding Company's
Board, but pursuant to which stockholders may receive a substantial premium for
their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have any opportunity
to do so. Such provisions will also render the removal of the Holding Company's
Board of Directors and of management more difficult. The Board of Directors of
the Holding Company, however, has concluded that the potential benefits outweigh
the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders, the Holding Company may adopt additional charter provisions
regarding the acquisition of its equity securities that would be permitted for a
California business corporation. The Holding Company does not presently intend
to propose the adoption of further restrictions on the acquisition of the
Holding Company's equity securities.
The cumulative effect of the restriction on acquisition of the Holding
Company contained in the Articles of Incorporation and Bylaws, federal law and
California law may be to discourage potential takeover attempts and perpetuate
incumbent management, even though certain stockholders of the Holding Company
may deem a potential acquisition to be in their best interest, or deem existing
management not to be acting in their best interests.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE BANK
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes and trends related to
the financial condition of the Bank and the results of its operations. This
discussion and analysis should be read in conjunction with the Bank's audited
and unaudited financial statements and the notes thereto included elsewhere
in this report.
As reported in Note L to the Financial Statements, Bank of Santa Maria
and Templeton Nation Bank were merged on September 8, 1995. All prior years'
numbers contained in this section have been restated to give effect for this
merger on a pooling of interest basis.
Reference should also be made to Note I to the Interim Financial
Statements, where an evaluation has been made of the financial effects of the
merger with Citizens Bank of Paso Robles on May 3, 1996, which was accounted
for using the purchase method of accounting.
OVERVIEW
The Bank reported net earnings of $2,754,000, or $.98 per share for the
first nine months of 1996. This represents an increase of 10.5% over a the
same period in 1995, where net earnings were $2,492,000, or $.91 per share.
The increase in profitability is the net results of several major factors,
both positive and negative, which occurred in the nine month period under
review here. On a pre-tax basis, the difference between the two periods is
approximately $430,000. This recap is presented as a preview to a more
detailed discussion to follow. All numbers are pre-tax figures.
Contribution of former Citizens' branches to
profitability since merger $144,000
Reduction in net losses on the sale of fixed
assets and other real estate 183,000
Reduction in regulatory assessments 238,000
Reduction in merger-related expenses 270,000
Reduction in provision of loan losses 315,000
Increase in promotional and advertising costs (80,000)
Decline in net interest income (excluding the
effects of Citizen merger) (800,000)
--------
CHANGE IN PRETAX INCOME BETWEEN THE TWO NINE MONTH PERIODS $430,000
--------
--------
Other key financial ratios are listed below to facilitate easy comparison:
TABLE 1 - KEY FINANCIAL RATIOS
FOR PERIOD ENDED
SEPT. 30, 1996 SEPT. 30, 1995
- --------------------------------------------------------------------------------
Annualized return on average assets 1.34% 1.35%
Annualized return on average equity 12.94% 13.12%
Annualized return on beginning equity 13.38% 13.89%
Dividend payout ratio 35.59% 10.53%
Average equity to average assets 10.36% 10.27%
NET INTEREST INCOME AND NET INTEREST MARGIN
Table 2 entitled AVERAGE BALANCE AND INTEREST RATES shows the Bank's
average assets, liabilities, and stockholders' equity with the related
interest income, interest expense and rates for the nine month interim
periods ended September 30, 1996, and September 30, 1995; such information
for the final year ends December 31, 1995, 1994 and 1993 is contained in the
1995 Annual Report of the Bank that is contained in "ANNUAL REPORT" herein.
Rates for tax preferenced investments are
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shown on a tax equivalent basis using a 34% tax rate. Table 3 entitled RATES
AND VOLUME ANALYSIS reports the factors causing the change in net interest
income. Reference should be made to both Table 2 and Table 3 to assist in
understanding this major component of bank profitability.
Net interest income is the difference between the interest and fees
earned on interest-bearing assets, such as loans and investments, and the
interest paid on interest-bearing liabilities, such as deposits. Net
interest income is similar to "gross profits on sales" used in financial
statements for retail sales organizations. Net interest income for the first
nine months of 1996, was $10.6 million compared to $10.8 million for the same
period in 1995. Net interest income, when expressed as a percentage of total
average interest-earning assets, (defined herein as investments, Fed funds and
net loans) is referred to as net interest margin or NIM. The Bank's NIM was
5.91% for the first nine months of 1996, compared with 6.67% for a similar
period in 1995.
NIM is used as a measure of the efficiency of the Bank's asset/liability
management. The Bank's NIM declined by approximately 11.4% between the period
ended September, 1995 and the same period in 1996, with most of the decline
occurring during the last quarter of 1995. There are several reasons for
this decline, which are best explained by an analysis of the NIM's major
components, interest income and interest expense.
The first component of NIM is interest income. Loans are the largest
interest bearing assets group which contributes to interest income. Loan
demand in California has not yet recovered. Although the average earning
assets, (AFTER EXCLUDING THE EFFECT OF THE PURCHASE OF CITIZENS' ASSETS)
increased by approximately $10 million between September 30, 1995 and
September 30, 1996, loans as a percentage of earning assets declined from
67% to 56%. The investment portfolio absorbed these dollars which resulted
in the percentage of earning assets in investments moving up by 26.7% to 34%
of pre-Citizen's average earning assets. This change in mix of approximately
$5 million from the higher yielding loans grouping to the moderate yields
available in investments that would have the effect of lowering interest
income by approximately $200,000. However, in addition, the bank's average
base rate declined from 8.89% for the first nine months of 1995, to 8.28%
for the same period in 1996. This 61 basis point move has a significant
effect on the bank's loan portfolio, as approximately 38% of all bank loans
are tied to base rates which reprice immediately upon movements in prime
rates. Close to 60% of all loan dollars are subject to repricing within 90
days, and more than 72% of all loan dollars can be repriced within any 12 month
period. The actual decline in effective rates of the loan portfolio was 62
basis points from the third quarter of 1995 to the third quarter of 1996.
During the third quarter of 1995, the bank benefited from the payoff of a
large loan, which had been on non-accrual since 1991. As reported in the
annual report, this resulted in the recapture of over $270,000, of which
$210,000 would have been reported over several years prior to 1995. The
recapture of this prior period interest resulted in increasing the
year-to-date third quarter effective average loan yield by approximately 19
basis points. The restated loan yield as of September 30, 1995, would have
been 11.03% and the overall decline between periods would have been reduced
to 43 basis points. The effect on interest loan income of this overall
decline in interest rates would approximate $475,000, excluding the $270,000
from the large loan payoff.
Interest income is also generated from the bank's investment portfolio,
where overall income between the two periods increased by $900,000. This was
largely attributable to the increase in volume by close to $20 million,
although the effective yield on the portfolio increased by 19 basis points.
Total interest income on earning assets for the nine months ended
September 30, 1996, was up by $593,000 over the nine months reported in 1995,
despite the large decline in interest rate yields. This is primarily the
result of the increase in average loans outstanding acquired in the Citizen's
purchase.
The funding of earning assets comes primarily from deposits. Between
September of 1996 and September of 1995, the percentage of average interest
bearing deposits remained constant at approximately 78% of all deposits.
However, the mix among average interest bearing deposits changed with time
deposits growing from 32.5% to 45.3% of all average interest bearing funds.
This resulted in an increase in the cost of interest-bearing funds by 20
basis points at the same time interest-earning assets were experiencing a
decline of 61 basis points. Contributing to the change in deposit mix was
the Bank's entrance in the northern San Luis Obispo County market place where
meeting competition has required the Bank to be more aggressive than in the
past.
The average interest rate from interest expense used in NIM is based upon
average earning assets rather than average interest-bearing deposits.
Accordingly, fluctuations in earning assets can affect both the interest
yield and the interest cost
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percentages. Earning assets, as a percentage of total assets, were
essentially constant between the two periods, only the mix rather than the
volume of earning assets had any effect on the decline in NIM by 76 basis
points. Discounting the effect of the large non-accrual loan payoff, the
decline in NIM would have been reduced to 63 basis point. A quarter-by
quarter review of the decline of the NIM (again after discounting the effect
of the large prior period recapture), shows that 64% of the decline occurred
in the last quarter of 1995, during the same period when slowness in the
economy promoted several declines in market rates within a seven month period.
TABLE 2 - AVERAGE BALANCES AND INTEREST RATES
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED 09/30/96 FOR THE NINE MONTHS ENDED 09/30/95
---------------------------------- ----------------------------------
AVERAGE AMOUNT AVERAGE AMOUNT
BALANCE OF AVERAGE BALANCE OF AVERAGE
(000'S) INTEREST RATE (000'S) INTEREST RATE
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
INVESTMENT SECURITIES
TAXABLE $ 63,731 $ 2,837 5.95% $ 47,658 $ 2,046 5.74%
NON-TAXABLE 14,754 425 5.82% 10,948 309 5.71%
-------- ------- ------ -------- ------- -----
TOTAL SECURITIES 78,485 3,262 5.92% 58,606 2,355 5.73%
-------- ------- ------ -------- ------- -----
FEDERAL FUNDS SOLD 12,915 510 5.27% 12,986 543 5.59%
NET LOANS 152,652 12,114 10.60% 147,705 12,395 11.22%
-------- ------- ------ -------- ------- ------
*TOTAL EARNING ASSETS* 244,051 $15,885 8.81% 219,297 $15,293 9.42%
-------- ------- ------ -------- ------- ------
------- ------ ------- ------
TOTAL NON-EARNING ASSETS 30,497 28,065
-------- --------
**TOTAL ASSETS** $274,548 $247,363
-------- --------
-------- --------
LIABILITIES AND CAPITAL:
INT-BEARING DEMAND/SAVINGS 104,422 1,797 2.30% $108,740 2,130 2.62%
TIME DEPOSITS UNDER $100M 58,163 2,361 5.42% 43,401 1,627 5.01%
TIME DEPOSITS $100M OR + 28,458 1,154 5.42% 19,830 756 5.10%
-------- ------- ------ -------- ------- ------
TOTAL INT/BEAR'G DEPOSITS 191,042 $ 5,313 3.71% 171,971 $ 4,513 3.51%
-------- ------- ------ -------- ------- ------
------- ------ ------- ------
DEMAND DEPOSITS 53,187 48,274
OTHER LIABILITIES 1,881 1,724
CAPITAL 28,438 25,393
-------- --------
**TOTAL LIAB & CAPITAL** $274,548 $247,363
-------- --------
-------- --------
SPREAD ON AVERAGE
INTEREST-BEARING FUNDS 5.10% 5.92%
INTEREST INCOME/EARNING ASSETS 8.81% 9.42%
INTEREST EXPENSE/EARNING ASSETS 2.91% 2.75%
------ ------
NET INTEREST MARGIN 5.91% 6.67%
------ ------
------ ------
</TABLE>
(1) NON-ACCRUAL LOANS HAVE BEEN INCLUDED IN NET LOAN FIGURES
(2) YIELDS ARE CALCULATED ON A TAX EQUIVALENT BASIS
The impact of changes in the net interest income spread between the two
nine month periods can also be analyzed by reference to Table 3, where
increase or decreases in interest income or interest expense are broken down
into two components. Such information for the fiscal year ending December 31,
1995, 1994 and 1993 is contained in the 1995 Annual Report of the
39
<PAGE>
Bank that is contained in "Annual Report" herein. Changes due primarily to
increases or decreases in the size of each category are called volume
variances. Changes due primarily to increases or decreases in rates are
called rate variances.
TABLE 3 - RATE AND VOLUME ANALYSIS
Period ended September 30,
1996 over 1995
Increase (Decrease)
due to change in
----------------------------------
INTEREST EARNING ASSETS: Volume Rate Total
- ------------------------------------------------------------------------------
Investment Securities
Taxable $ 715 $ 76 $ 791
Non-Taxable 110 6 116
------ ----- -----
TOTAL SECURITIES 824 82 907
Federal funds sold (3) (30) (33)
Net loans 585 (867) (282)
------ ----- -----
TOTAL EARNING ASSETS $1,406 $(814) $ 593
------ ----- -----
------ ----- -----
INTEREST BEARING LIABILITIES:
Interest-bearing demand/savings (226) (106) (331)
Time deposits under $100,000 594 143 737
Time deposits $100,000 or above 344 50 394
------ ----- -----
TOTAL INTEREST
BEARING DEPOSITS $ 713 $ 87 $ 800
------ ----- -----
------ ----- -----
Increase (decrease) in interest differential $ 694 $(901) $(208)
------ ----- -----
Information is provided in each category with respect to (a) changes
attributable to changes in volume (changes in volume multiplied by prior
period's rate); (b) changes attributable to changes in rates (changes in
rates multiplied by prior volume); and (c) the net change. Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the volume and rate changes.
The method of accounting for the merger of Citizens into Bank of Santa
Maria tends to limit the full benefits normally derived from Table # 3. If
we attempted to isolate the effects of the purchase of Citizens, and applying
the variance to the volume column, certain changes between periods become
clearer.
RESTATED RATE AND VOLUME ANALYSIS
RESTATED PER TABLE
VOLUME RATE TOTAL 3
----------------------------------
Total Earning Assets $477 $(814) $(337) $ 593
Total Interest-Bearing Liabilities $388 $ 87 $ 475 $ 800
---- ----- ----- -----
Increase (decrease) in interest differential $ 89 $(901) $(812) $(208)
---- ------ ------ ------
---- ------ ------ ------
The level of non-performing loans in the Bank's portfolio affects the
amount of interest income. As noted in the notes to the financial
statements, when serious doubt exists as to the repayment of a loan, that
loan is placed on non-accrual status and previously accrued and uncollected
interest for the current year is reversed against income. Had non-performing
loans as of September 30, 1996 complied with original terms, related interest
income would have been approximately $51,000, of which approximately $15,000
was collected. The difference of approximately $36,000 was not taken into
income, which resulted in lowering NIM for the first nine months of 1996 by
less than 2 basis points.
SUMMARY OF CREDIT LOSS EXPERIENCE
The Bank maintains an allowance for loan losses, which is reduced by net
loan charge-offs and increased by provisions for loan losses charged against
operating income. The adequacy of the allowance for loan losses is reviewed
on a continual basis. The amount of provisions and the level of the total
allowance are based upon the Bank's loan loss experience, the performance of
loans in the portfolio, evaluation of loan collateral, the financial
abilities and net worth of the borrowers or guarantors and such other factors
as, in management's judgment, deserve recognition.
40
<PAGE>
In addition to internal evaluation, the adequacy of the allowance for
loan losses is subject to review by regulators and outside consultants.
While no assurance can be given that economic conditions, which adversely
affect the Bank's service areas, or other unforeseen circumstances, will not
require increased provisions for loan losses in the future. It is
management's opinion that the allowance for loan losses as of September 30,
1996, of $2,580,000 (or 1.57% of total loans) was adequate to absorb losses
from any known or inherent risks in the portfolio. Table 4 shows comparative
statistics and a more detailed breakdown of activity in the loan loss reserve
account. The level of the provision, at $ 0 for 1996, reflects the limited
growth of outstanding loan dollars, the favorable ratio of charge-offs and
reduction in non-performing loans to outstanding loans during 1996. A
provision of $315,000 was made during the nine month period ending September
30, 1995. Such information for the fiscal year ending December 31, 1993,
1992 and 1991 is contained in the 1995 Annual Report of the Bank that is
contained in "ANNUAL REPORT" herein.
TABLE 4 - SUMMARY OF LOAN LOSS EXPERIENCE
FOR PERIOD ENDED
---------------------------------------
September 30, 1996 September 30, 1995
- ------------------------------------------------------------------------------
BALANCE OF RESERVE AT
BEGINNING OF YEAR $2,537 $2,228
CHARGE-OFFS
Consumer 92 92
Commercial 97 164
Agricultural 0 0
Construction and Development 19 0
Other Real Estate Loans 53 152
------ ------
TOTAL CHARGE-OFFS 261 408
------ ------
RECOVERIES
Consumer 15 15
Commercial 60 46
Agricultural 0 0
Construction and Development 0 0
Other Real Estate Loans 1 12
------ ------
TOTAL RECOVERIES 76 73
------ ------
NET CHARGE-OFFS 185 335
Adjustment due to Citizens Merger 228 0
Provision charge to operations 0 315
------ ------
BALANCE AT YEAR-END $2,580 $2,208
------ ------
------ ------
Ratio of net charge-offs to average
net loans during the nine month period 0.12% 0.23%
Allowance for loan losses to loans
at end of period 1.76% 1.51%
Net loan charge-offs to beginning
of period allowances for loan losses 7.29% 15.04%
Net loan charge-offs to provisions
charged to operating expense N/A 106.35%
The ratio of net charge-offs to average net loans during the 1994-1996,
period remains quite favorable when compared with industry standards. The
1996 net charge-off ratio is extremely encouraging, although the local
economy remains weak. The Bank anticipates that net charge-offs will remain
stable but has budgeted to provide approximately $50,000 per month to the
provision for loan losses account, if conditions warrant a change in the
future.
41
<PAGE>
NON INTEREST INCOME
Non-Interest income increased by $ 254,000 to $2.2 million for the first
nine months of 1996 over the similar period in 1995. Service charges related
to the Bank's deposit products account for the largest portion of other
operating income. The increase noted in service charges and fees comes
primarily from increased service charges on many of the bank's deposit
products. Merchant discount fees are obtained in conjunction with the
processing of credit card drafts and related products. Increases in fees are
generally offset by increased costs from the bank's service provider. Other
fee income includes servicing fees on loans sold into the secondary market,
and other non-deposit related charges including wires, safe deposit, ATM's,
etc. The increase noted in this category was primarily from service and loan
fees on the loans sold into the secondary market. Other non-interest income
includes net gains on sale of fixed assets, and other real estate, plus
income generated from the holding of other real estate owned. The increase
noted in this category was from the gain on sale of fully depreciated
computer products.
NON-INTEREST EXPENSE
The Bank's total non-interest expense declined by $69,000 to $8.3 million
for the first nine months of 1996, when compared with the first nine months
of 1995. As noted before, the reduction in the cost of FDIC insurance was a
major contributor to this reduction. However, other savings from the merger
with Templeton National Bank (included in OTHER EXPENSES), also offset other
increases in the other expense categories attributable to the Bank's growth.
Non-interest expense, as a percentage of average assets, declined to 4.1%
during this nine month period from the historical range of 4.5% to 4.6%
BALANCE SHEET ANALYSIS
Total assets as of September 30, 1996, have increased 11.6% to $294.1
million in comparison to total assets of $263.6 million as of the end of
1995. The growth in assets during the same period in 1995 was only 4.1
percent. However, the majority of the growth in assets and in deposits during
1996, can be attributed to the acquisition of Citizens Bank.
Net loans have increased 8.9% to $164.5 million during this 1996.
Deposits grew throughout the period with a 12.2% increase to $264.8 million.
Again, the purchase of Citizens Bank of Paso Robles as of May 3, 1996, was
the primary reason for the large increases noted. As of the acquisition
date, Citizens' assets totaled approximately $32 million, loans were at $18
million and deposits were at just over $29 million.
INVESTMENT SECURITIES
The Bank maintains a portfolio of investment securities to provide income
and to serve as a secondary source of liquidity for its operations in
conjunction with moneys sold overnight in the Federal funds market. The types
of investments held in the portfolio include; U.S. Treasury Bills and Notes,
Government Agency issues, short-term municipal issues and corporate
obligations guaranteed by the U.S. Government. The type of investments held
in the Bank's portfolio are influenced by several factors, among which are;
rate of return, maturity, and risk. Note B to the financial statements, sets
forth additional information regarding our investment portfolio as well as
Table 5, INVESTMENT PORTFOLIO which reports maturity distributions by
contractual maturity dates and weighted tax-equivalent rates by types of
investments. Such information for the fiscal year ending December 31, 1995,
1994 and 1993 is contained in the 1995 Annual Report of the Bank that is
contained in "ANNUAL REPORT" herein.
42
<PAGE>
TABLE 5 - INVESTMENT PORTFOLIOS
(In thousands)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
TOTAL SECURITIES WITHIN ONE YEAR 1-5- YEARS 5- 10 YEARS OVER 10 YEARS
---------------- --------------- ---------- ----------- -------------
Weighted Weighted Weighted Weighted Weighted
Book average Book average Book average Book average Book average
U.S. TREASURY value T/E yield value T/E yield value T/E yield value T/E yield value T/E yield
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity, at
Amortized Cost:
U.S. Treasury $ 3,203 6.85% $ 3,203 6.85% $ 0 0.00% $ 0 0.00% $ 0 0.00%
U.S. Government
Agencies 46,627 5.92% 13,192 5.78% $33,435 5.98% 0 0.00% 0 0.00%
Municipal Issues 11,629 6.61% 3,132 6.31% 7,630 6.52% 867 8.45% 0 0.00%
Other Debt Securities 3,031 5.57% 1,200 5.07% 1,832 5.89% 0 0.00% 0 0.00%
------- ----- ------- ----- ------- ----- ---- ----- ---- -----
64,490 6.07% 20,726 5.99% 42,897 6.07% 867 8.45% 0 0.00%
Available for Sale, at
Market:
U.S. Treasury 4,986 6.18% 3,482 5.68% 1,505 7.34% 0 0.00% 0 0.00%
U.S. Government
Agencies 17,519 5.94% 8,040 5.66% 9,479 6.17% 0 0.00% 0 0.00%
------- ----- ------- ----- ------- ----- ---- ----- ---- -----
22,505 5.99% 11,522 5.67% 10,984 6.33% 0 0.00% 0 0.00%
TOTAL SECURITIES $86,995 6.05% $32,248 5.87% $53,881 6.12% $867 8.45% $ 0 0.00%
------- ----- ------- ----- ------- ----- ---- ----- ---- -----
------- ----- ------- ----- ------- ----- ---- ----- ---- -----
</TABLE>
LOANS
Table 6, entitled LOAN PORTFOLIO ANALYSIS BY CATEGORY, sets forth the
distribution of the Bank's loan portfolio for the periods under review. During
1996, the loan portfolio mix had several notable changes. Consumer loans grew
by 13% and now represents 25% of the Bank's portfolio. Agricultural loans grew
by 9% and now represent 16% of the portfolio. Construction and land development
loans grew by 14% and other types of real estate loans declined to 20% of the
portfolio. Commercial loans, at 31% of the portfolio, remains the most
constant category for the Bank.
TABLE 6 - LOAN PORTFOLIO ANALYSIS BY CATEGORY
(In Thousands)
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1996 1995
-----------------------------
Consumer $ 41,500 $ 37,574
Commercial 50,299 46,561
Agricultural 25,667 18,818
Construction/Development 14,396 15,649
Other Real Estate Loans 32,614 31,817
-------- --------
TOTAL LOANS $164,476 $150,419
-------- --------
-------- --------
The vast majority of the loans in the portfolio are either amortizing
monthly or have relatively short maturities. This helps maintain liquidity
in the portfolio. Most of the loans which have floating rates are tied to
the Bank's base rate or other market rate indicators. This serves to lessen
the risk to the Bank from movement in interest rates, particularly rate
increases. See Table 7 in the annual report which shows the maturity of
certain loan categories outstanding as of December 31, 1995, net of deferred
fees and deferred costs.
43
<PAGE>
NON-PERFORMING ASSETS At September 30, 1996, non-performing assets
(non-accrual loans, loans 90 days or more past due, restructured loans and
other real estate owned) totaled $2.4 million or .82% of total assets, up
from $1.4 million or .53% at December 31, 1995. At September 30, 1995, non
performing assets totaled $1.5 million, down from the December 31, 1994
balance of $3.1 million. The payoff on the large non-accrual loan mentioned
elsewhere in this discussion was the primary reason for this large reduction.
Management believes that non-performing loans are generally well secured and
that potential losses are reflected in the allowance for loan losses. In
November of 1996, the FDIC concluded its periodic safety and soundness
examination. At that time the internal grading system of the Bank was tested
against the findings of the FDIC examiners. Management was directed to
downgrade only one extension of credit, which reflects positively on
management's efforts to identify and manage credit problems on a timely
basis. There are no trends or uncertainties which management expects will
impact future operating results, liquidity, or capital resources. Management
is also not aware of any information where serious doubts exist regarding any
significant borrower's ability to comply with loan repayment terms. Table 7
in this discussion sets forth information on non-performing assets for the
periods indicated. The market value of other real estate owned and
collateral securing non-performing loans is regularly monitored for changes.
Such information for the fiscal year ending December 31, 1993, 1992 and 1991
is contained in the 1995 Annual Report of the Bank that is contained in
"ANNUAL REPORT" herein.
TABLE 7 - NON-ACCRUAL AND NON-PERFORMING ASSETS
(In thousands)
FOR PERIOD ENDED
----------------
SEPT. 30, 1996 SEPT. 30, 1995
- ---------------------------------------------------------------------------
Non-Accrual $ 640 $ 239
Loans currently accruing which are
past due 90 days or more 310 23
Restructured Loans 357 191
Other real estate owned 1,382 1,268
------ ------
TOTAL NON-PERFORMING ASSETS $2,689 $1,721
------ ------
Percentage of non-performing loans
to total loans 0.79% 0.30%
Percentage of non-performing assets
to total assets 0.91% 0.68%
DEPOSITS
As was noted, deposits have grown steadily over the reporting periods. The
average balances for deposit categories and their associated costs are presented
in Table 8, DETAILED DEPOSIT SUMMARY.
TABLE 8 - DETAILED DEPOSIT SUMMARY
(In thousands)
For the Periods Ending
----------------------
Sept. 30, 1996 Sept. 30, 1995
- ------------------------------------------------------------------------------
Average Average
Balance Rate Balance Rate
- ------------------------------------------------------------------------------
Interest-bearing demand 26,709 1.19% 25,103 1.34%
Savings accounts 31,255 2.42% 31,770 2.69%
Money market savings 46,458 2.86% 51,867 3.19%
TCD less than $100,000 58,163 5.42% 43,401 5.01%
TCD $100,000 or more 28,458 5.42% 19,830 5.10%
------ ----- ------ -----
TOTAL INTEREST-
BEARING DEPOSITS 191,042 3.71% 171,971 3.51%
----- -----
Demand 53,187 48,274
------ ------
TOTAL DEPOSITS $244,228 2.91% $220,245 2.74%
-------- ----- -------- -----
-------- ----- -------- -----
44
<PAGE>
The effective cost of all funds increased during 1996, as noted earlier in
this discussion. Demand deposits continue to represent 22% of all deposits.
However, funds formerly included in money market savings have gravitated towards
time deposits with the promise of better returns in exchange for liquidity.
Table 9 sets forth the remaining maturities of large denomination time
deposits, including public funds as of September 30, 1996.
TABLE 9 - MATURITY DISTRIBUTION OF TCD'S OF $100,000 OR MORE
(In thousands)
For period ending Sept. 30, 1996
--------------------------------
Three months or less $12,670
After three months to six months 8,763
After six months to one year 7,727
Over one year 2,761
-------
TOTAL $31,921
-------
-------
LIQUIDITY
Liquidity is the Bank's ability to meet fluctuations in deposit levels
and to provide for the credit needs of its customers. The objective in
liquidity management is to maintain a balance between the sources and uses of
funds. Principal sources of liquidity include interest and principal payments
on loans and investments, proceeds from the maturity of investments and
growth in deposits. The Bank holds overnight Federal funds as a cushion for
temporary liquidity needs. During the first nine months of 1996, Federal
funds averaged $12.9 million, or 4.7% of total average assets. During the
first nine months of 1995, Federal funds averaged $13.0 million or 5.2% of
total average assets. In addition, the Bank maintains Federal funds credit
lines with major correspondents aggregating $11.1 million, subject to the
customary terms for such arrangements.
There are several accepted methods of measuring liquidity as used by the
regulators. One ratio is referred to as the liquidity ratio and measures the
percentage of deposits which are used to fund cash, cash equivalents, and
marketable securities. The Bank has set a minimum standard percentage of
20%, and as of September 30, 1996, the Bank's liquidity ratio was 41.4%, more
than twice that set as a minimum to meet liquidity needs. The same ratio for
last year was 43.7%. The Bank appears to be sufficiently liquid to meet all
operating concerns.
CAPITAL RESOURCES
The primary source of capital for the Bank is the retention of operating
profits. The Bank reviews its capital needs on an ongoing basis to ensure an
adequate level of capital to support growth and to ensure depositor
protection. The level of capital required to operate safely is measured by
the regulators using three primary methodologies. The results of these
measurements are reported in Note H of the Interim Financial Statements.
The Bank has recently purchased land adjacent to the Paso Robles branch for
the purpose of building a permanent building. The cost of the land was
approximately $900,000. The Bank has sufficient liquidity to purchase the
land without financing either by debt or equity funding. The Bank of Santa
Maria can operate safely at its current level of capital and is positioned to
grow within acceptable parameters.
45
<PAGE>
INFORMATION CONCERNING THE BUSINESS
AND PROPERTIES OF THE HOLDING COMPANY
ORGANIZATION
The Holding Company was organized under the laws of California on
November 12, 1996 at the direction of the Board of Directors of the Bank for
the purpose of becoming a bank holding company by acquiring all of the
outstanding Bank Common Stock. Mr. William A. Hares has provided the Holding
Company's initial capitalization of $1,500 by purchasing 150 shares of
Holding Company Common Stock at $10.00 per share. Upon consummation of the
Reorganization, these 150 shares will be repurchased, for the same aggregate
sum of $1,500, and cancelled by the Holding Company, in accordance with the
terms of the "BSM Bancorp Stockholder Agreement" attached hereto as Appendix
II.
Prior to the Effective Time of the Merger, the Holding Company will
purchase, for $1,000, and will own 100% of the common stock of the Merger Corp.,
a California corporation organized for the sole purpose of facilitating the
Reorganization. At the Effective Time of the Merger, the outstanding shares of
Merger Corp. Common Stock will be cancelled and will cease to be outstanding.
See "BANK HOLDING COMPANY REORGANIZATION - ORGANIZATIONAL TRANSACTIONS."
BUSINESS
The Holding Company has not yet engaged in any substantial business
activity. The Holding Company has filed with the Federal Reserve Board its
application for prior approval to become a bank holding company through the
acquisition of 100% of the voting shares of the Bank pursuant to the BHC Act.
Furthermore, the Holding Company and the Merger Corp. have filed an application
with the FDIC, providing for the merger of the Merger Corp. with and into the
Bank. See "BANK HOLDING COMPANY REORGANIZATION - REGULATORY APPROVALS." Upon
consummation of the Reorganization, the Holding Company will own all of the
common stock of the Surviving Bank, the Surviving Bank will be the Holding
Company's wholly-owned bank subsidiary and the Holding Company will be
registered as a bank holding company. There can be no assurances that the
required approvals will be obtained, or as to conditions or timing of such
approvals.
Subject to constraints under the BHC Act, the Holding Company may acquire
other financial institutions in the future. See "BANK HOLDING COMPANY
REORGANIZATION - REASONS FOR THE REORGANIZATION." During the initial months
following the consummation of the Reorganization, the principal business
activity of the Holding Company will be to serve as the bank holding company for
the Surviving Bank. At the present time, the Holding Company has no specific
plans to engage in any activities other than acting as a bank holding company
for the Surviving Bank. The Holding Company may, however, seek to raise
additional equity capital through a sale of Holding Company securities shortly
following the Reorganization, although no specific proposals have been made at
this time.
MANAGEMENT
The Board of Directors of the Holding Company consists of Armand R. Acosta,
Richard E. Adam, Fred L. Crandall, Jr., D.D.S., A.J. Diani, William A. Hares,
Roger A. Ikola, M.D., Toshiharu Nishino, Joseph Sesto, Jr., William L. Snelling,
Mitsuo Taniguchi and Joseph F. Ziemba, M.D., all of whom are presently directors
of the Bank and who will continue to serve as directors of the Holding Company
until the first annual meeting of shareholders of the Holding Company and until
their successors are elected and qualified. It is anticipated that, initially,
directors of the Holding Company
46
<PAGE>
will receive no fees for their attendance at Holding Company Board of
Directors meetings. For additional information regarding the directors, see
"SOLICITATION OF WRITTEN CONSENTS - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
The officers of the Holding Company are, and upon consummation of the
Reorganization will continue to be, Mr. Hares, who will serve as President and
Chief Executive Officer, Mr. F. Dean Fletcher, who will serve as Executive Vice
President and Chief Financial Officer, Ms. Carol Bradfield, who will serve as
Executive Vice President, Ms. Susan D. Forgone, who will serve as Executive Vice
President, Mr. James D. Glines, who will serve as Executive Vice President, and
Mr. Snelling, who will serve as Secretary.
It is expected that until the officers of the Holding Company begin to
devote significant time to the separate management of the Holding Company's
business, which is not expected to occur until such time as the Holding Company
becomes actively involved in additional businesses, the officers will only
receive compensation for services as directors, officers and employees of the
Bank, and no separate compensation will be paid for their services to the
Holding Company. At the present time, the Holding Company does not intend to
employee any persons other than its officers. If the Holding Company
establishes or acquires other businesses, it may add additional employees at
that time.
EMPLOYEES
Currently, the Holding Company has no full-time or part-time employees. It
is anticipated that the Holding Company will utilize the employees of the
Surviving Bank without payment therefor until it becomes actively engaged in
business. Thereafter, the Holding Company will pay the Surviving Bank for a
fair and reasonable amount for all services furnished to it.
PROPERTIES
Currently, the Holding Company does not own or lease any property. It is
anticipated that the Holding Company will utilize the premises of the Surviving
Bank without payment therefor until it becomes actively engaged in business.
Thereafter, the Holding Company will pay the Surviving Bank for a fair and
reasonable amount for all services furnished to it.
LEGAL PROCEEDINGS
The Holding Company is not a party to any pending legal proceeding and is
unaware of any proceeding being contemplated against it by any governmental
entity.
INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE BANK
GENERAL
The Bank was incorporated under the laws of California on June 27, 1977,
was licensed by the Superintendent and commenced operations as a California
state-chartered bank on March 18, 1978. The Bank is a member of the Federal
Reserve System, and its deposits are insured by the FDIC to the maximum amount
permitted under the Federal Deposit Insurance Act.
The Bank currently operates 13 retail banking offices along the central
coast of California. The main office and two branch offices are located in the
City of Santa Maria with additional offices located in the communities of
Guadalupe, Oak Knolls, Vandenberg Village, Nipomo, Grover Beach,
47
<PAGE>
Pismo Beach, Paso Robles, Lompoc, and two offices in Templeton. The Bank
intends to open a new banking office in Atoscadero in February 1997. The
Bank has its headquarters in the City of Santa Maria at 2739 Santa Maria Way,
Santa Maria, California 93455. Its telephone number is (805) 937-8551.
The Bank has expanded from its initial branches in the larger community
of Santa Maria both to the North and to the South along a corridor following
U.S. highway 101. The economy in this area of California is based upon
agricultural, oil, tourism, light industry, the aerospace industries and
nuclear energy production. Services to support those employed in this
industries, (including medical, financial, and educational services) have
expanded the two county area increasing the population of the Bank's service
area to approximately 175,000. Certain economic activities are unique to
the area such as the lunar orbit space launching facility at Vandenberg Air
Force Base (which now is being actively used by large commercial enterprises)
and the production of seeds for numerous flowers grown worldwide. While
major oil companies have elected to do business elsewhere (due to the very
stringent county business regulation), smaller production companies has moved
in to continue the oil industry in the area. The moderate climate allows a
year round growing seasons for numerous vegetables and fruits. Vineyards and
cattle ranches make large contributions to the local economy. Access to
numerous recreational activities including both mountains and beaches
provide a fairly stable tourist industry from larger metropolitan area to the
North, South and East. The commerical space industry will continue to bring
"high tech" employment into the area. Due to the diversity of the industries
within the Bank's market area, the Central Coast, while not immune to
economic fluctuations, trend to enjoy more stability than many areas of both
the California marketplace and the country in general.
ACQUISITION OF TEMPLETON NATIONAL BANK
Following all necessary regulatory approvals, on September 8, 1995, the
Bank acquired Templeton National Bank ("Templeton") pursuant to an Agreement and
Plan of Reorganization dated March 10, 1995 providing for the merger of
Templeton into the Bank. The Agreement provided for Templeton shareholders to
receive shares of the Bank Common Stock based upon the comparative book values
of the banks at the closing plus a premium of $500,000. The Bank issued 397,561
shares of its Common Stock to the former shareholders of Templeton. As of the
merger date, Templeton's deposits were approximately $24 million, and loans were
approximately $18 million. Templeton had one office and two ATM locations.
Since the acquisition, one of the offsite ATM locations was closed as its
location was directly across from the recently acquired Templeton office of
Citizens Bank of Paso Robles. This acquisition was treated as a pooling
transaction for accounting purposes.
ACQUISITION OF CITIZENS BANK OF PASO ROBLES, N.A.
Following all necessary regulatory approvals, on May 3, 1996, the Bank
acquired Citizens National Bank of Paso Robles, N.A. ("Citizens") pursuant to an
Agreement and Plan of Reorganization dated October 30, 1995, providing for the
merger of Citizens into the Bank. The Agreement provided for the shareholders
of Citizens to receive cash per share at the rate of 1.6 times book value per
share of Citizens stock as the end of the month preceding the closing. The
exchange value used in the merger was $16.94 of each share of Citizens stock
surrendered. The transaction was treated as a purchase for accounting purposes
and approximately $1.9 million of goodwill was recorded. Acquired deposits were
recorded at approximately $29 million and acquired loans at $18 million. The
Bank continues to operate at both former Citizens' locations.
ACQUISITION OF EL CAMINO NATIONAL BANK.
Following all necessary regulatory approvals, on January 10, 1997, the Bank
acquired El Camino National Bank ("El Camino") pursuant to an Agreement and
Plan of Reorganization dated July 16, 1996, amended October 10, 1996,
providing for the merger of El Camino into the Bank. The Agreement provided
for the shareholders of El Camino to receive shares of Bank Common Stock
based upon the comparative book values of the banks as of the end of the
months preceding the closing. As of the closing date, El Camino's deposits
were approximately $16 million, and loans were approximately $12 million.
This acquisition was treated as a pooling transaction for accounting
purposes. The exchange value used in the merger was .7332 shares of Bank
Common Stock for each share of El Camino Common Stock. The Bank issued
201,678 shares to complete this transaction. El Camino had only one office
in Lompoc, California, and the Bank continues to operate from this location.
SERVICES
The Bank offers a full range of commercial banking services including the
acceptance of checking and savings deposits, Money Market checking and savings
accounts, Time Certificates of Deposit of varying maturities, Individual
Retirement Accounts, the making of commercial loans, various types of consumer
loans and real estate loans and provides safe deposits, travelers cheques,
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notary public and other customary non-deposit banking services. The Bank is a
merchant depository for Master Charge and Visa drafts enabling merchants to
deposit both types of drafts with the Bank.
Banks in California have been empowered to conduct certain insurance
activities and to market that services to the consuming public. The Bank did
obtain its Organizational Insurance License in the fall of 1989, but has not
elected to offer products which require this license.
The Bank's organization and operations have been designed to serve the
banking needs of individuals and small to medium sized businesses located in the
Northern Santa Barbara and San Luis Obispo County areas of California.
EMPLOYEES
As of September 30, 1996, the Bank had a total of 151 full-time employees
and 59 part-time employees. The management of the Bank believes that its
employee relations are satisfactory.
PROPERTIES
The Bank owns the land and buildings at nine of its twelve locations.
Those locations include:
OFFICE NAME ADDRESS
Head Office 2739 Santa Maria Way
Santa Maria, California
South Broadway 528 South Broadway
Santa Maria, California
Oak Knolls 1070 East Clark Avenue
Santa Maria, California
Guadalupe 905 Guadalupe Street
Guadalupe, California
Vandenberg Village 2745 Constellation
Vandenberg Village, California
Grover Beach 1580 Grand Avenue
Grover Beach, California
Pismo Beach 790 Price Street
Pismo Beach, California
Las Tablas 1025 Las Tablas Road
Templeton, California
Main Street 599 Main Street
Templeton, California
The Bank has an option to purchase land which it is currently leasing as
the parking lot adjacent to the Head Office. The option can be exercised at the
earlier of two events: (1) the
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expiration of the lease in December 1996, or (2) at any time during the lease
when requested by the lessor. The price has been set at the higher of
$270,000 or the currently fair market value. The Bank and the lessor are in
the process of arriving at the fair market value of the land. The Bank has
obtained a current appraisal of $285,000, and the lessor is in the process of
obtaining a second appriasal. As soon as the fair market value is
determined, the Bank intends to purchase the land.
The Bank also leases the land where the Nipomo branch has been built and a
portion of the land upon which the North Broadway branch building now stands.
Both leases were long-term (25 years with an option to renew for a like period),
and do contain the right of first refusal if the lessor elects to sell.
However, neither lease has an options to purchase and, therefore, no ownership
is assumed.
The Bank also leases the land upon which the modular unit at the Paso
Robles branch now sits. The lease expires in 1997. The Bank intends to
complete a new permanent building adjacent to the present location on land which
was recently purchase for this purpose.
The Bank also leases approximately 3,850 square feet of space for the
Lompoc branch office. The lease expires in 1999; subject to one option to renew
for five (5) years.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary,
routine litigation incidental to the Bank's business, to which the Bank is a
party or of which any of its property is subject.
SUPERVISION AND REGULATION OF
THE HOLDING COMPANY AND THE BANK
THE HOLDING COMPANY
If the Reorganization is consummated, the Holding Company, as a registered
bank holding company, will be subject to regulation under the BHC Act. The
Holding Company will be required to file with the Federal Reserve Board
quarterly and annual reports and such additional information s the Federal
Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board
may conduct examinations of the Holding Company and its subsidiaries.
The Federal Reserve Board may require that the Holding Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
or the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Holding
Company would be required to file written notice and obtain approval from the
Federal Reserve Board prior to purchasing or redeeming its equity securities.
Under the BHC Act and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Holding Company is required by the Federal Reserve Board to maintain certain
levels of capital. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND
THE BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION - CAPITAL
ADEQUACY GUIDELINES."
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The Holding Company will be required to obtain the prior approval of the
Federal Reserve Board for the acquisition of more than 5% of the outstanding
shares of any class of voting securities or substantially all of the assets of
any bank or bank holding company. Prior approval of the Federal Reserve Board
will also be required for the merger or consolidation of the Holding Company and
another bank holding company.
The Holding Company will be prohibited by the BHC Act, except in certain
statutorily prescribed instances, from acquiring direct or indirect ownership or
control of more than 5% of the outstanding voting shares of any company that is
not a bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, the Holding Company would be
able, subject to the prior approval of the Federal Reserve Board, to engage in
any, or acquire shares of companies engaged in, activities that are deemed by
the Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In making any such
determination, the Federal Reserve Board is required to consider whether the
performance of such activities by the Holding Company or an affiliate can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. The
Federal Reserve Board is also empowered to differentiate between activities
commenced DE NOVO and activities commenced by acquisition, in whole or in part,
of a going concern and is generally prohibited from approving an application by
a bank holding company to acquire voting shares of any commercial bank in
another state unless such acquisition is specifically authorized by the laws of
such other state.
A bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its
operations in an unsafe or unsound manner. In addition, it is the Federal
Reserve Board's policy that in serving as a source of strength to its
subsidiary banks, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks. A bank holding company's failure to meet its
obligations to serve as a source of strength to its subsidiary banks will
generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both.
The Holding Company will also be a bank holding company within the meaning
of Section 3700 of the California Financial Code. As such, the Holding Company
and its subsidiaries would be subject to examination by, and may be required to
file reports with, the Superintendent.
Finally, the Holding Company will be subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended, including but
not limited to, filing annual, quarterly and other current reports with the
Securities and Exchange Commission.
THE BANK
The Bank, as a California state-chartered bank, is subject to primary
supervision, periodic examination and regulation by the Superintendent. As a
member of the Federal Reserve System, the Bank also is subject to certain
regulations of the Federal Reserve Board should determine that the financial
condition, capital resources, asset quality, earnings prospects, management,
liquidity or other aspects of the Bank's operations are unsatisfactory or that
the Bank or its management is violating
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or has violated any law or regulation, various remedies are available to the
Federal Reserve Board. Such remedies include the power to enjoin "unsafe or
unsound" practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order
that can be judicially enforced, to direct an increase in capital, to
restrict the growth of the Bank, to assess civil monetary penalties, to
remove officers and directors and ultimately to terminate the Bank's deposit
insurance, which for a California state-chartered bank, would result in
revocation of the Bank's charter. The Superintendent has many of the same
remedial powers. As an FDIC-insured institution, the bank is also subject to
certain rules and regulations of the FDIC.
The Bank is insured by the FDIC, which currently insured deposits of each
member bank to a maximum of $100,000 per depositor. For this protection, the
bank, as is the case with all insured banks, pays a semi-annual statutory
assessment and is subject to the rules and regulations of the FDIC. See
"SUPERVISION AND REGULATION OF HOLDING COMPANY AND BANK - EFFECT OF GOVERNMENTAL
POLICIES AND RECENT LEGISLATION."
Various requirements and restrictions under the laws of California and
the United States affect the operations of the Bank. State and federal
statutes and regulations relate to many aspects of the bank's operations,
including reserves against deposits, interest rates payable on deposits,
loans, investments, mergers and acquisitions, borrowings, dividends and
locations of branch offices. Further, the Bank is required to maintain
certain levels of capital. See "SUPERVISION AND REGULATION OF THE HOLDING
COMPANY AND THE BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
- - CAPITAL ADEQUACY GUIDELINES."
There are statutory and regulatory limitations on the amount of dividends
by state chartered banks to the lesser of retained earnings or the bank's net
income for its las three fiscal years (less any distributions to shareholders
made during such period). In the event a bank has not retained earnings or net
income for its last three fiscal years, cash dividends may be paid in an amount
not exceeding the net income for such bank's last preceding fiscal year only
after obtaining the prior approval of the Superintendent.
Furthermore, the FDIC also has authority to prohibit the Bank from
engaging in what, in the FDIC's opinion, constitutes an unsafe or unsound
practice in conducting its business. It is possible, depending upon the
financial condition of the bank in questions and other factors, that the FDIC
could assert that the payment of dividends or other payments might, under
some circumstances, be such an unsafe or unsound practice. Further, the FDIC
and the Federal Reserve Board have established guidelines with respect to the
maintenance of appropriate levels of capital by banks or bank holding
companies under their jurisdiction. Compliance with the standards set forth
in such guidelines and the restrictions that are or may be imposed under the
prompt corrective action provisions of the FDIC Improvement Act could limit
the amount of dividends which the Bank may pay. See "SUPERVISION AND
REGULATION OF THE HOLDING COMPANY AND THE BANK - FEDERAL DEPOSIT INSURANCE
CORPORATION IMPROVEMENT ACT OF 1991 - PROMPT CORRECTIVE REGULATORY ACTION"
AND "- CAPITAL ADEQUACY GUIDELINES" for a discussion of these additional
restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of its affiliates, the purchase of or investments in stock or other
securities thereof, the taking of such securities as collateral for loans and
the purchase of assets of its affiliates. Such restrictions prevent its
affiliates from borrowing from the Bank unless the loans are secured by
marketable obligations of designated amounts. Further, such secured loans and
investments by the Bank in any other affiliate is limited to 10% of the Bank's
capital and surplus (as defined by federal regulations) and such secured loans
and
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investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations). California law also imposes
certain restrictions with respect to transactions involving controlling persons
of the Bank. Additional restrictions on transactions with affiliates may be
imposed on the Bank under the prompt corrective action provisions of the FDIC
Improvement Act. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE
BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION - FEDERAL DEPOSIT
INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 - PROMPT CORRECTIVE REGULATORY
ACTION."
The Bank is also subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, including, but not limited to,
filing annual, quarterly, and other current reports with the Federal Reserve
Board.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial intermediaries subject to its
reserve requirements and by varying the discount rates applicable to borrowings
by depository institutions. The actions of the Federal Reserve Board in these
areas influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and other
financial intermediaries are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
The likelihood of any major changes and the impact such changes might have on
the Bank are impossible to predict. Certain of the potentially significant
changes which have been enacted and proposals which have been made recently are
discussed below.
Federal Deposit Insurance Corporation Improvement Act of 1991. On December
19, 1991, the FDIC Improvement Act was enacted into law. Set forth below is a
brief discussion of certain portions of this law and implementing regulations
that have been adopted or proposed by the Federal Reserve Board, the Comptroller
of the Currency ("Comptroller"), the Office of Thrift Supervision ("OTS") and
the FDIC (collectively, the "federal banking agencies").
STANDARDS FOR SAFETY AND SOUNDNESS. The FDIC Improvement Act requires the
federal banking agencies to prescribe, by regulation, standards for all insured
depository institutions and depository institution holding companies relating to
internal controls, loan documentation, credit underwriting, interest rate
exposure and asset growth. Standards must also be prescribed for classified
loans, earnings and the ratio of market value to book value for publicly traded
shares. The FDIC Improvement Act also requires the federal banking agencies to
issue uniform regulations prescribing standards for real estate lending that are
to consider such factors as the risk to the deposit insurance fund, the need for
safe and sound operation of insured depository institutions and the availability
of credit. Further, the FDIC Improvement Act requires the federal banking
agencies to establish
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standards prohibiting compensation, fees and benefit arrangements that are
excessive or could lead to financial loss.
In July 1992, the federal banking agencies issued a joint advance notice of
proposed rule making requesting public comment on the safety and soundness
standards required to be prescribed by the FDIC Improvement Act. The purpose of
the notice is to assist the federal banking agencies in the development of
proposed regulations. In accordance with the FDIC Improvement Act, final
regulations must become effective no later than December 1, 1993.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan-to-value limits that do
not exceed the supervisory limits prescribed by the regulations.
PROMPT CORRECTIVE REGULATORY ACTION. The FDIC Improvement Act requires
each federal banking agency to take prompt corrective action to resolve the
problems of insured depository institutions that fall below one or more
prescribed minimum capital ratios. The purpose of this law is to resolve the
problems of insured depository institutions at the least possible long-term cost
to the appropriate deposit insurance fund.
The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized (significantly exceeding the required minimum capital requirements),
adequately capitalized (meeting the required capital requirements),
undercapitalized (failing to meet any one of the capital requirements),
significantly undercapitalized (significantly below any one capital requirement)
and critically undercapitalized (failing to meet all capital requirements).
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of the FDIC
Improvement Act. Under the regulations, an insured depository institution will
be deemed to be:
- "well capitalized" if it (i) has total risk-based capital of 10% or
greater, Tier 1 risk-based capital of 6% or greater and a leverage
capital ratio of 5% or greater and (ii) is not subject to an order,
written agreement, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any
capital measure;
- "adequately capitalized" if it has total risk-based capital of 8% or
greater, Tier 1 risk-based capital of 4% or greater and a leverage
capital ratio of 4% or greater (or a leverage capital ratio of 3% or
greater if the institution is rated composite 1 under the applicable
regulatory rating system in its most recent report of examination);
- "undercapitalized" if it has total risk-based capital that is less
than 8%, Tier 1 risk-based capital that is less than 4% or a leverage
capital ratio that is less than 4% (or a leverage capital ratio that
is less than 3% if the institution is rated composite 1 under the
applicable regulatory rating system in its most recent report of
examination);
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- "significantly undercapitalized" if it has total risk-based capital
that is less than 6%, Tier 1 risk-based capital that is less than 3%
or a leverage capital ratio that is less than 3%; and
- "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2%.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized may be reclassified to
the next lower capital category if the appropriate federal banking agency, after
notice and opportunity for hearing, (i) determines that the institution is an
unsafe or unsound condition or (ii) deems the institution to be engaging in an
unsafe or unsound practice and not to have corrected the deficiency. At each
successive lower capital category, an insured depository institution is subject
to more restrictions and federal banking agencies are given less flexibility in
deciding how to deal with it.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines; of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time the institution became undercapitalized or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate federal banking
agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized,
or is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced
sale of voting shares to raise capital or, if grounds exist for appointment of a
receiver or conservator, a forced merger; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits; (iv)
further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers, subject to certain grandfather provisions for those elected
prior to enactment of the FDIC Improvement Act; (vii) prohibitions on the
receipt of deposits from correspondent institutions; (viii) restrictions on
capital distributions by the holding companies of such institutions; (ix)
required divestiture of subsidiaries by the institution; or (x) other
restrictions as determined by the appropriate federal banking agency. Although
the appropriate federal banking agency has discretion to determine which of the
foregoing restrictions or sanctions it will seek to impose, it is required to
force a sale of voting shares or merger,
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impose restrictions on affiliate transactions and impose restrictions on
rates paid on deposits unless it determines that such actions would not
further the purpose of the prompt corrective action provisions. In addition,
without the prior written approval of the appropriate federal banking agency,
a significantly undercapitalized institution may not pay any bonus to its
senior executive officers or provide compensation to any of them at a rate
that exceeds such officer's average rate of base compensation during the 12
calendar months preceding the month in which the institution became
undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository
institution would not be liable to the institution's shareholders or creditors
for consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.
The FDIC has adopted risk-based minimum capital guidelines intended to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on the balance
sheet as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off-balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off-balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high credit
risk, such as business loans.
In addition to the risk-based guidelines, the FDIC requires banks to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a bank rated in the highest of the five categories used by
the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to total
assets is 3%. For all banks not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the FDIC has the discretion to
set individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates on
the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed would
be determined on a case-by-case basis by the examiner and the appropriate
federal banking agency. Because this proposal has only recently been issued,
the Bank
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currently is unable to predict the impact of the proposal on the Bank if
the policy statement is adopted as proposed.
In January 1995, the federal banking agencies issued a final rule
relating to capital standards and the risks arising from the concentration of
credit and nontraditional activities. Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory minimums. The
federal banking agencies have not imposed any quantitative assessment for
determining when these risks are significant, but have identified these
issues as important factors they will review in assessing an individual
bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among
other things, establishes certain benchmark ratios of loan loss reserves to
classified assets. The benchmark set forth by such policy statement is the
sum of (a) assets classified loss; (b) 50 percent of assets classified
doubtful; (c) 15 percent of assets classified substandard; and (d) estimated
credit losses on other assets over the upcoming 12 months.
As of September 30, 1996, the Bank had a total risk-based capital ratio
of 15.90%, a Tier 1 risk-based capital ratio of 14.65% and a leverage capital
ratio of 9.49%. The Bank is considered to be well capitalized as of
September 30, 1996. A subsequent reduction in the Bank's capital could cause
it to fall within a lower capital category and subject it to the mandatory
and discretionary sanctions applicable to that category. Further, as noted
above, an institution that, based upon its capital levels, is well
capitalized, adequately capitalized or undercapitalized can, under certain
circumstances, be reclassified to the next lower capital category.
OTHER ITEMS. The FDIC Improvement Act also, among other things, (i)
limits the percentage of interest paid on brokered deposits and limits the
unrestricted use of such deposits to only those institutions that are well
capitalized; (ii) requires the FDIC to charge insurance premiums based on the
risk profile of each institution; (iii) eliminates "pass through" deposit
insurance for certain employee benefit accounts unless the depository
institution is well capitalized or, under certain circumstances, adequately
capitalized; (iv) prohibits insured state chartered banks from engaging as
principal in any type of activity that is not permissible for a national bank
unless the FDIC permits such activity and the bank meets all of its
regulatory capital requirements; (v) directs the appropriate federal banking
agency to determine the amount of readily marketable purchased mortgage
servicing rights that may be included in calculating such institution's
tangible, core and risk-based capital; and (vi) provides that, subject to
certain limitations, any federal savings association may acquire or be
acquired by any insured depository institution.
In addition, the FDIC has issued final and proposed regulations
implementing provisions of the FDIC Improvement Act relating to powers of
insured state banks. Final regulations issued in October 1992 prohibit
insured state banks from making equity investments of a type, or in an
amount, that are not permissible for national banks. In general, equity
investments include equity securities, partnership interests and equity
interests in real estate. Under the final regulations, non-permissible
investments must be divested by no later than December 19, 1996. The Bank
has no such non-permissible investments.
Regulations issued in December 1993 prohibit insured state banks from
engaging as principal in any activity not permissible for a national bank,
without FDIC approval. The proposal also provides
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that subsidiaries of insured state banks may not engage as principal in any
activity that is not permissible for a subsidiary of a national bank, without
FDIC approval.
The impact of the FDIC Improvement Act on the Bank is uncertain,
especially since many of the regulations promulgated thereunder have only
been recently adopted and certain of the law's provisions still need to be
defined through future regulatory action. Certain provisions, such as the
recently adopted real estate lending standards and the limitations on
investments and powers of state banks and the rules to be adopted governing
compensation, fees and other operating policies, may affect the way in which
the Bank conducts its business, and other provisions, such as those relating
to the establishment of the risk-based premium system, may adversely affect
the Bank's results of operations. Furthermore, the actual and potential
restrictions and sanctions that apply to or may be imposed on
undercapitalized institutions under the prompt corrective action and other
provisions of the FDIC Improvement Act may significantly adversely affect the
operations and liquidity of the Bank, the value of its Common Stock and its
ability to raise funds in the financial markets.
CAPITAL ADEQUACY GUIDELINES. The FDIC has issued guidelines to implement
the risk-based capital requirements. The guidelines are intended to
establish a systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among banking
organizations, takes off-balance sheet items into account in assessing
capital adequacy and minimizes disincentives to holding liquid, low-risk
assets. Under these guidelines, assets and credit equivalent amounts of
off-balance sheet items, such as letters of credit and outstanding loan
commitments, are assigned to one of several risk categories, which range from
0% for risk-free assets, such as cash and certain U.S. Government securities,
to 100% for relatively high-risk assets, such as loans and investments in
fixed assets, premises and other real estate owned. The aggregated dollar
amount of each category is then multiplied by the risk-weight associated with
that category. The resulting weighted values from each of the risk
categories are then added together to determine the total risk-weighted
assets.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus
and retained earnings, qualifying noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchase credit card
relationships may be included, subject to certain limitations. At least 50%
of the banking organization's total regulatory capital must consist of Tier 1
capital.
Tier 2 capital may consist of (i) the allowance for possible loan and
lease losses in an amount up to 1.25% of risk- weighted assets; (ii)
perpetual preferred stock, cumulative perpetual preferred stock and long-term
preferred stock and related surplus; (iii) hybrid capital instruments
(instruments with characteristics of both debt and equity), perpetual debt
and mandatory convertible debt securities; and (iv) eligible term
subordinated debt and intermediate-term preferred stock with an original
maturity of five years or more, including related surplus, in an amount up to
50% of Tier 1 capital. The inclusion of the foregoing elements of Tier 2
capital are subject to certain requirements and limitations of the federal
banking agencies.
The FDIC has also adopted a minimum leverage capital ratio of Tier 1
capital to average total assets of 3% for the highest rated banks. This
leverage capital ratio is only a minimum. Institutions experiencing or
anticipating significant growth or those with other than minimum risk
profiles are expected to maintain capital well above the minimum level.
Furthermore, higher leverage capital
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ratios are required to be considered well capitalized or adequately
capitalized under the prompt corrective action provisions of the FDIC
Improvement Act.
SAFETY AND SOUNDNESS STANDARDS. In February 1995, the federal banking
agencies adopted final guidelines establishing standards for safety and
soundness, as required by FDICIA. The guidelines set forth operational and
managerial standards relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth and compensation, fees and benefits. Guidelines
for asset quality and earnings standards will be adopted in the future. The
guidelines establish the safety and soundness standards that the agencies
will use to identify and address problems at insured depository institutions
before capital becomes impaired. If an institution fails to comply with a
safety and soundness standard, the appropriate federal banking agency may
require the institution to submit a compliance plan. Failure to submit a
compliance plan or to implement an accepted plan may result in enforcement
action.
In December 1992, the federal banking agency issued final regulations
prescribing uniform guidelines for real estate lending. The regulations
require insured depository institutions to adopt written policies
establishing standards, consistent with such guidelines, for extensions of
credit secured by real estate. The policies must address loan portfolio
management, underwriting standards and loan to value limits that do not
exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state-certified or state-licensed appraisers for
transactions in excess of certain amounts. State-certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A
state-licensed appraiser is required for all other appraisals. However,
appraisals performed in connection with "federally related transactions" must
now comply with the agencies' appraisal standards. Federally related
transactions include the sale, lease, purchase, investment in, or exchange
of, real property or interests in real property, the financing of real
property, and the use of real property or interests in real property as
security for a loan or investment, including mortgage backed securities.
PREMIUMS FOR DEPOSIT INSURANCE. Federal law has established several
mechanisms to increase funds to protect deposits insured by the Bank
Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to
borrow up to $30 billion from the United States Treasury; up to 90% of the
fair market value of assets of institutions acquired by the FDIC as receiver
from the Federal Financing Bank; and from depository institutions that are
members of the BIF. Any borrowings not repaid by asset sales are to be repaid
through insurance premiums assessed to member institutions. Such premiums
must be sufficient to repay any borrowed funds within 15 years and provide
insurance fund reserves of $1.25 for each $100 of insured deposits. The FDIC
also has authority to impose special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, as required by
FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the
total amount raised from BIF members by the risk-based assessment system may
not be less than the amount that would be raised if the assessment rate for
all BIF members were .023% of deposits. The FDIC, effective September 15,
1995, lowered assessments from their rates of $.23 to $.31 per $100 of
insured deposits to rates of $.04 to $.31, depending on the condition of the
bank, as a result of the recapitalization of the BIF.
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On November 15, 1995, the FDIC voted to drop its premiums for well
capitalized banks to zero effective January 1, 1996. Other banks will be
charged risk-based premiums up to $.27 per $100 of deposits.
Governor Pete Wilson recently signed Assembly Bill 3351 (the "Banking
Consolidation Bill"), authored by Assemblyman Ted Weggeland and sponsored by
the California State Banking Department (the"Department"), effective July 1,
1997, which creates the California Department of Financial Institutions
("DFI") to be headed by a Commissioner of Financial Institutions out of the
existing Department which regulates state chartered commercial banks and
trust companies in California.
The Banking Consolidation Bill, among other provisions, also (i)
transfers regulatory jurisdiction over state chartered savings and loan
associations from the Department of Savings and Loans ("DSL") to the newly
created DFI and abolishes the DSL; (ii) transfers regulatory jurisdiction
over state chartered industrial loan companies and credit unions from the
Department of Corporations to the newly-created DFI; and (iii) establishes
within the DFI separate divisions for credit unions, commercial banks,
industrial loan companies and savings and loans. As the Banking
Consolidation Bill has only recently been enacted, it is impossible to
predict with any degree of certainty what impact it will have on the banking
industry in general and the Bank in particular.
Congress has recently passed, and the President has signed into law
provisions to strengthen the Savings Association Insurance Fund (the "SAIF")
and to repay outstanding bonds that were issued to recapitalize the SAIF's
successor as result of payments made due to insolvency of savings and loan
associations and other federally insured savings institutions in the late
1980's and early 1990's. The new law will require savings and loan
associations to bear the cost of recapitalizing the SAIF and, after January
1, 1997, banks will contribute towards paying off the financing bonds,
including interest. In 2000, the banking industry will assume the bulk of
the payments. The new law also aims to merge the Bank Insurance Fund and
SAIF by 1999 but not until the bank and savings and loan charters are
combined. The Treasury Department has until March 31, 1997 to deliver to
Congress on combining the charters. Additionally, the new provides
"regulatory relief" for the banking industry by effecting approximately 30
laws and regulations. The costs and benefits of the new law to the Bank can
not currently be accurately predicted.
INTERSTATE BANKING AND BRANCHING. On September 29, 1994, the President
signed in law the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Act"). Under the Interstate Act, beginning one year
after the date of enactment, a bank holding company that is adequately
capitalized and managed may obtain regulatory approval to acquire an existing
bank located in another state without regard to state law. A bank holding
company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of
deposits of insured depository institutions in the United States or (b) 30%
or more of the deposits in the state in which the bank is located. A state
may limit the percentage of total deposits that may be held in that state by
any one bank or bank holding company if application of such limitation does
not discriminate against out-of-state banks. An out-of-state bank holding
company may not acquire a state bank in existence for less than a minimum
length of time that may be prescribed by state law except that a state may
not impose more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of
the acquired bank into branches of the resulting bank. Each state may permit
such combinations earlier than June 1, 1997, and may adopt legislation to
prohibit interstate mergers after that date in that state or in other states
by that state's banks. The
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same concentration limits discussed in the preceding paragraph apply. The
Interstate Act also permits a national or state bank to establish branches in
a state other than its home state if permitted by the laws of that state,
subject to the same requirement and conditions as for a merger transaction.
Effective October 2, 1995, California adopted legislation which "opts
California into" the Interstate Act. However, the California Legislation
restricts out of state banks from purchasing branches or starting a de novo
branch to enter the California banking market. Such banks may proceed only
by way of purchases of whole banks.
The Interstate Act is likely to increase competition in the Bank's market
areas especially from larger financial institutions and their holding
companies. It is difficult to asses the impact such likely increased
competition will have on the Bank' operations.
In 1986, California adopted an interstate banking law. The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e., provided the
other state's law permit California banking organizations to acquire banking
organizations in that state on substantially the same terms and conditions
applicable to banking organizations solely within that state). The law took
effect in two states. The first state allowed acquisitions on a "reciprocal"
basis within a region consisting of 11 western states. The second stage,
which became effective January 1, 1991, allows interstate acquisitions on a
national "reciprocal" basis. California has also adopted similar legislation
applicable to savings associations and their holding companies.
On September 28, 1995, Governor Wilson signed Assembly Bill No. 1482, the
Caldera, Weggeland, and Killea California Interstate Banking and Branching
Act of 1995 (the "1995 Act"). The 1995 Act, which was filed with the
Secretary of State as Chapter 480 of the Statutes of 1995, became operative
on October 2, 1995.
The 1995 Acts opts in early for interstate branching, allowing
out-of-state banks to enter California by merging or purchasing a California
bank or industrial loan company which is at least five years old. Also, the
1995 Act repeals the California Interstate (National) Banking Act of 1986,
which regulated the acquisition of California banks by out-of-state bank
holding companies. In addition, the 1995 Act permits California state banks,
with the approval of the Superintendent of Banks, to establish agency
relationships with FDIC-insured banks and savings associations. Finally, the
1995 Act provides for regulatory relief, including (i) authorization for the
Superintendent to exempt banks from the requirement of obtaining approval
before establishing or relocating a branch office or place of business, (ii)
repeal of the requirement of directors' oaths (Financial Code Section 682),
and (iii) repeal of the aggregate limit on real estate loans (Financial Code
Section 1230).
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS. The Bank is
subject to certain fair lending requirements and reporting obligations
involving home mortgage lending operations and Community Reinvestment Act
("CRA") activities. The CRA generally requires the federal banking agencies
to evaluate the record of financial institutions in meeting the credit needs
of their local community, including low and moderate income neighborhoods.
In addition to substantial penalties and corrective measures that may be
required for a violation of certain fair lending laws, the federal banking
agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation
system which bases CRA ratings on an institutions' actual lending
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service and investment performance rather than the extent to which the
institution conducts needs assessments, documents community outreach or
complies with other procedural requirements. In March 1994, the Federal
Interagency Tax Force on Fair lending issued a policy statement on
discrimination in lending. The policy statement describes the three methods
that federal agencies will use to prove discrimination: overt evidence of
discrimination, evidence of disparate treatment and evidence of disparate
impact.
In February 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate
to internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards,
the appropriate federal banking agency may require the institution to submit
a compliance plan. Failure to submit a compliance plan may result in
enforcement proceedings. Additional standards on earnings and classified
assets are expected to be issued in the near future.
CHANGES IN ACCOUNTING PRINCIPLES. In February 1992, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 109 ACCOUNTING FOR INCOME
TAXES, which supersedes SFAS No. 96 of the same title. SFAS No. 109 is
effective for fiscal years beginning after December 31, 1992, or earlier at
the Bank's option. SFAS No. 109 employs an asset and liability approach in
accounting for income taxes payable or refundable at the date of the
financial statements as a result of all events that have been recognized in
the financial statements and as measured by the provisions of enacted tax
laws. SFAS No. 109 was adopted by the Bank in 1993 and there is no material
impact on the Bank's financial statements.
In addition, in December 1991, the FASB issued SFAS No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, which is effective for fiscal
years ending after December 15, 1992 (December 15, 1995 in the case of
entities with less than $150 million in total assets such as the Bank). SFAS
No. 107 requires financial intermediaries to disclose, either in the body of
their financial statements or in the accompanying notes, the "fair value" of
financial instruments for which it is "practicable to estimate that value."
SFAS No. 107 defines "fair value" as the amount at which a financial
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Quoted market prices,
if available, are deemed the best evidence of the fair value of such
instruments. Most deposit and loan instruments issued by financial
intermediaries are subject to SFAS No. 107 and its effect will be to require
financial statement disclosure of the fair value of most of the assets and
liabilities of financial intermediaries such as the Bank. Management is
unable to predict what effect, if any, such disclosure requirements could
have on the market price of the common stock of the Bank or its ability to
raise funds in the financial markets.
In May 1993, the FASB issued Statement of Financial Standards No. 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN ("SFAS No. 114"). SFAS No.
114 was amended by SFAS No. 118 in October 1994 by providing guidance on
income measurement and the disclosure thereof. Under the provisions of SFAS
No. 114, as amended, a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. SFAS No. 114, as amended, requires creditors to measure
impairment of a loan based on the present value of expected future cash flows
discounted at the loan's effective interest rate. If the measure of the
impaired loan is less than the recorded investment in the loan, a creditor
shall recognize an impairment by creating a valuation allowance with a
corresponding charge to bad debt expense. This statement also applies to
restructured loans and changes the definition of in-substance foreclosures to
apply
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only to loans where the creditor has taken physical possession of the
borrower's assets. SFAS No. 114, as amended, applies to financial statements
for fiscal years beginning after December 15, 1994. Earlier implementation
is permitted. The adoption of this statement as of the first quarter of 1995
did not have a material effect on the Bank's financial condition or results
of operations at December 31, 1995.
In June, 1993, the FASB issued Financial Accounting Series Statement No.
115 addressing the accounting and reporting for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities. Those investments would be classified in three categories and
accounted for as follows: (i) debt securities that the entity has the positive
intent and ability to hold to maturity would be classified as "held to maturity"
and reported at amortized cost; (ii) debt and equity securities that are held
for current resale would be classified as trading securities and reported at
fair value, with unrealized gains and losses included in earnings; and (iii)
debt and equity securities not classified as either securities held to maturity
or trading securities would be classified as securities available for sale, and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of shareholders' equity. The rule is
effective for financial statements for calendar year 1994, but may be applied to
an earlier fiscal year for which annual financial statements have not been
issued.
Effective for 1994, the Bank has implemented SFAS No. 115 regarding its
investment securities. Accordingly, all of the securities have been classified
as "hold to maturity". The Bank has established this classification due to its
intent and ability to hold such securities throughout their respective
investment terms. As a result, any subsequent increases or decreases in the
fair market values of the securities are not reflected on either the income
statement or changes in stockholders equity.
In December 1994, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 94-6, DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND
UNCERTAINTIES. This SOP applies to financial statements prepared in conformity
with GAAP by all nongovernmental entities. The disclosure requirements in SOP
94-6 focus primarily on risks and uncertainties that could significantly affect
the amounts reported in the financial statements in the near-term functioning of
the reporting entity. The risks and uncertainties discussed in SOP 94-6 stem
from the nature of the entity's operations, from the necessary use of estimates
in the preparation of the entity's financial statements and from significant
concentrations in certain aspects of the entity's operations. SOP 94-6 is
effective for financial statements issued for fiscal years ending after December
15, 1995 and did not have any impact in the financial position or results of
operations of the Bank.
In March of 1995, the FASB issued SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. The statement does not apply to financial
instruments long-term customer relationships of a financial institution (core
deposits), mortgage and other servicing rights, and tax deferred assets. SFAS
121 requires the review of long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances include,
for example, a significant decrease in market value of an assets, a significant
change in use of an asset, or an adverse change in a legal factor that could
affect the value of an asset. If such an event occurs and it is determined that
the carrying value of the asset may not be recoverable, an impairment loss
should be recognized a measured by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Fair value can be determined by
a current transaction, quoted market prices, or present value of estimated
expected future cash flows discounted at the appropriate rate. The statement is
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effective for fiscal years beginning after December 15, 1995. The Bank does not
anticipate that implementation of SFAS No. 121 will have a material impact on
its results of operations or financial position.
In May of 1995, the FASB issued SFAS 122, ACCOUNTING FOR MORTGAGE SERVICING
RIGHTS. SFAS No. 122 eliminates distinctions between servicing rights that were
purchased and those that were retained upon the sale of loans. The statement
requires mortgage servicers to recognize as separate assets rights to service
loans, no matter how the rights were acquired. Institutions who sell loans and
retain the servicing rights will be required to allocate the total cost of the
loans to servicing rights and loans based on their relative fair values if the
value can be estimated. SFAS No. 122 is effective for fiscal years beginning
after December 15, 1995. Further, SFAS No. 122 requires that all capitalized
mortgage servicing rights be periodically evaluated for impairment based upon
the current fair value of these rights. Management believes the implementation
of this statement will not have a material effect on the Bank's financial
condition and results of operations since it does not retain servicing on its
sold mortgage loans.
In October of 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-
BASED COMPENSATION, establishing financial accounting and reporting standards
for stock-based employee compensation plans. This statement encourages all
entities to adopt a new method of accounting to measure compensation cost of all
employee stock compensation pans based on the estimated fair value of the award
at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net income and, if presented, earnings per share, as if this statement
had been adopted. The accounting requirements of this statement are effective
for transactions entered into in fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards
granted in their first fiscal year beginning after December 15, 1994.
Management of the Bank has not completed an analysis of the potential effects of
this statement on its financial condition or results of operations.
In June of 1996, the FASB issued SFAS No. 125, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, establishing
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of the
financial-components approach. This approach requires the recognition of
financial assets and servicing assets that are controlled by the reporting
entity, the derecognition of financial assets when control is surrendered, and
the derecognition of liabilities when they are extinguished. Specific criteria
are established for determining when control has been surrendered in the
transfer of financial assets. Liabilities and derivatives incurred or obtained
by transferors in conjunction with the transfer of financial assets are required
to be measured at fair value, if practicable. Servicing assets and other
retained interests in transferred assets are required to be measured by
allocating the previous carrying amount between the assets sold, if any, and the
interest that is retained, if any, based on the relative fair values of the
assets on the date of the transfer. Servicing assets retained are subsequently
subject to amortization and assessment for impairment. Management believes the
implementation of this statement will not have a material effect on the Bank's
financial condition or results of operations.
OTHER REGULATIONS AND POLICIES. The federal regulatory agencies have
adopted regulations that implement Section 304 of FDICIA which requires federal
banking agencies to adopt uniform regulations prescribing standards for real
estate lending. Each insured depository institution must
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adopt and maintain a comprehensive written real estate lending policy, developed
in conformance with prescribed guidelines, and each agency has specified loan-
to-value limits in guidelines concerning various categories of real estate
loans.
Various requirements and restrictions under the laws of the United States
and the State of California affect the operations of the Bank. Federal
regulations include requirements to maintain non-interest bearing reserves
against deposits, limitations on the nature and amount of loans which may be
made, and restrictions on payment of dividends. The California Superintendent
of Banks approves the number and locations of the branch offices of a bank.
California law exempts banks from the usury laws.
RESTRICTIONS ON TRANSFERS OF FUNDS TO
THE HOLDING COMPANY BY THE BANK
The Holding Company is a legal entity separate and distinct from the Bank.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to the Holding Company by the Bank. Under California law, no
distribution of dividends is permitted unless: (i) such distribution would not
exceed a bank's retained earnings; or (ii) in the alternative, after giving
effect to the distribution, (y) the sum of a bank's assets (net of goodwill,
capitalized research and development expenses and deferred charges) would be not
less than 125% of its liabilities (net of deferred taxes, income and other
credits), or (z) current assets would not be less than current liabilities
(except that if a bank's average earnings before taxes for the last two years
had been less than average interest expenses, current assets must not be less
than 125% of current liabilities).
The FDIC also has authority to prohibit the Bank from engaging in what, in
the FDIC's opinion, constitutes an unsafe or unsound practice in conducting its
business. It is possible, depending upon the financial condition of the bank in
question and other factors, that the FDIC could assert that the payment of
dividends or other payments might, under some circumstances, be such an unsafe
or unsound practice. Further, the FDIC has established guidelines with respect
to the maintenance of appropriate levels of capital by bank under their
jurisdiction. Compliance with the standards set forth in such guidelines and
the restrictions that are or may be imposed under the prompt corrective action
provisions of the FDIC Improvement Act could limit the amount of dividends which
the Bank may pay to the Holding Company. See "SUPERVISION AND REGULATION OF THE
HOLDING COMPANY AND THE BANK - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT
ACT OF 1991 - PROMPT CORRECTIVE REGULATORY ACTION" AND "- CAPITAL ADEQUACY
GUIDELINES" for a discussion of these additional restrictions on capital
distributions.
Following the Reorganization, the Bank would be subject to certain
restrictions imposed by federal law on any extensions of credit to, or the
issuance of a guarantee or letter of credit on behalf of, the Holding Company or
other affiliates, the purchase of or investments in stock or other securities
thereof, the taking of such securities as collateral for loans and the purchase
of assets of the Holding Company or other affiliates. Such Restrictions would
prevent the Holding Company and such other affiliates from borrowing from the
bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Holding Company or to in any other affiliate would be limited to 10% of the
Bank's capital and surplus (as defined by federal regulations) and such secured
loans and investments would be limited, in the aggregate, to 20% of the Bank's
capital and surplus (as defined by federal regulations). In addition, following
the Reorganization any transaction with an affiliate of the Bank must be on
terms and under
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circumstances that are substantially the same as a comparable transaction with a
non-affiliate. Additional restrictions on transactions with affiliates may be
imposed on the Bank under the prompt corrective action provisions of the FDIC
Improvement Act. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE
BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION - FEDERAL DEPOSIT
INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 - PROMPT CORRECTIVE REGULATORY
ACTION."
MARKET PRICE OF AND DIVIDENDS ON HOLDING COMPANY
COMMON STOCK AND BANK COMMON STOCK
MARKET INFORMATION
Trading in the Bank Common Stock has been limited, and such trading cannot
be characterized as amounting to an established public trading market. The Bank
Common Stock is traded in the over-the-counter market. It is not listed on any
exchange or on NASDAQ. Furthermore, the Bank Common Stock is not listed in the
"pink sheets" published by National Quotation Bureau, Inc. or in any other
published quotation service and, therefore, information about the high and low
bid price is not readily obtainable.
There is no trading in the Holding Company Common Stock. After
consummation of the Holding Company Reorganization, it is anticipated that the
Holding Company Common Stock will be traded in the over-the-counter market and
most probably will not be, in the near term, listed on any exchange or on
NASDAQ.
Management of the Bank is aware of three securities dealers who maintain an
inventory and make a market in Bank Common Stock. The market makers are Maquire
Investments of Santa Maria, Hoefer & Arnett of San Francisco, and Sutro &
Company, with a local office in Santa Maria.
The information set forth in the table below summarizes, for the periods
indicated, the bid and ask prices of Bank Common Stock based upon information
provided by Maquire Investments, Inc. and by the OTC Bulletin Board. These
quotes do not necessarily include retail markups, markdowns, or commissions and
may not necessarily represent actual transactions. Additionally, there may have
been transactions at prices other than those shown below.
1995 BID ASK
First Quarter $13.25 $13.75
Second Quarter 13.25 13.75
Third Quarter 13.75 14.25
Fourth Quarter 13.75 14.25
1996
First Quarter 14.00 14.50
Second Quarter 13.75 14.25
Third Quarter 15.00 15.75
Fourth Quarter 15.00 16.00
As of the Record Date, the Bank has reserved 160,400 shares of
Bank Common Stock for issuance upon the exercise of outstanding stock options
granted pursuant to the Bank's Stock Option Plan and 85,520 shares that
66
<PAGE>
may be issued pursuant to stock options that may be granted in the future. Upon
consummation of the Reorganization, the Holding Company will assume the Bank's
rights and obligations under the Plan and under each of the outstanding options
previously granted under the Plan by which assumption the optionee shall have
the right to purchase one share of Holding Company Common Stock for each share
of Bank Common Stock the optionee was entitled to purchase prior the Holding
Company Reorganization.
Upon consummation of the Reorganization, up to 1% of the outstanding shares
of Holding Company Common Stock could be sold pursuant to Rule 144 under the
Securities Act for the account of an affiliate of the Holding Company during a
three month period. For purposes of Rule 144, affiliates including the Holding
Company's directors and executive officers and the Bank's directors and
executive officers.
The Holding Company has never paid a dividend. Since 1984, the Bank has
consistently declared and paid a cash dividend, with the equivalent of $.06 per
share being paid since February 1988. In 1994, the Board of Directors of the
Bank increased the per share cash dividend to $.10. In 1995, the Board of
Directors of the Bank again increased the per share cash dividend to $.11. In
January 1996, the Board of Directors of the Bank declared a $.20 per share cash
dividend. At the 1996 Annual Shareholders Meeting, the Bank announced that it
would begin to pay dividends on a semi-annual basis. In July 1996, a $.15
dividend was declared to be paid in August. However, no assurance can be given
that the pattern of dividends described herein will continue at the Bank, or if
the Reorganization is consummated, at the Holding Company, or if any cash
dividends will be paid in the future either by the Bank, or if the
Reorganization Proposal is approved, by the Holding Company.
SHAREHOLDERS
As of the Record Date, there were approximately 2,000 holders of record of
Bank Common Stock. As of the Record Date, there was 1 shareholder of Holding
Company Common Stock.
DIVIDENDS
Upon consummation of the Reorganization, as a bank holding company without
significant assets other than its equity interest in the Surviving Bank, the
Holding Company's ability to pay cash dividends will depend upon the dividends
it receives from the Surviving Bank which, in turn, are subject to certain
limitations. In addition, the Holding Company's and the Bank's ability to pay
dividends are, and the Surviving Bank's ability to pay cash dividends will be,
limited by California law. The Bank's Board of Directors intends to retain
earnings, if any, in order to increase capital, and to pay cash dividends only
when it is prudent to do so and the Bank's performance justifies such action.
See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - THE BANK -
POTENTIAL AND EXISTING ENFORCEMENT ACTIONS."
Since the Bank is a state-chartered bank, its ability to pay dividends or
make distributions to its shareholders is subject to restrictions set forth in
the California Financial Code. The California Financial Code provides that a
bank may not make a distribution to its shareholders in an amount which exceeds
the less of (i) the bank's retained earnings; or (ii) the bank's net income for
its last three fiscal years, less the amount of any distributions made by the
bank to the shareholders of the bank during such period. However, a bank may,
with the prior approval of the Superintendent make a distribution to the
shareholders of the bank in an amount not exceeding the greatest of (i) its
retained earnings; (ii) its net income for its last fiscal year; or (iii) its
net income for its current fiscal
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<PAGE>
year. In the event that the Superintendent determines that the stockholders'
equity of a bank is inadequate or that the making of a distribution by a bank
would be unsafe or unsound, the Superintendent may order the bank to refrain
from making a proposed distribution. Under the FDIC Improvement Act, additional
limitations can be imposed on the Bank with regard to making capital
distributions if after such transaction the Bank would be undercapitalized. See
"SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - EFFECT OF
GOVERNMENTAL POLICIES AND RECENT LEGISLATION - FEDERAL DEPOSIT INSURANCE
CORPORATION IMPROVEMENT ACT OF 1991."
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF
THE HOLDING COMPANY AND THE BANK
Each of the current directors of the Bank are directors of the Holding
Company. The following tables set forth certain information as of December 31,
1996, with respect to the directors and executive offices of the Bank of Santa
Maria:
YEAR FIRST
APPOINTED
BUSINESS EXPERIENCE OR ELECTED
DIRECTORS AGE DURING PAST FIVE YEARS DIRECTOR
Armand R. Acosta 71 Retailer, Retired 1977
Richard E. Adam 66 Farmer 1977
Fred L. Crandall, Jr., D.D.S. 68 Dentist 1978
A. J. Diani 74 Construction 1977
William A. Hares 62 President and Chief 1981
Executive Officer
Roger A. Ikola, M.D. 65 Pediatrician 1977
Toshiharu Nishino 70 Wholesale Produce 1977
Joseph Sesto, Jr. 84 Investments, Retired 1977
William L. Snelling 65 Real Estate Development 1977
Mitsuo Taniguchi 70 Wholesale Produce, Retired 1977
Joseph F. Ziemba, M.D. 79 Physician, Retired 1978
YEAR FIRST
APPOINTED
BUSINESS EXPERIENCE EXECUTIVE
EXECUTIVE OFFICERS AGE DURING PAST FIVE YEARS OFFICER
William A. Hares 62 President and Chief 1978
Executive Officer
Carol Bradfield(1) 42 Executive Vice President 1996
Administration
F. Dean Fletcher 48 Executive Vice President 1991
and Chief Financial Officer
Susan Forgnone (2) 35 Executive Vice President 1994
and Loan Administrator
James D. Glines 54 Executive Vice President and 1992
Manager - Santa Maria Way Branch
(1) Ms. Bradfield joined the Bank in April, 1988. She was formerly Senior Vice
President - Human Resources prior to her appointment as an executive officer.
(2) Ms. Forgnone joined the Bank in October, 1988. She has worked in various
aspects of lending with the Bank prior to her appointment as an executive
officer.
All directors of the Bank of Santa Maria serve for a term of one year and
hold office until the 1997 Annual Meeting of Shareholders or until their
successors are duly elected and qualified. The executive officers are elected
annually by the Board of Directors following the Annual Meeting of the
Shareholders and serve at the pleasure of the Board.
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<PAGE>
The following provides information on the principal occupation or
employment during the past five years of each of the Bank's directors and
executive officers.
CAROL BRADFIELD is presently the Executive Vice President responsible for
the administrative departments within the Bank. She assumed this position in
June of 1996. She previously held the position of Senior Vice President/Human
Resources Officer. Her primary responsibility is to ensure efficient operations
and effective communication between the administrative departments and the
branch system. Her duties include supervision of the Human Resources
Department, Credit Services Department, Loan Review and Compliance, the
Marketing Department, Informational Services Department and the Operational
Review Department.
Ms. Bradfield graduated from Cal Poly with a Bachelor of Science in
Agricultural Business Management. She has also graduated from a two year post
graduate course with the California Banking School, and a two year course with
the American Bankers Association in Human Resource Management.
Ms. Bradfield has been in banking since 1978. She has worked for Wells
Fargo Bank and Security Pacific Bank in a variety of positions, including branch
manager, commercial and agricultural loan officer and in the commercial loan
review function. She joined Bank of Santa Maria in 1988 as a commercial loan
officer. In January 1989, she became the Bank's first full time manager of the
Human Resources Department supervising the training division and administering
the Bank's benefit programs.
F. DEAN FLETCHER is currently employed as the Executive Vice President,
Chief Financial Officer of Bank of Santa Maria, a position he has held five
years. Mr. Fletcher has been in banking since 1976, where he started as the
Assistant Controller of the billion dollar Zion First National Bank. Mr.
Fletcher entered his banking career after leaving the CPA firm of what is now
known as Deloitte & Touche. During his auditing career, he was actively
involved in auditing financial institutions. Mr. Fletcher holds a degree in
accounting from the University of Utah which he graduated cum laude. He has
also completed a three year post graduate course at the Pacific Coast Banking
School at the University of Washington.
During his bank career, in addition to the accounting function, he has
organized and opened a new bank, installed one of the first ATM systems in
California, converted a bank to in-house processing, assisted in numerous
conversions, facilitated several mergers and acquisitions, built or remodeled
several bank facilities and has managed most bank operations and personnel
functions where he has been employed.
SUSAN D. FORGNONE is presently the Executive Vice President/Loan
Administrator, having assumed the position in December, 1994. She previously
held the position of Senior Vice President/Chief Lending Officer since June,
1994. She is also the Bank's CRA Officer and was appointed to this position in
August, 1994. Duties include monitoring loan quality and the Allowance for Loan
Loss Reserves, establishing policy specifically for the lending function and the
Community Reinvestment Act. Ms. Forgnone graduated from Arkansas Tech
University in 1983, with a degree in Business Administration. She has also
graduated from a two year post graduate course with the California Banking
School.
Ms. Forgnone began her banking career in 1983, with Security Pacific
National Bank. She entered SPNB's Commercial Loan Officer Training Program and
later served as a Commercial Loan Associate with SPNB's Salinas Business Banking
Center. In 1986, she transferred to SPNB's Credit Review Department in Los
Angeles where she participated in a two year rotation program, reviewing the
credit quality and documentation of various lending relationships throughout the
bank's commercial loan centers, private banking centers and corporate
departments. Upon completing the Credit Review rotational program in mid-1988,
she was assigned as a Commercial Loan Officer with SPNB's Long Beach Commercial
Loan Center. Ms. Forgnone joined Bank of Santa Maria as a Commercial Loan
Officer in October, 1988. In December of 1992, she assumed the responsibility
of managing the Credit Services Department and assisting the Loan Administrator
in monitoring, structuring and the approval of credit.
JAMES D. GLINES is the Executive Vice President/Manager of the Santa Maria
Office. He attended school in Santa Maria and graduated from Cal Poly with a
Bachelor of Science in Farm Management (Agricultural Economics). Mr. Glines
joined Bank of Santa Maria in 1983, as a Commercial Loan Officer. He was
appointed Vice President and Branch Manager in August, 1983, appointed Senior
Vice President in December, 1987, and appointed to Executive Vice President as
of December, 1992. Previous to working for BSM, he was employed by Wells Fargo
Bank for thirteen years. He is active in various community activities such as
the Elks Lodge #1538, the YMCA, Jr. Livestock Sales Committee for the Santa
Barbara County Fair, Area Chairman for Duck's Unlimited and others.
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<PAGE>
ARMAND ACOSTA a fifty-one year resident of Santa Maria, is a retired
retailer of menswear, owner of Armand's from 1963 until 1987. He is the past
president of 20/30 International Service Club, charter member of Lions
Noontimers Service Club, member of Santa Maria Country Club and has served on
the Santa Barbara County Grand Jury.
RICHARD E. ADAM is a lifetime vegetable grower in the Santa Maria area who
owns and operates a substantial farm. Mr. Adam, a fourth generation resident of
the Santa Maria area, is also involved in sales and cooling activities in
connection with vegetable growing activities. He is currently an active member
of the Santa Maria Valley Water Conservation District and was formerly a member
and president of the Santa Maria Elementary School Board. He earned a B.S. Ag
Econ Degree from the University of California at Berkeley and served in the U.S.
Air Force from 1952 through 1957.
FRED L. CRANDALL, JR. has been a practicing dentist in the Santa Maria
area since 1961. Prior to this, he was in the U.S. Army Dental Corp based in
Germany and Oklahoma. He is a member of the Central Coast Dental Society, Delta
Sigma Delta, American Dental Association and involved in the Mental Health
Association, serving ten years as President. He has a BA in Zoology from
B.Y.U., attended Washington University, St. Louis, MO for dentistry and
continued education programs in the Combined Therapy Study Group in Santa
Barbara.
A. J. DIANI is the founder of A.J. Diani Construction Company, Inc. a
general engineering and building construction firm operating throughout
California since 1949. Mr. Diani has extensive business experience having
served on many boards, including several financial institutions and being a
general partner in many real estate development ventures and construction
related activities. Mr. Diani has also served the Santa Maria community through
his affiliation with many civic organizations, including the Santa Maria Arts
Council, the YMCA, Santa Maria Valley Developers, the Chamber of Commerce and
others.
WILLIAM A. HARES has been the President/CEO of Bank of Santa Maria since
January 1982 and has been with the Bank since September 1978 and is on the Board
of Directors. Prior to this date, he worked for several different banks dating
back to 1951, in many capacities including marketing, operations, lending,
credit administration, and personnel. He graduated from New Castle High School
in Pennsylvania, completed several AIB courses and attended Riverside College.
He has been a member of the Rotary Club, the Chamber of Commerce and many other
organizations.
ROGER A. IKOLA, M. D. has been a practicing pediatrician for thirty years.
He is a founding Director and Chief Financial Officer of Marian Independent
Physicians Association contracting with various HMO's to provide managed medical
care. Dr. Ikola was the developer and has been the managing partner of the
Marion Medical-Dental Center. Other non-medical business experience includes
eighteen years owning and directing a Holiday Inn, ten years owner of a
restaurant, three years strawberry growing, seven years Christmas tree farming
and sixteen years as a Santa Maria High School District board member.
TOSHIHARU NISHINO, owner of the wholesale produce business of Nishino and
Taniguchi since 1957, is a leader of the Japanese-American community in Santa
Maria and a resident of the Santa Maria area for forty years and is active in
various Santa Maria civic and charitable activities. The bank believes that Mr.
Nishino's experience as one of the area's leading wholesale produce merchants is
useful in the development of loan programs suitable to Santa Maria's
agricultural community.
JOSEPH SESTO, JR., a forty year resident of Santa Maria, is a community
leader in Santa Maria. As a retired independent insurance agent since 1949, Mr.
Sesto has considerable experience in designing insurance funded programs for
independent business enterprises. Mr. Sesto's numerous civic involvements
include the Santa Maria Chamber of Commerce (of which he is a past President),
and the Board of Directors of the Marian Hospital (of which he was Chairman of
the Board from 1965 to 1976); Chairman of the Military Affairs Committee of the
Chamber of Commerce and various other charitable and civic activities.
WILLIAM L. SNELLING is currently active in commercial real estate
development in Santa Maria area and has been a consultant to Southwest Leasing
Corporation of Beverly Hills, California, to which Mr. Snelling was an officer
and full time employee from 1968 to 1974. Mr. Snelling came to Santa Maria in
October of 1974, as an officer and director of SAMHI Corporation, owner and
operator of the Santa Maria Holiday Inn. His numerous civic activities include
President of the Board of Directors of the YMCA of Santa Maria, a director of
the Boys' Club, Visiting Nurses of Northern Santa Barbara County, Co-Chairman
and Vice President of the United Way and many others. Mr. Snelling attended
Oregon State University and UCLA and holds a Juris Doctorate Degree, Cum Laude,
from the California College of Law.
71
<PAGE>
MITSUO TANIGUCHI, retired from wholesale produce business, Nishino &
Taniguchi, in 1992, of which he had been a partner since 1957 in Santa Maria.
Mr. Taniguchi is a leader of the Japanese-American community in the Santa Maria
area and has numerous civic and community involvements. His experience in the
agricultural community is a great asset to the bank.
JOSEPH F. ZIEMBA, M. D., an anesthesiologist, practiced in Santa Maria
since 1958 until his retirement in 1992 at both Valley Community Hospital and
Marian Hospitals. During this period, he participated, at various times, in
many charitable and civic organizations such as the Chamber of Commerce, the
YMCA, Visiting Nurse Service, Santa Barbara County Medical Society, American
Lung Association, Tri County Blood Bank and others.
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<PAGE>
DIRECTOR COMPENSATION
During 1995, each non-officer director received $650 for each Board of
Directors meeting attended. The Chairman of the Board and the Secretary
received an additional $650 and $225 respectively each month. Members of all
other committees received $225 for each committee meeting attended.
EXECUTIVE COMPENSATION SUMMARY
It is expected that until the officers of the Holding Company begin to
devote significant time to the separate management of the Holding Company's
business, which is not expected to occur until such time as the Holding Company
becomes actively involved in additional businesses, the officers will only
receive compensation for services as directors, officers and employees of the
Bank, and no separate compensation will be paid for their services to the
Holding Company. At the present time, the Holding Company does not intend to
employ any persons other than its officers. If the Holding Company establishes
or acquires other businesses, it may add additional employees at that time.
The following Summary Compensation Table shows compensation earned from the
Bank for services rendered during fiscal years 1995, 1994, and 1993, to each of
the Bank's executive officers whose salaries and bonuses exceeded $100,000 in
1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Annual Compensation
Compensation(1) Awards
---------------------------------------------------
Securities All Other
Salary Bonus Underlying Compensation
Name and Principal Position Year ($)(2) ($)(4) Options(#)(5) ($)(3)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William A. Hares 1995 $ 160,000 $ 150,000 10,000 $16,843
President and Chief 1994 147,818 115,000 5,000 16,796
Executive Officer 1993 140,550 90,000 21,006
F. Dean Fletcher 1995 93,000 45,000 15,223
Executive Vice President 1994 90,300 30,000 11,666
and Chief Financial Officer 1993 87,600 25,000 8,703
Susan Forgnone 1995 80,000 45,000 9,241
Executive Vice President 1994 54,063 15,000 5,976
and Loan Administrator 1993 N/A N/A N/A N/A
James D. Glines 1995 85,000 45,000 12,025
Executive Vice President 1994 80,000 30,000 10,624
and Manager-Santa Maria 1993 73,925 25,000 7,146
Way Office
</TABLE>
(1) The column for other annual compensation has been omitted since the only
items reportable thereunder for the named persons are perquisites, which did not
exceed the lessor of $50,000 or 10% of salary and bonus for any of the named
persons.
(2) Includes all contributions to the Bank's 401(k) Plan, and the Bank's
Flexible Spending Account for medical and child care expenditures made through
salary reductions and deferrals.
(3) All employees of the Bank who have at least one year of service having
worked at least 1,000 hours during that year and are at least 18 years of age
are eligible to participate in the Bank's Profit Sharing and the 401(k) Salary
Deferral Plan.
The Salary Deferral Plan is a self funded voluntary plan that offers
certain tax savings with tax deferred investment earnings. The amount
contributed by the participants is fully vested from the date of deposit. The
directors of the Bank, at their discretion, may elect to match an amount equal
to $.50 for every $1.00 the 401(k) participant invests, not to exceed 2% of
their gross compensation. This contribution is made as of June 30th and
December 31st of each year. All matching contributions follows a seven year
vesting schedule.
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<PAGE>
Contributions to the Bank's Profit Sharing Plan are also at the discretion
of the Bank's directors. Any amount that is contributed is allocated to
accounts established for each participating employee and is based on a
percentage of their gross income. These are subject to a seven year vesting
schedule with 100% vesting occurring after seven years of service. Funding for
the plan always occurs in January of each year.
Participants contributions toward the 401(k) are included in amounts shown
as "Salary," above. The Bank's matching contributions are, as well as the
Profit Sharing contribution, are aggregated and included under "All Other
Compensation," above.
(4) Cash bonuses are reported in the year earned and may be paid in that year or
in January of the following year at the discretion of the officer. Bonuses are
recommended by the Compensation Committee of the Board and are approved by the
full board at the December meeting. Bonuses are discretionary, but are
generally based upon the operating results of the Bank.
(5) Options shown were issued under the Bank's Incentive Stock Option Plans.
These plans are administered by the Compensation Committee. Options granted
have an exercise price equal to the fair market value on the date of grant,
vested over a term of 5 years and expired 5 years from the date of grant unless
otherwise noted.
(6) Ms. Bradfield was not included in the compensation tables as she was not
named as an executive officer until June 11, 1996.
STOCK OPTION GRANTS IN FISCAL 1995
The following table shows the number of shares with respect to which
options were granted during 1995 to each of the named persons, together with the
percentage of all grants to employees which the grant to the named person
represents, the exercise price of such option and the expiration date of the
option.
Individual Grants
--------------------------------------------------------------
% of Total
Options
Options Granted to Exercise
Granted Employees Price Expiration
Name (1) in Fiscal Year ($/Sh) Date
- --------------------------------------------------------------------------------
William A. Hares 10,000 42.55% $ 13.50 8/8/00
F. Dean Fletcher 0 0 0 0
Susan Forgnone 0 0 0 0
James D. Glines 0 0 0 0
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth the number of shares acquired by any of the named
persons upon exercise of stock options in 1995, the value realized through the
exercise of such options and the number of unexercised options held by such
person, including both those which are presently exercisable and those which are
not presently exercisable.
<TABLE>
<CAPTION>
Shares Number of
Acquired Shares Underlying Value of Unexercised
Upon Unexercised In-the
Option Value Options Money Options
Name Exercise (#) Realized($) at 12-31-95 (#) at 12-31-95 ($)(1)
- ---- ----------------------------------------------------------------------------------------------------
Not Not
Exercisable Exercisable Exercisable Exercisable
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
William A. Hares 11,500 18,500 $ 88,063 $ 52,563
F. Dean Fletcher 12,000 3,000 54,000 13,500
Susan Forgnone 3,000 $ 13,500 2,000 5,500 5,000 13,125
James D. Glines 3,000 2,000 11,250 7,500
</TABLE>
(1) Potential unrealized value is determined by multiplying the number of shares
by the net of the fair market value at fiscal year end ($14.00) less the option
exercise price.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS REGARDING
BANK OF SANTA MARIA
There are no existing or proposed material transactions between the Bank's
executive officers or directors or the immediate family or associates of any of
the foregoing persons. None of the directors or executive officers of the Bank
were selected pursuant to any arrangement or understanding, other than with the
directors and executive officers of the Bank, acting with their capacities as
such. There are no family relationships between the directors and executive
officers of the Bank, except between Director Nishino and Director Taniguchi who
are brothers-in-law. None of the directors or executive officers of the Bank
serve as directors of any company which has a class of securities registered
under or which is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, or any investment company registered under the
Investment Company Act of 1940, as amended.
Some of the Bank's directors, nominees for director, and executive officers and
their immediate families, as well as the companies with which such directors and
executive officers are associated, are customers of, and have had banking
transactions with the Bank in the ordinary course of the Bank's business and the
Bank expects to have such ordinary banking transactions with such persons in the
future. In the opinion of Management of the Bank, all loans and commitments to
lend included in such transactions were made in compliance with applicable laws
on substantially the same terms, including interest rates and collateral, as
those prevailing for comparable transactions with other persons of similar
creditworthiness and did not involve more than a normal risk of collectibility
or present other unfavorable features.
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<PAGE>
APPROVAL OF BSM BANCORP 1996 STOCK OPTION PLAN
INTRODUCTION
Shareholders of the Bank, as prospective shareholders of the Holding
Company, are being asked to approve the proposed BSM Bancorp 1996 Stock Option
Plan (the "1996 Plan"), which was adopted by the Board of Directors of Holding
Company on November 12, 1996, subject to the approval of the California
Commissioner of Corporations and the holders of a majority of the issued and
outstanding shares of the Bank as prospective shareholders of the Holding
Company. The purpose of the 1996 Plan is to strengthen the Holding Company and
its prospective wholly-owned subsidiary bank, Bank of Santa Maria (the "Bank"),
by providing an additional means of attracting and retaining competent
managerial personnel and by providing to participating officers, key employees
and directors, as well as consultants, advisors and others having a business
relationship with the Holding Company and the Bank, added incentive for high
levels of performance and for unusual efforts to increase the earnings of the
Holding Company and the Bank. The 1996 Plan seeks to accomplish these purposes
and achieve these results by providing a means whereby such officers, key
employees and directors, as well as consultants, advisors and others having a
business relationship with the Holding Company and the Bank, purchase shares of
the Holding Company's Common Stock pursuant to options granted in accordance
with the 1996 Plan.
The Board of Directors believes the 1996 Plan is beneficial to the Holding
Company, the Bank and the Holding Company's shareholder and prospective
shareholders. The 1996 Plan is subject to approval of the California
Commissioner of Corporations and the holders of a majority of the issued and
outstanding shares of the Bank as prospective shareholders of the Holding
Company, subject to any required changes of any regulatory agency.
SUMMARY OF PLAN
The purpose of the 1996 Plan is to strengthen the Holding Company and the
Bank by providing an additional means of attracting and retaining competent
managerial personnel. The 1996 Plan provides to participants added incentive
for high levels of performance and for unusual efforts to increase the earnings
of the Holding Company and the Bank. It is intended that the 1996 Plan will
assist in accomplishing these objectives and facilitate in achieving these
results by providing a means whereby directors, officers and key employees, as
well as consultants, advisors and others having a business relationship with the
Holding Company and the Bank, may purchase shares of the Common Stock of the
Holding Company pursuant to options granted in accordance with the 1996 Plan.
892,001 unissued shares of the Holding Company, or approximately 30% of the
issued and outstanding shares of the Holding Company, will be reserved for
issuance to directors, officers and employees, as well as consultants, advisors
and others having a business relationship with the Holding Company and the Bank
("Eligible Participants"). Options granted pursuant to the 1996 Plan may be
non-qualified options or incentive stock options within the meaning of Section
422A of the Internal Revenue Code.
The 1996 Plan will be administered by the Board of Directors of the Holding
Company or by a committee appointed from time to time by the Board. The Board
of Directors or the committee will determine with respect to the Eligible
Participants in the 1996 Plan and the extent of their participation.
The purchase price of stock subject to each option shall be not less than
one hundred (100%) of the fair market value of such stock at the time such
option is granted. An Eligible Participant owning more than ten percent (10%)
of the total combined voting power of all classes of stock of
76
<PAGE>
the Holding Company may only be granted an option with an exercise price at
least 110% of the fair value of Holding Company stock at the date of grant. The
purchase price of any shares exercised shall be paid in full in cash or, with
the prior written approval of the committee, in shares of the Holding Company or
on a deferred basis evidenced by a promissory note. In addition, the optionee
shall have the right upon exercise of an option to surrender for cancellation a
portion of the option for the number os shares exercised. Options may be
granted pursuant to the 1996 Plan for a term of up to ten (10) years. Each
option shall be exercisable according to the determination of the Board or
committee, except that options shall be exercisable at a minimum of 20% per year
over a five year period.
Options granted under the 1996 Plan shall not be transferable by the
optionee during the optionee's lifetime. In the event of termination of
employment as a result of the optionee's disability or in the event of an
employee's death during the exercise period, to the extent the option is
exercisable on the date employment terminates or the date the employee dies, the
option shall remain exercisable for up to one (1) year (but not beyond the end
of the original option term) by the disabled optionee or, in the event of death
of the optionee, a non-qualified option shall be exercisable by the person or
persons to whom rights under the option shall have passed by will or the laws of
descent and distribution.
If an optionee's employment is terminated, unless termination was by reason
of disability or death, the optionee shall have the right, for a 3-month period
after termination, to exercise that portion of the option which was exercisable
immediately prior to such termination. If an optionee's employment is
terminated for cause, except for options granted to consultants and business
advisors, the optionee shall have the right for a 30 day period after
termination, to exercise that portion of the option which was exercisable
immediately prior to such termination. In no event may the option be exercised
after the end of the original option term. However, such termination provisions
shall not apply for options granted to consultants, business associates or other
persons or entities with important business relationships with the Holding
Company.
In the event of certain changes in the outstanding Common Stock of the
Holding Company without receipt of consideration by the Holding Company, such as
stock dividends, stock splits, recapitalization, reclassification,
reorganization, merger, stock consolidation, or otherwise, appropriate and
proportionate adjustments shall be made in the number, kind and exercise price
of shares covered by any unexercised or partially unexercised options which were
already granted. Optionees will receive prior notice of any pending dissolution
or liquidation of the Holding Company, or reorganization, merger or dissolution
or liquidations of the Holding Company, or reorganization, merger or
consolidation where the Holding Company is not the surviving corporation or sale
of substantially all the assets of the Holding Company or other form of
corporate reorganization in which the Holding Company is not a surviving entity,
or the acquisition of stock representing more than 50% of the voting power of
the stock of the Holding Company then outstanding ("Terminating Event").
Optionees have thirty (30) days from the date of mailing of such notices to
exercise any option in full. After such thirty (30) days, any option not
exercised shall terminate and upon the occurrence of the Terminating Event, the
1996 Plan shall terminate, unless some other provision is made in connection
with the Terminating Event.
The Board reserves the right to suspend, amend, or terminate the 1996 Plan,
and, with the consent of the optionee, make such modifications, of the terms and
conditions of his or her option as it deems advisable, such as changing the
number of shares or the period such shares are vested, except that the Board may
not, without further approval of a majority of the shares, increase the maximum
number of shares covered by the 1996 Plan, change the minimum option price,
increase the maximum term of options under the 1996 Plan or permit options to be
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granted to any one other than an officer, employee or director, or consultant,
advisor or other person having a business relationship with the Holding Company
or the Bank.
Unless previously terminated by the Board of Directors, the 1996 Plan shall
terminate ten years from the date the 1996 Plan was adopted by the Board of
Directors of the Holding Company, or November 12, 2006.
Shares of the Holding Company's Common Stock to be issued upon exercise of
stock options need not be registered with the SEC. However, the Holding Company
has applied for a permit from the California Commissioner of Corporations and
the Holding Company intends to register the Common Stock reserved for issuance
under the 1988 Plan with the SEC prior to issuing any of its Common Stock upon
exercise thereof.
COMPARISON TO THE BANK OF SANTA MARIA 1988 STOCK OPTION PLAN
The Holding Company's 1996 Plan differs from the Bank's 1988 Stock Option
Plan (the "1988 Plan"), which will terminate in December 1998, and will be
terminated by the Bank upon the assumption of the Bank's Stock Options by the
Holding Company under the 1996 Plan, in several important respects. The 1996
Plan reserves up to 892,001 shares or approximately 30% of the currently issued
and outstanding shares of the Holding Company. By comparison, the 1988 Plan
reserves 245,920 shares of the Bank's Common Stock. The 1988 Plan will expire
on December 13, 1998, and the establishment of the 1996 Plan is designed to
replace the 1988 Plan. Currently, 160,400 shares are outstanding under the
1988 Plan. The total number of shares under the 1996 Plan will be equal to 30%
of the issued and outstanding shares of the Holding Company, which is within the
administrative standards of the California Commissioner of Corporations.
The 1996 Plan allows for options to be exercised with cash, a promissory
note, or the surrender of a portion of the option being exercised by applying
the appreciated value of the shares being surrendered to payment of the exercise
price. The 1988 Plan only allows options to be exercised with cash.
The 1996 Plan also allows for the granting of options to business
associates and others having a business relationship with the Holding Company
and the Bank. In addition, options granted to such business associates may not
be terminated before the expiration of such option. The 1988 Plan allows
options to be granted to directors, officers and key employees only.
The 1996 Plan requires a minimum exercise period of a stock option of at
least 20% per year over five years from the date the option is granted. In
comparison, the 1988 Plan allows the Bank and the optionee complete discretion
in the vesting of such options.
The 1996 Plan also allows that an optionee has the right to exercise vested
options in the event of termination for cause for a period of at least 30 days
following such termination. By comparison, the 1988 Plan provides that such
options will terminate subject to possible reinstatement by the Stock Option
Committee.
FEDERAL INCOME TAX CONSEQUENCES
To the extent that options granted under the 1996 Plan qualify as incentive
stock options and (i) the optionee does not sell the stock acquired upon
exercise of the options within two (2) years of the date of grant and one (1)
year from the date of exercise and (ii) the optionee was employed by
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the Holding Company or a subsidiary for the entire period beginning on the date
of grant of option and ending three (3) months prior to the exercise of the
option, then the optionee will not recognize compensation income to the extent
of any "bargain element" determined as of the time of grant or exercise, and the
Holding Company will not be entitled to a corresponding tax deduction. However,
the bargain element is a time of tax preference for the purpose of determining
the employee's alternative minimum tax.
If the optionee disposes of the stock acquired through the exercise of the
incentive stock option prior to satisfaction of the holding period or fails to
satisfy the employment requirement, the optionee will recognize compensation
income and the Holding Company will be entitled to a corresponding tax deduction
to the extent of the lesser of (i) the excess of the fair market value of the
stock at the date of exercise over the exercise price or (ii) the amount
realized in excess of the tax basis of the stock if disposed in a taxable
transaction.
If the options granted under the 1996 Plan are nonqualified, the optionee
will not recognize taxable income, and the Holding Company will not be entitled
to a corresponding tax deduction, at the time of grant or exchange. Upon the
exercise of a non-qualified stock option, however, the optionee will recognize
taxable income equal to the "bargain element" or the "spread", the difference
between the fair market value determined as of the time of exercise of the
Holding Company's Common Stock acquired by the optionee and the option price
paid for the stock. The Holding Company will be entitled to a corresponding tax
deduction equal to the income recognized by the optionee provided that the
income tax withholding attributable to the optionee's recognized income is
collected from the optionee.
Shares of the Holding Company's Common Stock to be issued upon exercise of
stock options need not be registered with the Securities and Exchange
Commission. However, the Holding Company has applied for a permit from the
California Commissioner of Corporations and the Holding Company intends to
register the Common Stock reserved for issuance under the 1996 Plan with the SEC
prior to issuing any of its Common Stock upon exercise thereof.
Approval of the 1996 Plan requires the affirmative vote of a majority of
the issued and outstanding shares of the Bank as prospective shareholders of the
Holding Company, and the 1996 Plan is subject to the approval of the California
Commissioner of Corporations.
The description herein is intended to highlight and summarize the principle
terms of the 1996 Plan. For further information, shareholders are referred to a
copy of the 1996 Plan which is available for inspection at the Holding Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE HOLDING
COMPANY'S 1996 STOCK OPTION PLAN
COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Holding
Company, the Holding Company has been advised that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
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EXPERTS
The financial statements as of the Bank as of December 31, 1995, 1994 and
1993 and for the years then ended included in this Written Consent
Statement/Prospectus have been so included in reliance on the report of Dayton &
Associates, independent certified public accountants, given on the authority of
said firm as experts in accounting. Dayton & Associates was merged into
Vavrinek, Trine, Day and Co. in 1996.
LEGAL MATTERS
The validity of the Holding Company Common Stock being registered with the
Commission will be passed upon for the Holding Company and the Bank by Knecht &
Hansen, Newport Beach, California. The opinion given under "Certain Federal
Income Tax Consequences" has been rendered by Vavrinek, Trine, Day & Co.
ANNUAL REPORT
UPON WRITTEN REQUEST OF ANY PERSON ENTITLED TO VOTE AT THE MEETING,
ADDRESSED TO BANK OF SANTA MARIA, 2739 SANTA MARIA WAY, SANTA MARIA, CALIFORNIA
93455-6090, ATTENTION: MR. F. DEAN FLETCHER, EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER, THE BANK WILL PROVIDE, WITHOUT CHARGE, A COPY OF ITS 1995
ANNUAL REPORT TO SHAREHOLDERS.
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ANNEX I
A copy of the Plan of Reorganization and Merger Agreement entered into as
of November 20, 1996 by the Bank, Holding Company and the Merger Company is
attached hereto.
<PAGE>
PLAN OF REORGANIZATION AND MERGER AGREEMENT
This Plan of Reorganization and Merger Agreement is entered into as of
November 20, 1996, by and between Bank of Santa Maria ("Bank"), BSM Merger
Company ("Subsidiary"), and BSM Bancorp ("Holding Company").
RECITALS AND UNDERTAKINGS
A. Bank is a California banking corporation with its principal office in
the City of Santa Maria, County of Santa Barbara, California. Subsidiary and
Holding Company are each corporations duly organized and existing under the laws
of the State of California with their principal offices in the City of Santa
Maria, County of Santa Barbara, California.
B. As of September 30, 1996, Bank had 25,000,000 shares of no par value
Common Stock authorized and 2,764,261 shares outstanding.
C. As of the date hereof, Subsidiary has an authorized maximum number of
shares of capital stock of 1,000,000 shares of no par value Common Stock, and at
the time of the merger referred to herein 100 of such shares of Common Stock
will be outstanding, all of which outstanding shares will be owned by Holding
Company.
D. As of the date hereof, Holding Company has an authorized maximum
number of shares of capital consisting of 50,000,000 shares of no par value
Common Stock, and 25,000,000 shares of no par value Preferred Stock, of which
150 shares of Common Stock will be outstanding and no shares of Preferred Stock
will be outstanding at the time of the merger referred to herein.
E. The Boards of Directors of Bank and Subsidiary have, respectively,
approved this Agreement and authorized its execution; and the Board of Directors
of Holding Company has approved this Agreement and has authorized the Holding
Company to join in and be bound by this Agreement, and authorized the
undertakings and representations made herein by Holding Company.
NOW, THEREFORE, in consideration of the promises and the mutual covenants,
agreements and undertakings of the parties herein set forth and for the purpose
of prescribing the terms and conditions of the merger, the parties hereto agree
as follows:
SECTION 1. GENERAL
1.1 THE MERGER. On the Effective Date, Subsidiary shall be merged into
Bank, which shall be the Surviving Corporation (the "Surviving Corporation") and
a subsidiary of Holding Company, and its name shall continue to be "Bank of
Santa Maria."
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<PAGE>
1.2 EFFECTIVE DATE. The merger described herein shall become effective,
and actions to consummate such merger shall commence, at the close of business
on the date (the "Effective Date") upon which an executed counterpart of this
Agreement (as amended, if necessary, to conform to any requirements of law or
governmental authority or agency, which requirements are not materially in
contravention of any of the substantive terms hereof) shall have been filed with
the Office of the Secretary of State of the State of California, in accordance
with Section 1103 of the California Corporations Code.
1.3 ARTICLES OF INCORPORATION, BYLAWS AND CERTIFICATE OF AUTHORITY. At the
close of business on the Effective Date, the Articles of Incorporation of Bank,
as in effect immediately prior to such time on the Effective Date, shall be and
remain the Articles of Incorporation of the Surviving Corporation, the Bylaws of
Bank shall be and remain the Bylaws of the Surviving Corporation until altered,
amended or repealed; the Certificate of Authority of Bank issued by the
Superintendent of Banks of the State of California shall be and remain the
Certificate of Authority of the Surviving Corporation; and Bank insurance of
deposits coverage by the Federal Deposit Insurance Corporation shall be and
remain the deposit insurance of the Surviving Corporation.
1.4 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. At the close of
business on the Effective Date, the directors and officers of Bank immediately
prior to such time on the Effective Date shall be and remain the directors and
officers of the Surviving Corporation. Directors of the Surviving Corporation
shall serve until the next Annual Meeting of Shareholders of the Surviving
Corporation or until such time as their successors are elected and have
qualified.
1.5 EFFECT OF THE MERGER.
(a) ASSETS AND RIGHTS. At the close of business on the Effective Date
and thereafter, all rights, privileges, franchises and property of Subsidiary,
and all debts and liabilities due or to become due to Subsidiary, including
things in action and every interest or asset of conceivable value or benefit,
shall be deemed fully and finally and without any right of reversion
transferred to and vested in the Surviving Corporation without further act or
deed, and the Surviving Corporation shall have and hold the same in its own
right as fully as the same was possessed and held by Subsidiary.
(b) LIABILITIES. At the close of business on the Effective Date and
thereafter, all debts, liabilities, and obligations due or to become due of, and
all claims and demands for any cause existing against, Subsidiary shall be and
become the debts, liabilities or obligations of, or the claims and demands
against, the Surviving Corporation in the same manner as if the Surviving
Corporation had itself incurred or become liable for them.
(c) CREDITORS' RIGHTS AND LIENS. At the close of business on the
Effective Date and thereafter, all rights of creditors of Subsidiary, and all
liens upon the property of Subsidiary, shall be preserved unimpaired, and shall
be limited to the property affected by such liens immediately prior to the
Effective Date.
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(d) PENDING ACTIONS. At the close of business on the Effective Date
and thereafter, any action or proceeding pending by or against Subsidiary shall
not be deemed to have abated or been discontinued, but may be pursued to
judgment with the full right to appeal or review. Any such action or proceeding
may be pursued as if the merger described herein had not occurred, or with the
Surviving Corporation substituted in place of Subsidiary, as the case may be.
1.6 FURTHER ASSURANCES. Bank and Subsidiary each agree that at any time,
or from time to time, as and when requested by the Surviving Corporation, or by
its successors and assigns, it will execute and deliver, or cause to be executed
and delivered, in its name by its last acting officers, or by the corresponding
officers of the Surviving Corporation, all such conveyances, assignments,
transfers, deeds or other instruments, and will take or cause to be taken such
further or other action as the Surviving Corporation, its successors or assigns
may deem necessary or desirable in order to evidence the transfer, vesting or
devolution of any property right, privilege or franchise or to vest or perfect
in or confirm to the Surviving Corporation, its successors and assigns, title to
and possession of all the property rights, privileges, powers, immunities,
franchises and interests referred to in this Section 1, or otherwise to carry
out the intent and purposes of this Agreement.
SECTION 2. CAPITAL STOCK OF THE SURVIVING CORPORATION
2.1 STOCK OF SUBSIDIARY. At the close of business on the Effective Date,
each share of Common Stock of Subsidiary issued and outstanding immediately
prior thereto shall, by virtue of the merger described herein, be deemed to be
exchanged for and converted into one fully paid share, assessable in accordance
with Section 662 of the California Financial Code, of Common Stock of Bank as
the Surviving Corporation.
2.2 STOCK OF BANK. At the close of business on the Effective Date, each
share of Common Stock of Bank issued and outstanding immediately prior thereto
shall, by virtue of the merger described herein, and without any action on the
part of the holder thereof, be exchanged for and converted into one share of
fully paid nonassessable Common Stock of Holding Company, in accordance with the
provisions of Paragraph 2.3.
2.3 EXCHANGE OF STOCK BY BANK SHAREHOLDERS. The conversion of the shares
of Bank provided in Paragraph 2.2 above shall occur automatically at the close
of business on the Effective Date without action by the holders thereof. Each
share certificate evidencing ownership of shares of Bank Common Stock thereupon
shall be deemed to evidence one share of Common Stock of the Holding Company.
Each holder of shares of Bank Common Stock may but is not required to surrender
his share certificate or certificates to the Holding Company, or an Exchange
Agent appointed by the Holding Company, and shall be entitled to receive in
exchange therefor a certificate or certificates representing the number of
shares into which his shares theretofore represented by a certificate or
certificates so surrendered shall have been converted.
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2.4 EMPLOYEE STOCK OPTIONS. At the close of business on the Effective
Date, the Holding Company will assume Bank's rights and obligations under Bank's
Stock Option Plan (the "Plan") and under each of the outstanding options
previously granted under the Plan (each such option existing immediately prior
to the Effective Date being an "existing option" and each such option so assumed
by the Holding Company being called an "assumed option"), by which assumption
the optionee shall have the right to purchase one share of Holding Company
Common Stock for each share of Common Stock of Bank he was entitled to purchase
under such existing option, except that no option shall survive to purchase
fractional shares. Each assumed option, subject to such modification as may be
required, shall constitute a continuation of the existing option substituting
the Holding Company for Bank and employment by the Holding Company or any of its
subsidiaries for employment by the Bank. The price per share of Holding Company
Common Stock at which the assumed option (or any installment) may be exercised
shall be the price as was applicable to the purchase of the Bank Common Stock
pursuant to the existing option, and all other terms and conditions applicable
to the assumed options shall, except as herein provided, be unchanged. Each
option granted under the Plan after the close of business on the Effective Date
shall evidence the right to purchase shares of Common Stock of the Holding
Company rather than shares of Common Stock of the Bank and the Plan shall be
modified to so provide.
2.5 OTHER RIGHTS TO STOCK. From time to time, as and when required by the
provisions of any agreement to which Bank or Holding Company shall become a
party after the date hereof providing for the issuance of shares of Common Stock
or other equity securities of Bank or Holding Company in connection with a
merger into Bank of any other banking institution or other corporation, or the
acquisition by the Bank of the assets or stock of any other banking institution
or corporation, Holding Company shall issue in accordance with the terms of any
such agreement, its Common Stock or other equity securities as required by such
agreement, or in substitution of the shares of Common Stock or other equity
securities of Bank required to be issued by such agreement, as the case may be,
which the shareholders of any other such banking institution or other
corporation shall be entitled to receive by virtue of any such agreement.
SECTION 3. OBLIGATIONS OF THE PARTIES PENDING THE EFFECTIVE DATE OF MERGER
3.1 STOCKHOLDER APPROVALS. As soon as practicable, this Agreement shall be
duly submitted to stockholders of Bank, Subsidiary and the Holding Company for
the purpose of considering and acting upon this Agreement in the manner required
by law. Each of the parties shall use its best efforts to obtain the requisite
approval of its stockholders to this Agreement and the transactions contemplated
herein.
3.2 REGULATORY APPROVALS. Each of the parties hereto shall execute and
file with the appropriate regulatory authorities all necessary documents and
instruments and shall take every reasonable and necessary step and action to
comply with and to secure such regulatory approval of this Agreement and the
transactions contemplated herein as may be required by all applicable statutes,
rules and regulations, including
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without limitation the consents and approvals referred to in Paragraphs 4.1(b),
4.1(c) and 4.1(d).
SECTION 4. CONDITIONS PRECEDENT, TERMINATION AND PAYMENT OF EXPENSES
4.1 CONDITIONS PRECEDENT TO THE MERGER. Consummation of the merger
described herein is subject to satisfaction of the following conditions:
(a) Ratification and confirmation of this Agreement by the respective
stockholders of Bank, the Subsidiary and the Holding Company, in accordance with
the applicable provisions of law;
(b) Obtaining all other consents and approvals, on terms and
conditions satisfactory to each of the parties hereto, and satisfying all other
requirements, prescribed by law or otherwise, which are necessary for the merger
described herein to be consummated, including without limitation: approvals from
the Federal Deposit Insurance Corporation, the Superintendent of Banks of the
State of California, and the Board of Governors of the Federal Reserve System
under the Bank Holding Company Act of 1956, approval from the California
Commissioner of Corporations under the California Corporate Securities Law of
1968 and authorizations, to the extent necessary under applicable blue sky laws
with respect to the securities of the Holding Company issued upon consummation
of the merger, and the declaration as effective by the Securities and Exchange
Commission of a registration statement under the Securities Act of 1933 with
respect to the securities of the Holding Company issuable upon consummation of
the merger,
(c) Issuance (unless waived by each of the parties hereto) of a
favorable ruling by the Internal Revenue Service of the United States Department
of the Treasury, in form and substance satisfactory to each of the parties
hereto and their counsel, with respect to the tax consequences to the parties
and their stockholders of the merger described herein;
(d) Procuring all other consents or approvals, governmental or
otherwise, which in the opinion of counsel for Bank are or may be necessary to
permit or to enable the Surviving Corporation to conduct, upon and after the
merger described herein, all or any part of the business and other activities in
which Bank will be engaged up to the time of such merger, in the same manner and
to the same extent Bank engages in such businesses and other activities
immediately prior to such merger; and
(e) Performance by each of the parties hereto of all obligations under
this Agreement which are to be performed prior to the consummation of the merger
described herein.
4.2 TERMINATION OF THE MERGER. If any condition specified in Paragraph 4.1
has not been fulfilled, or prior to the Effective Date a majority of the members
of the Board of Directors of any of the parties hereto has determined that:
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(a) The number of shares of Common Stock of Bank voting against the
merger makes consummation of the merger inadvisable; or
(b) Any action, suit, proceeding or claim relating to the merger
described herein has been instituted, made or threatened which makes
consummation of the merger inadvisable; or
(c) For any other reason consummation of the merger is inadvisable;
then this Agreement may be terminated at any time before the merger becomes
effective. Upon termination, this Agreement shall be void and of no further
effect, and there shall be no liability by reason of this Agreement or the
termination thereof on the part of the parties or their respective directors,
officers, employees, agents or shareholders.
4.3 EXPENSES OF THE MERGER. All expenses of the merger, described herein,
including, without limitation, filing fees, printing costs, mailing costs,
accountant's fees and legal fees, shall be borne jointly by the Surviving
Corporation and the Holding Company; provided, however, that if the merger is
abandoned for any reason, then all of such expenses, including but not limited
to, the Holding Company's obligation to repurchase the shares issued to its
initial shareholders, shall be paid by Bank.
SECTION 5. MISCELLANEOUS
5.1 ENTIRE AGREEMENT. This Agreement embodies the entire agreement among
the parties and there have been and are no agreements, representations or
warranties among the parties with respect to the subject matter of this
Agreement other than those set forth herein or those provided for herein.
5.2 GOVERNING LAW. This Agreement has been executed in the State of
California and the laws of such State shall govern the validity and the
interpretation hereof and the performance by the parties hereto.
5.3 COUNTERPARTS. To facilitate the filing of this Agreement, any number
of counterparts hereof maybe executed and each such counterpart shall be deemed
to be an original instrument, but all such counterparts together shall
constitute but one instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Plan of
Reorganization and Merger Agreement to be executed by their duly authorized
officers as of the day and year first above written.
BANK OF SANTA MARIA
By: /s/ William A. Hares
---------------------------------------
William A. Hares,
President and Chief Executive Officer
By: /s/ William Snelling
---------------------------------------
William Snelling, Secretary
BSM MERGER COMPANY
By: /S/ William A. Hares
---------------------------------------
William A. Hares,
President and Chief Executive Officer
By: /s/ F. Dean Fletcher
---------------------------------------
F. Dean Fletcher, Secretary
BSM BANCORP
By: /s/ William A. Hares
---------------------------------------
William A. Hares,
President and Chief Executive Officer
By: /s/ William Snelling
---------------------------------------
William Snelling, Secretary
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<PAGE>
ANNEX II
A copy of the BSM Bancorp Stockholder Agreement entered into as of
November 12, 1996 by the Holding Company and Mr. William A. Hares is attached
hereto.
<PAGE>
STOCKHOLDER AGREEMENT
THIS AGREEMENT is entered into this 12th day of November, 1996 by and
between William A. Hares ("Shareholder") and BSM Bancorp ("Corporation"), a
California corporation with its principal executive office in Santa Maria,
California 93455.
A. WHEREAS, the Articles of Incorporation of BSM Bancorp currently
authorize the issuance of up to 50,000,000 of its no par value Common Stock
("Common Stock") and 25,000,000 of its no par value Preferred Stock.
B. WHEREAS, the Board of Directors of the Corporation have authorized the
sale and issuance of 150 shares of the Corporation's Common Stock at the
purchase price of $10.00 per share to Shareholder pursuant to the terms of
Corporation Code Section 25102(f);
C. WHEREAS, Shareholder desires to purchase 150 shares of the
Corporation's Common Stock for the purchase price of $10.00 per share pursuant
to the terms and conditions herein set forth;
IT IS MUTUALLY AGREED by and between the parties hereto as follows:
1. PURCHASE. The Corporation agrees to sell and Shareholder agrees to
for each purchase 150 shares of the Corporation's Common Stock at the price of
$10.00 per share for an aggregate purchase price of $1500.00
2. TRANSFER OF SHARES. The Shareholder agrees not to sell, assign,
transfer, encumber, hypothecate, or make any other disposition of any of the
shares of the Common Stock to be purchased except with the prior written consent
of the Corporation and except in accordance with the terms of this Stockholder
Agreement. This Stockholder Agreement shall be binding upon and shall operate
for the benefit of the Corporation and the Shareholder and the respective
executors or administrators and any transferees or assignees of the Shareholder,
whether such transfers or assignments are in accordance with or in violation of
the provisions of this Stockholder Agreement.
3. THE PURCHASE BY THE CORPORATION. Upon consummation of the merger
between the Corporation's wholly-owned subsidiary, BSM Merger Company, and
pursuant to which this Corporation will issue shares of its Common Stock to the
shareholders of Bank of Santa Maria ("the Merger"), the Corporation shall be
obligated to repurchase for cash and the Shareholder shall be obligated to
resell to the Corporation the above-mentioned shares at the repurchase price of
$10.00 per share, for a total repurchase price of $1,500. The repurchase and
repayment therefor shall
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occur simultaneously with the consummation of the Merger, at which time
Shareholder's share certificates shall be returned and cancelled.
4. TERMINATION. This Stockholder Agreement shall terminate upon the
occurrence of any of the following events:
(a) The bankruptcy, receivership, or dissolution of the Corporation;
(b) Mutual agreement of the Corporation and Shareholder; or
(c) The failure of the consummation of the Merger for any reason
whatsoever.
5. LEGEND. Upon execution of this Stockholder Agreement, the certificate
representing the number of shares of Stock to be issued shall be endorsed as
follows:
"It is unlawful to consummate a sale or transfer of this
security, or any interest therein, or to receive any
consideration therefor, without the prior written consent of
the Commissioner of Corporations of the State of California,
except as permitted by the Commissioner's rules.
Additionally, this certificate is transferable only upon
compliance with provisions of a Stockholder Agreement dated
November 12, 1996."
6. GOVERNING LAW. This Stockholder Agreement shall be construed and
governed by the laws of the State of California. The offer and sale of this
stock will not be accompanied by the publication of any advertisement, that no
selling expenses will be given, paid or incurred in connection therewith, that
no promotional considerations will be given, paid or incurred in connection
therewith, that a notice in the form prescribed by the rules of Commissioner of
Corporations ("Commissioner") shall be filed with the Commissioner, and that a
copy of Section 260.141.11 of the Corporate Securities Rules is attached hereto
and is hereby acknowledged as received by shareholder.
7. ENTIRE AGREEMENT. This Stockholder Agreement constitutes the sole and
only agreement of the parties hereto respecting the sale and purchase of the
shares of the Corporation and the resale and repurchase of the shares of the
Corporation's Common Stock and correctly sets forth the rights, duties, and
obligations of each party to the other in relation thereto as of this date. Any
prior agreements, promises, negotiations or representations concerning the
subject matter of this Stockholder Agreement not expressly set forth in this
Stockholder Agreement are of no force or effect.
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IN WITNESS WHEREOF, the parties hereto have executed this Stockholder
Agreement in Santa Maria, California on the date first above written.
BSM BANCORP
By /s/ A. J. Diani
---------------------------------------
A. J. Diani
Chairman of the Board
By /s/ F. Dean Fletcher
---------------------------------------
F. Dean Fletcher
Chief Financial Officer
By /s/ William A. Hares
---------------------------------------
William A. Hares
"Shareholder"
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INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report
Financial Statements of Bank of Santa Maria
Balance sheets as of December 31, 1995 and 1994
Statements of Operations for the Years Ended
December 31, 1995, 1994 and 1993
Statements of Shareholders' Equity for the Years
Ended December 31, 1995, 1994 and 1993
Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993
Notes to Financial Statements
Unaudited Financial Statements
Balance Sheet as of September 30, 1996
Statements of Operations for the Nine Months
Ended September 30, 1996 and 1995
Statements of Shareholders' Equity for the Nine
Months Ended September 30, 1996
Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995
Notes to Financial Statements
Financial Statements of the Holding Company are not presented herein
because BSM Bancorp has not yet
issued any stock, has no assets and liabilities
and has not conducted any business other
than of an organizational nature.
All schedules are omitted because the required information
is not applicable or is included in the
Financial Statements of Bank of Santa Maria
and the related notes.
Notes to Financial Statements
<PAGE>
R E P O R T O F C E R T I F I E D P U B L I C A C C O U N T A N T S
BOARD OF DIRECTORS
BANK OF SANTA MARIA
SANTA MARIA, CALIFORNIA
I N D E P E N D E N T A U D I T O R ' S R E P O R T
We have audited the accompanying statements of condition of Bank of Santa Maria
as of December 31, 1995 and December 31, 1994, and the related statements of
income, changes in capital, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bank of Santa Maria as of
December 31, 1995 and December 31, 1994, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
Dayton and Associates
Laguna Hills, California
January 3, 1996
F-1
<PAGE>
S T A T E M E N T S O F C O N D I T I O N
DECEMBER 31,
------------------------------
ASSETS 1995 1994
- ------------------------------------------------------------------------------
Cash and Due from Banks $ 15,772,603 $ 14,899,27
Investment Securities - Note B:
Securities available for sale 4,046,341 3,060,598
Securities held to maturity 66,490,797 54,309,136
-------------- ------------
TOTAL INVESTMENT SECURITIES 70,537,138 57,369,734
Federal Funds Sold 13,429,000 10,130,000
Loans - Note C:
Commercial 46,357,520 42,629,045
Agricultural 23,633,081 22,806,450
Real Estate 44,443,104 44,292,650
Consumer 36,793,706 39,033,118
-------------- ------------
TOTAL LOANS 151,227,411 148,761,263
Allowance for possible credit losses (2,536,894) (2,227,725)
-------------- ------------
NET LOANS 148,690,517 146,533,538
Premises and equipment - Note D 10,212,568 10,586,604
Accrued interest and other assets 3,677,219 3,066,534
Other Real Estate Owned 1,258,261 1,549,808
-------------- ------------
TOTAL ASSETS $263,577,306 $244,135,488
-------------- ------------
-------------- ------------
LIABILITIES AND CAPITAL
- ------------------------------------------------------------------------------
Deposits
Noninterest-bearing demand $ 57,666,556 $ 50,148,005
Interest-bearing demand and savings 103,180,201 108,714,246
Time deposits under $100,000 49,465,869 40,408,723
Time deposits of $100,000 or more 23,741,749 19,323,869
-------------- ------------
TOTAL DEPOSITS 234,054,375 218,594,843
Accrued interest and other liabilities 2,019,334 1,566,842
-------------- ------------
TOTAL LIABILITIES 236,073,709 220,161,685
-------------- ------------
Commitments - Note H
Capital - Note E:
Common shares - authorized 25,000,000
shares; issued and outstanding
2,748,261 as of December 31, 1995;
2,676,919 as of December 31, 1994 8,512,498 7,934,404
Undivided profits 18,946,368 16,053,808
Net unrealized depreciation on available
for sale securities, net of taxes of
$(29,820), in 1995 and $9,406 in 1994 44,731 (14,409)
-------------- ------------
TOTAL CAPITAL 27,503,597 23,973,803
-------------- ------------
TOTAL LIABILITIES AND CAPITAL $263,577,306 $244,135,488
-------------- ------------
-------------- ------------
The accompanying notes are an integral part of these financial statements
F-2
<PAGE>
S T A T E M E N T S O F I N C O M E
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
INTEREST INCOME 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and fees on loans $16,396,749 $14,869,663 $14,181,594
Interest on investment securities-taxable 2,857,080 1,991,678 1,958,588
Interest on investment securities-non
taxable 463,366 324,462 233,429
Other interest income 711,811 420,009 316,534
----------- ----------- -----------
TOTAL INTEREST INCOME 20,429,006 17,605,812 16,690,145
----------- ----------- -----------
INTEREST EXPENSE
- ------------------------------------------------------------------------------------------
Interest on demand and savings deposits 2,773,221 2,505,233 2,464,491
Interest on time CD's over $100,000r 1,102,190 776,500 698,958
Interest on time CD's less than $100,000 2,305,628 1,534,069 1,711,778
----------- ----------- -----------
TOTAL INTEREST EXPENSE 6,181,039 4,815,802 4,875,226
----------- ----------- -----------
NET INTEREST INCOME 14,247,967 12,790,010 11,814,919
Provision for credit losses 700,000 250,000 601,801
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 13,547,967 12,540,010 11,213,118
----------- ----------- -----------
NON-INTEREST INCOME
- ------------------------------------------------------------------------------------------
Service charges on deposits 1,607,800 1,395,769 1,425,967
Merchant discount fees 405,924 384,311 331,872
Other fee income 462,380 433,249 543,054
Other non-interest income 116,209 144,620 114,810
----------- ----------- -----------
TOTAL 2,592,313 2,357,948 2,415,703
----------- ----------- -----------
NON-INTEREST EXPENSE
- ------------------------------------------------------------------------------------------
Salaries and employee benefits 5,897,042 5,582,417 5,417,613
Occupancy expenses 786,278 781,363 749,613
Furniture and equipment 1,243,660 1,201,658 1,233,051
Advertising and promotion 397,649 362,583 340,886
Professional 454,320 346,347 371,682
Office expenses 720,131 642,139 564,145
Regulatory assessments 288,751 511,653 703,471
Merchant processing costs 338,431 320,282 301,265
Other OREO expense 39,658 306,090 62,525
Other expenses 946,068 753,666 518,800
----------- ----------- -----------
TOTAL 11,111,988 10,808,198 10,263,052
----------- ----------- -----------
INCOME BEFORE TAXES 5,028,292 4,089,760 3,365,768
Income taxes - Note H 1,878,900 1,529,000 1,245,650
----------- ----------- -----------
NET INCOME $3,149,392 $2,560,760 $2,120,118
----------- ----------- -----------
----------- ----------- -----------
Per share data:
Net income $1.15 $0.96 $0.81
----------- ----------- -----------
----------- ----------- -----------
Number of shares used in computation 2,748,000 2,667,000 2,603,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
S T A T E M E N T S O F C A S H F L O W S
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------------------------
OPERATING ACTIVITIES 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $3,149,392 $2,560,759 $2,120,118
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,076,818 1,038,970 1,032,877
Provision for credit losses 700,000 250,000 601,801
Amortization of premium/discounts
on investment securities 96,824 299,986 475,156
Loans originated for sale (4,316,600) (5,086,100) (10,377,300)
Proceeds from loan sales 3,969,394 7,767,819 12,069,173
Net loss (gain) from sale of fixed assets (30,450) (16,540) (34,971)
Net loss (gain) on sale of other real
estate loans 149,571 61,613 (33,836)
Net change in accrued interest, other assets
and other liabilities (197,420) 185,533 (12,467)
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 4,597,529 7,062,040 5,840,501
INVESTING ACTIVITIES
- -----------------------------------------------------------------------------------------------
Proceeds from maturities of securities held
to maturity 30,085,000 23,453,600 20,235,000
Proceeds from maturities of securities held
for sale 5,582,750 0 0
Purchases of held to maturity securities (45,918,382) (32,853,512) (30,305,388)
Purchases of available for sale securities (2,915,230) (2,776,076) 0
Net (increase) decrease in loans (2,961,634) (3,906,188) 1,877,260
Purchases of premises and equipment (713,281) (3,097,065) (1,186,883)
Proceeds from sales of other real estate owned 593,838 978,092 1,339,170
Proceeds from sales of fixed assets 40,949 44,524 40,581
----------- ----------- -----------
NET CASH USED BY
INVESTING ACTIVITIES (16,205,990) (18,156,625) (8,000,260)
FINANCING ACTIVITIES
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in demand deposits and
savings accounts 1,984,507 10,418,720 12,334,976
Net increase (decrease) in time deposits 13,475,025 (1,101,739) (7,865,190)
Payments for dividends/distributions (258,396) (219,103) (130,506)
Proceeds from exercise of stock options 579,658 1,209,382 76,037
----------- ----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 15,780,794 10,307,260 4,415,317
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,172,333 (787,325) 2,255,558
Cash and cash equivalents at beginning of year 25,029,270 25,816,595 23,561,037
CASH AND CASH EQUIVALENTS
AT END OF YEAR $29,201,603 $25,029,270 $25,816,595
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosures of cash flow
information:
Loans transferred to other real estate owned $451,861 $209,000 $2,977,971
Cash paid during the year for interest $5,703,359 $4,791,321 $5,070,481
Cash paid during the year for income taxes $2,194,780 $1,195,625 $1,246,871
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
S T A T E M E N T S O F C H A N G E S I N C A P I T A L
<TABLE>
<CAPTION>
Net
Unrealized
Common Shares Adjustment in
------------------------- Available for
Number of Undivided Sale
Shares Amount Profits Securities Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 2,503,415 $6,537,252 $11,834,273 $0 $18,371,525
Proceeds from exercise of stock 11,500 76,037 76,037
options
Dividends paid (130,506) (130,506)
Net income for the year 2,120,118 2,120,118
---------- ----------- ----------- ----------- -----------
Balance at January 1, 1994 2,514,915 6,613,289 13,823,885 0 20,437,174
---------- ----------- ----------- ----------- -----------
Proceeds from exercise of stock
options, including the realization of
tax benefits of $197,000 145,650 1,209,382 1,209,382
5% stock dividend (Templeton only) 16,354 111,733 (112,175) (442)
Dividends paid (218,661) (218,661)
Net income for the period 2,560,759 2,560,759
Adjustment in Available for Sale
Securities, Net of Taxes of $9,406 (14,409) (14,409)
---------- ----------- ----------- ----------- -----------
Balance at December 31, 1994 2,676,919 7,934,404 16,053,808 (14,409) 23,973,803
---------- ----------- ----------- ----------- -----------
Proceeds from exercise of stock
options 71,469 579,658 579,658
Partial Distribution-Templeton
Merger (127) (1,564) (1,564)
Dividends paid (256,832) (256,832)
Net income for the period 3,149,392 3,149,392
Adjustment in Available for Sale
Securities, Net of Taxes of
$(39,227) 59,140 59,140
---------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 2,748,261 $8,512,498 $18,946,368 $44,731 $27,503,597
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
N O T E S T O F I N A N C I A L S T A T E M E N T S
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
INVESTMENT SECURITIES
Securities held to maturity are stated at cost, adjusted for amortization of
premiums and accretion of discounts over the period to maturity, or to an
earlier call, if appropriate, on a straight-line basis. Such securities include
those that management intends and has the ability to hold into the foreseeable
future.
Securities would be considered available for sale if they would be sold under
certain conditions, among these being changes in interest rates, fluctuations in
deposit levels or loan demand, or need to restructure the portfolio to better
match the maturity or interest rate characteristics of liabilities with assets.
Securities classified as available for sale are accounted for at their current
fair value rather than amortized historical cost. Unrealized gains or losses
are not recognized as current income, but rather as an increase or decrease of
capital through a separate reserve.
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
NOTE A (CONTINUED)
LOANS, FEES, AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans are carried at amounts advanced less payments collected. Interest on
loans is accrued on a simple interest basis, except where management believes
that serious doubt exists as to the repayment of the loan. When a loan is
placed on non-accrual status, previously accrued and uncollected interest for
the current year is reversed from income.
Loans originated and intended for sale in the secondary market are carried at
the lower of cost or estimated market value in the aggregate. Net unrealized
losses are recognized through a valuation allowance by charges to income.
Servicing income is generally recognized as received over the life of the
loan. If the normal servicing fees are expected to be less than the estimated
servicing costs, a loss would be recognized when the loan was sold.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to make all payments due according to the
contractual terms of the loan agreement. When interest accrual is discontinued,
all unpaid accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
In May 1993 and October 1994, respectively, the Financial Accounting
Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 114 and
118 address the accounting and disclosure by creditors for Impairment of
certain loans, and is not applicable to certain homogeneous loans that
collectively evaluated for impairment, and may impact how a bank reports
loans and loan loss reserves. These statements are effective for financial
statements issued for fiscal years beginning after December 15, 1994.
Management adopted SFAS No. 114 and 118 in the first quarter of 1995.
Loan origination fees offset by certain direct origination costs are deferred
and recognized over the contractual life of the loan as an adjustment to the
yield. The unrecognized fees and costs are reported either as a reduction of
the loan principal outstanding, or, if deferred costs are greater than deferred
fees, as additions to the applicable loan grouping. Commitment fees are
deferred and recognized over the term of the commitment. Most deferred fees and
costs are recognized using the interest method.
The determination of the balance in the allowance for possible loan losses is
based on an analysis of the loan portfolio and reflects an amount which, in
management's judgment, is adequate to provide for potential loan losses after
giving consideration to the character of the loan portfolio, current economic
conditions, past loan loss experience and such other factors as warrant
recognition in estimating loan losses. The allowance is increased by provisions
charged to operating expense and reduced by net charge-offs.
OTHER REAL ESTATE OWNED
Other real estate owned, which represents real estate acquired through
foreclosure, or deed in lieu of foreclosure, is reported at the fair value of
the property at the time of transfer to other real estate owned, reduced by
estimated selling expenses. Any subsequent operating expenses, or income,
reductions in estimated values, and gains or losses on disposition of such
properties are charged to current operations.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation, which
is computed principally on the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the shorter of
their economic lives or the term of the lease.
F-6
<PAGE>
NOTE A (CONTINUED)
INCOME TAXES
Income taxes are accounted for by the asset and liability method as required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Deferred tax liabilities or assets are established for
temporary differences between financial and tax reporting basis and are
subsequently adjusted to reflect changes in tax rates expected to be in effect
when the temporary differences reverse. A valuation allowance is established
for any deferred tax asset for which realization is not likely.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include; cash on
hand, amounts due from banks and Federal funds sold. Generally, Federal funds
are purchased and sold for one-day periods.
EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of shares
outstanding during the year plus shares issuable upon the assumed exercise of
outstanding common stock options.
RECLASSIFICATION
Certain reclassifications were made to prior years' presentations to conform to
the current year. These reclassifications are of a normal recurring nature.
All prior years' numbers have been reinstated to give affect for the acquisition
of Templeton National Bank on a pooling of interest basis.
F-7
<PAGE>
NOTE B - INVESTMENT SECURITIES
Securities have been classified in the Statements of Condition according to
management's intent. The carrying amount of securities and their approximate
fair values at December 31, were as follow:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
1995:
Available for Sale Securities:
U.S. Treasury securities $3,971,790 $74,631 $80 $4,046,341
----------- ------------ ------------ ------------
$3,971,790 $74,631 $80 $4,046,341
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
1995:
Held to Maturity Securities:
U.S. Treasury securities $6,672,923 $50,332 $260 $6,722,995
U. S. Government and agency
securities 41,332,055 157,919 50,307 41,439,667
Obligations of states and
political subdivisions 16,419,726 95,150 5,067 16,509,808
Other debt securities 2,066,093 1,775 13,282 2,054,586
----------- ------------ ------------ ------------
$66,490,797 $305,175 $68,916 $66,727,056
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
1994:
Available for Sale Securities:
U.S. Treasury securities $1,078,861 $0 $1,341 $1,077,519
U.S. Government and agency
securities 2,005,553 0 22,474 1,983,079
----------- ------------ ------------ ------------
$3,084,414 $0 $23,815 $3,060,598
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
1994:
Held to Maturity Securities:
U.S. Treasury securities $17,443,000 $1,361 $200,871 $17,243,490
U.S. Government and agency
securities 27,665,418 1,229 841,226 26,825,421
Obligations of states and
political subdivisions 7,946,948 4,112 87,539 7,863,521
Other debt securities 1,253,770 0 64,594 1,189,176
----------- ------------ ------------ ------------
$54,309,136 $6,702 $1,194,230 $53,121,608
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
There were no gross realized gains or gross realized losses on sales of
available for sale securities. The Bank does not expect to realize either gains
or losses shown in the above schedule. The Bank fully expects to hold these
securities to maturity/call date at which time the amortized cost and market
value will be the same as the par value of the bond.
F-8
<PAGE>
NOTE B (CONTINUED)
At December 31, 1995 and 1994, investment securities having an amortized cost of
approximately $4,994,000 and $6,006,000 respectively, were pledged to secure
public deposits and for other purposes as required or permitted by law.
The amortized cost and estimated market value of all debt securities as of
December 31, 1995 by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
Due in one year or less $26,671,648 $26,705,804 $2,503,065 $2,520,571
Due after one year to five
years 39,111,554 39,310,825 1,468,726 1,525,770
Due after five years to ten
years 108,420 108,916
Due after ten years 599,175 601,511
------- ------- ---------- ----------
TOTAL $66,490,797 $66,727,056 $3,971,790 $4,046,341
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
NOTE C - LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within Santa
Barbara and San Luis Obispo counties. Although the Bank seeks to avoid
concentrations of loans to a single industry, loans to the agricultural
community are listed separately as in total they exceed 10% of all loans
outstanding as of December 31, 1995, and December 31, 1994. Concentrations also
can occur based upon a single class of collateral. Real estate and real estate
associated businesses are among the principal industries in the Bank's market
area and, as a result, the Bank's loan and collateral portfolios are to some
degree concentrated in those industries. Real estate related loans, net of
deferred fees and costs, at December 31, 1995, and December 31, 1994 were as
follows.
1995 1994
Construction and land development $12,619,000 $13,141,000
Home equity credit lines 18,002,000 19,556,000
Residential properties 14,878,000 13,705,000
Commercial properties 40,861,000 43,588,000
Farmland 5,537,000 4,259,000
----------- -----------
$91,897,000 $94,249,000
----------- -----------
----------- -----------
The Bank also originates real estate related loans for sale to governmental
agencies and institutional investors. At December 31, 1995, and at December 31,
1994, the Bank had outstanding approximately $1,300,000 and $958,000 in loans
held for sale respectively, and was servicing approximately $40,700,000 and
$40,007,000, respectively, in loans previously sold.
F-9
<PAGE>
NOTE C (CONTINUED)
Impairment of loans having recorded investments of $336,388 as of December 31,
1995 has been recognized in conformity with SFAS No. 114 as amended by SFAS
No. 118. The average recorded investment in such impaired loans during 1995
was $1,064,026. The total allowance for loan losses related to these loans
was $61,008 at December 31, 1995. Interest income on impaired loans of
$364,130 was recognized for cash payments received in 1995. This amount was
received on a single loan which had a protracted repayment period resulting
from a bankruptcy. The loan paid in full in 1995 including all interest in
arrears for approximately 43 months.
A summary of the changes in the allowance for possible credit losses follows:
1995 1994 1993
---- ---- ----
Balance at beginning of year $2,228,000 $2,254,000 $2,415,000
Additions to the allowance charged
to expense 700,000 250,000 602,000
Recoveries on loans charged off 99,000 120,000 152,000
------ ------- -------
Subtotal 3,027,000 2,624,000 3,169,000
--------- --------- ---------
Less loans charged off 490,000 396,000 915,000
------- ------- -------
TOTAL $2,537,000 $2,228,000 $2,254,000
---------- ---------- ----------
---------- ---------- ----------
NOTE D - PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
1995 1994
---- ----
Land $1,623,724 $1,623,724
Buildings and improvements 7,398,803 7,465,309
Leasehold improvements 15,424 18,793
Furniture, fixtures, and equipment 6,701,407 6,179,900
--------- ---------
Subtotal 15,739,358 15,287,726
Less accumulated depreciation/amortization 5,526,791 4,701,122
--------- ---------
TOTAL $10,586,604 $10,586,604
----------- -----------
----------- -----------
NOTE E - STOCK OPTION PLAN
In 1978, the Bank adopted a stock option plan under which the Bank's Common
shares may be issued to officers and key employees at not less than 100% of fair
market value at the date the options were granted. This plan expired in 1988.
There are, however, 22,000 options outstanding, but not yet exercised (from this
plan), which do not expire until 1998.
In 1989, the Bank adopted a stock option plan under which up to 209,360 shares
of the Bank's Common shares may be issued to directors, officers, and key
employees at not less than 100% of the fair market value at the date the options
are granted. The two for one stock split increased the shares in the plan
available and granted, but not exercised by 208,960.
F-10
<PAGE>
NOTE E (CONTINUED)
Changes in the number of shares subject to option during the years ended
December 31, 1995. December 31, 1994, and December 31, 1993, have been restated
for the stock split and are summarized as follows:
1995 1994 1993
---- ---- ----
Outstanding at beginning of year 153,300 238,300 238,300
Options granted ($10.50 - $14.00
per share) 23,500 65,500 11,500
Options forfeited (4,450) (4,850) 0
Options exercised (18,450) (145,650) (11,500)
------- -------- -------
Outstanding at end of year 153,900 153,300 238,300
------- ------- -------
------- ------- -------
Total option price $1,627,550 $1,515,800 $1,832,538
---------- ---------- ----------
---------- ---------- ----------
Options exercisable 53,400 45,140 146,480
------ ------ -------
------ ------ -------
Available for future grant 118,420 137,470 198,120
------- ------- -------
------- ------- -------
NOTE F - RETIREMENT PLAN
The Bank has a noncontributory retirement plan covering substantially all of its
employees. The plan is a defined contribution plan with annual contributions
established at the discretion of the Board of Directors. The retirement plan
expense was $336,000 for 1995, $317,000 for 1994, and $303,000 for 1993.
In 1988, the Bank established a Profit Sharing and Salary Deferral 401(K) Plan
to allow employees to defer a portion of their current compensation until
retirement. Since 1991, the Board of Directors, at their discretion, have
elected to make a matching contribution at a predetermined percentage of
deferred dollars up to 2% of the participant's gross salary. The expense of the
matching contribution was $74,000 for 1995, $73,000 for 1994, and $63,000 for
1993.
NOTE G - INCOME TAXES
The provisions for income taxes included in the Statements of Income consist of
the following:
1995 1994 1993
---- ---- ----
Current:
Federal $1,480,900 $1,168,000 $841,000
State 618,000 483,000 364,000
------- ------- -------
2,098,900 1,651,000 1,205,000
Deferred (220,000) (122,000) 40,650
-------- -------- ------
$1,878,900 $1,529,000 $1,245,650
---------- ---------- ----------
---------- ---------- ----------
F-11
<PAGE>
NOTE G (CONTINUED)
A comparison of the federal statutory income tax rates to the Bank's effective
income tax rates follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Federal tax rate $1,710,000 34.0% $1,390,000 34.0% $1,144,000 34.0%
California franchise taxes,
net of federal tax benefit 375,000 7.5% 308,000 7.5% 254,000 7.5%
Tax savings from exempt
loan and investment
income (166,000) (3.3%) (121,000) (3.0%) (87,000) (2.6%)
Other items - net (40,100) (.8%) (48,000) (1.1%) (65,350) (1.9%)
------- ---- ------- ----- ------- -----
$1,878,900 37.4% $1,529,000 37.4% $1,245,650 37.0%
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
</TABLE>
The following is a summary of the components of the net deferred tax asset and
liability accounts recognized in the accompanying statements of Condition:
1995 1994
---- ----
Deferred Tax Assets:
Allowance for Credit Losses Due to Tax Limitations $980,000 $761,000
Other Assets/Liabilities 217,000 98,000
------- ------
1,197,000 859,000
Deferred Tax Liability:
Premises and Equipment Due to Depreciation
Difference (611,000) (454,000)
-------- --------
Net Deferred Tax $586,000 $405,000
-------- --------
-------- --------
NOTE H - FINANCIAL COMMITMENTS
In the normal course of business, the Bank enters into financial commitments to
meet the financing needs of its customers. These financial commitments include
commitments to extend credit and standby letters of credit. Those instruments
involve to varying degrees elements of credit and interest rate risk not
recognized in the Bank's financial statements.
The Bank's exposure to credit loss in the event of nonperformance on commitments
to extend credit and standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments as it does for loans reflected in the financial statements.
F-12
<PAGE>
NOTE H (CONTINUED)
As of December 31, 1995, the Bank had the following outstanding financial
commitments whose contractual amount represents credit risk:
Commitments to extend credit $34,248,129
Standby letters of credit 779,747
-----------
$35,027,876
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments to guarantee the performance of a
Bank customer to a third party. Since many of the commitments and standby
letters of credit are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank, is based on
management's credit evaluation of the customer. The majority of the Bank's
commitments to extend credit and standby letters of credit are secured by real
estate.
NOTE I - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
officers, directors, and the companies with which they are associated. In the
Bank's opinion, all loans and loan commitments to such parties are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons. The
balance of these loans outstanding at December 31, 1995 was $5,677,777.
NOTE J - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
on the next page) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1995, that the
Bank meets all capital adequacy requirements to which it is subject.
F-13
<PAGE>
NOTE J (CONTINUED)
The Bank's actual capital amounts and ratios are presented in the following
table:
<TABLE>
<CAPTION>
IN THOUSANDS
To be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Provisions
------ -------- ----------
Amount Ratio Amount Ratio Amount Ratio
---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995:
Total Capital to Risk-Weighted Assets $29,995 14.89% $16,098 8.00% $20,123 10.00%
Tier 1 Capital to Risk-Weighted Assets $27,458 13.66% $8,049 4.00% $12,074 6.00%
Tier 1 Capital to Average Assets $27,458 10.72% $10,245 4.00% $6,403 5.00%
As of December 31, 1994:
Total Capital to Risk-Weighted Assets $26,202 14.76% $14,201 8.00% $17,752 10.00%
Tier 1 Capital to Risk-Weighted Assets $23,974 13.51% $7,101 4.00% $10,651 6.00%
Tier 1 Capital to Average Assets $23,974 9.83% $9,753 4.00% $12,191 5.00%
</TABLE>
The California Financial Code provides that a bank may not make a cash
distribution to its shareholders in excess of the lessor of (1) the bank's
undivided profits or (2) the bank's net income for its last three fiscal years
less the amount of any distribution made by the bank to shareholders during the
same period. Under these restrictions, approximately $7,112,000 was available
for payment of dividends at December 31, 1995.
Banking regulations require that all banks maintain a percentage of their
deposits as reserves at the Federal Reserve Bank. During the year ended
December 31, 1995, required reserves averaged approximately $2,281,000.
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Financial Accounting Standards No.
107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. For financial
instruments, whether or not recognized in the Statements of Condition, the Bank
is required to disclose the fair value of those instruments for which it is
practicable to estimate that value. In addition, the Bank is required to
disclose the methods and significant assumptions used to estimate those fair
values.
Considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Bank could realize in a
current market exchange. This disclosure of the fair value of financial
instruments should not be viewed as equivalent to the valuation of the Bank as a
whole.
F-14
<PAGE>
NOTE K (CONTINUED)
Fair value estimates, methods, and assumptions are set forth below:
CASH, DUE FROM BANKS, AND FED FUND SOLD
For these short-term instruments, the carrying amount approximates fair value.
INVESTMENT SECURITIES
For investment securities, fair value equals quoted market prices where
available, or, if unavailable, the fair value is based upon similar securities.
LOANS
For those loans with floating interest rates, it is presumed that estimated fair
value generally approximates the carrying value. The fair value of other types
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
The fair value of non-accrual loans with a recorded book value of $147,000 was
not estimated because it was not practicable to reasonably estimate the amount
or timing of future cash flows for such loans.
DEPOSITS
The fair value of demand deposits, savings, and money market accounts is the
amount payable on demand at the reporting date. The fair value of fixed-
maturity certificates of deposit is estimated using rates currently offered for
deposits of similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
Commitments to extend credit and letters of credit are written at current market
rates. The Bank does not anticipate any interest rate or credit factors that
would materially affect the fair value of these commitments or letters of credit
outstanding at December 31, 1995.
F-15
<PAGE>
NOTE K (CONTINUED)
The estimated fair values of the Bank's financial instruments at December 31,
1995 are as follows:
Carrying
Amount Fair Value
------ ----------
Financial Assets:
Cash and Due from banks $15,773,000 $15,773,000
Fed funds sold 13,429,000 13,429,000
Investment securities 70,537,000 73,773,000
Loans 151,227,000 150,727,000
Less: Non-Accruals 147,000 147,000
Allowance for losses 2,537,000 0
--------- -----------
Net Loans 148,543,000 150,580,000
Financial Liabilities:
Deposits $234,054,000 $233,824,000
Unrecognized commitments to extend credit and
standby letters of credit 35,038,000 35,038,000
NOTE L - MERGER WITH TEMPLETON NATIONAL BANK
At the close of business on September 8, 1995, Bank of Santa Maria consummated a
merger with Templeton National Bank. This merger was accounted for by the
pooling of interest method, whereby the Statements of Condition and the
Statements of Income are combined and restated as if the two banks were
historically one unit. A total of 397,561 common shares were issued to the
shareholders of Templeton National Bank in connection with this merger.
The following summarizes the separate revenue and net income of Bank of Santa
Maria and Templeton National Bank that have been reported in the restated
financial statements included herein:
Eight month Twelve month Twelve month
period ended period ended period ended
August 31, 1995 December 31, 1994 December 31, 1993
--------------- ----------------- -----------------
Interest and non-interest
income
Bank of Santa Maria $13,608,014 $17,696,229 $17,162,381
Templeton National Bank 1,754,146 2,267,531 1,987,919
--------- --------- ---------
$15,362,160 $19,963,760 $19,150,300
----------- ----------- -----------
----------- ----------- -----------
Net Income
Bank of Santa Maria $2,061,359 $2,264,500 $1,978,733
Templeton National Bank 199,598 296,259 141,385
------- ------- -------
$2,260,957 $2,560,759 $2,120,118
---------- ---------- ----------
---------- ---------- ----------
F-16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion presents information about the results of operations
and the financial condition of Bank of Santa Maria which expands upon the
information contained in the financial statements and the notes thereto. Bank
of Santa Maria was incorporated under the laws of the State of California on
June 27, 1977 and was licensed by the California State Banking Department. The
Bank commenced operations on March 18, 1978 and has grown to ten retail
locations along the central coast of California. The Bank offers a full range
of commercial banking services designed to serve the banking needs of
individuals and small to medium sized businesses located within its primary
market area.
As reported in Note L to the Financial Statements, the Bank of Santa Maria and
Templeton National Bank merged during 1995. All prior years' numbers contained
in this section have been restated to give effect for this merger using the
pooling of interest method.
R E S U L T S O F O P E R A T I O N S
The Bank reported net earnings of $3,149,392, or $1.15 per share, in 1995. This
represents an increase of 23.0% over 1994 where net earnings were $2,560,759, or
$.96 per share. Net earnings in 1993 were $2,120,118 or $.81 per share.
Other key financial ratios are listed below:
TABLE 1 - KEY FINANCIAL RATIOS
Year ended December 31,
---------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Return on average assets 1.26% 1.08% 0.94% 0.92% 0.91%
Return on average equity 12.16% 11.38% 10.91% 11.47% 12.00%
Return on beginning equity 13.14% 12.53% 11.54% 12.24% 12.72%
Dividend payout ratio 8.33% 9.00% 6.44% 6.68% 7.13%
Average equity to average assets 10.38% 9.50% 8.65% 8.05% 7.60%
NET INTEREST INCOME AND NET INTEREST MARGIN
Table 2 entitled Average Balances and Interest Rates, shows the Bank's average
assets, liabilities, and stockholders' equity with the related interest income,
interest expense and rates for the years 1995, 1994 and 1993. Rates for tax
preferenced investments are shown on a tax equivalent basis using a 34% tax
rate. Table 3 analyzes the reasons for change in net interest income resulting
from movement in rates and changes in average outstanding balances. Reference
should be made to both Table 2 and Table 3 in the discussion of net interest
income and net interest margin.
F-17
<PAGE>
The primary component of the Bank's operating income is net interest income.
This is the difference between the interest and fees earned on interest-bearing
assets such as loans and investments and the interest paid on interest-bearing
liabilities such as deposits. Net interest income is similar to "gross profits
on sales" used in financial statements for retail sales organizations. Net
interest income in 1995 was $14.2 million as compared to $12.8 million in 1994
and $11.8 million in 1993. Net interest income, when expressed as a percentage
of total average interest-earning assets, is referred to as net interest margin
or NIM. The Bank's NIM was 6.53% in 1995, compared to 6.14% in 1994, and 5.97%
in 1993.
NIM is used as a measure of the efficiency of the Bank's asset/liability
management. The Bank's NIM in 1995 increased by 6.4% compared to the increase
of 2.3% in 1994. There are several reasons for the improved NIM in 1995.
The two components of NIM are interest income and interest expense. Loans are
the largest interest earning assets group which contribute to interest income.
During 1995, interest earned from loans increased by $1.5 million dollars,
despite a decline in average loans outstanding by $1.8 million dollars. The
loss in interest income from the decline in loans was more than offset by the
increase in the effective yield on loans. The improvement in the loan earnings
rate was effected by two factors.
The primary factor was upward movement in the Bank's base lending rate which
began increasing in the second quarter of 1994. The rates continued to increase
through the second quarter of 1995, when interest rates declined in response to
the decline in concern regarding inflation. The Bank's base lending rate at the
end of 1995 was 8.5%. A significant portion (over 70%) of the Bank's loans are
sensitive to changes in the Bank's base lending rate. The average base lending
rate for 1993 was 6.50%, for 1994 - 7.41%, and for 1995 - 8.83%.
In addition, a large loan, which was placed on non-accrual status in late 1991,
paid off in full during 1995. This resulted in a recapture of approximately
$210,000 in interest income previously excluded in previous periods. Of the 116
basis point increase in the average effective interest rates on loans between
1994 and 1995, 14 basis points resulted from the payment of this single credit.
During 1994, while the average loans outstanding remained essentially level, the
effective yield on those loans rose by 33 basis points to 9.97%. The additional
interest income from loans, coupled with the interest income generated from
Federal funds sales, offset the overall decline in average yield in the
investment portfolio. Both new and reinvested dollars were invested according
to Bank policy in short term instruments. The return available during 1992
through 1993 fell short of the returns available in the preceding three years.
This resulted in an average yield on earning assets of 8.43%, which was
essentially the same as in 1993.
The cost of deposits also responded to market conditions. Interest expense on
interest-bearing deposits increased $1.4 million in 1995 over 1994, after
showing virtually no increase in 1994 over 1993. Average interest-bearing
deposits grew $5.5 million in 1995, which was a modest 3.3% increase.
Accordingly, most of the increase in interest expense ($1.2 million), resulted
from the increase in average effective rates on interest-bearing liabilities
which grew from 2.88%
F-18
<PAGE>
in 1994 to 3.58% in 1995, a 24.0% increase. In 1994, the effect of the overall
decline in effect interest rates on interest-bearing deposits fully offset any
additional interest expense for growth in deposits.
The average interest rate from interest expense used in NIM is based upon
average earning assets rather than average interest-bearing deposits.
Accordingly, fluctuations in earning assets effect the results of the
percentages used in arriving at NIM. In 1994, interest expense, as expressed as
a percentage of earning assets, declined by 6.6% to 2.28%, but increased
dramatically in 1995 to 2.78%, a 21.9% increase.
NIM increased to 6.53% as of 1995, up 38 basis points from 1994, as a result of
the greater movement upwards in interest-earning assets over the interest-
bearing liabilities. NIM also benefited from the infusion of new capital from
the exercise of stock options, which represents a non-interest bearing
liability, which funded the increase in earning assets, primarily investments.
F-19
<PAGE>
TABLE 2 - AVERAGE BALANCES AND INTEREST RATES
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
----------------------------------------------------------------------------------------
Average Amount Average Amount Average Amount
INTEREST Balance of Average Balance of Average Balance of Average
EARNING ASSETS: (000'S) Interest Rate(2) (000'S) Interest Rate(2) (000'S) Interest Rate(2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities
Taxable $49,572 $2,857 5.76% $41,935 $1,985 4.73% $35,455 $1,959 5.53%
Non-Taxable 12,324 463 5.70% 9,019 334 5.61% 5,799 233 6.10%
------ --- ----- ----- --- ----- ----- --- -----
TOTAL SECURITIES 61,896 3,320 5.75% 50,954 2,319 4.89% 41,254 2,192 5.61%
------ ----- ----- ------ ----- ----- ------ ----- -----
Federal Funds Sold 12,809 712 5.56% 10,858 417 3.84% 11,606 317 2.73%
Net Loans (1) 147,342 16,397 11.13% 149,156 14,870 9.97% 147,075 14,181 9.64%
------- ------ ------ ------- ------ ----- ------- ------ -----
TOTAL EARNING
ASSETS 222,047 20,429 9.31% 210,968 17,606 8.43% 199,935 16,690 8.41%
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
TOTAL
NON-EARNING
ASSETS 27,525 25,810 24,492
------ ------ ------
TOTAL ASSETS $249,572 $236,777 $224,427
-------- -------- --------
-------- -------- --------
LIABILITIES
AND CAPITAL:
- --------------------------------------------------------------------------------------------------------------
Interest-bearing
demand/savings $107,464 $2,772 2.58% $105,823 $2,505 2.37% $98,718 $2,464 2.50%
Time deposits
under $100,000 44,519 2,302 5.17% 40,495 1,534 3.79% 43,040 1,712 3.98%
Time deposits $100,000
or more 20,985 1,102 5.25% 21,170 777 3.67% 19,522 699 3.58%
------ ----- ----- ------ --- ----- ------ --- -----
TOTAL INTEREST
BEARING DEPOSITS 172,968 $6,176 3.57% 167,488 $4,816 2.88% 161,280 $4,875 3.02%
------- ------ ----- ------- ------ ----- ------- ------ -----
------ ----- ------ ----- ------ -----
Demand deposits 48,897 45,489 42,220
Other liabilities 1,806 1,294 1,503
Capital 25,901 22,506 19,424
TOTAL LIABILITIES
AND CAPITAL $249,572 $236,777 $224,427
-------- -------- --------
-------- -------- --------
Spread on average
interest-bearing
funds 5.74% 5.55% 5.38%
----- ----- -----
----- ----- -----
Interest
income/earning assets 9.31% 8.43% 8.41%
Interest
expense/earning assets 2.78% 2.28% 2.44%
----- ----- -----
Net interest margin 6.53% 6.15% 5.97%
----- ----- -----
----- ----- -----
</TABLE>
(1) Non-accrual loans have been included in net loan figures
(2) Yields are calculated on a tax equivalent basis
F-20
<PAGE>
The impact of changes in the net interest income spread during 1995 and 1994 can
also be analyzed by reference to Table 3, where increases or decreases in
interest income is broken down into two components. Changes due primarily to
increases or decreases in the size of the category are called volume variances.
Changes due primarily to increases or decreases in the rates associated with
each category are called rate variances. During 1995, interest income increased
by $2,832,000. Limited loan demand shifted the assets into the investment
portfolio, where the largest volume variance is reflected. Most of the increase
in interest income is attributable to upward rate movements in loans, Federal
funds and investments. During 1994, interest income increased by $916,000.
Again, limited loan demand shifted the increase in assets primarily into
investments, with most of the interest income increase attributable to increases
in overall asset growth.
The shift in the deposit mix towards shorter-term interest bearing and non-
interest bearing accounts was noted in 1994. During 1995, with an improvement
in interest rates, there was some movement of funds into time deposits.
However, the primary reason for the $1.4 million increase in interest expense
was attributed to increasing rates.
TABLE 3 - RATE AND VOLUME ANALYSIS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1995 over 1994 1994 over 1993
Increase (Decrease) Increase (Decrease)
due to change in due to change in
-------------------- ---------------------
INTEREST EARNING ASSETS: Volume Rate Total Volume Rate Total
- ------------------------ ------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Investment securities
Taxable $397 $475 $872 $331 ($305) $26
Non-taxable 124 5 129 138 (37) 101
--- - --- --- --- ---
TOTAL SECURITIES 521 480 1,001 469 (342) 127
Federal funds sold 84 211 295 (22) 122 100
Net loans (183) 1,710 1,527 202 487 689
---- ------ ------ --- --- ---
TOTAL EARNING ASSETS $422 $2,401 $2,823 $649 $267 $916
---- ------ ------ ---- ---- ----
---- ------ ------ ---- ---- ----
INTEREST BEARING LIABILITIES:
- -----------------------------
Interest-bearing demand/savings $0 $267 $267 $173 ($132) $41
Time deposits under $100,000 165 603 768 (99) (79) (178)
Time deposits $100,000 or above (7) 332 325 60 18 78
-- --- --- -- -- --
TOTAL INTEREST
BEARING DEPOSITS $158 $1,202 $1,360 $135 ($193) ($59)
---- ------ ------ ---- ----- ----
---- ------ ------ ---- ----- ----
Increase (decrease) in
interest differential $264 $1,199 $1,463 $515 $460 $975
</TABLE>
Information is provided in each category with respect to (a) changes
attributable to changes in volume (changes in volume multiplied by prior rate);
(b) changes attributable to changes in rates (changes in rates multiplied by
prior volume); and (c) the net change. The change attributable to the combined
impact of volume and rate has been allotted proportionately to the change due to
volume and the change due to rate.
F-21
<PAGE>
The level of non-performing loans in the Bank's portfolio affects the amount of
interest income. As noted in the notes to the financial statement, when the
serious doubt exists as to the repayment of a loan, that loan is placed on non-
accrual status and previously accrued and uncollected interest for the current
year is reversed against income. Had non-performing loans as of December 31,
1995 complied with original terms, related interest income would have been
approximately $11,000, of which approximately $0 was collected. The difference
of approximately $11,000 was not taken into income, which was so immaterial it
would have had no effect on NIM.
SUMMARY OF CREDIT LOSS EXPERIENCE
The Bank maintains an allowance for loan losses, which is reduced by net loan
charge-offs and increased by provisions for loan losses charged against
operating income. The adequacy of the allowance for loan losses is reviewed on
a continual basis. The amount of provisions and the level of the total allowance
are based upon the Bank's loan loss experience, the performance of loans in the
portfolio, evaluation of loan collateral, the financial abilities and net worth
of the borrowers or guarantors and such of the factors as, in management's
judgment, deserve recognition.
In addition to internal evaluation, the adequacy of the allowance for loan
losses is subject to review by regulators and outside consultants. While no
assurance can be given that economic conditions which adversely affect the
Bank's service areas or other unforeseen circumstance will not require increased
provisions for loan losses in the future, it is management's opinion that the
allowance for loan losses as of December 31, 1995, of $2,537,000, or 1.70% of
total loans, was adequate to absorb losses from any known or inherent risks in
the portfolio. Table 4 shows comparative statistics and a more detailed
breakdown of activity in the loan loss reserve account. The level of the
provision at $700,000 for 1995 is up by 180% from 1994, reflecting management's
conservative approach when establishing the allowance for potential loan losses.
TABLE 4 - SUMMARY OF LOAN LOSS EXPERIENCE
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE OF RESERVE AT
BEGINNING OF YEAR $2,228 $2,254 $2,415 $2,043 $1,632
CHARGE OFFS
Consumer 194 206 475 271 152
Commercial 242 138 144 470 70
Agricultural 0 0 64 0 0
Construction and development 0 0 151 0 0
Other real estate 54 52 82 37 0
-- -- -- -- -
TOTAL CHARGE OFFS 490 396 916 778 222
RECOVERIES
Consumer 40 28 63 21 20
Commercial 59 55 89 40 55
Agricultural 0 36 0 0 0
Construction and development 0 1 0 0 0
Other real estate 0 0 0 0 0
TOTAL RECOVERIES 99 120 152 61 75
-- --- --- -- --
NET CHARGE OFFS 391 276 764 717 147
--- --- --- --- ---
Provision charged to operations 700 250 603 1,089 558
--- --- --- ----- ---
BALANCE AT YEAR END $2,537 $2,228 $2,254 $2,415 $2,043
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of net charge-offs to average
net loans during the period 0.27% 0.19% 0.52% 0.48% 0.11%
</TABLE>
F-22
<PAGE>
The ratio of net charge-offs to average net loans during the 1992-1993 period
increased with the recessionary economy. It remained however, quite favorable
when compared with industry standards. The 1994-1995 net charge-off ratio
reflects an improvement in the local economy, although loan demand remains weak.
The Bank does not anticipate higher levels of charge-offs in the future, but has
elected to set aside $50,000 per month to the provision for loan losses account.
NON-INTEREST INCOME
Non-interest income increased by $234,000 to $2.6 million in 1995 from $2.4
million in 1994 and $2.5 million in 1993. Service charges related to the Bank's
deposit products account for the largest portion of non-interest income. Other
fee income includes servicing fees on loans sold in the secondary markets, and
other non-deposit related charges, including wires, safe deposit, ATM's,
merchant draft processing, etc. Other non-interest income includes net gains of
sale of fixed assets and other real estate owned, income generated from the
holding of other real estate owned, and other non-fee related income.
NON-INTEREST EXPENSE
The Bank's total non-interest expense amounted to $11.1 million in 1995, $10.8
million in 1994, and $10.3 million in 1993. The increase in 1995 of $303,000,
or 2.8%, can be primarily attributed to the expansion of the Bank into San Luis
Obispo County. The increase in 1994 of $501,000, or 4.9%, was due primarily to
costs associated with maintenance and disposal of other real estate owned, plus
costs associated with expansion of the Bank into San Luis Obispo County.
Non-interest expense as a percentage of average assets has continued to decline
from 1993 at 4.59%, to 1994 at 4.56%, to 1995 at 4.45%.
B A L A N C E S H E E T A N A L Y S I S
Total assets as of year end have increased by 8.0% in 1995 to $264 million, and
by 5.6% in 1994 to $244 million. Net loans showed no growth in 1995, increasing
by 1.5% to $149 million. Net loans in 1994 increased by only .5% due to the
depressed economy. Deposits grew throughout the period with a 4.5% increase in
1994, followed by a 7.1% increase in 1995, to a year end total of $236 million.
Certain components of the Bank's balance sheet are discussed below.
INVESTMENT SECURITIES
The Bank maintains a portfolio of investment securities to provide income and to
serve as a secondary source of liquidity for its operations in conjunction with
moneys sold overnight in the Federal funds market. The types of investments
held in the portfolio include U.S. Treasury Bills and Notes, Government Agency
issues, short-term municipal issues, and corporate obligations guaranteed by the
U.S. Government. The type of investments held in the Bank's portfolio are
influenced by several factors among which are; rate of return, maturity, and
risk. Note B to the financial statement sets forth additional information
regarding our investment portfolio as well as Table 5 which reports maturity
distributions and weighted tax-equivalent rates by types of investments.
F-23
<PAGE>
TABLE 5 - INVESTMENT PORTFOLIO
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1995
-------------------------------------------------------------------------------------------------------------------------
After 1 But After 5 But
Total Securities Within One Year Within 5 Years Within 10 Years After 10 Years
---------------- --------------- -------------- --------------- --------------
Weighted Weighted Weighted Weighted Weighted
Book average Book average Book average Book average Book average
U.S. TREASURY: value T/E yield value T/E yield value T/E yield value T/E yield value T/E yield
Held to Maturity, at
Amortized Cost:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $6,673 6.07% $5,465 6.06% $1,208 6.11% $0 0.00% $0 0.00%
U.S. Government
Agencies 41,332 5.60% 14,700 5.10% 26,632 5.87% 0 0.00% 0 0.00%
Municipal Issues 16,420 6.28% 6,019 5.68% 9,693 8.79% 108 7.65% 599 9.17%
Other Debt
Securities 2,066 5.42% 470 4.98% 1,596 5.55% 0 0.00% 0 0.00%
-------------------------------------------------------------------------------------------------------------
66,491 5.81% 26,654 5.43% 39,129 6.59% 108 7.65% 599 9.17%
Available for Sale,
at Market:
U.S. Treasury 3,972 6.71% 2,503 6.33% 1,469 7.34% 0 0
-------------------------------------------------------------------------------------------------------------
TOTAL
SECURITIES $70,463 5.86% $29,157 5.50% $40,598 6.62% $108 7.65% $599 9.17%
------- ----- ------- ----- ------- ----- ---- ----- ---- -----
------- ----- ------- ----- ------- ----- ---- ----- ---- -----
</TABLE>
LOANS
Table 6 sets forth the distribution of the Bank's loan Portfolio for the past
five years. During 1995 the loan portfolio mix had several notable changes.
Commercial loans grew by 9.3% and now represent 30% of the Bank's portfolio.
Construction and land development loans declined by 4.0%, to a low of 8% of the
portfolio. Consumer loans also declined by 5.8%, and now only represent 24% of
the loan portfolio of the Bank.
TABLE 6 - LOAN PORTFOLIO ANALYSIS BY CATEGORY
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer $36,794 $39,033 $39,115 $42,261 $40,696
Commercial 46,357 42,629 34,316 33,140 34,825
Agricultural 23,633 22,806 21,722 22,439 18,202
Construction/Development 12,619 13,141 19,247 24,618 17,476
Other Real Estate 31,824 31,152 33,621 32,874 40,167
------ ------ ------ ------ ------
TOTAL LOANS $151,227 $148,761 $148,021 $155,332 $151,366
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
F-24
<PAGE>
The vast majority of the loans in the portfolio are either amortizing monthly or
have relatively short maturities. This helps maintain liquidity in the
portfolio. Most of the loans which have floating rates are tied to the Bank's
base rate or other market rate indicators. This serves to lessen the risk to
the Bank from movement in interest rates, particularly rate increases. Table 7
shows the maturity of certain loan categories outstanding as of December 31,
1995, net of deferred fees and deferred costs.
TABLE 7 - MATURITIES AND SENSITIVITIES OF CERTAIN LOAN TYPES TO CHANGES IN
INTEREST RATES
(In thousands)
Due after
Due in one one year to Due after
year or less five years five years Total
------------ ---------- ---------- -----
Commercial and Agricultural
Floating Rate $25,087 $10,568 $12,572 $48,227
Fixed Rate 5,756 14,383 1,848 21,987
Real Estate Construction
Floating Rate 5,318 2,016 0 7,334
Fixed Rate 5,029 256 0 5,285
------------------------------------------------------
TOTAL $41,190 $27,223 $14,420 $82,833
------------------------------------------------------
------------------------------------------------------
At December 31, 1995, non-performing assets (non-accrual loans, loans 90 days or
more past due, restructured loans and other real estate owned) totaled $1.4
million or .10% of total assets, down from $3.0 million or 1.25% at December 31,
1994. Management believes that these assets are generally well secured and that
potential losses have already been reflected in valuation or allowance accounts.
There are no trends or uncertainties which management expects will impact
future operating results, liquidity, or capital recources. Management is not
aware of any information where serious doubts exist regarding any significant
borrower's ability to comply with loan repayment terms. Table 8 sets forth
information on non-performing assets for the periods indicated. The market
value of other real estate owned and collateral securing non-performing loans
is regularly monitored for changes.
TABLE 8 - NON-ACCRUAL AND NON-PERFORMING ASSETS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
- ---------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-Accrual $147 $1,315 $2,425 $4,187 $809
Loans currently accruing which are
past due 90 days or more 0 2 172 364 8
Restructured loans 190 35 28 0 386
Other real estate owned 1,258 1,550 2,225 552 0
------ ------ ------ ------ ----
TOTAL NON-PERFORMING
ASSETS $1,595 $2,902 $4,849 $5,103 $1,203
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Percentage of non-performing loans
to total loans 0.22% 0.91% 1.76% 3.25% 0.89%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Percentage of non-performing
assets to total assets 0.61% 1.19% 1.99% 2.53% 0.63%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
F-25
<PAGE>
DEPOSITS
As was noted, deposits have grown steadily over the reporting periods. The
average balances for deposit categories and their associated costs are presented
in Table 9.
TABLE 9 - DETAILED DEPOSIT SUMMARY
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
----------------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand $25,250 1.34% $25,074 1.32% $23,386 1.64%
Savings accounts 31,587 2.70% 32,584 2.53% 28,716 2.71%
money market savings 50,627 3.12% 48,165 2.80% 46,616 2.79%
TCD less than $100,000 44,519 5.17% 40,495 3.79% 43,040 3.98%
TCD $100,000 or more 20,985 5.25% 21,170 3.67% 19,522 3.58%
------ ----- ------ ----- ------ -----
TOTAL INTEREST-
BEARING DEPOSITS 172,968 3.57% 167,488 2.88% 161,280 3.02%
Demand 48,897 45,489 42,220
------ ----- ------ ----- -------- -----
TOTAL DEPOSITS $221,865 2.78% $212,977 2.26% $203,500 2.40%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</TABLE>
The effective cost of all funds increased during 1995, reversing a trend which
has existed for the last several years in which interest costs had been
declining. The deposit mix has several notable changes, modifying the previous
trend towards more liquidity and shorter-termed accounts. Time deposits of less
than $100,000 grew by 10%, demand deposits were up by 7.5% and money market
savings grew by 5%. Demand deposits now represent over 22% of all deposits in
the Bank.
Table 10 sets forth the remaining maturities of large denomination time
deposits, including public funds, as of December 31, 1995.
TABLE 10 - MATURITY DISTRIBUTION OF TCD'S OF $100,000 OR MORE
(In thousands)
Year ended December 31, 1995
Three months or less $10,514
After three months to six months 6,058
After six months to one year 4,514
Over one year 2,656
-----
TOTAL $23,742
-------
-------
F-26
<PAGE>
LIQUIDITY
Liquidity is the Bank's ability to meet fluctuations in deposit levels and
provide for credit needs of its customers. The objective in liquidity
management is to maintain a balance between the sources and uses of funds.
Principal sources of liquidity include interest and principal payments on loans
and investments, proceeds from the maturity of investments and growth in
deposits. The Bank holds overnight Federal funds as a cushion for temporary
liquidity needs. During 1995, Federal funds averaged $12.8 million, or 8.7% of
total average assets. in addition, the Bank maintains Federal funds credit
lines with major correspondents, aggregating $11.1 million, subject to the
customary terms for such arrangements.
There are several accepted methods of measuring liquidity as used by the
regulators. One ratio which is fairly easy to understand is referred to as the
liquidity ratio and measures the percentage of deposits which are used to fund
cash, cash equivalents, and marketable securities. The Bank has set a minimum
standard percentage of 20%, and as of December 31,1995 the Bank's liquidity
ratio was 48.5%. The Bank appears to be sufficiently liquid to meet its
operational needs.
CAPITAL RESOURCES
The primary source of capital for the Bank is the retention of operating
profits. The Bank reviews its capital needs on an ongoing basis to ensure an
adequate level of capital to support growth and to ensure depositor protection.
Total capital grew by $3.5 million of 15% to $27 million as of December 31,1995.
During 1995, the Bank's capital was augmented by the exercise of stock options
originally granted to the Bank's directors in 1989. The exercise of these
options contributed $953,000 in cash and tax benefits to the Bank's capital.
Comments regarding the established minimum capital ratios can be found in
footnote J of the financial statements.
MARKET INFORMATION REGARDING THE BANK'S COMMON STOCK
The common stock of the Bank is not listed on any national stock exchange or
with NASDAQ. Trading in the stock has not been extensive and such trades which
have occurred would not constitute an active trading market. As of December 31,
1995, there were approximately 1,000 shareholders. During 1995, the authorized
number of shares the Bank can issue was increased from 3,000,000 to 25,000,000
shares. Since 1984, the Bank has consistently declared and paid a cash dividend
to the then shareholders of Bank of Santa Maria, with the equivalent of $.06
being paid since February of 1988. In 1994, the Board of Directors increased
the per share dividend to $.10, again to the holders of Bank of Santa Maria
stock at that time. in 1995, the Board of Directors again increased the per
share dividend to $.11 payable on February 17, 1995 to the holders of their
stock. in 1996, the Board of Directors increased the cash dividend to $.20
payable on February 21, 1996. While future dividends are subject to the Bank's
financial performance, it is reasonable that the current pattern of dividends
will continue. Restrictions on dividend payments are outlined in the notes to
the financial statements.
F-27
<PAGE>
The following quarterly summary of market activity is furnished by Maguire
Investments of Santa Maria, the Bank's primary market maker.
Bid Ask
1st Quarter 1994 $11.50 $12.00
2nd Quarter 1994 $11.50 $12.00
3rd Quarter 1994 $11.50 $12.00
4th Quarter 1994 $12.25 $12.75
1st Quarter 1995 $13.25 $13.75
2nd Quarter 1995 $13.25 $13.75
3rd Quarter 1995 $13.75 $14.25
4th Quarter 1995 $13.75 $14.25
SELECTED FINANCIAL DATA
The following is a summary of operations of Bank of Santa Maria for each of the
last five years ended December 31, 1995. This summary has not been examined by
an independent public accountant. However, in the opinion of management, this
summary reflects all adjustments which would be considered necessary for a fair
presentation of the results of operations for each of these periods. This
summary of operations should be read in conjunction with the financial
statements and notes relating thereto included elsewhere in this report.
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Total assets $263,577 $244,135 $231,128 $224,675 $214,365
Net interest income $14,248 $12,790 $11,815 $11,920 $10,529
Provision for loan loss $700 $250 $602 $1,089 $558
Other income $2,592 $2,358 $2,460 $2,308 $1,990
Other expense $11,112 $10,808 $10,308 $9,880 $9,164
Net income $3,149 $2,561 $2,103 $2,013 $1,856
Net income per share $1.15 $.96 $.81 $.78 $.73
Cash dividend per share $.096 $.086 $.052 $.052 $.052
</TABLE>
F-28
<PAGE>
BANK OF SANTA MARIA
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
UNAUDITED
- ---------
ASSETS SEP 30, 1996 SEP 30,1995
- ------ ------------ ------------
<S> <C> <C>
Cash and due from banks $18,466,275 $14,524,319
Investment securities: - Note B
Securities available for sale (at market) 22,505,178 6,512,683
Securities held to maturity 64,489,908 55,879,597
------------ ------------
(Market value of securities held to maturity $64,151,544 and $55,824,624)
TOTAL INVESTMENT SECURITIES 86,995,086 62,392,280
Federal funds sold 7,345,000 14,320,000
Loans: - Note C
Commercial 50,298,890 46,569,899
Agricultural 25,667,412 18,818,319
Real estate 47,009,894 47,457,463
Consumer 41,499,549 37,573,590
------------ ------------
TOTAL LOANS 164,475,745 150,419,271
Allowance for possible credit losses (2,580,045) (2,207,660)
------------ ------------
NET LOANS 161,895,700 148,211,611
Premises and equipment - Note D 12,051,469 10,368,996
Accrued interest and other assets 4,094,841 3,108,339
Goodwill 1,901,440 0
Other Real Estate Owned 1,382,261 1,268,190
TOTAL ASSETS $294,132,072 $254,193,735
------------ ------------
------------ ------------
LIABILITES AND CAPITAL SEP 30, 1996 SEP 30, 1995
------------ ------------
Deposit:
Noninterest-bearing demand $58,247,460 $52,742,126
Interest-bearing demand and savings 108,638,775 103,190,458
Time deposits under $100,000 63,825,142 45,658,468
Time deposits of $100,000 or more 31,920,591 24,160,802
------------ ------------
TOTAL DEPOSITS 262,631,968 225,751,854
Accrued interest and other liabilities 2,170,492 1,680,954
------------ ------------
TOTAL LIABILITIES 264,802,460 227,432,808
------------ ------------
------------ ------------
Capital: - Note E
Common shares - authorized 25,000,000
shares: issured and outstanding
2,764,261 as of September 30, 1996
2,740,811 as of September 30, 1995 8,649,998 8,441,723
Undivided profits 20,736,118 18,288,492
Net unrealized depreciation on available
for sale securities, net of taxes of $37,670
and $(20,475) respectively (56,504) 30,712
------------ ------------
TOTAL CAPITAL 29,329,612 26,760,927
------------ ------------
TOTAL LIABILITIES AND CAPTITAL $294,132,072 $254,193,735
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
BANK OF SANTA MARIA
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
(Unaudited) 1995 1996
---- ----
<S> <C> <C>
INTEREST INCOME:
- ----------------
Interest and fees on loans $ 12,113,702 $ 12,395,468
Interest on investment securities-taxable 2,837,075 2,045,042
Interest on investment securities-non taxable 424,524 308,647
Other interest income 509,969 543,559
------------ ------------
Total interest income 15,885,270 15,292,726
------------ ------------
INTEREST EXPENSE:
- -----------------
Interest on demand and savings deposits 1,797,181 2,130,091
Interest on time certificates of $100,000 and over 1,154,426 756,002
Interest on time certificates less than $100,000 2,361,392 1,627,071
------------ ------------
Total interest expense 5,312,999 4,513,164
NET INTEREST INCOME 10,572,271 10,779,562
- -------------------
PROVISION FOR LOAN LOSSES - 315,000
- ------------------------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION
- ----------------------------------
FOR LOAN LOSSES 10,572,271 10,464,562
- --------------- ------------ ------------
SERVICE CHARGES AND OTHER INCOME
- --------------------------------
Service charges and fees 1,287,914 1,210,900
Merchant discount fees 373,357 298,935
Other fee income 408,144 346,255
Other income 162,513 122,181
------------ ------------
Total other income 2,231,928 1,978,271
------------ ------------
OTHER EXPENSES
- --------------
Salaries and employee benefits 4,573,951 4,419,375
Occupancy expenses 641,467 602,844
Furniture and equipment 995,778 921,643
Advertising and promotion 400,149 292,574
Professional expenses 245,823 357,338
Office Expenses 548,569 501,615
Regulatory assessments 18,248 255,976
Merchant processing costs 379,452 305,946
Other OREO expenses 22,452 23,592
Other operating expenses 503,367 717,438
------------ ------------
Total Other Expenses 8,329,257 8,398,341
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,474,942 4,044,492
- ----------------------------------------
PROVISION FOR INCOME TAXES 1,721,000 1,552,976
- -------------------------- ------------ ------------
NET INCOME $ 2,753,942 $ 2,491,516
- ---------- ------------ ------------
------------ ------------
EARNINGS PER SHARE $ 0.98 $ 0.91
- ------------------ ------------ ------------
NUMBER OF SHARES USED IN COMPUTATION 2,800,000 2,749,000
- ------------------------------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
BANK OF SANTA MARIA
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
OPERATING ACTIVITIES (Unaudited) Period Ended September 30,
- --------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 2,753,942 $ 2,491,516
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 837,020 807,379
Amortization of Goodwill 56,170 0
Provision for credit losses - 315,000
Amortization of premium/discounts
on investment securities 265,460 53,101
Loans originated for sale (4,708,950) (2,510,000)
Proceeds from loan sales 5,163,484 2,878,328
Net loss (gain) from sale of fixed assets 51,612 (30,405)
Net loss (gain) on sale of other real estate owned (34,972) 101,933
Net change in accrued interest,
other assets and other liabilities 253,470 42,426
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,637,236 4,149,278
INVESTING ACTIVITIES
- --------------------------------------------------------------------------------------------------------------
Proceeds from maturities of securities held to maturity 27,916,923 19,905,000
Proceeds from maturities of securities held for sale 3,000,000 3,082,750
Purchases of held to maturity securities (25,720,465) (25,073,165)
Purchases of available for sale securities (21,589,931) (2,915,230)
Net (increase) decrease in loans 3,207,040 (2,541,401)
Purchases of premises and equipment (2,391,121) (600,270)
Proceeds from sales of other real estate owned 985,972 359,686
Proceeds from sales for fixed assets 63,366 40,904
Net cash received for purchase of Citizens Bank of Paso Robles - Note 1 8,067,071 0
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (6,461,145) (7,741,726)
FINANCING ACTIVITIES
- --------------------------------------------------------------------------------------------------------------
Net increase(decrease) in demand deposits
and savings accounts (14,571,234) (2,929,707)
Net increase(decrease) in time deposits 13,831,507 10,086,718
Payments for dividends/distributions (964,192) (258,396)
Proceeds from exercise of stock options 137,500 508,883
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (1,566,419) 7,407,498
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,390,328) 3,815,050
Cash and cash equivalents at beginning of year 29,201,603 25,029,270
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,811,275 $ 28,844,319
------------- -------------
------------- -------------
Supplemental disclosures of cash flow information:
Loans transferred to other real estate owned $ 836,000 $ 180,000
Cash paid during the period for interest $ 5,264,631 $ 4,254,286
Cash paid during the period for income taxes $ 1,758,007 $ 1,509,181
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
BANK OF SANTA MARIA
STATEMENT OF CHANGES IN CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NET UNREALIZED
COMMON SHARES ADJUSTMENT IN
------------- AVAILABLE FOR
NUMBER OF UNDIVIDED SALE
SHARES AMOUNT PROFITS SECURITIES TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 2,748,261 $ 8,512,498 $ 18,946,368 $ 44,731 $ 27,503,597
Proceeds from exercise of stock options 16,000 137,500 137,500
Dividends paid (964,192) (964,192)
Net income for the period 2,753,942 2,753,942
Adjustment in Available for Sale
Securities, Net of Taxes of $67,490 (101,235) (101,235)
--------- ----------- ------------ --------- ------------
Balance at September 30, 1996 2,764,261 $ 8,649,998 $ 20,736,118 ($ 56,504) $ 29,329,612
---------- ----------- ------------ --------- ------------
---------- ----------- ------------ --------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
NOTES TO FINANCIAL STATEMENTS FOR PERIODS ENDING SEPTEMBER 30, 1996 AND 1995.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements for interim periods are unaudited. In the opinion of
management, all material adjustments necessary for fair presentation of the
interim financial statements have been included.
Interim period financial statements are not necessarily indicative of results
to be expected for the entire year. However, in the opinion of management,
all adjustments have been made which are necessary to a fair statement of the
results for the interim periods presented. All such adjustments are of a
normal recurring nature, such as accruals towards year-end bonuses and profit
sharing arrangements; provisions for taxes, loan losses, and contractual
annual contracts; as well as amortization, accretion and depreciation of
assets consistently applied through the year.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
INVESTMENT SECURITIES
Securities held to maturity are stated at cost, adjusted for amortization of
premiums and accretion of discounts over the period to maturity, or to an
earlier call, if appropriate, on a straight-line basis. Such securities include
those that management intends and has the ability to hold into the foreseeable
future.
Securities would be considered available for sale if they would be sold under
certain conditions, among these being changes in interest rates, fluctuations
in deposit levels or loan demand, or need to restructure the portfolio to better
match the maturity or interest rate characteristics of liabilities with assets.
Securities classified as available for sale are accounted for at their current
fair value rather than amortized historical cost. Unrealized gains or losses
are not recognized as current income, but rather as an increase or decrease of
capital through a separate reserve.
LOANS, FEES AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans are carried at amounts advanced less payments collected. Interest on
loans is accrued on a simple interest basis, except where management believes
that serious doubt exists as to the repayment of the loan. When a loan is
placed on non-accrual status, previously accrued and uncollected interest for
the current year is reversed from income.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to make all payments due according to the
contractual terms of the loan agreement. When interest accrual is discontinued,
all unpaid accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
In May 1993 and October 1994, respectively, the Financial Accounting
Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 114 and
118 address the accounting and disclosure by creditors for impairment of
certain loans, and is not applicable to certain homogeneous loans that
collectively evaluated for impairment, and may impact how a bank reports
loans and loan loss reserves. These statements are effective for financial
statements issued for fiscal years beginning after December 15, 1994.
Management adopted SFAS No. 114 and 118 in the first quarter of 1995.
F-33
<PAGE>
Loan origination fees offset by certain direct origination costs are deferred
and recognized over the contractual life of the loan as an adjustment to the
yield. The unrecognized fees and costs are reported either as a reduction of
the loan principal outstanding, or, if deferred costs are greater than deferred
fees, as additions to the applicable loan grouping. Commitment fees are
deferred and recognized over the term of the commitment. Most deferred fees and
costs are recognized using the interest method.
The determination of the balance in the allowance for possible loan losses
is based on an analysis of the loan portfolio and reflects an amount which, in
management's judgment, is adequate to provide for potential loan losses after
giving consideration to the character of the loan portfolio, current economic
conditions, past loan loss experience and such other factors as warrant
recognition in estimating loan losses. The allowance is increased by provisions
charged to operating expense and reduced by net charge-offs.
OTHER REAL ESTATE OWNED
Other real estate owned, which represents real estate acquired through
foreclosure, or deed in lieu of foreclosure, is reported at the fair value of
the property at the time of transfer to other real estate owned, reduced by
estimated selling expenses. Any subsequent operating expenses, or income,
reductions in estimated values, and gains or losses on disposition of such
properties are charged to current operations.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation, which
is computed principally on the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the shorter of
their economic lives or the term of the lease.
INCOME TAXES
Income taxes are accounted for by the asset and liability method as required by
Statement of Financial Accounting Standards No. 109, "ACCOUNTING FOR INCOME
TAXES" (SFAS 109). Deferred tax liabilities or assets are established for
temporary differences between financial and tax reporting basis and are
subsequently adjusted to reflect changes in tax rate expected to be in effect
when the temporary differences reverse. A valuation allowance is established
for any deferred tax asset for which realization is not likely.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include, cash on
hand, amounts due from banks and Federal funds sold. Generally, Federal funds
are purchased and sold for one day periods.
EARNINGS PER SHARE
Earning per common share are based on the weighted average number of shares
outstanding during the year plus shares issuable upon the assumed exercise of
outstanding common stock options.
F-34
<PAGE>
RECLASSIFICATION
Certain reclassifications were made to prior years' presentations to conform to
the current year. These reclassifications are of a normal recurring nature.
All prior years' numbers have been restated to give effect for the acquisition
of Templeton National Bank on a pooling of interest basis. As the acquisition
of Citizens Bank of Paso Robles, N.A. was treated as a purchase, no restatement
of prior period numbers was required.
GOODWILL
In accordance with the purchase method of accounting, the assets and
liabilities of purchased banking and financial organizations were stated at
estimated fair values at the date of acquisition. The excess of cost over fair
value of net assets acquired has been accounted for as goodwill and is being
amortized on the straight line method for a 15 year period.
NOTE B - INVESTMENT SECURITIES
Securities have been classified in the Statements of Condition according to
management's intent. The carrying amount of securities and their approximate
fair values at September 30, 1996, were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996:
Available for Sale Securities:
U.S. Treasury securities $ 4,961,360 $ 26,894 $ 1,718 $ 4,986,536
U.S. Government and agency
securities 17,637,992 12,268 131,619 17,518,641
------------ ------------ ------------ -------------
$ 22,599,352 $ 39,162 $ 133,337 $ 22,505,177
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
1996:
Held to Maturity Securities
U.S. Treasury securities $ 3,202,668 $ 10,124 $ 431 $ 3,212,361
U.S. Government and agency
securities 46,627,245 35,536 412,858 46,249,923
Obligations of states and
Political subdivisions 11,628,553 45,214 8,765 11,665,002
Other debt securities 3,031,442 22,515 29,697 3,024,260
------------ ------------ ------------ -------------
$ 64,489,908 $ 113,389 $ 451,751 $ 64,151,545
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
There were no gross realized gains or gross realized losses on sales of
available for sale securities. The Bank does not expect to realize either
gains or losses shown in the above schedule. The Bank fully expects to hold
these securities to maturity/call date at which time the amortized cost and
market value will be the same as the par value of the bond.
F-35
<PAGE>
NOTE B (CONTINUED)
At September 30, 1996 and 1995, investment securities having an amortized cost
of approximately $5,027,168 and $4,990,990 respectively, were pledged to secure
public deposits and for other purposes as required or permitted by law.
The amortized cost and estimated market value of all debt securities as of
September 30, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
----------------------------------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 20,725,823 $ 19,334,816 $ 11,520,400 $ 11,502,750
Due after one year to five
years 42,897,175 43,137,271 11,078,952 11,002,427
Due after five years to ten
years 866,910 1,679,458 - -
Due after ten years - - - -
------------- ------------- ------------- -------------
TOTAL $ 64,489,908 $ 64,151,545 $ 22,599,352 $ 22,505,177
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
F-36
<PAGE>
NOTE C - LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within Santa
Barbara and San Luis Obispo counties. Although the Bank seeks to avoid
concentrations of loans to a single industry, loans to the agricultural
community are listed separately, as in total, they exceed 10% of all loans
outstanding as of September 30, 1996 and 1995. Concentrations also can occur
based upon a single class of collateral. Real estate and real estate associated
businesses are among the principal industries in the Bank's market area and,
as a result, the Bank's loan and collateral portfolios are, to some degree,
concentrated in those industries. Real estate related loans, net of deferred
fees and costs at September 30, 1996 and September 30, 1995, were as follows:
Real estate related: September 30, September 30,
1996 1995
---- ----
Construction and land development $ 14,169,000 $ 15,513,000
Home equity credit lines 20,321,000 18,204,000
Residential properties 17,329,000 14,963,000
Commercial properties 40,077,000 41,178,000
Farmland 5,343,000 4,885,000
------------ ------------
$ 97,239,000 $ 94,743,000
------------ ------------
------------ ------------
The Bank also originates real estate loans for sale to governmental agencies and
institutional investors. At September 30, 1996, the Bank had approximately
$1,000,000 in loans to be sold, and, at September 30, 1995, the Bank had
approximately $656,000 available for sale. The Bank was servicing approximately
$40,545,000 in loans previously sold as of the end of September, 1996 and
September, 1995.
The following is a summary of the investment in impaired loans, the related
allowance for loan losses, and income recognized thereon as of September 30:
1996 1995
---- ----
Recorded Investment in Impaired Loans $997,044 $ 430,020
-------- ----------
-------- ----------
Related Allowance for Loan Losses $302,970 $ 115,603
-------- ----------
-------- ----------
Average Recorded Investment in Impaired Loans $462,953 $1,296,286
-------- ----------
-------- ----------
Interest Income Recognized for Cash Payments $ 24,869 $ 359,007
-------- ----------
-------- ----------
A summary of the changes in the allowance for possible credit losses follows:
1996 1995
---- ----
Balance at beginning of year $ 2,536,916 $ 1,974,237
Adjustment due to merger with Citizens 228,022 253,488
Additions to the allowance charged to expense - 315,000
Recoveries on loans charged off 76,084 72,700
------------ ------------
Subtotal 2,841,022 2,615,425
Less: loans charged off 260,977 407,764
------------ ------------
Balance as of September 30 $ 2,580,045 $ 2,207,661
------------ ------------
------------ ------------
F-37
<PAGE>
NOTE D - PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
September 30, 1996 September 30, 1995
------------------ ------------------
Land $ 2,940,913 $ 1,623,724
Buildings and improvements 8,186,093 7,404,643
Leasehold improvements - 15,424
Furniture, fixtures, and equipment 6,787,220 6,583,645
----------- -----------
Subtotal 17,914,226 15,627,436
Less accumulated depreciation/amortization 5,862,755 5,258,440
----------- -----------
TOTAL $12,051,469 $10,368,996
----------- -----------
----------- -----------
NOTE E - STOCK OPTION PLAN
In 1978, the Bank adopted a stock option plan under which the Bank's Common
shares may be issued to officers and key employees at no less than 100% of the
fair market value at the date the options were granted. This plan expired in
1988. There are, however, 15,000 options outstanding, (but not yet exercised
from this plan) which do not expire until 1998.
In 1989, the Bank adopted a stock option plan under which up to 209,360 shares
of the Bank's Common shares may be issued to directors, officers and key
employees at not less than 100% of the fair market value at the date the options
are granted. The two for one stock split increased the shares in the plan
available and granted, but not exercised by 208,960.
Changes in the number of shares subject to option during the periods ending
September 30, 1996 and September 30, 1995, have been restated to recognize the
effect of the merger with Templeton National Bank. These numbers have been
summarized as follows:
Period Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
Outstanding at beginning of year 153,900 153,300
Options granted($13.50-$14.25 per share) 19,500 21,500
Options forfeited 600 2,450
Options exercised 16,000 11,000
-------------- --------------
Outstanding at end of period 156,800 161,350
-------------- --------------
-------------- --------------
Total option price $ 1,758,375 $ 1,725,025
-------------- --------------
-------------- --------------
Options exercisable 59,300 51,500
-------------- --------------
-------------- --------------
Available for future grant 99,520 118,420
-------------- --------------
-------------- --------------
F-38
<PAGE>
NOTE F - FINANCIAL COMMITMENTS
In the normal course of business, the Bank enters into financial commitments to
meet the financing needs of its customers. These Financial commitments include
commitments to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk not
recognized in the Bank's financial statements.
The Bank's exposure to credit loss, in the event of nonperformance on
commitments to extend credit and standby letters of credit, is represented by
the contractual amount of those instruments. The Bank uses the same credit
policies in making commitments as it does for loans reflected in the financial
statements.
As of September 30, 1996, the Bank had the following outstanding financial
commitments whose contractual amount represents credit risk:
Commitments to extend credit $ 44,504,066
Standby letters of credit 743,505
------------
$ 45,247,571
------------
------------
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments to guarantee the performance of a
Bank customer to third party. Since many of the commitments and standby letters
of credit are expected to expire without being drawn upon, the total amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the bank, is based on management's credit
evaluation of the customer. The majority of the Bank's commitments to extend
credit and standby letters of credit are secured by real estate.
Following all necessary regulatory approvals, on January 10, 1997, the Bank
acquired El Camino National Bank ("El Camino") pursuant to an Agreement and
Plan of Reorganization dated July 16, 1996, amended October 10, 1996,
providing for the merger of El Camino into the Bank. The Agreement provided
for the shareholders of El Camino to receive shares of Bank Common Stock
based upon the comparative book values of the banks as of the end of the
months preceding the closing. As of the closing date, El Camino's deposits
were approximately $16 million, and loans were approximately $12 million.
This acquisition was treated as a pooling transaction for accounting
purposes. The exchange value used in the merger was .7332 shares of Bank
Common Stock for each share of El Camino Common Stock. The Bank issued
201,678 shares to complete this transaction. El Camino had only one office in
Lompoc, California, and the Bank continues to operate from this location.
NOTE G - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
officers, directors and the companies with which they are associated. In the
Bank's opinion, all loans and loan commitments to such parties are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons. The
aggregate amount of loans made to officers and directors for the period ending
September 30, 1996, was $5,137,219. An analysis of loans to the Bank's officers
and directors for the fiscal period ending December 31, 1995, is shown below:
Balance at January 1,1995 $6,432,851
Additions 3,014,355
Payments 3,768,980
----------
Balance at December 31, 1995 $5,678,226
----------
----------
F-39
<PAGE>
NOTE H - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly, additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy,
require the Bank to maintain minimum amounts and ratios (set forth in the table
on the next page) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of September 30, 1996, that the
Bank meets all capital adequacy requirements to which it is subject.
The Bank's actual capital amounts and ratios are presented in the following
table:
IN THOUSANDS
<TABLE>
<CAPTION>
To be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Provisions
------ -------- ----------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1996:
- -------------------------
Total Capital to Risk-Weighted Assets $29,833 15.90% $ 15,011 8.00% $18,764 10.00%
Tier 1 Capital to Risk-Weighted Assets $27,485 14.65% $ 7,505 4.00% $11,258 6.00%
Tier 1 Capital to Average Assets $27,485 9.49% $ 11,761 4.00% $9,382 5.00%
As of September 30, 1995:
- -------------------------
Total Capital to Risk-Weighted Assets $28,938 14.62% $ 15,840 8.00% $19,800 10.00%
Tier 1 Capital to Risk-Weighted Assets $26,730 13.49% $ 7,920 4.00% $11,880 6.00%
Tier 1 Capital to Average Assets $26,730 10.58% $ 10,190 4.00% $12,738 5.00%
</TABLE>
The California Financial Code provides that a bank may not make a cash
distribution to its shareholders in excess of the lessor of (1) the bank's
undivided profits or (2) the bank's net income for its last three fiscal years
less the amount of any distribution made by the bank to shareholders during the
same period. Under these restrictions, approximately $7,112,000 was available
for payment of dividends at December 31, 1995.
Banking regulations require that all banks maintain a percentage of their
deposits as reserves at the Federal Reserve Bank. During the period ended
September 30, 1996, required reserves averaged approximately $3,609,000.
F-40
<PAGE>
NOTE I - BUSINESS COMBINATION WITH CITIZEN'S BANK OF PASO ROBLES, N.A.
At the close of business on May 3, 1996, Bank of Santa Maria acquired Citizens'
Bank of Paso Robles, N.A. The method used to record this business combination
was the purchase method of accounting. Assets and liabilities were recorded at
fair values. The excess of cost over fair value of net assets acquired became
goodwill. Pro forma information for the period and for the corresponding period
in the preceding year is disclosed below as if both banks were combined at the
beginning of this reporting period. The income figure for Citizens' Bank for
1995, is that reported for the full nine months. The corresponding figure for
1996, includes only that income (net income) prior to the merger.
Nine month Nine month
period ended period ended
September 30, 1996 September 30, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Interest and non-interest income
Bank of Santa Maria (as reported) $18,117,198 $17,270,998
Citizens Bank of Paso Robles (as reported) 1,024,332 2,399,272
Lost Interest Income (1) (206,450) (206,450)
----------- -----------
$18,935,080 $19,463,820
----------- -----------
----------- -----------
Net Income
Bank of Santa Maria (as reported) $ 2,753,942 $ 2,491,516
Citizens Bank of Paso Robles (as reported) 19,134 166,768
----------- -----------
$ 2,773,076 $ 2,658,284
----------- -----------
----------- -----------
ADJUSTMENTS - PRETAX
Lost Interest Income (1) (206,450) (206,450)
Data Processing expense (2) 60,942 106,410
Courier expense (2) 7,527 10,350
Goodwill (3) (43,920) (98,820)
Depreciation (4) (14,489) (42,821)
Citizens' Bank merger expense (5) 124,236 0
Tax effect of adjustments 28,862 92,532
----------- -----------
NET INCOME $ 2,672,060 $ 2,519,485
----------- -----------
----------- -----------
Net income per share for
Bank of Santa Maria as restated $ 0.95 $ 0.92
----------- -----------
Number of shares used in computation 2,800,000 2,749,000
----------- -----------
(1) Lost interest income due to outflow of funds used to purchase Citizen's
Bank stock.
(2) The cost of both data processing and courier expenses of Citizen's Bank, as
reported, would have been fully eliminated if the merger had taken place at
the beginning of the period.
(3) The historical established goodwill amortization is assumed to have been
begun at the beginning of each period.
(4) This is the historically established increase in depreciation on assets
placed into operations as required to incorporate Citizens' into the Bank's
operating system.
(5) Assuming that the merger was completed at the beginning of each period, the
historical recorded merger related expenses for Citizens' Bank would not
have occurred during 1996. No adjustment was required for 1995, as there
were no merger expenses as of the September 30, 1995 date.
F-41
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article V of the Registrant's Articles of Incorporation provides that
the liability of the directors of the corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law. Article VI
of the Registrant's Articles of Incorporation provides that the corporation is
authorized to provide for the indemnification of agents (as defined in Section
317 of the California General Corporation Law) of the corporation in excess of
that expressly permitted by such Section 317 for breach of duty to the
corporation and its shareholders to the fullest extent permissible under
California law.
Article III of the Registrant's Bylaws provides, in pertinent part,
that each person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another foreign or domestic corporation
or other entity, shall be indemnified by the Registrant to the full extent
permitted by the General Corporation Law of the State of California or any other
applicable laws. Article III also authorizes the registrant to enter into one
or more agreements with any person which provides for indemnification greater or
different than that provided for in that Article.
Both the Registrant and its proposed wholly-owned subsidiary, Bank of
Santa Maria, have entered into indemnification agreements with their respective
officers and directors in the forms incorporated by reference as Exhibit 10.1 to
this Registration Statement.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted pursuant to the foregoing provisions to
directors, officers or persons controlling the Registrant, the Registrant has
been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in said Act and is
therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
EXHIBIT NO. EXHIBIT
----------- -------
2.1 Plan of Reorganization and Merger Agreement - Annex I
of Written Consent Statement/Prospectus incorporated by
reference
3.1 Articles of Incorporation of the Registrant.*
- 1 -
<PAGE>
3.2 Amendment to Articles of Incorporation of Registrant*
3.3 Amendment to Articles of Incorporation of Registrant
3.4 Bylaws of the Registrant*
4.1 Specimen Certificate evidencing shares of Registrant's
Common Stock*
4.2 Stockholder Agreement Covering Issuance and Compulsory
Repurchase of Organizing Shares of Registrant - Annex
II of Written Consent Statement/Prospectus incorporated
by reference*
5.1 Opinion of Knecht & Hansen*
8.1 Tax Opinion of Vavrinek, Trine, Day & Co.*
10.1 Form of Indemnification Agreement*
10.2 BSM Bancorp 1996 Stock Option Plan and form of Stock
Option Agreement*
10.3 Form of Written Consent*
10.4 Nipomo Branch Land Lease*
10.5 Lompoc Branch Lease*
10.6 Unisys License and Service Agreement*
10.7 Information Technology, Inc.*
21.1 Subsidiary of BSM Bancorp*
23.1 Consent of Vavrinek, Trine, Day & Co.
23.2 Consent of Knecht & Hansen (included in Exhibit 5.1)*
_________________________________________
* Previously filed and Incorporated by reference
(b) Financial Statement Schedules
All schedules are omitted because the required information
is not applicable or is included in the Financial Statements of the Bank and the
related notes.
(c) Not applicable.
- 2 -
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to file, during any
period in which offers or sales are being made, a post-effective amendment to
this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
Registration Statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the Registration Statement;
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the Registration Statement or any
material change to such information in the
Registration Statement.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officer and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the Written
Consent Statement/Prospectus pursuant to Item 4 of this form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(d) The undersigned Registrant hereby undertakes to supply by mans of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
- 3 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this pre-effective amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Maria, State of California, on January 14,
1997.
BSM BANCORP
a California corporation
By /s/ William A. Hares
----------------------------------------
William A. Hares, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
pre-effective amendment to the registration statement has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ William A. Hares President and Chief Executive January 14, 1997
- ------------------------- Officer (Principal Executive
William A. Hares Officer and Director)
/s/ F. Dean Fletcher Executive Vice President and January 14, 1997
- ------------------------- Chief Financial Officer
F. Dean Fletcher (Principal Financial Officer
and Accounting Officer)
/s/ Armand R. Acosta Director January 14, 1997
- -------------------------
Armand R. Acosta
/s/ Richard E. Adam Director January 14, 1997
- -------------------------
Richard E. Adam
/s/ Fred L. Crandall, Jr. Director January 14, 1997
- -------------------------
Fred L. Crandall, Jr.
/s/ A.J. Diani Director January 14, 1997
- -------------------------
A.J. Diani
- 4 -
<PAGE>
/s/ Roger A. Ikola Director January 14, 1997
- -------------------------
Roger A. Ikola
/s/ Toshiharu Nishino Director January 14, 1997
- -------------------------
Toshiharu Nishino
/s/ Joseph Sesto, Jr. Director January 14, 1997
- -------------------------
Joseph Sesto, Jr.
/s/ William L. Snelling Director January 14, 1997
- -------------------------
William L. Snelling
/s/ Miitsuo Taniguchi Director January 14, 1997
- -------------------------
Mitsuo Taniguchi
/s/ Joseph F. Ziemba Director January 14, 1997
- -------------------------
Joseph F. Ziemba
- 5 -
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
BSM BANCORP
William A. Hares and William L. Snelling certify that:
1. They are the President and Secretary, respectively, of BSM Bancorp, a
California corporation.
2. Paragraph A.1. of Section IX - APPROVAL OF CERTAIN BUSINESS
COMBINATIONS is hereby amended as follows:
"A.1. Except as otherwise expressly provided in this Article IX, the
affirmative vote of the holders of at least 66 2/3% of the outstanding shares
entitled to vote thereon (and, if any class or series of shares is entitled to
vote thereon separately, the affirmative vote of the holders of at least 66 2/3%
of the outstanding shares of each such class or series) shall be required in
order to authorize any of the following:
(a) any merger or consolidation of the Corporation with or into a
Related Person (as hereinafter defined);
(b) any sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage, or any other security device, of all
or any Substantial Part (as hereinafter defined) of the assets of the
Corporation (including without limitation any voting securities of a subsidiary)
or of a subsidiary, to a Related Person;
(c) any merger or consolidation of a Related Person with or into the
Corporation or a subsidiary of the Corporation;
(d) any sale, lease, exchange, transfer or other disposition of all or
any Substantial Part of the assets of a Related Person to the Corporation or a
subsidiary of the Corporation;
(e) the issuance of any securities of the Corporation or a subsidiary
of the Corporation to a Related Person;
(f) the acquisition by the Corporation or a subsidiary of the
Corporation of any securities of a Related Person;
- 1 -
<PAGE>
(g) any reclassification of the common stock of the Corporation, or
any recapitalization involving the common stock of the Corporation; and
(h) any agreement, contract or other arrangement providing for any of
the transactions described in this Article."
3. The foregoing amendments to the Articles of Incorporation have been
duly approved by the Board of Directors.
4. The foregoing amendments to the Articles of Incorporation have been
duly approved by the required vote of shareholders of Common Stock in accordance
with Section 902 of the Corporations Code. The corporation has 150 shares of
Common Stock issued and outstanding and no shares of Series A Preferred Stock
issued and outstanding. The number of shares of Common Stock entitled to vote
and voting in favor of each of the foregoing Amendments equaled or exceeded the
vote required. The percentage vote of Common Stock required for the approval of
the Amendments was more than 66 2/3% of the outstanding shares.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: December 31, 1996
-------------------------------
William A. Hares
-------------------------------
William L. Snelling
- 2 -
<PAGE>
[LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent, as successor accountants of Dayton & Associates (said firm
being merged with and into Vavrinek, Trine, Day & Co. on September 1, 1996) to
the inclusion of their Independent Auditor's Report dated January 3, 1996
regarding the statements of condition of Bank of Santa Maria as of December 31,
1995 and December 31, 1994, and the related statements of income, changes in
capital, and cash flows for each of the three years in the period ended December
31, 1995, and the reference to our firm as "experts", in the Form S-4 filed with
the Securities and Exchange Commission.
/s/ Vavrinek, Trine, Day & Co.
January 14, 1997
Laguna Hills, California
-EXHIBIT 23.1-
