<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1999
REGISTRATION NO. 333-81531
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
AMENDMENT NO. 1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MID-STATE BANCSHARES
<TABLE>
<S> <C> <C>
CALIFORNIA 6712 77-0442667
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Classification Identification
incorporation or organization) Code) No.)
</TABLE>
1026 GRAND AVENUE
ARROYO GRANDE, CALIFORNIA 93420
(805) 473-7700
(Address, including zip code and telephone number,
including area code, of registrant's principal office)
CARROL R. PRUETT
CHIEF EXECUTIVE OFFICER
1026 GRAND AVENUE
ARROYO GRANDE, CALIFORNIA 93420
(805) 473-7700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
JOHN F. STUART, ESQ. LOREN P. HANSEN, ESQ.
Reitner & Stuart Knecht & Hansen
1730 K Street, N.W., Suite 1100 1301 Dove Street, Suite 900
Washington, D.C. 20006 Newport Beach, CA 92660
(202) 466-2818 (949) 851-8070
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after 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>
MID-STATE BANCSHARES PROSPECTUS
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-4 ITEM CAPTION OR LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside Front
Cover page of Prospectus........................... Outside front cover page; facing page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... WHERE YOU CAN FIND MORE INFORMATION; TABLE OF
CONTENTS
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information.................................. RISK FACTORS
4. Terms of the Transactions............................ SUMMARY; THE MERGER; COMPARISON OF MID-STATE COMMON
STOCK AND CITY COMMERCE BANK COMMON STOCK UNAUDITED
PRO FORMA COMBINED
5. Pro Forma Financial Information...................... FINANCIAL INFORMATION
6. Material Contracts with the Company Being Acquired... THE MERGER
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters......
8. Interests of Named Experts and Counsel............... LEGAL MATTERS; EXPERTS
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... *
10. Information with Respect to S-3 Registrants.......... INFORMATION ABOUT MID-STATE; WHERE YOU CAN GET MORE
INFORMATION
WHERE YOU CAN GET MORE INFORMATION
11. Incorporation of Certain Information by Reference.... *
12. Information with Respect to S-2 or S-3 Registrants... *
13. Incorporation of Certain Information by Reference.... *
14. Information with Respect to Registrants Other Than
S-3 or S-2 Registrants............................. *
15. Information with Respect to S-3 Companies............
16. Information with Respect to S-2 or S-3 Companies..... *
17. Information with Respect to Companies Other Than S-2
or S-3 Companies................................... SUMMARY; THE MEETING; INFORMATION ABOUT CITY COMMERCE
BANK
18. Information if Proxies, Consents or Authorizations
are to be Solicited................................ THE MEETING
19. Information if Proxies, Consents or Authorizations
are not to be Solicited, or in an Exchange Offer... *
</TABLE>
- --------------------------
* Not applicable
<PAGE>
[LOGO]
July 9, 1999
Dear Shareholder:
You are cordially invited to attend the 1999 annual meeting of shareholders
of City Commerce Bank, which will be held at 6:00 p.m. on Tuesday, August 10,
1999.
As you have probably read, we have signed a merger agreement with Mid-State
Bancshares and its subsidiary, Mid-State Bank. You will not incur federal income
tax as a result of the merger, except with respect to cash you receive instead
of fractional shares.
In the proposed merger, you will receive a fraction of a share of Mid-State
Bancshares common stock for each share of City Commerce Bank common stock that
you own with the exchange ratio depending on the "average closing price" of
Mid-State common stock shortly before the closing of the merger. Mid-State's
common stock is traded on the Nasdaq National Market under the symbol "MDST" and
on July 8, 1999 the stock closed at $34.94 per share. If for example $34.94 was
the "average closing price" for Mid-State common stock, you would receive for
each share of City Commerce Bank that you own Mid-State common stock with a
value equal to $24.08. However, the exact exchange ratio depends on the
performance of Mid-State's stock in the future and can not be presently
determined.
You should review "RISK FACTORS" beginning on page 20 before deciding how to
vote your shares.
The most important issue on the agenda for the annual meeting will be a
shareholder vote to approve the merger and the merger agreement. We believe the
merger is in your best interests as shareholders and we hope you will support
it. Information about the proposed merger is included in the enclosed proxy
statement/prospectus. We will also be voting on the election of eight people to
City Commerce Bank's board of directors to serve until the merger is completed
or until the next annual meeting.
Please give these proxy materials your careful attention. Your board of
directors has unanimously approved the merger and recommends that you vote to
approve it as well.
Sincerely,
[LOGO]
Carl E. Lindros
CHAIRMAN OF THE BOARD
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAVE APPROVED THIS TRANSACTION OR THE SHARES OF MID-STATE COMMON STOCK
TO BE ISSUED UNDER THIS PROXY STATEMENT/ PROSPECTUS OR DETERMINED IF THIS
DOCUMENT IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS JULY 9, 1999, AND IS BEING
MAILED TO CITY COMMERCE BANK SHAREHOLDERS ON OR ABOUT JULY 12, 1999.
1
<PAGE>
CITY COMMERCE BANK
33 EAST CARRILLO STREET
SANTA BARBARA, CALIFORNIA 93101
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 10, 1999
------------------------
Notice is hereby given that the annual meeting of the shareholders of City
Commerce Bank, will be held at 6:00 p.m. on Tuesday, August 10, 1999, at the
Downtown Office of City Commerce Bank, 33 East Carrillo Street, Santa Barbara,
California 93101.
At the annual meeting, you will be asked to consider and vote on the
following:
1. A proposal to approve the principal terms of the Agreement to Merge and
Plan of Reorganization dated as of April 19, 1999 among City Commerce
Bank, Mid-State Bancshares ("Mid-State") and Mid-State Bank (the "merger
agreement") and of the merger contemplated thereby. Under the merger
agreement,
- City Commerce Bank will merge into Mid-State Bank, and Mid-State Bank
will continue as the surviving bank,
- Mid-State will remain the bank holding company for the surviving bank,
and
- you will become shareholders of Mid-State in accordance with the
exchange ratio set forth in the merger agreement. You will receive a
fraction of a share of Mid-State for each share of City Commerce Bank
that you own prior to the merger, with cash paid in lieu of issuing
fractional shares. The exchange ratio depends upon the performance of
Mid-State common stock shortly before the closing of the merger.
A copy of the merger agreement is attached as Appendix A to the proxy
statement/prospectus.
2. The election of eight persons to the board of directors. The following
persons have been nominated:
<TABLE>
<S> <C>
William J. Blythe Carl E. Lindros
Roger P. Duncan John R. Mackall
Betty M. Hatch C. Brian O'Gorman
H. Edward Heron Eloy U. Ortega
</TABLE>
In order to assist City Commerce Bank in complying with the agreement,
one of the current directors of City Commerce Bank will serve as a
director of Mid-State and Mid-State Bank after the merger. In the event
that the merger is not consummated, the aforementioned persons will
continue to serve as directors of City Commerce Bank for the period
elected herein.
3. Such other business as may properly come before the City Commerce Bank
annual meeting or any adjournments or postponements thereof.
2
<PAGE>
The board of directors has fixed the close of business on July 6, 1999 as
the record date for the determination of the shareholders entitled to have
notice of and to vote at the City Commerce Bank annual meeting and any
adjournments or postponements thereof.
In the election of directors, the bylaws of City Commerce Bank provides as
follows:
"Nominations for election of members of the Board of Directors may be
made by the Board of Directors or by any shareholder of any outstanding
class of capital stock of the Corporation entitled to vote for the
election of directors provided that a notice of intention to make
nominations is made in the form and manner specified in this paragraph.
Notice of intention to make any nominations other than by the Board of
Directors shall be made in writing and shall be delivered or mailed to
the President of the Corporation not less than twenty-one (21) days, nor
more than sixty (60) days before the date of any meeting of shareholders
called for the election of directors; provided, however, that if less
than twenty-one (21) days notice of the meeting is given to
shareholders, such notice of intention to nominate shall be mailed or
delivered to the President of the Corporation not later than the close
of business on the seventh day following the day on which the notice of
meeting was mailed. Such notification shall contain the following
information to the extent known to the person making the nomination: (a)
the name and address of the proposed nominee; (b) the principal
occupation of each proposed nominee; (c) the number of shares of capital
stock of the Corporation owned by each proposed nominee; (d) the name
and residence address of the person making the nominations, and (e) the
number of shares of capital stock of the Corporation owned by said
person. Nominations not made in accordance herewith may in discretion of
the Chairman of the meeting be disregarded and upon the Chairman's
instructions the inspector of election shall disregard all votes cast
for each such nominee. A copy of this paragraph shall be set forth in a
notice to shareholders of any meeting at which Directors are to be
elected."
Your board of directors recommends a vote "FOR" the merger and "FOR" the
candidates who have been nominated.
Your vote is very important. Please mark, sign, date and return your proxy
promptly, whether or not you plan to attend the annual meeting. Your proxy will
be revocable, either in writing or by voting in person at the annual meeting, at
any time prior to its exercise, by following the procedure described in the
proxy statement/prospectus.
If you would like to attend the City Commerce Bank annual meeting and your
shares are held by a broker, bank or other nominee, you must bring to the
meeting a recent brokerage statement or a letter from the nominee confirming
your beneficial ownership of the shares. You must also bring a form of personal
identification. In order to vote your shares at the City Commerce Bank annual
meeting, you must obtain from the nominee a proxy issued in your name.
By Order of the Board of Directors,
[LOGO]
Carl E. Lindros
CHAIRMAN OF THE BOARD
Santa Barbara, California
July 9, 1999
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE
MERGER.............................. 6
SUMMARY............................... 7
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 13
Mid-State........................... 14
City Commerce Bank.................. 15
SELECTED PROFORMA COMBINED FINANCIAL
INFORMATION......................... 17
RISK FACTORS.......................... 20
FORWARD LOOKING STATEMENTS............ 23
THE CITY COMMERCE BANK MEETING........ 24
General............................. 24
Record Date......................... 24
Revocability of Proxies............. 24
Matters to be Considered............ 24
PROPOSAL 1 THE MERGER................. 25
General............................... 25
Background and Reasons for the
Merger.............................. 25
Fairness Opinion of the Findley
Group............................... 29
Exchange Ratio........................ 33
Exchange Procedures................... 34
Regulatory Approvals Required......... 34
Management and Operations of Mid-State
after the Merger.................... 35
Management.......................... 35
Operations.......................... 36
NASDAQ Listing........................ 36
Resales of Mid-State Common Stock..... 36
Federal Income Tax Consequences....... 36
Accounting Treatment.................. 38
Dissenters' Rights.................... 38
Benefits to Certain Officers and
Directors of City Commerce Bank..... 40
The Merger Agreement.................. 41
Structure of the Merger............. 41
Additional Agreements............... 42
Treatment of Stock Options.......... 42
Conditions to the Merger............ 42
Nonsolicitation..................... 43
Expenses............................ 44
Termination......................... 44
Representation and Warranties....... 45
Covenants........................... 45
Amendment and Waiver................ 47
Stock Option Agreement................ 47
Exercise of Stock Option............ 47
Termination of Stock Option......... 47
Adjustment of Number of Shares
Subject to Option................. 49
Repurchase of Option Shares......... 49
Registration Rights................. 49
Effect of Stock Option Agreement.... 49
UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS.......................... 50
MID-STATE STOCK....................... 58
COMPARISON OF STOCK................... 58
Classification of Board of
Directors........................... 58
Voting Rights......................... 59
Vote on Business Combinations......... 59
Number of Directors................... 60
Dividend Restrictions................. 60
Amendments to Articles of
Incorporation and Bylaws............ 61
Dissenters' Rights.................... 61
Anti-Takeover Provisions.............. 61
Board of Directors.................. 62
Cumulative Voting................... 62
Authorized Shares................... 62
Shareholder Vote Required........... 62
Amendment of Articles of
Incorporation..................... 62
Shareholder Nominations............. 63
Purpose and Takeover Defensive
Effects............................. 63
INFORMATION ABOUT MID-STATE........... 64
General............................... 64
Mid-State Bank........................ 64
Acquisitions.......................... 64
Additional Information................ 65
INFORMATION ABOUT CITY COMMERCE
BANK................................ 65
General............................... 65
Business Strategy..................... 66
Properties............................ 66
Employees............................. 67
Competition........................... 67
Effect of Governmental Policies....... 67
Legal Proceedings..................... 68
CITY COMMERCE BANK-- MANAGEMENT
DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL
CONDITION........................... 68
Introduction.......................... 68
Comparision of Results of Operation... 68
Net Income............................ 68
Net Interest Income................... 68
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Yields Earned and Rates Paid.......... 70
Provision for Loan Losses............. 71
Non-interest Income................... 71
Income Taxes.......................... 72
Analysis of Financial Condition....... 72
Securities Portfolio.................. 73
Loan Portfolio........................ 74
Allowance for Loan Losses............. 78
Funding............................... 80
Capital Resources..................... 81
Liquidity and Interest Rate
Sensitivity......................... 83
Year 2000 Issue....................... 84
State of Readiness of City Commerce
Bank................................ 85
Impact of New Accounting
Pronouncements...................... 86
Impact of Inflation and Changing
Prices.............................. 86
PROPOSAL 2 ELECTION OF CITY COMMERCE
BANK DIRECTORS...................... 87
Board of Directors.................... 87
The Board of Directors and
Committees.......................... 88
Compensation of Non-Executive
Directors........................... 88
Executive Officers.................... 89
Security Ownership of Certain
Beneficial Owners and Management.... 90
Executive Compensation................ 91
Severance Agreements.................. 94
Stock Option Plan..................... 95
401(k) Plan........................... 96
Salary Continuation Agreements........ 97
Certain Relationships and Related
Transactions........................ 97
Market Price and Dividend
Information......................... 98
Relationship with Independent Public
Accountants......................... 98
OTHER BUSINESS........................ 99
LEGAL MATTERS......................... 99
EXPERTS............................... 99
MORE INFORMATION...................... 99
Financial Statements of City
Commerce............................ F-1
Agreement to Merge and Plan of
Reorganization ...................... Appendix A
Fairness Opinion of The Findley
Group ............................... Appendix B
Chapter 13 of California General
Corporation Law ..................... Appendix C
</TABLE>
5
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY IS THIS MERGER PROPOSED?
A: City Commerce Bank is proposing this merger because its board of directors
has concluded that this merger is in the best interest of its shareholders in
that it affords greater value and liquidity in the stock. Further, the combined
companies can offer City Commerce Bank's customers a broader array of services
and products than City Commerce Bank could offer on its own.
Q: WHAT WILL I RECEIVE IN THIS MERGER?
A: Under the merger agreement, you will have the right to receive a fraction of
a share of Mid-State common stock for each share of City Commerce Bank common
stock that you own with the exchange ratio depending on the "average closing
price" of Mid-State common stock shortly before the closing of the merger. On
July 8, 1999, Mid-State common stock closed at $34.94. If $34.94 were the
"average closing price," you would receive .6892 of a share of Mid-State for
each share which you owned.
Q: HOW DO I VOTE?
A: Simply indicate on your proxy card how you want to vote and then sign and
mail your proxy card in the enclosed return envelope as soon as possible so that
your shares may be represented at the City Commerce Bank annual meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will not vote your shares for you unless you provide instructions
to your broker on how to vote. It is important therefore that you follow the
directions provided by your broker regarding how to instruct your broker to vote
your shares. If you fail to instruct your broker how to vote your shares, the
effect will be the same as a vote against the merger agreement.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You may change your vote at any time before your proxy is voted at the
annual meeting. If your shares are held in your name you may do this in one of
three ways. First, you may send a written notice stating that you would like to
revoke your proxy. Second, you may complete and submit a new proxy card. If you
choose either of these two methods, you must submit your notice of revocation or
your new proxy card to City Commerce Bank at the address at the top of the City
Commerce Bank notice of annual meeting. Third, you may attend the meeting and
vote in person if you tell the Secretary that you want to cancel your proxy and
vote in person. Simply attending the City Commerce Bank annual meeting, however,
will not revoke your proxy. If you have instructed a broker to vote your shares,
you must follow directions received from your broker to change your vote or to
vote at the City Commerce Bank annual meeting.
Q: SHOULD I SEND IN MY CERTIFICATES NOW?
A: No. After the merger is completed, we will send you written instructions for
exchanging your stock certificates.
Q: WHEN DO YOU EXPECT THIS MERGER TO BE COMPLETED?
A: We are working toward completing this merger as quickly as possible. We
currently expect to complete this merger in the third quarter of 1999.
Q: WHY HAVE YOU SENT ME THIS DOCUMENT AND WHO CAN HELP ANSWER MY QUESTIONS?
A: This proxy statement/prospectus contains important information regarding this
proposed merger, as well as information about Mid-State and City Commerce Bank.
It also contains important information about what the City Commerce Bank board
of directors and management considered in evaluating this proposed merger. We
urge you to read this proxy statement/prospectus carefully, including its
appendices. You may also want to review the documents listed under "WHERE YOU
CAN FIND MORE INFORMATION" on page 99.
If you have more questions about the merger or the annual meeting, you should
contact:
FOR MID-STATE:
Mr. James G. Stathos
Mid-State Bancshares
1026 Grand Avenue
Arroyo Grande, California 93420
(805) 473-7700
FOR CITY COMMERCE BANK:
Mr. Eloy Ortega
City Commerce Bank
33 East Carrillo Street
Santa Barbara, California 93101
(805) 963-5871
6
<PAGE>
SUMMARY
This brief summary, together with the "Questions and Answers" on the
preceding page, highlights selected information from the proxy
statement/prospectus. It does not contain all of the information that is
important to you. We urge you to read carefully the entire proxy
statement/prospectus and the other documents to which we refer to understand
fully the merger. See "WHERE YOU CAN FIND MORE INFORMATION" on page 99. Each
item in this summary refers to the page where that subject is discussed in more
detail.
THE MERGER (PAGE 25 AND APPENDIX A)
We have attached the merger agreement as Appendix A at the back of this
proxy statement/ prospectus. We encourage you to read the merger agreement, as
it is the legal document that governs the merger.
In the merger, Mid-State Bank will be the surviving bank and Mid-State will
remain as the bank holding company for Mid-State Bank. The separate existence of
City Commerce Bank will end with the merger.
INFORMATION REGARDING THE PARTIES TO THE MERGER (PAGES 64 AND 65)
MID-STATE BANCSHARES
1026 Grand Avenue
Arroyo Grande, California 93420
(805) 473-7700
http://www.midstatebank.com
Mid-State is a California corporation incorporated November 12, 1996 and is
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended. Mid-State operates Mid-State Bank which is its wholly-owned
subsidiary. At March 31, 1999, Mid-State had total consolidated assets of $1.22
billion, consolidated deposits of $1.07 billion, and consolidated shareholders'
equity of $136.23 million.
Mid-State Bank is a California state-chartered bank headquartered in Arroyo
Grande, California, which commenced operations on June 12, 1961. Mid-State Bank
currently operates 28 banking offices on the Central Coast of California.
SEE, "INFORMATION ABOUT MID-STATE" AT PAGE 64 FOR ADDITIONAL INFORMATION
ABOUT MID-STATE. ALSO, SUBSTANTIAL INFORMATION ABOUT MID-STATE, INCLUDING
FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS THEREOF, ARE
INCLUDED IN ITS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IN ITS FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 1999. THESE REPORTS ARE INCORPORATED BY
REFERENCE INTO THIS PROXY STATEMENT/PROSPECTUS. IF YOU WANT TO OBTAIN COPIES OF
THESE DOCUMENTS OR OTHER INFORMATION CONCERNING MID-STATE, PLEASE SEE "WHERE YOU
CAN FIND MORE INFORMATION" AT PAGE 99.
CITY COMMERCE BANK
33 East Carrillo Street
Santa Barbara, California 93101
(805) 563-5871
City Commerce Bank is a California community bank headquartered in Santa
Barbara, California. In addition to its headquarters, City Commerce Bank
maintains three branch offices in Santa Barbara and Ventura Counties. City
Commerce Bank emphasizes community-based banking, with emphasis on both business
and individual customers. It serves small-to-medium size businesses,
professionals, retired individuals and residents, as well as businesses and real
estate owners and developers primarily throughout Santa Barbara and Ventura
Counties. Most of its loans are secured by real estate. At March 31, 1999, City
Commerce Bank had total assets of $149.5 million, deposits of $130.9 million,
and shareholders' equity of $17.3 million.
7
<PAGE>
SUBSTANTIAL INFORMATION ABOUT CITY COMMERCE BANK, INCLUDING FINANCIAL
STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS THEREOF, ARE INCLUDED
ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. SEE, "INFORMATION ABOUT CITY
COMMERCE BANK" AT PAGE 65 AND "FINANCIAL STATEMENTS OF CITY COMMERCE BANK" AT
PAGE F-1.
YOU WILL RECEIVE SHARES OF MID-STATE COMMON STOCK IN THE MERGER (PAGE 33)
When the merger is completed, you will receive a fraction of a share of
Mid-State common stock for each share of City Commerce Bank common stock that
you hold when the merger closes with the exchange ratio depending on the
"average closing price" of Mid-State common stock. Cash will be paid instead of
fractional shares.
"Average closing price" means the average daily closing price of Mid-State
common stock during the 20 trading days that Mid-State's stock trades ending on
the fifth trading day immediately before the effective day of the merger.
If the "average closing price" is between $26.60 and $30.91, the exchange
ratio will be .7791 of a share of Mid-State common stock for each share of City
Commerce Bank common stock. For example, if the "average closing price" was
within that range and you hold 110 shares of City Commerce Bank common stock at
the closing of the merger, you will have the right to receive 85.701 shares of
Mid-State common stock in the merger. Since cash will be paid instead of
fractional shares, you would only receive 85 shares of Mid-State common stock
and a check in an amount equal to .701 of a share multiplied by the "average
closing price" of Mid-State stock. Subject to such assumptions and based on the
number of shares of City Commerce Bank common stock outstanding on June 30,
1999, Mid-State would issue approximately 1,275,094 shares of Mid-State common
stock in the merger, representing approximately 11.21% of the number of shares
of Mid-State common stock that will be outstanding after the merger.
If the "average closing price" is more than $30.91, the exchange ratio will
be reduced. YOU SHOULD BE AWARE THAT MID-STATE COMMON STOCK CLOSED AT $34.94 ON
JULY 8, 1999. The reduced exchange ratio would be determined by:
- dividing $30.91 by the "average closing price", and
- multiplying such product by .7791.
For example, if the "average closing price" were $33.00, you would receive .7298
of a share of Mid-State common stock for each share of City Commerce Bank common
stock, and not .7791.
If the "average closing price" is less than $26.60, several alternatives may
occur:
- the exchange ratio may remain at .7791, or
- Mid-State may increase the exchange ratio so that it would then be
calculated by dividing $20.72 by the "average closing price", or
- if Mid-State does not increase the exchange ratio, City Commerce Bank will
have the right to terminate the merger, subject to certain rights of City
Commerce Bank or Mid-State to reinstate the merger.
BECAUSE THE PRICE OF MID-STATE COMMON STOCK FLUCTUATES, YOU WILL NOT KNOW
THE VALUE OF THE SHARES OF MID-STATE COMMON STOCK WHICH YOU WILL RECEIVE IN THE
MERGER WHEN YOU VOTE. THE MARKET VALUE OF MID-STATE SHARES AT THE TIME OF THE
MERGER COULD BE HIGHER OR LOWER THAN THE CURRENT MARKET VALUE.
COMPARATIVE MARKET PRICE DATA
Mid-State common stock is listed and traded on the Nasdaq National Market
under the symbol "MDST." City Commerce Bank common stock is traded infrequently
in the over the counter market and quoted on the Electronic Bulletin Board under
the symbol "CIBS." The following table sets forth historical per share market
value for Mid-State common stock and City Commerce Bank common stock
8
<PAGE>
based on the last sales prices and the equivalent market values for City
Commerce Bank common stock on:
- April 16, 1999, the last trading day before public announcement of the
merger, and
- July 8, 1999, the most recent date before the mailing of this proxy
statement/prospectus.
<TABLE>
<CAPTION>
HISTORICAL MARKET PRICE
---------------------------- CITY COMMERCE EQUIVALENT
MID-STATE CITY COMMERCE PRO FORMA MARKET VALUE
----------- --------------- -------------------------
<S> <C> <C> <C>
April 16, 1999.............................................. $ 27.67 $ 17.50 $ 21.56(1)
July 8, 1999................................................ $ 34.94 $ 22.62(2) $ 24.08(3)
</TABLE>
- ------------------------
(1) Assuming an exchange ratio of 0.7791 shares of Mid-State common stock for
each share of City Commerce Bank common stock.
(2) Reflects the average of the bid and ask prices for City Commerce common
stock since there were no sales of stock on July 8, 1999.
(3) Assuming an adjustment in the exchange ratio to .6892 if $34.94 were to be
the "average closing price."
Mid-State cannot assure you that actual stock prices for its common stock
will be equal to or greater than the prices shown in the table at the time of
the merger or at any time after the completion of the merger. In the merger,
City Commerce Bank will be merged into Mid-State Bank and there will be no
further public market for City Commerce Bank common stock after the merger.
LISTING OF YOUR STOCK (PAGE 36)
Mid-State will list the shares of its common stock to be issued in the
merger on the Nasdaq National Market.
COMPARISON OF YOUR RIGHTS AS A SHAREHOLDER (PAGE 58)
There are differences between your rights as a shareholder of City Commerce
Bank and the rights you will have as a shareholders of Mid-State. Among them are
differences in:
- a "classified" board of directors with only 1/3 of the directors being
elected annually;
- voting for directors and the right to remove directors;
- the right and power to amend charter provisions; and
- certain anti-takeover charter provisions.
THE MERGER WILL BE TAX-FREE TO YOU (PAGE 36)
The merger will be tax-free to City Commerce Bank shareholders for federal
income tax purposes, except for taxes on cash received for a fractional share.
The merger will also be tax-free to Mid-State, Mid-State Bank and City Commerce
Bank for federal income tax purposes. However, because tax matters are
complicated, and tax results may vary among shareholders, we urge you to contact
your own tax advisor to understand fully how the merger will affect you.
DIVIDENDS AFTER THE MERGER
City Commerce Bank generally has followed a policy of paying annual stock
dividends. Of course, this will cease at the conclusion of the merger since the
separate existence of City Commerce Bank will end.
Mid-State recently adopted a policy of paying quarterly cash dividends with
record dates approximating the last day of the calendar quarter. The payable
date for the dividend generally occurs in the month following. In January and
April 1999, Mid-State paid $0.12 per share cash dividends and has announced a
$0.12 per share cash dividend payable to shareholders of record on June 30,
1999. Mid-State anticipates declaring a quarterly cash dividend with
approximately a September 30, 1999
9
<PAGE>
record date with the dividend payable in October. Because the merger will likely
be effective by the anticipated record date in September, it is anticipated the
dividend will be paid on shares of Mid-State common stock issued in the merger
to City Commerce Bank shareholders.
Mid-State expects to pay cash dividends at the same general level but may
change that policy based on business conditions, its financial condition and
earnings or other factors.
OUR BOARD RECOMMENDS THAT YOU APPROVE THE MERGER (PAGE 25)
City Commerce Bank's board of directors believes that the merger is in your
best interest and that of City Commerce Bank. City Commerce Bank believes that
it must grow in order to compete with larger, more efficient financial
institutions within its marketplace. The need has become more acute with recent
consolidations in the banking industry. New regulatory requirements and
competition from larger banks will make the future more difficult for relatively
small banks like City Commerce Bank. At this time, the board of directors
believes the merger represents a better opportunity for City Commerce Bank's
shareholders than pursuing a strategy of increasing the business on its own. The
board of directors has unanimously approved the merger agreement and recommends
that you vote:
- FOR the principal terms of the merger and the merger agreement; and
- FOR the election of all City Commerce Bank nominees as directors of City
Commerce Bank.
FINANCIAL ADVISOR GIVES OPINION THAT CONSIDERATION IS FAIR TO YOU (PAGE 29 AND
APPENDIX B)
In deciding to approve the merger, City Commerce Bank's board of directors
considered the opinion of its financial advisor, The Findley Group, dated as of
April 19, 1999 and confirmed on July 7, 1999, as to the fairness of the merger
consideration to City Commerce Bank's shareholders from a financial point of
view. This opinion is attached as Appendix B to this proxy statement/prospectus.
We encourage you to read this opinion carefully. The Findley Group was paid
$10,000 for providing its opinion.
ANNUAL MEETING TO BE HELD ON AUGUST 10, 1999 (PAGE 24)
The annual meeting of City Commerce Bank shareholders will be held at 6:00
p.m. on August 10, 1999 at the Downtown Office of City Commerce Bank, 33 East
Carrillo Street, Santa Barbara, California 93101. At the annual meeting, you
will be asked to vote to approve the principal terms of the merger and to elect
directors for City Commerce Bank.
RECORD DATE SET AT JULY 6, 1999; MAJORITY VOTE OF OUTSTANDING SHARES VOTING AT
THE MEETING REQUIRED
You may vote at the annual meeting if you owned City Commerce Bank common
stock at the close of business on July 6, 1999. As of that date, there were
1,636,624 shares of City Commerce Bank common stock outstanding and entitled to
vote at the meeting. Approval of the principal terms of the merger requires that
a majority of the outstanding shares of City Commerce Bank common stock vote in
favor.
THE DIRECTORS HAVE AGREED TO VOTE IN FAVOR OF THE MERGER (PAGE 42)
The directors of City Commerce Bank, who are entitled to vote about 23% of
City Commerce Bank's outstanding shares of common stock, have entered into
director agreements with Mid-State. These agreements provide that the directors
will vote their shares of City Commerce Bank common stock in favor of the
merger.
10
<PAGE>
The directors entered into these agreements in order to induce Mid-State to
enter into the merger agreement. The director agreements could discourage other
companies from trying to acquire City Commerce Bank.
YOU MAY EXERCISE DISSENTERS' RIGHTS (PAGE 38 AND APPENDIX C)
If you follow certain procedures, you have the right to exercise dissenters'
rights in the merger and receive payment in cash of the "fair market value" of
your shares of City Commerce Bank common stock. For this purpose, City Commerce
Bank's board of directors has determined that "fair market value" is $17.50 per
share, which was the closing price for City Commerce Bank common stock on April
16, 1999, the last trading day before the announcement of the merger. The
procedures which you must follow to exercise your dissenters' rights are in
Chapter 13 of the California General Corporation Law. We have attached Chapter
13 as Appendix C.
MID-STATE TO USE POOLING ACCOUNTING TREATMENT (PAGE 38)
Mid-State will account for the merger as a pooling-of-interest for financial
reporting purposes.
BENEFITS TO CERTAIN OFFICERS AND DIRECTORS IN THE MERGER (PAGE 40)
When considering the recommendation of the City Commerce Bank board of
directors, you should be aware that some City Commerce Bank directors and
officers have interests in the merger that differ from the interests of other
City Commerce Bank shareholders. These interests include:
- -- one current director of City Commerce Bank will continue as a director of
Mid-State and Mid-State Bank;
- -- certain officers have pre-existing severance, stock option and salary
continuation agreements which will become fully vested as a result of the
merger; and
- -- directors and officers have continuing insurance protection under the
existing directors' and officers' liability insurance.
The City Commerce Bank board of directors was aware of these interests and
considered them before approving the merger agreement.
THINGS WE MUST DO FOR THE MERGER TO OCCUR (PAGE 42)
Completion of the merger is subject to various conditions, including:
-- approval of the merger agreement by the City Commerce Bank shareholders;
-- receipt of all governmental and other consents and approvals that are
necessary to permit completion of the merger; and
-- other usual conditions.
Certain of these conditions to the merger may be waived by Mid-State or City
Commerce Bank, as applicable.
REGULATORY APPROVALS WE MUST OBTAIN FOR THE MERGER (PAGE 34)
We cannot complete the merger unless it is approved by the California
Department of Financial Institutions and the Federal Deposit Insurance
Corporation. Mid-State Bank has filed applications with these regulators seeking
approval.
Although we do not know of any reason why we cannot obtain these regulatory
approvals in a timely manner, we cannot be certain when or if we will obtain
them.
11
<PAGE>
WE EXPECT THE MERGER TO OCCUR IN THIRD QUARTER OF 1999 (PAGE 41)
The merger will occur shortly after all of the conditions to its completion
have been satisfied. We currently anticipate that the merger will occur in the
third quarter of 1999.
TERMINATION OF THE MERGER AGREEMENT (PAGE 44)
The merger agreement may be terminated at any time prior to the effective
time of the merger:
-- by mutual consent of Mid-State and City Commerce Bank;
-- by Mid-State or City Commerce Bank if any material breach or default by
the other party is not cured within 20 business days after notice
thereof;
-- by Mid-State or City Commerce Bank if any governmental or regulatory
consent is not obtained by September 30, 1999 or if any governmental or
regulatory authority denies or refuses to grant any approval, consent or
authorization required to be obtained to consummate the transactions
contemplated by the merger agreement unless, within 20 business days
after such denial or refusal, all parties agree to resubmit the
application to the regulatory authority that has denied or refused to
grant the approval, consent or qualification requested;
-- by City Commerce Bank if any of the conditions to its performance of the
merger agreement shall not have been met, or by Mid-State if any of the
conditions to its performance of the merger agreement shall not have been
met, by September 30, 1999, or such earlier time as it becomes apparent
that such conditions shall not be met;
-- by Mid-State if City Commerce Bank shall have failed to act or refrained
from doing any "competing transaction" (as defined in the merger
agreement);
-- by Mid-State if it elects not to consummate the merger because it enters
into a transaction to be acquired by another financial institution; or
-- by City Commerce Bank if the "average closing price" is less than $26.60
and if Mid-State has failed to notify City Commerce Bank of its election
to fix the purchase price at $20.72, provided, however that if City
Commerce Bank elects to so terminate, Mid-State has the right to
reinstate the merger agreement by adjusting the exchange ratio to provide
shareholders of City Commerce Bank a price in Mid-State common stock
equal to $20.72 (as a result the exchange ratio shall then be calculated
by dividing $20.72 by the "average closing price").
STOCK OPTION AGREEMENT BETWEEN MID-STATE AND CITY COMMERCE BANK AND OTHER
PAYMENTS (PAGES 44 AND 47)
When we signed the merger agreement we also signed a stock option agreement.
Under the stock option agreement, City Commerce Bank gave Mid-State an option to
purchase, under certain circumstances, up to 325,884 shares of City Commerce
Bank common stock representing approximately 19.9% of the outstanding shares of
City Commerce Bank common stock. Mid-State has the right to purchase the shares
for $17.00 per share. Any purchase of shares pursuant to the option must be in
compliance with applicable law.
City Commerce Bank agreed to grant the option to Mid-State in order to
induce Mid-State to enter into the merger agreement and to protect Mid-State if
the merger is not completed. The option could have the effect of discouraging
other companies from trying to acquire City Commerce Bank and, therefore, may
make the merger more likely to occur.
In addition to the stock option, certain cash payments may be made under the
merger agreement in the event that a party terminates the merger agreement in
certain situations.
12
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
OF MID-STATE
The following selected consolidated financial data with respect to
Mid-State's consolidated statements of financial position as of December 31,
1998 and 1997 and its consolidated statements of
income for the years ended December 31, 1998, 1997 and 1996, have been derived
from the audited consolidated financial statement of Mid-State which are
incorporated by reference into this proxy statement/prospectus. The selected
consolidated financial data with respect to Mid-State's consolidated statements
of financial position as of December 31, 1996, 1995 and 1994 and its
consolidated statements of income for the years ended December 31, 1995 and 1994
have been derived from the audited consolidated financial statements of
Mid-State which are not incorporated by reference herein.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA--MID-STATE BANCSHARES
<TABLE>
<CAPTION>
YEAR-TO-DATE
--------------------------
MAR. 31, MAR. 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1998 1997 1996 1995 1994
- -------------------------------------- ------------ ------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Interest Income (not taxable
equivalent)......................... $ 21,315 $ 21,279 $ 86,960 $ 82,276 $ 75,416 $ 74,041 $ 68,533
Interest Expense...................... 5,712 6,511 25,992 25,560 24,150 23,685 19,716
------------ ------------ --------- --------- --------- --------- ---------
Net Interest Income................... 15,603 14,768 60,968 56,716 51,266 50,356 48,817
Provision for Loan Losses............. -- 150 300 30 227 875 2,790
------------ ------------ --------- --------- --------- --------- ---------
Net Interest Income after provision
for loan losses..................... 15,603 14,618 60,668 56,686 51,039 49,481 46,027
Non-interest income................... 3,710 4,168 22,881 16,460 15,819 14,720 13,338
Non-interest expense.................. 11,864 12,456 55,529 50,888 53,842 60,142 66,024
------------ ------------ --------- --------- --------- --------- ---------
Income before income taxes............ 7,449 6,330 28,020 22,258 13,016 4,059 (6,659)
Provision for income taxes............ 2,270 2,262 9,000 4,616 5,138 210 1,475
------------ ------------ --------- --------- --------- --------- ---------
Net Income............................ $ 5,179 $ 4,068 $ 19,020 $ 17,642 $ 7,878 $ 3,849 $ (8,134)
------------ ------------ --------- --------- --------- --------- ---------
------------ ------------ --------- --------- --------- --------- ---------
PER SHARE:
Net Income--basic..................... $ 0.51 $ 0.41 $ 1.90 $ 1.77 $ 0.79 $ 0.39 $ (0.83)
Net Income--diluted................... $ 0.51 $ 0.40 $ 1.88 $ 1.76 $ 0.79 $ 0.39 $ (0.83)
Weighted average shares for Basic
E.P.S. calculation.................. 10,082 9,994 10,031 9,965 9,948 9,900 9,779
Weighted average shares for Diluted
EPS calculation..................... 10,129 10,078 10,098 10,049 9,989 9,934 9,810
Cash dividends........................ 0.12 0.09 0.31 0.18 0.10 0.03 0.09
Book value at year-end................ 13.49 11.78 13.27 11.43 9.76 9.20 7.79
Ending Shares (adjusted for stock
dividends).......................... 10,096 9,997 10,078 9,980 9,962 9,938 9,867
BALANCE SHEET (AT END OF PERIOD)
Cash and cash equivalents............. $ 60,343 $ 82,839 $ 66,761 $ 92,180 $ 91,036 $ 87,631 $ 91,758
Investments and Fed Funds Sold........ 560,833 506,545 568,535 499,542 450,636 394,092 317,816
Loans, net of deferred fees, before
allowance........................... 551,438 539,317 551,780 540,878 509,020 480,362 515,135
Allowance for Loan & Lease Losses..... (12,435) (13,459) (12,901) (13,366) (13,141) (14,144) (15,629)
Other assets.......................... 61,756 65,981 60,781 67,111 76,277 95,061 115,861
------------ ------------ --------- --------- --------- --------- ---------
Total Assets........................ $1,221,935 $1,181,223 $1,234,956 $1,186,345 $1,113,828 $1,043,002 $1,024,941
------------ ------------ --------- --------- --------- --------- ---------
------------ ------------ --------- --------- --------- --------- ---------
Non-interest bearing deposits......... $ 201,476 $ 199,841 $ 224,516 $ 212,077 $ 189,578 $ 169,938 $ 164,780
Interest bearing deposits............. 865,778 853,770 864,159 851,269 811,425 767,940 767,523
Other borrowings...................... 4,715 4,456 3,049 4,494 7,424 5,589 8,992
Other liabilities..................... 13,733 5,346 9,508 4,476 8,205 8,057 6,762
Capital Accounts...................... 136,233 117,810 133,724 114,029 97,196 91,478 76,884
------------ ------------ --------- --------- --------- --------- ---------
Total Liabilities and Shareholders'
equity............................ $1,221,935 $1,181,223 $1,234,956 $1,186,345 $1,113,828 $1,043,002 $1,024,941
------------ ------------ --------- --------- --------- --------- ---------
------------ ------------ --------- --------- --------- --------- ---------
ASSET QUALITY
Non-accrual loans................... 1,450 1,681 1,899 3,467 4,619 14,114 26,089
Loans past due 90 days or more...... 1,686 1,066 4,399 663 2,801 2,048 5,531
Other real estate owned............. 206 3,242 259 3,480 7,838 11,814 15,123
------------ ------------ --------- --------- --------- --------- ---------
Total non performing assets......... 3,342 5,989 6,557 7,610 15,258 27,976 46,743
FINANCIAL RATIOS
For the year:
Return on assets.................... 1.71% 1.42% 1.59% 1.57% 0.74% 0.38% (0.78)%
Return on equity.................... 15.56% 14.35% 15.35% 16.67% 8.35% 4.53% (9.19)%
Net interest margin (not taxable
equivalent)....................... 5.68% 5.74% 5.69% 5.72% 5.62% 5.94% 5.66%
Net loan losses (recoveries) to avg.
loans............................. 0.35% 0.01% 0.14% (0.04)% 0.30% 0.48% 1.84%
Efficiency ratio.................... 61.4% 65.8% 66.2% 69.5% 80.3% 92.4% 106.2%
At period end:
Equity to average assets (leverage
ratio)............................ 10.8% 9.8% 10.5% 9.5% 8.6% 8.6% 8.3%
Tier One capital to risk-adjusted
assets............................ 17.2% 15.4% 16.7% 14.9% 13.7% 13.1% 12.3%
Total capital to risk-adjusted
assets............................ 18.5% 16.6% 17.9% 16.0% 15.0% 14.3% 13.5%
Loan loss allowance to loans,
gross............................. 2.3% 2.5% 2.3% 2.5% 2.6% 2.9% 3.0%
Non-accrual loans to total loans,
gross............................. 0.3% 0.3% 0.3% 0.6% 0.9% 2.9% 5.1%
Non performing assets to total
assets............................ 0.3% 0.5% 0.5% 0.6% 1.4% 2.7% 4.6%
Allowance for loan losses to non
performing loans.................. 397% 490% 205% 324% 177% 88% 49%
</TABLE>
14
<PAGE>
CITY COMMERCE BANK SELECTED FINANCIAL DATA
The following table presents selected historical financial data, including
per share information, for City Commerce Bank. The following financial data
should be read in conjunction with the financial statements of City Commerce
Bank included in this proxy statement/prospectus.
<TABLE>
<CAPTION>
PERIOD ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Interest income....................... $ 3,102 $ 2,869 $ 11,922 $ 10,815 9,801 $ 10,299 $ 9,070
Interest expense...................... 943 911 3,449 3,500 2,918 3,008 2,292
Net interest income................... 2,159 1,958 8,473 7,315 6,883 7,291 6,778
Provision (credit) for loan and lease
losses.............................. 15 -- -- 75 (220) 150 (150)
Other income.......................... 225 366 1,855 1,374 1,484 1,749 1,891
Other expenses........................ 1,599 1,797 6,777 6,786 6,754 7,129 6,980
Net income............................ 456 330 1,975 1,224 1,303 1,279 1,477
BALANCE SHEET (END OF PERIOD)
Total assets.......................... $ 149,578 $ 134,499 $ 154,370 $ 136,860 $ 126,842 $ 115,518 $ 113,349
Total loans........................... 121,471 96,790 123,701 102,797 91,398 81,242 72,968
Allowance for loan and lease losses... 1,567 1,698 1,540 1,699 1,420 1,654 1,627
Nonperforming loans(1)................ 136 405 129 472 716 578 1,981
Other real estate owned............... -- 1,708 -- 1,708 -- -- --
Total deposits........................ 130,943 115,813 135,804 118,632 111,460 101,494 100,899
Shareholders' equity.................. 17,302 16,474 17,367 16,058 14,830 13,422 11,586
BALANCE SHEET (PERIOD AVERAGE)
Total assets.......................... $ 148,883 $ 134,384 $ 134,468 $ 129,876 $ 118,589 $ 110,176 $ 110,359
Total loans........................... 120,906 100,470 100,250 94,999 80,552 75,482 71,080
Earning assets........................ 136,380 122,862 122,322 118,384 107,076 98,482 97,533
Total deposits........................ 129,926 116,051 115,165 105,726 103,735 96,465 98,516
Stockholders' equity.................. 17,230 16,559 17,113 15,591 14,227 12,812 11,008
Average stockholders' equity/ average
assets.............................. 11.57% 12.32% 12.73% 12.00% 12.00% 11.63% 9.97%
CAPITAL RATIOS
Leverage ratio........................ 11.51% 12.00% 11.17% 11.58% 11.45% 11.67% 9.97%
Tier 1 risk-based capital............. 12.36% 13.55% 12.19% 12.94% 13.17% 13.83% 13.68%
Total risk-based capital.............. 13.49% 14.98% 13.28% 14.35% 14.47% 14.99% 14.93%
ASSET QUALITY RATIOS
Nonperforming loans/total loans(1).... 0.11% 0.42% 0.10% 0.46% 0.78% 0.71% 2.71%
Nonperforming assets/total
assets(2)........................... 0.09% 1.57% 0.08% 1.59% 0.56% 0.50% 1.74%
Allowance for loan losses/
nonperforming loans................. 1,152% 419% 1,194% 360% 198% 286% 82%
Allowance of loan losses/total
loans............................... 1.29% 1.75% 1.24% 1.65% 1.55% 2.04% 2.23%
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (DOLLARS IN THOUSAND, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS
Return on average assets........ 1.23% 0.98% 1.47% 0.94% 1.10% 1.16% 1.34%
Return on average equity........ 10.53% 7.97% 11.54% 7.85% 9.16% 9.98% 13.42%
Net interest margin(3).......... 6.33% 6.37% 6.93% 6.18% 6.42% 7.11% 6.72%
Net interest spread(4).......... 5.27% 5.18% 5.72% 4.64% 5.28% 6.01% 5.96%
Average total loans to average
deposits...................... 93.06% 86.57% 87.05% 89.85% 77.65% 78.25% 72.15%
Efficiency ratio(5)............. 67.06% 77.36% 67.04% 78.10% 80.72% 78.86% 80.52%
PER SHARE INFORMATION
Basic earnings(6)............... $ 0.28 $ 0.19 $ 1.17 $ 0.73 0.80 0.79 0.92
Diluted earnings(7)............. $ 0.27 $ 0.19 $ 1.14 $ 0.68 0.77 0.78 0.92
Stock dividends declared........ -- -- 10.00% 5.00% 10.00% 10.00% 10.00%
Dividend payout ratio(8)........ -- -- -- -- -- -- --
Common shares outstanding at
period end(9)................. 1,633,301 1,546,110 1,663,795 1,505,543 1,430,870 1,272,501 1,149,823
Weighted average common shares
outstanding
--Basic....................... 1,646,749 1,696,834 1,689,724 1,671,076 1,638,253 1,609,765 1,606,935
Weighted average common shares
outstanding
--Diluted..................... 1,693,084 1,763,389 1,735,302 1,791,465 1,684,884 1,646,687 1,607,420
</TABLE>
- ------------------------
(1) Nonperforming loans consist of loans on nonaccrual and loans past due 90
days or more.
(2) Nonperforming assets consist of nonperforming loans and other real estate
owned.
(3) Net interest margin is net interest income expressed as a percentage of
average total interest-earning assets.
(4) Net interest spread is the difference between the yield on average total
interest-earning assets and cost of average total interest-bearing
liabilities.
(5) The efficiency ratio is the ratio of noninterest expense to the sum of net
interest income before provision for loan losses and total noninterest
income.
(6) Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period.
(7) Diluted earnings per share reflects the potential dilution that would occur
if securities or other contracts to issue common stock were exercised or
converted into the common stock or resulted in the issuance of common stock
that then shared in earnings.
(8) The dividend payout ratio consists of the cash dividends declared per share
of common stock divided by basic earnings per share of common stock.
(9) Based on shares outstanding at period end, excluding shares issuable upon
exercise of outstanding options. Shares outstanding at period end do not
reflect adjustment for subsequent stock dividends.
16
<PAGE>
SELECTED PROFORMA COMBINED FINANCIAL INFORMATION
The following selected unaudited pro forma combined financial information
has been prepared to reflect the effects of the merger on the historical results
of Mid-State. The pro forma combined financial information set forth below is
unaudited and not necessarily indicative of the results that will occur in the
future. The information has been prepared in anticipation of the merger being
accounted for as a pooling-of-interest under generally accepted accounting
principles. Consequently, the financial information of City Commerce Bank and
Mid-State have been combined as if they were historically one unit. Weighted
average shares outstanding of the pro forma combined institution assume an
exchange ratio of 0.7791 shares of Mid-State common stock for each share of City
Commerce Bank common stock. THE ACTUAL EXCHANGE RATIO MAY BE HIGHER OR LOWER.
17
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
AT OR FOR THE PERIOD
ENDED, MARCH 31, AT OR FOR THE YEAR ENDED,
-------------------------- ----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest income............................ $ 24,417 $ 24,148 $ 98,882 $ 93,091 $ 85,217
Interest expense........................... 6,655 7,422 29,441 29,060 27,068
------------ ------------ ------------ ------------ ------------
Net interest income........................ 17,762 16,726 69,441 64,031 58,149
Provision for loan losses.................. 15 150 300 105 7
------------ ------------ ------------ ------------ ------------
Net interest income after provision for
loan losses.............................. 17,747 16,576 69,141 63,926 58,142
Non-interest income........................ 3,935 4,534 24,736 17,834 17,303
Non-interest expense....................... 13,463 14,253 62,306 57,674 60,596
------------ ------------ ------------ ------------ ------------
Income before income taxes................. 8,219 6,857 31,571 24,086 14,849
Provision for income taxes................. 2,584 2,459 10,576 5,220 5,668
------------ ------------ ------------ ------------ ------------
Net income................................. $ 5,635 $ 4,398 $ 20,995 $ 18,866 $ 9,181
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income per share--basic................ $ 0.50 $ 0.39 $ 1.85 $ 1.67 $ 0.82
Net income per share--diluted.............. $ 0.49 $ 0.38 $ 1.83 $ 1.65 $ 0.81
Weighted average shares
outstanding--basic....................... 11,365 11,316 11,348 11,267 11,224
Weighted average shares
outstanding--diluted..................... 11,448 11,452 11,450 11,444 11,303
BALANCE AT PERIOD END:
Total assets............................... 1,371,513 1,315,722 1,389,326 1,323,205 1,240,670
Total loans, net........................... 658,907 620,950 661,040 628,610 585,857
Total deposits............................. 1,198,197 1,169,424 1,224,479 1,181,978 1,112,463
Other borrowings........................... 4,715 4,456 3,049 4,495 7,424
Total Shareholders' equity................. 151,441 134,284 151,091 130,087 112,026
Book value per share at period-end......... $ 13.20 $ 11.65 $ 13.17 $ 11.50 $ 9.99
Shares assumed outstanding for book
value.................................... 11,470 11,525 11,474 11,308 11,217
SELECTED STATISTICS:
Return on average total assets............. 1.66% 1.38% 1.58% 1.50% 0.78%
Return on average common shareholders
equity................................... 15.11% 13.49% 14.93% 15.58% 8.46%
Average equity to average total assets..... 11.0% 10.2% 10.6% 9.6% 9.2%
REGULATORY CAPITAL RATIOS:
Leverage ratio............................. 10.9% 10.0% 10.7% 9.7% 8.9%
Tier 1 risk based capital ratio............ 16.5% 15.2% 16.1% 14.7% 13.7%
Total risk based capital ratio............. 17.8% 16.4% 17.4% 15.8% 15.0%
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
MID- CITY PRO FORMA
PER COMMON SHARE STATE COMMERCE COMBINED
- -------------------------------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
NET INCOME
For the quarter ended March 31,
1999 - Basic.................................................................. $ 0.51 $ 0.28 $ 0.50
Diluted................................................................. $ 0.51 $ 0.27 $ 0.49
1998 - Basic.................................................................. $ 0.41 $ 0.19 $ 0.39
Diluted................................................................. $ 0.40 $ 0.19 $ 0.38
For the year ended December 31,
1998 - Basic.................................................................. $ 1.90 $ 1.17 $ 1.85
Diluted................................................................. $ 1.88 $ 1.14 $ 1.83
1997 - Basic.................................................................. $ 1.77 $ 0.73 $ 1.67
Diluted................................................................. $ 1.76 $ 0.68 $ 1.65
1996 - Basic.................................................................. $ 0.79 $ 0.80 $ 0.82
Diluted................................................................. $ 0.79 $ 0.77 $ 0.81
CASH DIVIDENDS
For the quarter ended March 31,
1999 -........................................................................ $ 0.12 $ -- $ 0.11
1998 -........................................................................ $ 0.09 $ -- $ 0.08
For the year ended December 31,
1998 -........................................................................ $ 0.31 $ -- $ 0.28
1997 -........................................................................ $ 0.18 $ -- $ 0.16
1996 -........................................................................ $ 0.10 $ -- $ 0.09
BOOK VALUE
As of March 31, 1999.......................................................... $ 13.49 $ 10.57 $ 13.20
As of March 31, 1998.......................................................... $ 11.78 $ 10.66 $ 11.65
As of December 31, 1998....................................................... $ 13.27 $ 10.44 $ 13.17
As of December 31, 1997....................................................... $ 11.43 $ 10.67 $ 11.50
As of December 31, 1996....................................................... $ 9.76 $ 10.36 $ 9.99
</TABLE>
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RISK FACTORS
IN DECIDING HOW TO VOTE YOUR SHARES AT THE MEETING, YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS, IN ADDITION TO THE INFORMATION AND OTHER MATTERS
SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS.
MID-STATE MAY BE UNABLE TO INTEGRATE SUCCESSFULLY OPERATIONS OR TO ACHIEVE
EXPECTED COST SAVINGS. The earnings, financial condition and prospects of
Mid-State after the merger will depend in part on Mid-State's ability to
integrate successfully the operations and management of City Commerce Bank and
to continue to implement its own business plan. We cannot assure you that
Mid-State will be able to effectively and profitably integrate the operations
and management of City Commerce Bank, or that Mid-State will be able to continue
to profitably implement its own business plan. Among the issues which Mid-State
could face are:
- unexpected problems with risks, operations, personnel, technology or
credit;
- loss of customers and employees of City Commerce Bank;
- difficulty in working with City Commerce Bank's employees and customers;
- the assimilation of new operations, sites and personnel could divert
resources from regular banking operations;
- Mid-State's new offices acquired in the merger may not generate enough
revenue to offset acquisition costs; and
- instituting and maintaining uniform standards, controls, procedures and
policies.
Further, although Mid-State's board of directors and City Commerce Bank's
board of directors do anticipate cost savings as a result of the merger to be
meaningful, Mid-State may be unable to fully realize any of the potential cost
savings expected. Finally, any cost savings which are realized may be offset by
losses in revenues or other charges to earnings.
THE COMBINED LOAN PORTFOLIOS MAY NOT PERFORM AS EXPECTED. Mid-State's
performance and prospects after the merger will be dependent to a significant
extent on the performance of the combined loan portfolios of City Commerce Bank
and Mid-State and ultimately on the financial condition of City Commerce Bank's
and Mid-State's borrowers and other customers. The existing loan portfolios of
City Commerce Bank and Mid-State differ to some extent in the types of
borrowers, industries and credits represented. In addition, there are
differences in the documentation, classifications, credit ratings and management
of the portfolios. As a result, Mid-State's overall loan portfolio after the
merger will have a different risk profile than the loan portfolio of either City
Commerce Bank or Mid-State before the merger. The performance of the combined
loan portfolio will be adversely affected if any of such factors is worse than
currently anticipated. In addition, to the extent that present customers are not
retained by the surviving bank or additional expenses are incurred in retaining
them, there could be adverse effects on future results of operations of
Mid-State following the merger. Realization of improvement in profitability is
dependent, in part, on the extent to which the revenues of Mid-State are
maintained and enhanced.
A DOWNTURN IN THE REAL ESTATE MARKET COULD NEGATIVELY IMPACT MID-STATE'S
BUSINESS. As of March 31, 1999, approximately 67% of the value of Mid-State's
loan portfolio and 52% of the value of City Commerce Bank's loan portfolio
consisted of loans secured by various types of real estate. Most of Mid-State
and City Commerce Bank's real property collateral is located in their market
areas. If real estate values decline significantly, especially in California,
higher vacancies and other factors could harm the financial condition of
borrowers, and the collateral for loans which would provide less security and
Mid-State would be more likely to suffer losses on defaulted loans.
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<PAGE>
THE MARKET PRICE OF MID-STATE COMMON STOCK AFTER THE MERGER IS
UNCERTAIN. The number of shares of Mid-State common stock which will be issued
to City Commerce Bank shareholders in the merger is determined by the "average
closing price" (as defined in the merger agreement) of Mid-State common stock.
The market price of Mid-State common stock on or after consummation of the
merger may not approximate the "average closing price" of Mid-State prior to the
merger.
YEAR 2000 ISSUES MAY CAUSE COMPUTER RELATED DISRUPTIONS. Like all financial
institutions, Mid-State Bank relies heavily on its computer and software
programs to accurately process and keep track of customer financial records and
transactions. Year 2000 related failure of this hardware or software, especially
if for an extended period of time, could pose a significant risk to the
viability of Mid-State. Management believes that its Year 2000 plan, especially
as it relates to its recent computer hardware and software conversion, fully
mitigates this direct risk from the Year 2000 problem. However, while Mid-State
has back-up generating capacity for its main-frame computer system and a
contingency plan for its implementation, an extensive and protracted power
outage throughout the Bank's system could prove difficult to mitigate.
Additionally, Year 2000 problems may negatively effect Mid-State's credit
customers and vendors which, in turn, could negatively impact Mid-State. While
Mid-State has taken a number of steps to mitigate these risks, no assurance can
be given that Year 2000 problems will not be experienced by Mid-State's credit
customers and vendors nor that such problems will not negatively impact
Mid-State.
SHARES AVAILABLE FOR FUTURE SALE MAY DILUTE VALUE AND HAVE POSSIBLE
ANTI-TAKEOVER EFFECT. Shares of Mid-State common stock eligible for future
sale, including in future acquisitions, could have a dilutive effect on the
market for Mid-State common stock and could adversely affect market prices. As
of June 30, 1999, the articles of incorporation of Mid-State authorize
50,000,000 shares of Mid-State common stock, of which 10,098,691 shares were
outstanding, and approximately 1,275,094 additional shares of Mid-State common
stock are anticipated to be issued in the merger to shareholders of City
Commerce Bank. The Mid-State articles of incorporation also authorize the
issuance of 25,000,000 shares of preferred stock of which none are currently
outstanding. Any new series of preferred stock could have rights, preferences
and privileges senior to those of Mid-State common stock.
Mid-State expects to continue to take advantage of the consolidation of the
financial services industry by developing its franchise through the acquisition
of financial institutions and related businesses. Such acquisitions may entail
the payment by Mid-State of consideration in excess of the book value of the
underlying net assets acquired, may result in the issuance of additional shares
of Mid-State stock or the incurring of indebtedness by Mid-State, and could have
a dilutive effect on the per share earnings or book value of Mid-State common
stock. Moreover, such acquisitions sometimes result in a significant front-end
charge against earnings, although costs savings, especially incident to
in-market acquisitions, also are anticipated.
The shares of Mid-State common and preferred stocks were authorized in these
amounts to provide Mid-State's board of directors with as much flexibility as
possible to effect, among other transactions, 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
Mid-State.
CHANGING INTEREST RATES MAY REDUCE MID-STATE'S NET INTEREST INCOME. Banking
companies' earnings depend largely on the relationship between the cost of
funds, primarily deposits, and the yield on earning assets. This relationship,
known as the interest rate spread, is subject to fluctuation and is affected by
economic and competitive factors which influence interest rates, the volume and
mix of interest-earning assets and interest-bearing liabilities, and the level
of nonperforming assets. Fluctuations in interest rates affect the demand of
customers for Mid-State's and City Commerce Bank's products and services.
Mid-State and City Commerce Bank are subject to interest rate risk to the
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degree that their interest-bearing liabilities reprice or mature more slowly or
more rapidly or on a different basis than their interest-earning assets. Given
Mid-State's and City Commerce Bank's current volume and mix of interest-bearing
liabilities and interest-earning assets, Mid-State's and City Commerce Bank's
interest rate spread could be expected to increase during times of rising
interest rates and, conversely, to decline during times of falling interest
rates. Therefore, significant fluctuations in interest rates may have an adverse
effect on Mid-State's results of operations.
CHANGING ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION IN ONE MARKET MAY
UNFAVORABLY IMPACT MID-STATE. The operations of Mid-State and City Commerce
Bank are located on the California Central Coast and concentrated in San Luis
Obispo and Santa Barbara Counties. As a result of this geographic concentration,
Mid-State's and City Commerce Bank's results depend largely upon economic
conditions in these areas. A deterioration in economic conditions in these
market areas could:
- increase loan delinquencies,
- increase problem assets and foreclosures,
- increase claims and lawsuits,
- decrease the demand for Mid-State's products and services, and
- decrease the value of collateral for loans, especially real estate, in
turn reducing customers' borrowing power, the value of assets associated
with problem loans and collateral coverage.
CHANGES IN GOVERNMENT REGULATION AND MONETARY POLICY MAY UNFAVORABLY IMPACT
MID-STATE. The banking industry is subject to extensive federal and state
supervision and regulation. Such regulation limits the manner in which Mid-State
and City Commerce Bank conduct their respective businesses, undertake new
investments and activities and obtain financing. This regulation is designed
primarily for the protection of the deposit insurance funds and consumers, and
not to benefit holders of Mid-State's or City Commerce Bank's common stocks.
Financial institution regulation has been the subject of significant legislation
in recent years, and may be the subject of further significant legislation in
the future, none of which is in the control of Mid-State or City Commerce Bank.
Significant new laws or changes in, or repeal of, existing laws may cause
Mid-State's or City Commerce Bank's results to differ materially. Further,
federal monetary policy, particularly as implemented through the Federal Reserve
System, significantly affects credit conditions for financial institutions,
primarily through open market operations in United States government securities,
the discount rate for bank borrowings and bank reserve requirements. Any
material change in these conditions would be likely to have a material impact on
Mid-State's and City Commerce Bank's respective results of operations.
INTENSE COMPETITION EXISTS FOR LOANS AND DEPOSITS. The banking and
financial services business in California generally, and in Mid-State's and City
Commerce Bank's market areas specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems and the
accelerating pace of consolidation among financial services providers. City
Commerce Bank and Mid-State compete for loans, deposits and customers for
financial services with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, insurance companies,
finance companies, money market funds, credit unions and other nonbank financial
service providers. Many of these competitors are much larger in total assets and
capitalization, have greater access to capital markets and offer a broader array
of financial services than City Commerce Bank or Mid-State. There can be no
assurance that Mid-State will be able to compete effectively in its markets, and
the results of operations of Mid-State and City Commerce Bank could be adversely
affected if circumstances affecting the nature or level of competition change.
LENDING RISK MAY LEAD TO LOSSES AND IMPAIRED CREDIT QUALITY. A significant
source of risk for financial institutions such as City Commerce Bank and
Mid-State arises from the possibility that losses
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<PAGE>
will be sustained because borrowers, guarantors and related parties may fail to
perform in accordance with the terms of their loans. Mid-State and City Commerce
Bank have adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for credit
losses, that each company's respective management believes are appropriate to
minimize this risk by assessing the likelihood of nonperformance, tracking loan
performance and diversifying the respective credit portfolios. Such policies and
procedures, however, may not prevent unexpected losses that could materially
adversely affect the results of operations. In addition, since real estate is an
essential part of both Mid-State's and City Commerce Bank's loan businesses, a
downturn in the real estate market could hurt Mid-State's business.
FORWARD LOOKING STATEMENTS
Certain statements contained in this proxy statement/prospectus or in
documents incorporated herein by reference, including, without limitation,
statements containing the words "believes," "anticipates," "intends," "expects"
and words of similar import, constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward looking statements, including
those found in "THE MERGER-- Management and Operations of Mid-State after the
Merger--Operations," involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements of
Mid-State or City Commerce Bank to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
- general economic and business conditions in those areas in which Mid-State
or City Commerce Bank operate;
- demographic changes;
- competition;
- fluctuations in interest rates;
- changes in business strategy or development plans;
- changes in governmental regulation;
- credit quality;
- the availability of capital to fund the expansion of Mid-State's or City
Commerce Bank's business;
- and other factors referenced in this proxy statement/prospectus or the
documents incorporated herein by reference.
Given these uncertainties, you are cautioned not to place undue reliance on
such forward-looking statements. Mid-State and City Commerce Bank disclaim any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
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<PAGE>
THE ANNUAL MEETING OF CITY COMMERCE BANK
GENERAL
An annual meeting of the shareholders of City Commerce Bank will be held at
the Downtown Office, 33 East Carrillo Street, Santa Barbara, California 93101 on
Tuesday, August 10, 1999 at 6:00 p.m., local time.
At the annual meeting, the holders of the common stock of City Commerce Bank
will vote on
- the approval of the principal terms of the merger;
- the election of eight persons to serve as directors until the 2000 annual
meeting or until the merger is completed; and
- such other business as may properly come before the annual meeting or any
adjournments or postponements thereof.
RECORD DATE; SOLICITATION OF PROXIES
The close of business on July 6, 1999 has been selected as the record date
for the determination of shareholders entitled to notice of, and to vote at, the
annual meeting. At that date, there were 1,636,624 outstanding shares of City
Commerce Bank common stock entitled to vote at the annual meeting.
In addition to soliciting proxies by mail, officers, directors and employees
of City Commerce Bank, without receiving any additional compensation, may
solicit proxies by telephone, fax, in person or by other means. Arrangements
will also be made with brokerage firms and other custodians, nominees and
fiduciaries to forward proxy solicitation materials to the beneficial owners of
City Commerce Bank common stock held of record by such persons, and City
Commerce Bank will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of pocket expenses incurred by them in connection
therewith. Mid-State will pay all expenses related to printing and filing this
proxy statement/ prospectus, including all filing fees of the Securities and
Exchange Commission.
The required quorum for the transaction of business at the annual meeting is
a majority of the shares of City Commerce Bank common stock entitled to vote at
the annual meeting. Shares voted in a matter are treated as being present for
purposes of establishing a quorum. Abstentions and broker nonvotes will be
counted for determining a quorum, but will not be counted for purposes of
determining the number of votes cast "FOR" or "AGAINST" any matter.
REVOCABILITY OF PROXIES
Any holder of City Commerce Bank common stock may revoke a proxy at any time
before it is voted by filing with the secretary of City Commerce Bank an
instrument revoking the proxy or by returning a duly executed proxy bearing a
later date, or by attending the annual meeting and voting in person. Any such
filing should be made to the attention of the Secretary, City Commerce Bank, 33
East Carrillo Street, Santa Barbara, California 93101. Attendance at the annual
meeting will not by itself constitute revocation of a proxy.
MATTERS TO BE CONSIDERED AT THE MEETING
PROPOSAL NO. 1--APPROVAL OF THE MERGER. At the annual meeting, you will be
asked to approve the principal terms of the merger and the merger agreement. A
vote of a majority of the outstanding shares of City Commerce Bank common stock
entitled to be cast at the annual meeting is required to approve the merger.
AFTER CAREFUL CONSIDERATION, CITY COMMERCE BANK'S BOARD OF DIRECTORS, BY
UNANIMOUS VOTE OF THE DIRECTORS, HAS DETERMINED THAT THE MERGER IS FAIR TO AND
IN THE BEST INTERESTS OF THE
24
<PAGE>
SHAREHOLDERS OF CITY COMMERCE BANK. ACCORDINGLY, THE CITY COMMERCE BANK BOARD
HAS UNANIMOUSLY APPROVED THE MERGER. YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE
"FOR" THIS PROPOSAL.
PROPOSAL NO. 2--ELECTION OF DIRECTORS. At the annual meeting you will also
be asked to elect eight persons to serve as directors.
The board of directors has nominated the following persons to serve as
directors:
<TABLE>
<S> <C> <C>
William J. Blythe Carl E. Lindros
Roger P. Duncan John R. Mackall
Betty M. Hatch C. Brian O'Gorman
H. Edward Heron Eloy U. Ortega
</TABLE>
In the election of directors, shareholders may vote their shares
cumulatively if, prior to the voting, a shareholder present and voting at the
annual meeting gives notice to the chairman of the meeting that he or she
intends to vote cumulatively. If any shareholder of City Commerce Bank gives
such notice, then all shareholders will be entitled to cumulate their votes.
Cumulative voting allows a shareholder to cast a number of votes equal to the
number of shares held in his or her name as of the record date, multiplied by
the number of directors to be elected. This total number of votes may be cast
for one nominee, or distributed among as many nominees or in whatever proportion
as the shareholder chooses. If cumulative voting is declared at the meeting, the
proxy holders will have discretion to cumulate the votes represented by any
proxy delivered under this proxy statement/prospectus, and vote them in
accordance with the recommendations of the City Commerce Bank's management.
PROPOSAL 1
THE MERGER
GENERAL
The board of directors of City Commerce Bank has approved the merger and the
merger agreement, which provides for the merger of City Commerce Bank with and
into Mid-State Bank, the banking subsidiary of Mid-State. Upon completion of the
merger, the separate corporate existence of City Commerce Bank will end. This
section of the proxy statement/prospectus describes certain aspects of the
merger, including the background of the merger and City Commerce Bank's reasons
for the merger.
BACKGROUND AND REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS
City Commerce Bank, based in Santa Barbara County, California, has conducted
general banking operations to serve individuals and small- to medium-sized
businesses since September 11, 1978. In serving individuals, small businesses
and mid-market corporations, City Commerce Bank historically has focused on a
community-based approach to banking.
In early 1998, the board of directors evaluated the banking marketplace, the
economic cycle and the historically high acquisition prices being paid for banks
of City Commerce Bank's size. The board of directors was concerned about the
rapid changes occurring in the banking industry in central and southern
California. Tremendous consolidation had taken place, especially in 1996, 1997
and 1998. To effectively compete with other, more efficient financial
institutions, City Commerce Bank's board of directors and management knew that
they had to continue to increase its core deposit base as well as its loan
portfolio, or substantially modify their business practices to a less costly
process. Although the board believed that City Commerce Bank was in a position
to do this, because of the particularly high
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<PAGE>
acquisition prices seen during the first three quarters of 1998, the board
agreed to entertain offers for purchasing the bank as well as looking at
possible acquisitions.
From time to time in 1998 and early in 1999, City Commerce Bank had meetings
and discussions with respect to potential acquisitions and business
combinations. The institutions discussing certain business combinations with
City Commerce Bank were only those institutions that focused on the
community-based approach to banking and were located in markets that would
provide City Commerce Bank with both strategic and synergistic benefits. One of
the institutions with which City Commerce Bank had discussions was Mid-State.
After several informal discussions, the board of directors saw the
advantages of a potential business combination with Mid-State. At the same time,
City Commerce Bank recognized the opportunity to participate in a larger
regional, independent financial institution in the Santa Barbara county market.
In the first quarter of 1999, the principals of City Commerce Bank and
Mid-State met several times to have preliminary discussions regarding the
possible synergies between the companies. City Commerce Bank and Mid-State
thereafter discussed a possible combination of the companies. In early March
1999, a confidentiality agreement was executed to facilitate mutual due
diligence and transfers of information. Both City Commerce Bank and Mid-State
conducted due diligence during various periods in March 1999. Also in early
March 1999, Mid-State presented an offer to City Commerce Bank that provided for
a financial structure of a tax-free exchange of stock to be accounted for on a
pooling-of-interest basis, and such offer was thereafter thoroughly discussed
with the City Commerce Bank board of directors. At meetings over the following
several weeks, the principals of City Commerce Bank and Mid-State further
discussed a proposed merger involving City Commerce Bank, Mid-State and
Mid-State Bank. The City Commerce Bank board of directors also authorized
management to select appropriate legal counsel and a financial advisor to advise
it on the strategic alternatives available to City Commerce Bank. Thereafter,
City Commerce Bank retained Knecht & Hansen as its legal counsel and The Findley
Companies as its financial advisor to issue a fairness opinion in connection
with City Commerce Bank's consideration of the merger proposal from Mid-State.
At the April 5, 1999, meeting of the City Commerce Bank board of directors,
Mr. Ortega described the results of the due diligence and the operations of the
Mid-State and Mid-State Bank. The members of the board of directors and advisors
to City Commerce Bank discussed in detail the proposed merger terms and plans
for City Commerce Bank's officers and staff following the proposed merger. The
City Commerce Bank board considered this information and then authorized
representatives of City Commerce Bank to continue negotiating a tentative merger
agreement between City Commerce Bank, Mid-State and Mid-State Bank.
Negotiations continued between the representatives of City Commerce Bank and
Mid-State, and on April 15, 1999, the City Commerce Bank board deliberated at
length concerning the transaction. The City Commerce Bank board reviewed the
merger agreement and related documents, its strategic alternatives, the
competitive banking environment in California, and the prospects for City
Commerce Bank if it remained independent. At this meeting, Findley discussed
with the City Commerce Bank board its analysis of the merger and delivered to
the City Commerce Bank board its opinion that the consideration to be received
in the merger was fair to the City Commerce Bank shareholders from a financial
point of view. Thereafter, the City Commerce Bank board unanimously approved,
and authorized the execution of, the merger agreement.
The City Commerce Bank board believes that the terms of the merger are fair,
and are in the best interests of City Commerce Bank and its shareholders and
recommends that the shareholders of City Commerce Bank vote FOR approval of the
merger.
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<PAGE>
In reaching its conclusion, the City Commerce Bank board considered
information provided at meetings of its board of directors in March 1999 and
April 1999, including, among other things:
- information concerning the financial performance and condition, business
operations, capital levels, asset quality, loan portfolio breakdown, due
diligence review of the loan portfolio, material contracts, contingent
liabilities, Year 2000 preparedness, management, and prospects of
Mid-State and Mid-State Bank;
- the structure of the transaction, including the fact that the City
Commerce Bank shareholders would receive approximately 11.33% of the
common stock of Mid-State;
- the fact that one member of the board of City Commerce Bank would be
appointed to the boards of Mid-State and Mid-State Bank at the effective
time of the merger, and that the total number of directors of Mid-Sate and
Mid-State Bank would total eleven;
- the terms of the merger agreement and other documents to be executed in
connection with the merger, including the substantial premium over book
value and the substantial multiple over earnings of City Commerce Bank;
- the presentation of Findley and the opinion of Findley that the merger is
fair to the shareholders of City Commerce Bank from a financial point of
view;
- the positive results of City Commerce Bank's due diligence examination of
Mid-State and Mid-State Bank;
- the prices paid and the terms of other recent comparable combinations of
banks and bank holding companies;
- the City Commerce Bank board's review with its legal and financial
advisors of alternatives to the merger, the range of possible values to
City Commerce Bank shareholders obtainable through implementation of
alternatives and the timing and likelihood of the same;
- the current and prospective economic environment and increasing regulatory
and competitive burdens and constraints facing community banks;
- the pro forma financial statements of the combined companies and the
capitalization of the combined companies;
- the City Commerce Bank board's review with its legal and financial
advisors of potential merger targets;
- the compatibility of City Commerce Bank with Mid-State and Mid-State Bank
and the complementary lines of business;
- the geographic distribution of Mid-State Bank offices vis-a-vis City
Commerce Bank's banking offices and strategic plan;
- the advantages of being part of a larger entity, including the potential
for operating efficiencies, the effect of a higher lending limit on City
Commerce Bank's customers and prospective customers, and the generally
higher trading multiples of larger financial institutions;
- the business strategies, the strength and depth of management of the
combined entity and the extent of their interest in continuing the City
Commerce Bank's significant business relationships in Santa Barbara and
Ventura counties;
- the ability of a larger institution to compete in the banking environment
and to leverage overhead costs;
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<PAGE>
- the anticipated positive effect of the merger on existing shareholders,
employees, officers and customers of City Commerce Bank;
- information concerning the ability of City Commerce Bank and Mid-State
Bank to achieve operating efficiencies;
- the anticipated positive impact on the communities served by City Commerce
Bank and Mid-State Bank in the merger, and the increased ability to serve
the communities through the larger branch network;
- the unprecedented consolidation currently underway in the banking industry
and increased competition from larger independent banks in California;
- the value of the consideration offered by Mid-State compared to the value
of the consideration offered in other acquisitions of financial
institutions in California in 1996, 1997 and 1998, and the prospects for
enhanced value of the combined entity in the future;
- the tax-free nature of the Mid-State offer;
- the Mid-State common stock to be issued in the merger to the City Commerce
Bank shareholders will be listed on Nasdaq's National Market and the
future liquidity of the Mid-State common stock; and
- the prospect for City Commerce Bank on a stand alone basis and on the
basis of alternative stand alone strategies, such as dividends, share
repurchases, restructurings and growth through acquisitions.
In addition to the advantages, discussed in the previous paragraph, of a
merger with a larger financial institution, the board of directors and
management of City Commerce Bank also discussed the various risks of combining
with Mid-State and Mid-State Bank, including
- the disadvantages of being part of a larger entity, including
substantially reduced voting power for the board of directors of Mid-State
and the potential for decreased customer service;
- the integration of City Commerce Bank and Mid-State Bank will divert the
combined entities' management from other activities; and
- since City Commerce Bank's market area is located generally in Santa
Barbara and Ventura counties, with generally little geographical overlap
in the market areas of City Commerce Bank and Mid-State Bank, the merger
will introduce the combined entity to new markets and cultures, and no
assurance can be given that the combined entities' policies, procedures
and products will prove successful in the combined market areas and in a
combined commercial and consumer culture.
However, after weighing the advantages and disadvantages of a merger with
Mid-State and Mid-State Bank, the City Commerce Bank board of directors
determined that the advantages clearly outweighed the disadvantages. For
example,
- the substantially larger lending limits of the combined entity will better
serve customers and prospective customers of City Commerce Bank;
- the prospects of the combined entity are substantially greater than the
prospects of City Commerce Bank on a stand alone basis;
- the liquidity of the Mid-State stock to be received by the City Commerce
Bank shareholders would be substantially greater than the current
liquidity of City Commerce Bank stock; and
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<PAGE>
- the substantial premium over book and the substantial multiple over
earnings being paid by Mid-State in the merger.
The managements of City Commerce Bank and Mid-State also saw opportunities
for increased operating efficiencies. In particular, the managements believe
that cost savings can be achieved as a result of economies of scale, the
consolidation of executive management and elimination of certain redundant
staff, the consolidation of data processing and operations activities and the
elimination of duplicative administrative functions. There can be no assurance
that Mid-State and Mid-State Bank will be able to realize fully the increased
operating efficiencies or that such operating efficiencies will be realized in a
timely manner. See "Management and Operations of Mid-State after the Merger--
Operations."
The managements of City Commerce Bank and Mid-State Bank also believe that
each complements each other both in their community-based approach to banking
and in terms of geographic service areas. Consequently, City Commerce Bank and
Mid-State believe that by combining forces, City Commerce Bank and Mid-State
will be able to more effectively compete and successfully to take advantage of
banking opportunities in the central California market.
The foregoing discussion of the information and factors considered by the
City Commerce Bank board of directors is not intended to be exhaustive, but
constitutes the material factors considered by the City Commerce Bank board of
directors. In reaching its determination to approve and recommend the principal
terms of the merger, the City Commerce Bank board did not assign relative or
specific weights to the foregoing factors and individual directors may have
weighed such factors differently.
For the reasons set forth above, the City Commerce Bank board of directors
has unanimously approved the merger agreement as in the best interest of City
Commerce Bank and its shareholders and unanimously recommends that the City
Commerce Bank shareholders approve the principal terms of the merger.
FAIRNESS OPINION OF THE FINDLEY GROUP
City Commerce Bank has retained The Findley Group ("Findley") to act as its
financial advisor in connection with the merger pursuant to an engagement letter
dated March 8, 1998. Findley has rendered to the board of directors of City
Commerce Bank its written opinion dated April 19, 1999, as affirmed on July 7,
1999, pursuant to the terms of the merger agreement that, subject to the
assumptions and limitations set forth therein, the exchange ratio is fair, from
a financial point of view, to the holders of the shares of City Commerce Bank
common stock. A copy of the opinion dated April 19, 1999 of Findley is attached
as Appendix B to this proxy statement/prospectus and should be read in its
entirety. The following summary is qualified in its entirety by reference to the
full text of the opinion. This opinion is addressed to the board of directors of
City Commerce Bank and does not constitute a recommendation to any shareholder
of City Commerce Bank as to how such shareholder should vote at the City
Commerce Bank meeting.
In connection with its fairness opinion, Findley, among other things:
- reviewed certain publicly available financial and other data with respect
to City Commerce Bank and Mid-State, including the consolidated financial
statements for recent years and interim periods to March 31, 1999, and
certain other relevant financial and operating data relating to City
Commerce Bank and Mid-State made available to Findley from published
sources and from the internal records of City Commerce Bank;
- reviewed the merger agreement;
- reviewed certain historical market prices and trading volumes of City
Commerce Bank and Mid-State common stocks;
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- compared City Commerce Bank and Mid-State from a financial point of view
with certain other banks and bank holding companies that Findley deemed to
be relevant;
- considered the financial terms, to the extent publicly available, of
selected recent business combinations of banks and bank holding companies
that Findley deemed to be comparable, in whole or in part, to the merger;
- reviewed and discussed with representatives of the management of City
Commerce Bank certain information of a business and financial nature
regarding City Commerce Bank and Mid-State furnished to Findley by City
Commerce Bank, including financial forecasts and related assumptions of
City Commerce Bank and Mid-State;
- made inquiries regarding and discussed the merger and the merger agreement
and other matters related thereto with City Commerce Bank's counsel; and
- performed such other analyses and examinations as Findley deemed
appropriate.
For its evaluation Findley used an exchange ratio under the terms of the merger
agreement of 0.7791, which is based upon Mid-State having an "average closing
price" (as defined in the merger agreement) of between $26.60 and $30.91. Based
upon an exchange ratio of 0.7791, the equivalent value was $21.52. If
Mid-State's "average closing price" is above $30.91, the exchange ratio will be
modified according to the merger agreement, and a City Commerce Bank shareholder
will receive equivalent value of $24.08. As of July 8, 1999, Mid-State's common
stock was trading in excess of $30.91. Based upon such a modified exchange
ratio, the equivalent value would be higher than the $21.52 equivalent value
initially considered by Findley.
CONTRIBUTION ANALYSIS. Findley analyzed the contribution of each City
Commerce Bank and Mid-State to, among other things, common equity and net income
of the pro forma combined companies for the period ending December 31, 1998.
This analysis showed, among other things, that based on pro forma combined
balance sheets and income statements for City Commerce Bank and Mid-State as of
December 31, 1998, City Commerce Bank would have contributed approximately
11.07% of the deposits, 11.6% of the shareholder equity of the combined
companies (before costs savings and revenue enhancements), 18.47% of net loans
and 9.30% of 1998 net income. Based upon the stock consideration to be paid in
the merger as provided in the merger agreement, the City Commerce Bank
shareholders would own approximately 11.33% of the combined company before
giving effect to all outstanding options.
DISCOUNTED CASH FLOW ANALYSIS. Findley examined the results of a discounted
cash flow analysis designed to compare the exchange ratio with the present
value, under certain assumptions, that would be attained if City Commerce Bank
remained independent through 2002, at which time City Commerce Bank was acquired
by a larger financial institution. The cash flows for the combined companies
assumed that the exchange ratio equals 0.7791 shares of Mid-State common stock
for each share of City Commerce Bank common stock. The results produced in the
analyses did not purport to be indicative of actual values or expected values of
City Commerce Bank or the combined companies at such future date. All cases were
analyzed assuming realization of operating cost savings, estimated by the
parties, in the amounts and time periods forecasted by the parties.
The discount rates used ranged from 10% to 14%. For the City Commerce Bank
stand alone analysis, the terminal price multiples applied to the 2002 estimated
earnings per share ranged from 12.0 to 20.0. The lower levels of the price to
earnings values multiples range reflected an estimated future trading range of
City Commerce Bank or the combined companies, while the higher levels of the
price to earnings value multiples range were more indicative of a future sale of
City Commerce Bank or the combined companies to a larger financial institution.
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For the City Commerce Bank stand alone analysis, the cash flows were
comprised of the projected stand alone dividends of $0.48 per share in years
1999 through 2002 plus the terminal value of City Commerce Bank common stock at
the year-end 2002 (calculated by applying each one of the assumed terminal price
to earnings value multiples as stated above to the 2002 projected City Commerce
Bank earnings per share). A similar analysis was done for the Mid-State using no
cash dividend rates for the combined companies. The discount rates described
above were then applied to these cash flows to obtain the present values per
share of City Commerce Bank common stock.
Under a most likely scenario, the Findley analysis assumed that projected
earnings, among other things, would be achieved; that projected operating cost
savings and revenue enhancements are a minimum of $1,000,000 realized (for the
combined companies case) a present value discount rate of 12% and a terminal
price to earnings value multiple of 20.0. Assuming City Commerce Bank remains
independent through 2002 and is then acquired by a larger financial institution,
at an earnings value multiple of 20.0 a holder of one share of City Commerce
Bank common stock today would receive cash flows with a present value of $28.05.
Assuming the merger is consummated and that combined companies remain
independent through 2002 and is then acquired by a larger financial institution,
a holder of one share of City Commerce Bank common stock today would receive
cash flows with a present value of at least $33.40. In comparison to these
ranges of value, the value for Mid-State common stock on April 16, 1999, the
last trading day before the announcement of the merger, was its closing price of
$27.625 per share. Based upon a exchange ratio of 0.7791, the equivalent value
was $21.52. On July 8, 1999, the closing price for a share of Mid-State common
stock was $34.94. If such amount were later to become the "average closing
price," the equivalent value would be $24.08. These analyses do not purport to
be indicative of actual values or expected values of the shares of City Commerce
Bank common stock. Discounted present value analysis is a widely used valuation
methodology which relies on numerous assumptions, including asset and earnings
growth rates, dividend payout rates, terminal values and discount rates. The
analysis showed that use of a higher (lower) level of projected earnings raised
(lowered) the resulting present value for a given level of City Commerce Bank
earnings, on a pro forma combined basis. The analysis also showed that use of a
lower (higher) discount rate or a higher (lower) terminal price-to-earnings per
share multiple raised (lowered) the calculated present values.
ANALYSIS OF SELECTED BANK MERGER TRANSACTIONS. Findley reviewed the
consideration paid in recently completed transactions whereby certain banks and
bank holding companies were acquired. Specifically, Findley reviewed 88
transactions involving acquisitions of selected banks in California completed
since January 1, 1996 (the "California Acquisitions"). For each bank acquired in
such transactions, Findley compiled figures illustrating, among other things,
the ratio of the premium (I.E., purchase price in excess of book value) to
deposits, purchase price to book value, and purchase price to previous year's
earnings.
The figures for all banks acquired in the California Acquisitions produced:
(a) a median percentage of premium to deposits of 6.93%; (b) a median ratio of
purchase price to book value of 1.68; and (c) a median ratio of purchase price
to previous year's earnings of 16.95. Findley analyzed California bank merger
and acquisition transactions where the total target asset size was $50 million
and less than $250 million for the period January 1, 1998 to December 31, 1998.
The transactions analyzed were: Harbor Bancorp and City National Corporation,
California Community Bancshares Corp and Sierra West Bancorp, DNB Financial Corp
and BYL Bancorp, Republic Bank and First Banks Inc., Bank of Los Angeles and
Western Bancorp, First Sate Bank of Southern California and Popular Inc., Downey
Bancorp and California Financial Bancorp, Channel Islands Bank and Americorp,
PNB Financial Group Inc. and Western Bancorp and The Bank of Orange County and
California Financial Bancorp. The figures for these 10 banks acquired in
California in 1998 produced: (a) a median percentage of premium to deposits of
11.45%; (b) a median ratio of purchase price to book value of 2.18; and (c) a
median ratio of purchase price to previous year's earnings of 21.17.
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In comparison, assuming that the exchange ratio to be paid in the merger
equals $22.20 per share (using a value for Mid-State of $28.50 per share),
Findley determined that the exchange ratio in the merger based upon December 31,
1998 information and including City Commerce Bank stock options represented a
percentage of premium to deposits of 14.25%, a ratio of purchase price to book
value of 2.16 and a ratio of purchase price to 1998 earnings of 18.66.
No other company or transaction used in the above analysis as a comparison
is identical to City Commerce Bank, Mid-State or the merger. Accordingly, an
analysis of the results of the foregoing is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other factors that
could affect the public trading value of the companies to which City Commerce
Bank, Mid-State and the merger are being compared.
COMPARABLE COMPANY ANALYSIS. Using public and other available information,
Findley compared certain financial ratios of City Commerce Bank and Mid-State
(including the ratio of net income to average total assets ["return on average
assets"], the ratio of net income to average total equity ["return on average
equity"], the ratio of average equity to average assets and certain credit
ratios) for the years ending December 31, 1997 and December 31, 1998 to a peer
group consisting of 20 selected banks and bank holding companies located in
California. No company used in the analysis is identical to City Commerce Bank
or Mid-State. The analysis necessarily involved complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies. The results of this analysis indicated that Mid-State performed
ahead of peer group level on the basis of profitability in 1997 and 1998 and
City Commerce Bank performed at peer group levels on the basis of profitability
in 1997 and 1998. City Commerce Bank's return on average assets and return on
average equity for 1997 and 1998 were similar to peer group levels, inclusive of
its interest spread factors (interest earned on assets minus interest paid on
liabilities). City Commerce Bank's and Mid-State's performances in 1997 and
1998, showed better than peer group levels concerning non-performing assets.
City Commerce Bank's non-interest expense, inclusive of payroll expense,
quarters expense and other related non-interest expenses were lower than peer
group level. Mid-State's return on average assets, return on average equity for
1997 and 1998 was ahead of peer group levels.
The foregoing summarizes the material portions of Findley's report, but does
not purport to be a complete description of the presentation by Findley to City
Commerce Bank's board of directors or of the analyses performed by Findley. The
preparation of a fairness opinion is not necessarily susceptible to partial
analysis or summary description. Findley believes that its analyses and the
summary set forth above must be considered as a whole and that selecting a
portion of its analyses and of the factors considered, without considering all
analyses and factors would create an incomplete view of the process underlying
the analyses set forth in its presentation to the City Commerce Bank board of
directors.
In performing its analyses, Findley made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Mid-State or City Commerce
Bank. The analyses performed by Findley are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. Such analyses were prepared solely as
part of Findley's analysis of the fairness, from a financial standpoint, of the
merger to City Commerce Bank's shareholders and were provided to the City
Commerce Bank board of directors in connection with the delivery of Findley's
opinion. The analyses do not purport to be appraisals or to reflect the prices
at which any securities may trade at the present time or at any time in the
future. Findley used in its analyses various projections of future performance
prepared by the management of City Commerce Bank. The projections are based on
numerous variables and assumptions which are inherently unpredictable and must
be considered not certain of occurrence as projected. Accordingly, actual
results could vary significantly from those set forth in such projections.
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In rendering its fairness opinion, Findley relied upon and assumed without
independent verification the accuracy and completeness of all of the financial
and other information reviewed by Findley for purposes of its opinion. Findley
did not make an independent evaluation or appraisal of the assets and
liabilities of Mid-State, City Commerce Bank or any of their respective
subsidiaries. City Commerce Bank did not impose any limitations or restrictions
with respect to the scope of Findley's investigation or the procedures or
methods it followed, or with regard to any other matters relating to Findley's
rendering of the opinion regarding the fairness of the merger. Findley did not
participate in negotiations regarding the merger agreement.
City Commerce Bank's board of directors selected and instructed Findley to
render an opinion with respect to the fairness of the merger to City Commerce
Bank's shareholders from a financial point of view based on its belief that
Findley is experienced and qualified in such matters. Findley has extensive
experience in the evaluation of banks in connection with mergers and
acquisitions, and valuations for corporate and other purposes. In over 40 years
of bank consulting, Findley has been involved in the creating, developing,
merging and acquisition of hundreds of financial institutions.
Pursuant to the engagement letter, City Commerce Bank agreed to pay Findley
a fee of $10,000 for Findley's services rendered to City Commerce Bank in
connection with the fairness opinion plus time and expenses. City Commerce Bank
has agreed to indemnify Findley against certain liabilities and expenses in
connection with its services as financial advisor to City Commerce Bank.
EXCHANGE RATIO
When the merger is completed, you will receive a fraction of a share of
Mid-State common stock for each share of City Commerce Bank common stock that
you hold when the merger closes with the exchange ratio depending on the
"average closing price" of Mid-State common stock. Cash will be paid instead of
fractional shares.
"Average closing price" means the average daily closing price of Mid-State
common stock during the 20 trading days that Mid-State's stock trades ending on
the fifth trading day immediately before the effective day of the merger.
If the "average closing price" is between $26.60 and $30.91, the exchange
ratio will be .7791 of a share of Mid-State common stock for each share of City
Commerce Bank common stock. For example, if the "average closing price" was
within that range and you hold 110 shares of City Commerce Bank common stock at
the closing of the merger, you will have the right to receive 85.701 shares of
Mid-State common stock in the merger. Since cash will be paid instead of
fractional shares, you would only receive 85 shares of Mid-State common stock
and a check in an amount equal to .701 of a share multiplied by the "average
closing price" of Mid-State stock. Subject to such assumptions and based on the
number of shares of City Commerce Bank common stock outstanding on June 30,
1999, Mid-State would issue approximately 1,275,099 shares of Mid-State common
stock in the merger, representing approximately 11.21% of the number of shares
of Mid-State common stock that will be outstanding after the merger.
If the "average closing price" is more than $30.91, the exchange ratio will
be reduced. YOU SHOULD BE AWARE THAT MID-STATE COMMON STOCK CLOSED AT $34.94 ON
JULY 8, 1999. The reduced exchange ratio would be determined by:
- dividing $30.91 by the "average closing price", and
- multiplying such product by .7791.
For example, if the "average closing price" were $33.00, you would receive .7298
of a share of Mid-State common stock for each share of City Commerce Bank common
stock, and not .7791.
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If the "average closing price" is less than $26.60, several alternatives may
occur:
- the exchange ratio may remain at .7791, or
- Mid-State may increase the exchange ratio so that it would then be
calculated by dividing $20.72 by the "average closing price", or
- if Mid-State does not increase the exchange ratio, City Commerce Bank will
have the right to terminate the merger, subject to certain rights of City
Commerce Bank or Mid-State to reinstate the merger.
Specifically, if the "average closing price" is below $26.60 AND Mid-State
does not increase the exchange ratio, City Commerce Bank may (but will not be
required) to terminate the merger agreement at any time during the two day
period following the calculation of the "average closing price" by giving
written notice to Mid-State. City Commerce Bank could withdraw such notice at
any time during such two day period. Mid-State may reinstate the merger
agreement within two days of receipt of any such notice of termination by City
Commerce Bank by adjusting the exchange ratio to provide shareholders of City
Commerce Bank a price in Mid-State common stock equal to $20.72 (as a result the
exchange ratio shall then be calculated by dividing $20.72 by the "average
closing price").
Because the price of Mid-State common stock fluctuates, you will not know
the value of the shares of Mid-State common stock which you will receive in the
merger when you vote. The market value of Mid-State shares at the time of the
merger could be higher or lower than the current market value.
EXCHANGE PROCEDURES
As soon as practicable after the effective time of the merger, ChaseMellon
Shareholder Services (the exchange agent designated pursuant to the merger
agreement) will mail to each holder of record of outstanding shares of City
Commerce Bank common stock a letter of transmittal which is to be used by each
City Commerce Bank shareholder to return to the exchange agent the stock
certificates representing the City Commerce Bank common stock owned by him,
which certificates should be duly endorsed in blank by such the shareholder. As
soon as practicable after receiving such certificates from a shareholder
together with the duly executed letter of transmittal and any other items
specified by the letter of transmittal, the exchange agent will deliver to such
shareholder new certificates representing the appropriate number of shares of
Mid-State common stock, together with a check for payment of cash in lieu of
fractional shares. No dividends or other distributions that are declared on
Mid-State common stock will be paid to persons otherwise entitled to receive the
same until the City Commerce Bank certificates have been surrendered in exchange
for the Mid-State certificates, but upon such surrender, such dividends or other
distributions, from and after the effective time of the merger, will be paid to
such persons in accordance with the terms of Mid-State common stock. No interest
will be paid to the City Commerce Bank shareholders on the cash or the value of
the Mid-State common stock into which their shares of City Commerce Bank common
stock will be exchanged.
YOU SHOULD NOT SEND IN YOUR STOCK CERTIFICATES UNTIL YOU RECEIVE THE LETTER
OF TRANSMITTAL FORM AND INSTRUCTIONS.
REGULATORY APPROVALS REQUIRED
Bank holding companies, such as Mid-State, and banks, such as City Commerce
Bank and Mid-State Bank, are highly regulated institutions with numerous federal
and state laws and regulations governing their activities. Among these laws and
regulations are requirements of prior approval by applicable government
regulatory authorities in connection with acquisition and merger transactions
such as the merger. In addition, these institutions are subject to ongoing
supervision, regulation and periodic examination by various federal and state
financial institution regulatory agencies. Detailed discussion of such ongoing
regulatory oversight and the laws and regulations under which it is carried
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out can be found in the Form 10-K of Mid-State for the year ended December 31,
1998 incorporated by reference into this proxy statement/prospectus. See "WHERE
YOU CAN FIND MORE INFORMATION" on page 99.
Consummation of the merger is subject to various conditions, including,
among others, receipt of the prior approvals of the California Department of
Financial Institutions and the Federal Deposit Insurance Corporation.
The merger agreement provides that the obligations of the parties to
consummate the merger are conditioned upon all regulatory approvals having been
granted by September 30, 1999 without the imposition of conditions which, in the
opinion of Mid-State, would materially adversely effect the financial condition
or operations of any party or otherwise would be burdensome.
Applications for regulatory review and approval of the merger and the
related transactions have been filed. There can be no assurance that the
California Department of Financial Institutions and the Federal Deposit
Insurance Corporation will approve or take other required action with respect to
the merger and the related transactions or as to the date of such approvals or
action.
In determining whether to approve the merger, the California Department of
Financial Institutions will consider factors such as
- the effects of the merger on competition;
- the effects of the merger on the convenience and needs of the communities
to be served;
- the financial condition of Mid-State and Mid-State Bank;
- whether the merger is fair and reasonable to the depositors, creditors and
shareholders of City Commerce Bank and Mid-State Bank;
- the competence, experience and integrity of Mid-State's management; and
- whether the merger is fair, just and equitable.
In determining whether to approve the merger, the Federal Deposit Insurance
Corporation will consider factors such as (1) the financial condition of
Mid-State and the competence, experience and integrity of Mid-State's
management; and (2) the effect of the merger on competition. The Federal Deposit
Insurance Corporation must also take into account the record of performance of
Mid-State Bank in meeting the credit needs of the entire community served by the
Bank pursuant to the Community Reinvestment Act of 1977. The Federal Deposit
Insurance Corporation frequently receives, in merger transactions, protests from
community groups and others regarding various aspects of the proposal and, in
particular, the extent to which the applicants are complying with the Community
Reinvestment Act. Mid-State has received a "satisfactory" rating in its most
recent Community Reinvestment Act examination by the Federal Deposit Insurance
Corporation.
MANAGEMENT AND OPERATIONS OF MID-STATE AFTER THE MERGER
MANAGEMENT
Immediately prior to the effective time of the merger, the number of
directors of Mid-State and Mid-State Bank will be increased to 11 and a current
director of City Commerce Bank will be added to the board of directors of
Mid-State and Mid-State Bank at that time.
The principal executive officers of Mid-State and Mid-State Bank immediately
prior to the effective time of the merger will continue as the principal
executive officers following the merger.
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OPERATIONS
Although we cannot assure you that any specific level of cost savings will
be achieved or as to the timing thereof, Mid-State currently expects cost
reductions for the calendar year 2000 to total approximately $1.5 million.
Savings in salaries and benefits will provide approximately $1.1 million of this
total. Depreciation expense is expected to decrease by about $100,000. The
remaining $300,000 will reflect reduced operating expenses in the areas of
marketing, accounting, insurance and directors' fees.
It is also estimated that one-time, merger related restructuring charges
will total about $2.7 million pre-tax, or $2.1 million after tax. These charges
will be recognized as incurred. It is expected that substantially all of such
charges will be recognized in the fourth quarter of 1999. Approximately $1.0
million of these pre-tax charges will relate to severance and benefits of
displaced employees. Another $1.0 million will relate to investment banking
fees, attorneys' fee, accountants' charges and filing fees. The remaining cost
will relate to computer equipment write-downs and marketing and advertising
expenses.
This information should be read in conjunction with the historical
consolidated financial statements of City Commerce Bank and Mid-State, including
the respective notes thereto, included in this proxy statement/prospectus or
incorporated herein, and in conjunction with the combined condensed historical
selected financial data and other pro forma combined financial information
appearing elsewhere in this proxy statement/prospectus.
The statements contained in this section constitute "forward looking
statements" and actual results, which are dependent on a number of factors, many
of which are beyond the control of Mid-State and City Commerce Bank, may differ
materially. See "RISK FACTORS--Forward Looking Statements May Not Prove
Accurate." The cost savings and restructuring charges reflected above and in
this proxy statement/prospectus may not be indicative of the results that may be
achieved in the future. Assuming consummation of the merger, the actual cost
savings and restructuring charges that may be realized in the merger may differ,
perhaps significantly, from the amounts reflected above and in this proxy
statement/prospectus due to a variety of factors, including expected growth of
the combined bank.
NASDAQ LISTING
The shares of Mid-State common stock to be issued in the merger will be
listed on the Nasdaq National Market.
RESALES OF MID-STATE COMMON STOCK
The shares of Mid-State common stock to be issued to shareholders of City
Commerce Bank in the merger have been registered under the Securities Act of
1933. Such shares will be freely transferable under such Act, except for shares
issued to any person who may be deemed to be an "affiliate" of City Commerce
Bank within the meaning of Rule 145 under the Securities Act of 1933.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the opinion of Arthur Andersen LLP,
Mid-State's independent public accountants, that Mid-State and City Commerce
Bank received concerning the material federal income tax consequences to holders
of City Commerce Bank common stock resulting from the merger. However, it is not
a complete description of all of the federal tax consequences of the merger nor
of any other tax laws, including applicable state, local, and foreign tax laws.
In addition, the following discussion is not applicable to any City Commerce
Bank common stock shareholder that has a special status, including (without
limitation) insurance companies; financial institutions; broker-dealers; foreign
corporations; estates and trusts not subject to U.S. federal income tax on their
income
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regardless of source; persons who are not citizens or residents of the United
States; and persons who acquired stock as the result of the exercise of a
compensatory stock option, pursuant to an employee stock purchase plan, or
otherwise as compensation.
DUE TO THE INDIVIDUAL NATURE OF THE TAX CONSEQUENCES OF THE MERGER, IT IS
RECOMMENDED THAT YOU CONSULT YOUR OWN TAX ADVISORS CONCERNING THE TAX
CONSEQUENCES OF THE MERGER (INCLUDING THE APPLICATION AND EFFECT OF STATE AND
LOCAL INCOME AND OTHER TAX LAWS).
In the opinion of Arthur Andersen LLP,
- The merger will qualify as a reorganization under Section 368(a)(1)(A) and
(a)(2)(D) of the Internal Revenue Code of 1986, as amended (the "Code").
Mid-State, Mid-State Bank and City Commerce Bank each will be a "party to
a reorganization" within the meaning of Section 368(b) of the Code.
- City Commerce Bank will recognize no gain or loss on the transfer of its
assets, subject to liabilities, to Mid-State Bank solely in exchange for
Mid-State common stock and cash in lieu of fractional shares of Mid-State
(Sections 361(a)). In addition, City Commerce Bank will recognize no gain
or loss on the distribution to its shareholders of the Mid-State stock and
cash in lieu of fractional share interests (Section 361(c)).
- The tax basis of the City Commerce Bank assets in the hands of Mid-State
Bank will be the same as the tax basis of those assets in the hands of
City Commerce Bank immediately prior to the merger (Section 362(b)).
- The holding period of the assets of City Commerce Bank in the hands of
Mid-State Bank will include the period during which such assets were held
by City Commerce Bank (Section 1223(2)).
- No gain or loss will be recognized to either Mid-State Bank or Mid-State
on the receipt of the assets of City Commerce Bank in the merger (Section
1032 and Treas. Reg. Section1.1032-2).
- No gain or loss will be recognized by a shareholder of City Commerce Bank
on the receipt solely of Mid-State common stock in exchange for their
shares of City Commerce Bank common stock (Section 354(a)(1)).
- The payment of cash to shareholders of City Commerce Bank in lieu of
fractional share interests of Mid-State common stock will be treated as if
the fractional shares actually were distributed as part of the exchange
and then redeemed by Mid-State. These cash payments will be treated as
having been received as a distribution in redemption of that fractional
share interest subject to the conditions and limitations of Section 302 of
the Code. If a fractional share interest in Mid-State common stock would
have constituted a capital asset in the hands of a redeeming shareholder,
and the actual receipt and redemption of such fractional interest would
have qualified for sale or exchange treatment, any resulting gain or loss
should be characterized as capital gain or loss in accordance with the
provisions and limitations of Subchapter P of Chapter 1 of the Code.
- The tax basis of the shares of Mid-State common stock to be received by
shareholders of City Commerce Bank pursuant to the merger will be the same
as the basis of the shares of City Commerce Bank common stock surrendered
in exchange therefor, decreased by the amount of basis allocated to any
fractional share of Mid-State common stock that is constructively received
by the City Commerce Bank shareholder and immediately redeemed for cash
(Section 358(a)).
- The holding period of the shares of Mid-State common stock to be received
by shareholders of City Commerce Bank pursuant to the merger will include
the holding period of shares of City Commerce Bank common stock exchanged
therefor, provided that the shares of City Commerce Bank common stock are
held as capital assets on the effective date of the merger (Section
1223(1)).
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- No gain or loss will be recognized for federal income tax purposes by the
holders of outstanding stock options granted under City Commerce Bank's
stock option plan as a result of the granting, pursuant to the merger, of
substitute options pursuant to Mid-State's stock option plan.
- The granting of any substitute incentive stock option under the Mid-State
stock option plan, to a holder of a City Commerce Bank stock option, under
the City Commerce Bank stock option plan, will not be deemed a
"modification" of City Commerce Bank's existing incentive stock option
plan under Code Section 424(h)(3), provided the requirements of Section
424(a)(1) and (2) are satisfied.
The opinion summarized above is not binding on the Internal Revenue Service,
which could take positions contrary to the conclusions in such opinion. The
parties have not requested a ruling from the Internal Revenue Service in
connection with the merger.
Receipt by Mid-State and City Commerce Bank of such opinion prior to the
date of this proxy statement/prospectus and Arthur Andersen LLP's not
withdrawing or modifying such opinion prior to the effective time of the merger
are both conditions to the merger.
The exchange of City Commerce Bank common stock for cash pursuant to the
exercise of dissenters' rights will be a taxable transaction. If you are
considering the exercise of dissenters' rights, you should consult your own tax
advisers as to the tax treatment in your particular circumstances. See
"Dissenting Shareholders' Rights."
ACCOUNTING TREATMENT
It is anticipated that the merger will be accounted for as a
pooling-of-interest transaction under generally accepted accounting principles.
Under such accounting method, holders of City Commerce Bank common stock will be
deemed to have combined their existing voting common stock interest with that of
holders of Mid-State common stock by exchanging their shares for shares of
Mid-State common stock. Accordingly, the book value of the assets, liabilities
and stockholders' equity of City Commerce Bank, as reported on its balance
sheet, will be carried over to the consolidated balance sheet of Mid-State, and
no goodwill will be created. Mid-State will be able to include in its
consolidated income the income of City Commerce Bank for the entire fiscal year
in which the merger occurs; however, certain expenses incurred to effect the
merger must be treated by Mid-State as current charges against income rather
than adjustments to its balance sheet. The unaudited pro form financial
information contained in this proxy statement/prospectus has been prepared using
the pooling-of-interest method of accounting. If the merger does not qualify for
pooling-of-interest accounting treatment in the opinion of Arthur Andersen LLP,
City Commerce Bank and/or Mid-State may terminate the merger.
DISSENTERS' RIGHTS
If you do not vote such shares in favor of the proposal to approve the
merger and you remain a holder of City Commerce Bank common stock at the
effective time of the merger, you will, by complying with the procedures set
forth in Chapter 13 of the California General Corporation Law, be entitled to
receive an amount equal to the fair market value of your shares as of April 16,
1999 the day before the public announcement of the merger. The final closing
price for City Commerce Bank common stock on April 16, 1999 was $17.50 per
share. A copy of Chapter 13 of the California General Corporation Law is
attached hereto as Appendix C and you should read it for more complete
information concerning dissenters' rights. The discussion in this section is
qualified in its entirety by reference to Appendix C. THE REQUIRED PROCEDURE SET
FORTH IN CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW MUST BE FOLLOWED
EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE LOST.
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In order to be entitled to exercise dissenters' rights, you must not vote
"FOR" the merger. Thus, if you wish to dissent and you execute and return a
proxy in the accompanying form, you must specify that your shares are to be
either voted "AGAINST" or "ABSTAIN" on Proposal 1. If you return a proxy without
voting instructions or with instructions to vote "FOR" the Proposal 1, your
shares will automatically be voted in favor of the merger and you will lose your
dissenters' rights.
If the merger is approved by the shareholders, City Commerce Bank will have
10 days after the approval to send to those shareholders who did not vote in
favor of the merger written notice of such approval accompanied by
- a copy of Chapter 13 of the California General Corporation Law,
- a statement of the price determined to represent the fair market value of
the dissenting shares as of April 16, 1999 and
- a brief description of the procedure to be followed if a shareholder
desires to exercise dissenters' rights.
Within 30 days after the date on which the notice of the approval of the
merger is mailed, the dissenting shareholder must make written demand upon City
Commerce Bank for the purchase of dissenting shares and payment to such
shareholder of their fair market value, specifying the number of shares held of
record by such shareholder and a statement of what the shareholder claims to be
the fair market value of those shares as of April 16, 1999, and must surrender,
at the office designated in the notice of approval, the certificates
representing the dissenting shares to be stamped or endorsed with a statement
that they are dissenting shares or to be exchanged for certificates of
appropriate denomination so stamped or endorsed. Any shares of City Commerce
Bank common stock that are transferred prior to their submission for endorsement
lose their status as dissenting shares.
If City Commerce Bank and the dissenting shareholder agree that the
surrendered shares are dissenting shares and agree upon the price of the shares,
the dissenting shareholder will be entitled to the agreed price with interest
thereon at the legal rate on judgments from the date of the agreement. Subject
to the restrictions imposed under California law on the ability of a California
corporation to purchase its outstanding shares, payment of the fair value of the
dissenting shares shall be made within 30 days after the amount thereof has been
agreed upon or 30 days after any statutory or contractual conditions to the
merger have been satisfied, whichever is later, subject to the surrender of the
certificates therefor, unless provided otherwise by agreement.
If City Commerce Bank denies that the shares surrendered are dissenting
shares or City Commerce Bank and the dissenting shareholder fail to agree upon a
fair market value of such shares, then the dissenting shareholder must, within
six months after the notice of approval is mailed, file a complaint in the
Superior Court of the proper county requesting the court to make such
determinations or intervene in any pending action brought by any other
dissenting shareholder. If the complaint is not filed or intervention in a
pending action is not made within the specified six-month period, the
dissenter's rights are lost. If the fair market value of the dissenting shares
is at issue, the court will determine, or will appoint one or more impartial
appraisers to determine, such fair market value.
A dissenting shareholder may not withdraw his or her dissent or demand for
payment unless City Commerce Bank consents to such withdrawal.
The merger is not directly conditioned upon only a limited number of
shareholders of City Commerce Bank having voted against the merger or otherwise
having perfected dissenters' rights. Nevertheless, the payment of a significant
amount of cash pursuant to the exercise of dissenters' rights would effect the
ability of the merger to be accounted for as a "pooling-of-interest." The merger
is conditioned upon Arthur Andersen LLP confirming in writing that the
accounting treatment for the merger is a pooling-of-interest (see "--Accounting
Treatment").
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BENEFITS TO CERTAIN OFFICERS AND DIRECTORS OF CITY COMMERCE BANK IN THE MERGER
The officers and employees of City Commerce Bank at the effective time will
become officers and employees of Mid-State Bank, will be entitled to participate
in all employee benefits and benefit programs of Mid-State on the same basis as
similarly situated employees of Mid-State and will be credited for eligibility,
participation and vesting purposes with their respective years of past service
with City Commerce Bank. Mid-State has adopted a severance policy by which all
employees of City Commerce Bank who are not offered employment or who are
terminated within 12 months following the effective time of the merger who
satisfy the requirement of the severance plan will receive severance benefits of
two weeks for every year of service.
Eloy Ortega, C. G. Kum and Peggy Shoemaker have entered into severance
agreements with City Commerce Bank that upon consummation of the merger with
Mid-State and if such individuals are terminated, they would be entitled to
severance benefits of $202,500, $166,950 and $43,488, respectively.
Messrs. Ortega and Kum have also entered into salary continuation agreements
that would provide each individual an annual sum of $62,500 in equal monthly
installments over a 15 year period upon reaching retirement age at 65. If either
is involuntarily terminated, they will receive the present value of the amount
accrued in the year of termination in one lump sum, unless either elects to have
the amount paid commencing on his 65(th) birthday over 15 years.
It is anticipated that Messrs. Ortega and Kum will not continue with
Mid-State after the merger and will become eligible to receive certain payments
under their severance and salary continuation agreements.
At and as of the effective time of the merger, Mid-State will grant
substitute stock options pursuant to its stock option plan to each person who
has at the effective time of the merger an outstanding option to purchase shares
of City Commerce Bank common stock.
The discovery periods for City Commerce Bank's policies of directors' and
officers' liability insurance will be extend for 48 months with respect to all
matters arising from facts or events which occurred before the effective time of
the merger for which City Commerce Bank would have had an obligation to
indemnify its directors and officers.
A current director of City Commerce Bank will be added to the board of
directors of Mid-State and Mid-State Bank at the effective time of the merger.
THE MERGER AGREEMENT
STRUCTURE OF THE MERGER; EFFECTIVE TIME
The merger agreement contemplates the merger of City Commerce Bank with and
into Mid-State Bank, the banking subsidiary of Mid-State. Mid-State Bank will be
the surviving bank in the merger and the separate corporate existence of City
Commerce Bank will end.
The effective time of the merger shall occur on the day that the agreement
of merger (which is Exhibit A to the merger agreement) is filed with the
California Department of Financial Institutions after having been previously
filed with the California Secretary of State with the Department of Financial
Institution's approval endorsed thereon in accordance with the provisions of the
California Financial Code. The effective time of the merger shall occur
following the last to occur of (1) receipt of all necessary regulatory approvals
with the expiration of any applicable regulatory waiting periods and (2)
satisfaction of the other conditions precedent set forth in the merger
agreement.
We currently anticipate that the merger will occur in the third quarter of
1999.
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ADDITIONAL AGREEMENTS
As a condition to the merger, each of the directors of City Commerce Bank
has entered into an agreement with Mid-State whereby each has agreed to
- vote his or her shares of City Commerce Bank common stock in favor of
approving the principal terms of the merger agreement and the transactions
contemplated thereby,
- recommend, subject to his or her fiduciary duty, to City Commerce Bank
shareholders to vote in favor of the merger agreement,
- not dispose, subject to certain exceptions, of his or her shares of City
Commerce Bank common stock,
- except for Mr. Ortega, for a two year period, not to compete with
Mid-State or solicit anyone who was a customer of Mid-State or City
Commerce Bank during the last three years, and
- cooperate fully with Mid-State in connection with the merger.
Under these agreements the respective directors of City Commerce Bank have
agreed to vote their shares (approximately 23% of the outstanding shares in the
case of City Commerce Bank common stock) to approve the principal terms of the
merger, increasing the likelihood that the merger will be approved.
In addition to these directors' agreements, the directors of City Commerce
Bank have entered into agreements restricting such persons' ability to sell
shares of Mid-State common stock which such person has acquired or may acquire
in connection with the merger except in accordance with such agreements.
TREATMENT OF STOCK OPTIONS
At the effective time of the merger, the City Commerce Bank stock option
plan will terminate and the Mid-State stock option plan will continue in effect.
At the effective time of the merger, Mid-State will grant substitute stock
options pursuant to its stock option plan to each person who has at the
effective time of the merger an outstanding option to purchase shares of City
Commerce Bank common stock. Each substitute stock option so granted by Mid-State
pursuant to its stock option plan to replace a City Commerce Bank stock option
will be 100% "vested" and will be exercisable for that number of whole shares of
Mid-State common stock equal to the product of (1) the number of shares of City
Commerce Bank common stock that were purchasable under such City Commerce Bank
stock option immediately prior to the effective time of the merger multiplied by
(2) the exchange ratio, rounded down to the nearest whole number of shares of
Mid-State common stock. Further, each and every substitute stock option so
granted shall provide for a per share exercise price which shall be equal to the
quotient determined by dividing (A) the exercise price per share of City
Commerce Bank common stock at which such City Commerce Bank stock option was
exercisable immediately prior to the effective time of the merger by (B) the
exchange ratio.
CONDITIONS TO THE MERGER
The obligation of Mid-State and City Commerce Bank to consummate the merger
is subject to the satisfaction or waiver on or before the effective time of the
merger of, among other things, the following conditions:
- the merger agreement and the transactions contemplated thereby will have
received all requisite approvals of the boards of directors of Mid-State,
Mid-State Bank and City Commerce Bank and of the shareholders of City
Commerce Bank;
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- no judgment, decree, injunction, order or proceeding will be outstanding
or threatened by any governmental entity which prohibits or restricts the
effectuation of, or threatens to invalidate or set aside the merger
substantially in the form contemplated by the merger agreement unless a
favorable opinion is rendered by counsel that such judgment, decree,
injunction, order or proceeding is without merit;
- by September 30, 1999, (1) all approvals or consents of any applicable
governmental agency will have been obtained or granted for the merger and
the transactions contemplated for the merger agreement and the applicable
waiting period under all laws will have expired and (2) no final FASB
ruling is adopted prohibiting the use of pooling-of-interest accounting
treatment in the merger;
- Mid-State's registration statement shall have been declared effective by
the Securities and Exchange Commission and shall not be the subject of any
stop order or proceedings seeking or threatening a stop order;
- Mid-State shall have received all state securities permits and other
authorizations necessary to issue the Mid-State common stock to consummate
the merger;
- Mid-State and City Commerce Bank will have received an opinion from Arthur
Andersen LLP as to federal tax effects of the merger (see "--Federal
Income Tax Consequences");
- Mid-State and City Commerce Bank will have received confirmation in
writing from Arthur Andersen LLP that the merger will qualify for pooling
of interests accounting treatment (see "--Accounting Treatment"); and
- all third party consent necessary to permit the parties to consummate the
merger will have been obtained except under certain specified
circumstances.
The obligations of City Commerce Bank to consummate the merger are also
subject to fulfillment of certain other conditions, including the following:
- there will not have occurred, between April 19, 1999 and the effective
time of the merger, any materially adverse change in the business,
financial condition, results of operations or properties of Mid-State or
Mid-State Bank;
- receipt of the fairness opinion from The Findley Group; and
- all corporate steps necessary to effect the corporate and director changes
described in "Management and Operations of Mid-State and Mid-State Bank
After the Merger" will have been completed.
The obligations of Mid-State and Mid-State Bank to consummate the merger are
also subject to the fulfillment of certain other conditions, including the
following:
- there will not have occurred, between April 19, 1999 and the effective
time of the merger, any material adverse change in the business, financial
condition, results of operations or properties of City Commerce Bank;
- at the month end proceeding the closing of the merger, City Commerce
Bank's shareholders' equity and allowance for credit losses will not be
less than $17,858,000 (including not to exceed $150,000 of legal,
accounting and investment advisor fees and expenses related to the merger)
and $1,600,000, respectively, and
- all corporate steps necessary to effect the corporate and director changes
described in "Management and Operations of Mid-State and Mid-State Bank
After the Merger" will have been completed.
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Additionally, the consummation of the merger is subject to the performance
of covenants, the execution and delivery of certain ancillary documents, the
accuracy of representations and warranties and the receipt of various legal
opinions, third-party consents, officers' certificates and other documents.
If these and other conditions are not satisfied or waived, the merger
agreement may be terminated. The merger agreement may also be terminated upon
the occurrence of certain other events. See "--Termination."
NONSOLICITATION
Under the terms of the merger agreement, City Commerce Bank has agreed not
to solicit, initiate or encourage any "Competing Transaction." In addition, it
has agreed (unless it determines, with advice of counsel, that its fiduciary
duty requires otherwise) not to participate in any negotiations or discussions
regarding, or furnish any information with respect to, or otherwise cooperate in
any way in connection with, any effort or attempt to effect any Competing
Transaction with or involving any person other than with Mid-State, unless City
Commerce Bank receives a bona fide offer from a person other than the parties to
the merger agreement and subject to the fiduciary obligations of the City
Commerce Bank board of directors. City Commerce Bank has agreed to promptly
notify Mid-State of the terms of any proposal which it may receive in respect of
any Competing Transaction. The term "Competing Transaction" means any of the
following involving City Commerce Bank:
- a merger, consolidation, share exchange or other business combination;
- a sale, lease, exchange, mortgage, pledge, transfer or other disposition
of assets representing 10% or more of City Commerce Bank's assets;
- a sale of shares of capital stock (or securities convertible or
exchangeable into or otherwise evidencing, or any agreement or instrument
evidencing, the right to acquire capital stock), representing 10% or more
of the voting power of City Commerce Bank;
- a tender offer or exchange offer for at least 10% of the outstanding
shares of City Commerce Bank;
- a solicitation of proxies in opposition to approval of the merger by City
Commerce Bank's shareholders; or
- a public announcement of an unsolicited bona fide proposal, plan or
intention to do any of the foregoing.
Any violation of these agreements by City Commerce Bank will result in
Mid-State having the right to terminate the merger agreement. If the merger
agreement were to be so terminated by Mid-State and City Commerce Bank enters
into an agreement for a Competing Transaction prior to the termination of the
merger agreement or during the 12 month period immediately following the
termination, City Commerce Bank will be obligated to pay Mid-State $250,000 plus
up to an additional $100,000 in documented out of pocket expenses which amounts
represents (1) Mid-State's direct costs and expenses (including, but not limited
to, fees and expenses of financial or other consultants, printing costs,
accountants and counsel) incurred in negotiating and undertaking to carry out
the transactions contemplated by the merger agreement, including Mid-State's
management time devoted to negotiation and preparation for the transactions
contemplated by the merger agreement; (2) Mid-State's indirect costs and
expenses incurred in connection with the transactions contemplated by the merger
agreement; and (3) Mid-State's loss as a result of the transactions contemplated
by the merger agreement not being consummated.
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Any payments by City Commerce Bank would be addition to whatever rights
Mid-State may have pursuant to the stock option agreement granted in connection
with the execution of the merger agreement.
EXPENSES
If the merger agreement is terminated by City Commerce Bank because
Mid-State fails to satisfy certain of its obligations under the merger
agreement, Mid-State will be obligated to pay all of City Commerce Bank's
expenses incurred in connection with the merger transaction, not to exceed
$250,000.
If the merger agreement is terminated by Mid-State because City Commerce
Bank's shareholders fail to approve the merger, or because City Commerce Bank
fails to satisfy certain of its obligations under the merger agreement, City
Commerce Bank will be obligated to pay all of Mid-State's expenses incurred in
connection with the merger transaction, not to exceed $250,000.
If the merger agreement is terminated by Mid-State because it enters into a
transaction to be acquired by another financial institution, Mid-State will be
obligated to pay $500,000 to City Commerce Bank plus all of City Commerce Bank's
expenses incurred in connection with the merger transaction, not to exceed
$100,000.
TERMINATION
The merger agreement may be terminated at any time prior to the effective
time of the merger:
- by mutual consent of Mid-State and City Commerce Bank;
- by Mid-State or City Commerce Bank if any material breach or default by
the other party is not cured within 20 business days after notice thereof;
- by Mid-State or City Commerce Bank if any governmental or regulatory
consent is not obtained by September 30, 1999 or if any governmental or
regulatory authority denies or refuses to grant any approval, consent or
authorization required to be obtained to consummate the transactions
contemplated by the merger agreement unless, within 20 business days after
such denial or refusal, all parties agree to resubmit the application to
the regulatory authority that has denied or refused to grant the approval,
consent or qualification requested;
- by City Commerce Bank if any of the conditions to its performance of the
merger agreement shall not have been met, or by Mid-State if any of the
conditions to its performance of the merger agreement shall not have been
met, by September 30, 1999, or such earlier time as it becomes apparent
that such conditions shall not be met;
- by Mid-State if City Commerce Bank shall have failed to act or refrained
from doing any "competing transaction" (as defined in the merger
agreement);
- by Mid-State if it elects not to consummate the merger because it enters
into a transaction to be acquired by another financial institution; or
- by City Commerce Bank if the "average closing price" is less than $26.60
and if Mid-State has failed to notify City Commerce Bank of its election
to fix the purchase price at $20.72, provided, however that if City
Commerce Bank elects to so terminate, Mid-State may reinstate the merger
agreement by adjusting the exchange ratio to provide shareholders of City
Commerce Bank a price in Mid-State common stock equal to $20.72 (as a
result the exchange ratio shall then be calculated by dividing $20.72 by
the "average closing price").
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REPRESENTATION AND WARRANTIES
The merger agreement contains customary mutual representations and
warranties by each party relating to, among other things: (1) incorporation,
standing and power; (2) capitalization; (3) subsidiaries; (4) financial
statements; (5) corporate authority; (6) litigation; (7) compliance with laws
and regulations; (8) brokers and finders; (9) absence of material changes; (10)
environmental matters; (11) Community Reinvestment Act; (12)
pooling-of-interest; (13) Securities and Exchange Commission reports; (14) trust
administration; (15) regulatory approvals; (16) Year 2000 readiness; (17)
performance of obligations; (18) licenses and permits; (19) undisclosed
liabilities; and (20) accounting records.
In the merger agreement, City Commerce Bank also makes additional
representations and warranties relating to: (1) insurance; (2) title to assets;
(3) real estate; (4) taxes; (5) employees; (6) employee benefit plans; (7)
corporate records; (8) Offices and ATMs; (9) loan portfolio; (10) power of
attorney; (11) operating losses; (12) derivatives; and (13) material contracts.
The representations and warranties of the parties terminate as of the
effective time of the merger.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME
The merger agreement provides that, during the period from April 19, 1999 to
the effective time of the merger, City Commerce Bank will conduct its business
only in the normal and customary manner and in accordance with sound banking
practices and will not, without the prior written consent of Mid-State, which
will not be unreasonably withheld, take any of the following actions, among
others:
- issue any security except pursuant to the exercise of options outstanding
as of the date of the merger agreement;
- declare, set aside or pay any dividend or make any other distribution
upon, or purchase or redeem any shares of its stock;
- amend its articles of incorporation or its bylaws;
- grant any general or uniform increase in the rate of pay of employees or
employee benefits except in the ordinary course of business and consistent
with past practice;
- grant any material increase in salary, incentive compensation or employee
benefits or pay any bonus to any person except in the ordinary course of
business and consistent with past practice or except pro rata bonuses
calculated in accordance with City Commerce Bank's existing bonus
compensation program;
- make any capital expenditure in excess of $50,000, except for ordinary
repairs, renewals and replacements;
- compromise, settle or adjust any assertion or claim of a deficiency in
taxes (or interest thereon or penalties in connection therewith), extend
the statute of limitations with any tax authority or file any pleading in
court on any tax litigation or any appeal from an asserted deficiency, or
file or amend any federal, foreign, state or local tax return, or make any
tax election;
- grant, renew or commit to grant or renew any extension of credit or amend
the terms of any such credit outstanding on the date hereof to any
executive officer, director or principal shareholder, or to any
corporation, partnership, trust or other entity controlled by any such
person, except under certain circumstances;
- make their credit underwriting policies, standards or practices less
stringent than those in effect on December 31, 1998;
- enter into or consent to any new employment agreement or other benefit
arrangement, or amend or modify any employment agreement or other benefit
arrangement in effect on the date of the merger agreement;
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- grant any person a power of attorney or similar authority;
- make any material investment by purchase of stock or securities,
contributions to capital, property transfers or otherwise in any other
person, except for investments made in the ordinary course of business
consistent with past practice;
- amend, modify or terminate, except in accordance with its terms, any
material contract or enter into any material agreement or contract;
- create or incur or suffer to exist any mortgage, lien, pledge, security
interest, charge, encumbrance or restraint of any kind against or in any
property or right of the respective party;
- sell, lease or otherwise dispose of any assets or release any claims,
except in the ordinary course of business consistent with past practice;
- except as required by law, knowingly take or cause to be taken any action
which would prevent the transactions contemplated hereby from qualifying
as tax free reorganizations under Section 368 of the Internal Revenue Code
or prevent Mid-State from accounting for the business combination to be
effected by the merger as a pooling-of-interests;
- sell any investment security prior to maturity, except in the ordinary
course of business; or
- grant, renew or commit to grant or renew any extension of credit if such
extension of credit, together with all other credit then outstanding to
the same person and all affiliated persons, would exceed $250,000 on an
unsecured basis and $500,000 on a secured basis subject to certain
exceptions.
The merger agreement further provides that, during the period from April 19,
1999 to the effective time of the merger, Mid-State will conduct its business
only in the normal and customary manner and in accordance with sound banking
practices and will not, without the prior written consent of City Commerce Bank,
which will not be unreasonably withheld, take any of the following actions,
among others:
- issue any security except pursuant to the exercise of options outstanding
as of the date of the merger agreement;
- declare, set aside or pay any dividend (other than up to $0.20 per share
cash dividends per quarter) or make any other distribution upon, or
purchase or redeem any shares of its stock;
- amend its articles of incorporation or bylaws; or
- except as required by law, knowingly take or cause to be taken any action
which would prevent the transactions contemplated hereby from qualifying
as tax free reorganizations under Section 368 of the Internal Revenue Code
or prevent Mid-State from accounting for the business combination to be
effected by the merger as a pooling-of-interests.
The merger agreement also provides that each party will (1) use its best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate the transactions contemplated by the merger agreement
as promptly as practical; and (2) obtain the consent of the other party before
it issues any press release or makes any public statement with respect to the
merger agreement or the transactions contemplated hereby.
The merger agreement also provides that each party will:
- duly and timely file all required governmental reports;
- periodically furnish to the other party certain information, loan reports
and updates of information previously provided;
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- promptly notify the other party of certain communications from tax
authorities, material litigation and any event which has had or may
reasonably be expected to have a materially adverse effect on the
financial condition, operations, business or properties;
- provide access to the other party of certain information; and
- use its reasonable efforts between the date of the merger agreement and
the effective time of the merger to take all actions necessary or
desirable, including the filing of any regulatory applications.
AMENDMENT AND WAIVER
Subject to applicable law: (1) the merger agreement may be amended at any
time by the action of the boards of directors of Mid-State, Mid-State Bank and
City Commerce Bank without action by their shareholders pursuant to a writing
signed by all parties to the merger agreement; and (2) the parties, by action of
their respective boards of directors, may, at any time prior to the effective
time, extend the performance of any obligation or action required by the merger
agreement, waive inaccuracies in representations and warranties and waive
compliance with any agreements or conditions for their respective benefit
contained in the merger agreement.
STOCK OPTION AGREEMENT
BETWEEN CITY COMMERCE BANK AND MID-STATE
Concurrently with the execution and delivery of the merger agreement, City
Commerce Bank and Mid-State entered into a stock option agreement, under which
City Commerce Bank granted Mid-State an option to purchase up to 325,884 shares
of City Commerce Bank common stock representing
approximately 19.9% of the outstanding shares of City Commerce Bank common stock
at a per share price equal to $17.00. The option will only become exercisable
upon the occurrence of certain events described below.
EXERCISE OF STOCK OPTION
Mid-State may elect to exercise the option in whole or in part only after
the occurrence of one of the following events (each a "Purchase Event"):
- City Commerce Bank or any of its subsidiaries recommends to its
shareholders or enters into an agreement with any person (other than
Mid-State or any subsidiary of Mid-State) to effect (1) a merger,
consolidation or similar transaction involving City Commerce Bank or any
if its subsidiaries, (2) the disposition, by sale, lease, exchange or
otherwise of all or substantially all the assets or deposits of City
Commerce Bank or any of its subsidiaries, or (3) the issuance, sale, or
other disposition by City Commerce Bank of securities representing 25% or
more of the voting power of City Commerce Bank or any of its subsidiaries,
or
- any person or group of persons (other than Mid-State or any subsidiary of
Mid-State) acquires beneficial ownership or the right to acquire
beneficial ownership of 25% or more of the voting power of City Commerce
Bank or any of its subsidiaries.
TERMINATION OF STOCK OPTION
The option will terminate and be of no further force or effect upon the
earliest to occur of:
- immediately prior to the effective time of the merger,
- termination of the merger agreement in accordance with its terms before a
Purchase Event or a Preliminary Purchase Event (as defined below) occurs
unless the merger agreement is terminated for certain specified events,
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- 18 months after the termination of the merger agreement following the
occurrence of a Preliminary Purchase Event,
- 12 months after the occurrence of a Purchase Event, or
- 18 months after the termination of the merger agreement in the event
Mid-State terminates as a result of certain specified events.
Even if the option terminates, Mid-State will still be entitled to purchase
those City Commerce Bank shares with respect to which it exercised the option
before the termination of the option.
A "Preliminary Purchase Event" means the occurrence of one of the following
events:
- City Commerce Bank or any of its subsidiaries recommends to its
shareholders or enters into an agreement with any person (other than
Mid-State or any subsidiary of Mid-State) to effect (1) a merger,
consolidation or similar transaction involving City Commerce Bank or any
if its subsidiaries, (2) the disposition, by sale, lease, exchange or
otherwise of all or substantially all the assets or deposits of City
Commerce Bank or any of its subsidiaries, or (3) the issuance, sale, or
other disposition by City Commerce Bank of securities representing 10% or
more of the voting power of City Commerce Bank or any of its subsidiaries
(any of the foregoing is defined as an "Acquisition Transaction."),
- any person (other than Mid-State or any subsidiary of Mid-State) acquires
beneficial ownership or the right to acquire beneficial ownership of 10%
or more of the voting power of City Commerce Bank or any of its
significant subsidiaries,
- any person makes a bona fide proposal to City Commerce Bank or its
shareholders to engage in an Acquisition Transaction or commences a tender
offer or files a registration statement under the Securities Act of 1933
with respect to an exchange offer for City Commerce Bank common stock such
that, upon completion of that offer, that person will own or control 10%
of more of the then outstanding shares of City Commerce Bank common stock,
- the City Commerce Bank shareholders have not approved the merger
agreement, or the annual meeting of shareholders of City Commerce Bank has
not been held or has been canceled, in each case after any person (other
than Mid-State or any subsidiary of Mid-State) has (1) made, or disclosed
an intention to make, a bona fide proposal, to engage in an Acquisition
Transaction, (2) commenced a tender offer or filed a registration
statement under the Securities Act of 1933 with respect to an exchange
offer, or (3) filed an application (or given a notice) with a bank
regulatory authority to engage in an Acquisition Transaction,
- after a proposal is made by a third party to City Commerce Bank or its
shareholders to engage in an Acquisition Transaction, or such third party
states its intention to make such a proposal if the merger agreement
terminates or the option terminates, City Commerce Bank breaches any
covenant or obligation contained in the merger agreement and such breach
would entitle Mid-State to terminate the merger agreement,
- any person files an application or notice with the Federal Reserve Board
or other governmental authority for approval to engage in an Acquisition
Transaction, or
- City Commerce Bank's board of directors withdraws or modifies in any
manner adverse to Mid-State its recommendation that the City Commerce Bank
shareholders approve the merger in anticipation of an Acquisition
Transaction or City Commerce Bank authorizes, recommends or proposes an
agreement to engage in an Acquisition Transaction with any person other
than Mid-State.
48
<PAGE>
ADJUSTMENT OF NUMBER OF SHARES SUBJECT TO OPTION
The number and type of securities subject to the option and the purchase
price of shares will be adjusted for any stock split, reverse split, dividend,
exchange of shares or similar transaction relating to the City Commerce Bank
common stock, so that Mid-State will receive upon exercise of the option the
same number and type of securities as if the option had been exercised
immediately before the change in City Commerce Bank common stock. The number of
shares of City Commerce Bank common stock subject to the option will also be
adjusted if City Commerce Bank issues additional shares of City Commerce Bank
common stock, so that the number of shares of City Commerce Bank common stock
subject to the option represents 19.9% of issued and outstanding City Commerce
Bank common stock. In the event of a capital reorganization, merger or
consolidation of City Commerce Bank with or into another corporation, or the
sale of all or substantially all of City Commerce Bank's assets to any other
person, then, as a part of any such transaction, provision will be made so that
Mid-State will be entitled to received and option of the succeeding corporation,
any person that controls the succeeding corporation or City Commerce Bank, at
the election of Mid-State.
REPURCHASE OF OPTION SHARES
After the occurrence of a Purchase Event but prior to termination of the
option, Mid-State can require City Commerce Bank to repurchase (1) the option,
and (2) any shares of City Commerce Bank common stock received by Mid-State upon
exercise of the option by Mid-State.
The option will be repurchased at a price equal to the amount by which (1)
the "market/offer price" exceeds (2) the option exercise price, multiplied by
the number of shares of City Commerce Bank common stock for which the option
could then be exercised.
Any shares held by Mid-State resulting from the exercise of the option will
be repurchased at a price equal to the "market/offer price" multiplied by the
number of shares.
The term "market/offer price" means the highest
- price per share of City Commerce Bank common stock at which a tender offer
or exchange offer therefor has been made,
- price per share of City Commerce Bank common stock paid or to be paid by
any third party pursuant to any agreement with City Commerce Bank (whether
by way of merger, consolidation or otherwise), or
- in the event of a sale of all or substantially all of City Commerce Bank's
assets, the sum of the price paid in such sale for such assets and the
current market value of the remaining assets of City Commerce Bank as
determined by a nationally recognized investment banking firm mutually
selected, divided by the number of shares of City Commerce Bank common
stock outstanding at the time of such sale.
REGISTRATION RIGHTS
Mid-State has certain rights to require registration of any shares of City
Commerce Bank common stock purchased pursuant to the stock option agreement
under the securities laws if necessary to enable Mid-State to sell such shares.
EFFECT OF STOCK OPTION AGREEMENT
The stock option agreement is intended to increase the likelihood that the
merger will be completed on the terms set forth in the merger agreement. As a
result, certain aspects of the stock option agreement may have the effect of
discouraging persons who might now or before the effective time of the merger be
interested in acquiring all of or a significant interest in City Commerce Bank
from
49
<PAGE>
considering or proposing such an acquisition, even if they were prepared to
offer higher consideration per share for City Commerce Bank common stock than
the consideration set forth in the merger agreement.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined statement of financial position
is based on the historical consolidated statement of financial position of
Mid-State and the statement of financial position of City Commerce Bank, using
the pooling method of accounting for business combinations, as of March 31, 1999
after giving effect to merger related adjustments described in the note herein.
It should be read in conjunction with the historical financial statements and
notes thereto which are included in this proxy statement/prospectus or are
incorporated herein by reference.
These pro forma financial statements are presented for illustrative purposes
only and are not indicative of the operating results that would have been
achieved or the financial position that would have existed had the merger been
consummated on March 31, 1999 nor are they indicative of the future operating
results or financial position of the combined companies. The pro forma
adjustments made in connection with the development of the pro forma information
are preliminary and have been made solely for purposes of developing such pro
forma information as necessary to comply with disclosure requirements.
50
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF FINANCIAL POSITION
AS OF MARCH 31, 1999
(000'S)
<TABLE>
<CAPTION>
MID-STATE CITY
BANCSHARES COMMERCE ADJUSTMENTS(1) COMBINED
------------ ---------- -------------- ------------
<S> <C> <C> <C> <C>
Cash and Due From Banks.................................. $ 60,343 $ 11,504 $ 71,847
Fed Funds Sold........................................... 64,865 3,500 68,365
Investment Securities--Available for Sale................ 459,482 9,357 468,839
Investment Securities--Held to Maturity.................. 36,486 -- 36,486
------------ ---------- ------- ------------
Total Investment Securities.............................. 495,968 9,357 505,325
Total Loans.............................................. 551,438 121,471 672,909
Loan Loss Allowance...................................... (12,435) (1,567) (14,002)
------------ ---------- ------- ------------
Net Loans................................................ 539,003 119,904 658,907
Premises and Equipment................................... 29,656 2,872 32,528
Accrued Interest Receivable.............................. 10,866 729 11,595
Other Real Estate Owned.................................. 206 -- 206
Investments in Real Estate............................... 6,755 -- 6,755
Goodwill................................................. 1,575 -- 1,575
Other.................................................... 12,698 1,712 14,410
------------ ---------- ------- ------------
TOTAL ASSETS....................................... $ 1,221,935 $ 149,578 1,371,513
------------ ---------- ------- ------------
------------ ---------- ------- ------------
Non Interest Bearing Demand.............................. $ 201,476 $ 31,734 233,210
NOW, Savings and Money Market............................ 540,192 68,662 608,854
Time Deposits--$100,000 or more.......................... 91,681 21,024 112,705
Time Deposits--Under $100,000............................ 233,905 9,523 243,428
------------ ---------- ------- ------------
Total Deposits........................................... 1,067,254 130,943 1,198,197
Other Liabilities........................................ 18,448 1,333 2,094 21,875
Capital:
Common Stock and Surplus............................... 43,069 15,444 58,513
Undivided Profits...................................... 90,517 1,795 (2,094) 90,218
Unrealized Gain on AFS Securities...................... 2,647 63 2,710
------------ ---------- ------- ------------
Total Shareholders' Equity............................. 136,233 17,302 (2,094) 151,441
------------ ---------- ------- ------------
TOTAL LIABILITIES & EQUITY......................... $ 1,221,935 $ 149,578 $ -- 1,371,513
------------ ---------- ------- ------------
------------ ---------- ------- ------------
</TABLE>
- ------------------------
(1) The following table reflects all non recurring Mid-State and City Commerce
Bank estimated merger-related costs as of March 31, 1999. These costs are
not included on the unaudited pro
51
<PAGE>
forma combined income statement, but are included on the unaudited pro forma
combined balance sheet as a reduction to equity capital. These costs will be
charged to expense as incurred. Such estimated merger-related costs are
summarized below:
<TABLE>
<S> <C>
Employment related...................................... 956
Financial Advisory...................................... 400
Professional Fees....................................... 574
Equipment write-down.................................... 507
All Other............................................... 263
---------
Total Pre-Tax....................................... 2,700
After-Tax....................................... 2,094
</TABLE>
The following unaudited pro forma combined statements of income are based on
the historical consolidated statements of income of Mid-State and the statements
of income of City Commerce Bank, using the pooling method of accounting for
business combinations for the three month periods ending March 31, 1999 and 1998
and for the years ending December 31, 1998, 1997 and 1996. It should be read in
conjunction with the historical financial statements and notes thereto which are
included in this proxy statement/prospectus or are incorporated herein by
reference. Weighted average shares outstanding of the pro forma combined
institution are based on a .7991 exchange ratio which assumes that the Mid-State
"average closing price" is between $26.60 and $30.91. THE EXCHANGE RATIO COULD
BE HIGHER OR LOWER THAN .7791. The closing price of Mid-State common stock on
July 8, 1999 was $34.94.
There pro forma financial statements are presented for illustrative purposes
only and are not indicative of the operating results that would have been
achieved or the financial position that would have existed had the merger been
consummated on the dates indicated in the preceding paragraph nor are they
indicative of the future operating results or financial position of the combined
companies.
52
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE 3 MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MID-STATE CITY COMMERCE
BANCSHARES BANK ADJUSTMENTS COMBINED
----------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans and Leases...................... $ 13,400 $ 2,892 $ 16,292
Interest on Securities, Fed Funds Sold--Taxable............ 7,265 166 7,431
Interest on Securities--Tax-exempt......................... 650 44 694
----------- ------ ----- -----------
TOTAL INTEREST INCOME.................................... 21,315 3,102 24,417
----------- ------ ----- -----------
Interest Expense:
Interest on NOW, Money Market and Savings Deposits......... 1,858 580 2,438
Interest on Time Deposits--$100,000 and over............... 1,057 255 1,312
Interest on Time Deposits--Under $100,000.................. 2,727 107 2,834
Interest on Mortgages Payable, Other....................... 70 1 71
----------- ------ ----- -----------
TOTAL INTEREST EXPENSE................................... 5,712 943 6,655
----------- ------ ----- -----------
Net Interest Income:
Before Provision for Possible Loan Losses.................. 15,603 2,159 17,762
Provision for Possible Loan Losses......................... -- 15 15
----------- ------ ----- -----------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES..................... 15,603 2,144 17,747
----------- ------ ----- -----------
Other Income:
Service Charges on Deposit Accounts........................ 1,505 134 1,639
Other Income and Fees...................................... 2,205 91 2,296
----------- ------ ----- -----------
TOTAL OTHER INCOME....................................... 3,710 225 3,935
----------- ------ ----- -----------
Other Expense:
Salaries and Employee Benefits............................. 6,725 875 7,600
Occupancy Expenses......................................... 1,787 154 1,941
Merger Related Charges..................................... -- -- --
Other Operating Expenses................................... 3,352 570 3,922
----------- ------ ----- -----------
TOTAL OTHER EXPENSES..................................... 11,864 1,599 13,463
----------- ------ ----- -----------
Income Before Taxes........................................ 7,449 770 8,219
Tax Expense................................................ 2,270 314 2,584
----------- ------ ----- -----------
NET INCOME............................................... $ 5,179 $ 456 $ 5,635
----------- ------ ----- -----------
----------- ------ ----- -----------
Earnings Per Share
--Basic.................................................. $ 0.51 $ 0.28 $ 0.50
--Diluted................................................ $ 0.51 $ 0.27 $ 0.49
Shares used in Earnings Per Share Calculation
--Basic.................................................. 10,082 1,647 (364) 11,365
--Diluted................................................ 10,129 1,693 (374) 11,448
</TABLE>
53
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE 3 MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MID-STATE CITY COMMERCE
BANCSHARES BANK ADJUSTMENTS COMBINED
----------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans and Leases...................... $ 13,676 $ 2,548 $ 16,224
Interest on Securities, Fed Funds Sold--Taxable............ 7,261 252 7,513
Interest on Securities--Tax-exempt......................... 342 69 411
----------- ------ ----- -----------
TOTAL INTEREST INCOME.................................... 21,279 2,869 24,148
----------- ------ ----- -----------
Interest Expense:
Interest on NOW, Money Market and Savings Deposits......... 2,181 552 2,733
Interest on Time Deposits--$100,000 and over............... 1,162 147 1,309
Interest on Time Deposits--Under $100,000.................. 3,101 209 3,310
Interest on Mortgages Payable, Other....................... 67 3 70
----------- ------ ----- -----------
TOTAL INTEREST EXPENSE................................... 6,511 911 7,422
----------- ------ ----- -----------
Net Interest Income:
Before Provision for Possible Loan Losses.................. 14,768 1,958 16,726
Provision for Possible Loan Losses......................... 150 -- 150
----------- ------ ----- -----------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES..................... 14,618 1,958 16,576
----------- ------ ----- -----------
Other Income:
Service Charges on Deposit Accounts........................ 1,655 129 1,784
Other Income and Fees...................................... 2,513 237 2,750
----------- ------ ----- -----------
TOTAL OTHER INCOME....................................... 4,168 366 4,534
----------- ------ ----- -----------
Other Expense:
Salaries and Employee Benefits............................. 6,836 985 7,821
Occupancy Expenses......................................... 1,905 156 2,061
Merger Related Charges..................................... -- -- --
Other Operating Expenses................................... 3,715 656 4,371
----------- ------ ----- -----------
TOTAL OTHER EXPENSES..................................... 12,456 1,797 14,253
----------- ------ ----- -----------
Income Before Taxes........................................ 6,330 527 6,857
Tax Expense................................................ 2,262 197 2,459
----------- ------ ----- -----------
NET INCOME............................................... $ 4,068 $ 330 $ 4,398
----------- ------ ----- -----------
----------- ------ ----- -----------
Earnings Per Share
--Basic.................................................. $ 0.41 $ 0.19 $ 0.39
--Diluted................................................ $ 0.40 $ 0.19 $ 0.38
Shares used in Earnings Per Share Calculation
--Basic.................................................. 9,994 1,697 (375) 11,316
--Diluted................................................ 10,078 1,763 (389) 11,452
</TABLE>
54
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MID-STATE CITY COMMERCE
BANCSHARES BANK ADJUSTMENTS COMBINED
----------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans and Leases...................... $ 55,064 $ 10,694 $ 65,758
Interest on Securities, Fed Funds Sold--Taxable............ 30,389 977 31,366
Interest on Securities--Tax-exempt......................... 1,507 251 1,758
----------- ------- --- -----------
TOTAL INTEREST INCOME.................................... 86,960 11,922 98,882
----------- ------- --- -----------
Interest Expense:
Interest on NOW, Money Market and Savings Deposits......... 8,704 2,338 11,042
Interest on Time Deposits--$100,000 and over............... 4,365 456 4,821
Interest on Time Deposits--Under $100,000.................. 12,590 648 13,238
Interest on Mortgages Payable, Other....................... 333 7 340
----------- ------- --- -----------
TOTAL INTEREST EXPENSE................................... 25,992 3,449 29,441
----------- ------- --- -----------
Net Interest Income:
Before Provision for Possible Loan Losses.................. 60,968 8,473 69,441
Provision for Possible Loan Losses......................... 300 -- 300
----------- ------- --- -----------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES..................... 60,668 8,473 69,141
----------- ------- --- -----------
Other Income:
Service Charges on Deposit Accounts........................ 6,454 553 7,007
Other Income and Fees...................................... 16,427 1,302 17,729
----------- ------- --- -----------
TOTAL OTHER INCOME....................................... 22,881 1,855 24,736
----------- ------- --- -----------
Other Expense:
Salaries and Employee Benefits............................. 26,098 3,742 29,840
Occupancy Expenses......................................... 7,643 871 8,514
Merger Related Charges..................................... 7,440 -- 7,440
Other Operating Expenses................................... 14,348 2,164 16,512
----------- ------- --- -----------
TOTAL OTHER EXPENSES..................................... 55,529 6,777 62,306
----------- ------- --- -----------
Income Before Taxes........................................ 28,020 3,551 31,571
Tax Expense................................................ 9,000 1,576 10,576
----------- ------- --- -----------
NET INCOME............................................... $ 19,020 $ 1,975 $ 20,995
----------- ------- --- -----------
----------- ------- --- -----------
Earnings Per Share
--Basic.................................................. $ 1.90 $ 1.17 $ 1.85
--Diluted................................................ $ 1.88 $ 1.14 $ 1.83
Shares used in Earnings Per Share Calculation
--Basic.................................................. 10,031 1,690 (373) 11,348
--Diluted................................................ 10,098 1,735 (383) 11,450
</TABLE>
55
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MID-STATE CITY COMMERCE
BANCSHARES BANK ADJUSTMENTS COMBINED
----------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans and Leases...................... $ 53,383 $ 9,509 $ 62,892
Interest on Securities, Fed Funds Sold--Taxable............ 28,099 963 29,062
Interest on Securities--Tax-exempt......................... 794 343 1,137
----------- ------ --- -----------
TOTAL INTEREST INCOME.................................... 82,276 10,815 93,091
----------- ------ --- -----------
Interest Expense:
Interest on NOW, Money Market and Savings Deposits......... 8,935 2,243 11,178
Interest on Time Deposits--$100,000 and over............... 4,363 521 4,884
Interest on Time Deposits--Under $100,000.................. 12,063 733 12,796
Interest on Mortgages Payable, Other....................... 199 3 202
----------- ------ --- -----------
TOTAL INTEREST EXPENSE................................... 25,560 3,500 29,060
----------- ------ --- -----------
Net Interest Income:
Before Provision for Possible Loan Losses.................. 56,716 7,315 64,031
Provision for Possible Loan Losses......................... 30 75 105
----------- ------ --- -----------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES..................... 56,686 7,240 63,926
----------- ------ --- -----------
Other Income:
Service Charges on Deposit Accounts........................ 6,813 447 7,260
Other Income and Fees...................................... 9,647 927 10,574
----------- ------ --- -----------
TOTAL OTHER INCOME....................................... 16,460 1,374 17,834
----------- ------ --- -----------
Other Expense:
Salaries and Employee Benefits............................. 26,698 3,614 30,312
Occupancy Expenses......................................... 7,871 1,002 8,873
Merger Related Charges..................................... -- -- --
Other Operating Expenses................................... 16,319 2,170 18,489
----------- ------ --- -----------
TOTAL OTHER EXPENSES..................................... 50,888 6,786 57,674
----------- ------ --- -----------
Income Before Taxes........................................ 22,258 1,828 24,086
Tax Expense................................................ 4,616 604 5,220
----------- ------ --- -----------
NET INCOME............................................... $ 17,642 $ 1,224 $ 18,866
----------- ------ --- -----------
----------- ------ --- -----------
Earnings Per Share
--Basic.................................................. $ 1.77 $ 0.73 $ 1.67
--Diluted................................................ $ 1.76 $ 0.68 $ 1.65
Shares used in Earnings Per Share Calculation
--Basic.................................................. 9,965 1,671 (369) 11,267
--Diluted................................................ 10,049 1,791 (396) 11,444
</TABLE>
56
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MID-STATE CITY COMMERCE
BANCSHARES BANK ADJUSTMENTS COMBINED
----------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans and Leases...................... $ 49,789 $ 8,307 $ 58,096
Interest on Securities, Fed Funds Sold--Taxable............ 25,059 1,008 26,067
Interest on Securities--Tax-exempt......................... 568 486 1,054
----------- ------ ----------- -----------
TOTAL INTEREST INCOME.................................... 75,416 9,801 85,217
----------- ------ ----------- -----------
Interest Expense:
Interest on NOW, Money Market and Savings Deposits......... 9,111 2,018 11,129
Interest on Time Deposits--$100,000 and over............... 3,940 285 4,225
Interest on Time Deposits--Under $100,000.................. 10,922 614 11,536
Interest on Mortgages Payable, Other....................... 177 1 178
----------- ------ ----------- -----------
TOTAL INTEREST EXPENSE................................... 24,150 2,918 27,068
----------- ------ ----------- -----------
Net Interest Income:
Before Provision for Possible Loan Losses.................. 51,266 6,883 58,149
Provision for Possible Loan Losses......................... 227 (220) 7
----------- ------ ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES..................... 51,039 7,103 58,142
----------- ------ ----------- -----------
Other Income:
Service Charges on Deposit Accounts........................ 6,470 474 6,944
Other Income and Fees...................................... 9,349 1,010 10,359
----------- ------ ----------- -----------
TOTAL OTHER INCOME....................................... 15,819 1,484 17,303
----------- ------ ----------- -----------
Other Expense:
Salaries and Employee Benefits............................. 24,768 3,461 28,229
Occupancy Expenses......................................... 7,738 1,087 8,825
Merger Related Charges..................................... -- -- --
Other Operating Expenses................................... 21,336 2,206 23,542
----------- ------ ----------- -----------
TOTAL OTHER EXPENSES..................................... 53,842 6,754 60,596
----------- ------ ----------- -----------
Income Before Taxes........................................ 13,016 1,833 14,849
Tax Expense................................................ 5,138 530 5,668
----------- ------ ----------- -----------
NET INCOME............................................... $ 7,878 $ 1,303 $ 9,181
----------- ------ ----------- -----------
----------- ------ ----------- -----------
Earnings Per Share
--Basic.................................................. $ 0.79 $ 0.80 $ 0.82
--Diluted................................................ $ 0.79 $ 0.77 $ 0.81
Shares used in Earnings Per Share Calculation
--Basic.................................................. 9,948 1,638 (362) 11,224
--Diluted................................................ 9,989 1,685 (372) 11,303
</TABLE>
57
<PAGE>
MID-STATE STOCK
Mid-State is authorized by its articles of incorporation to issue 50,000,000
shares of no par value common stock and 25,000,000 shares of preferred stock. As
of June 30, 1999, 10,098,691 shares of common stock were issued and outstanding
and no shares of preferred stock were issued and outstanding. Holders of
Mid-State common stock are entitled to one vote, in person or by proxy, for each
share of stock held of record in the shareholder's name on the books of
Mid-State as of the record date on any matter submitted to the vote of the
shareholders. Shares of Mid-State common stock may not be voted cumulatively in
connection with the election of directors.
Each share of Mid-State stock has the same rights, privileges and
preferences as every other share and will share equally in Mid-State's net
assets upon liquidation or dissolution. Mid-State stock has no preemptive,
conversion or redemption rights or sinking fund provisions and all of the issued
and outstanding shares of Mid-State common stock are fully paid and
nonassessable.
Mid-State shareholders are entitled to dividends when, as and if declared by
Mid-State'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).
The transfer agent and registrar for Mid-State common stock is ChaseMellon
Financial Services.
In connection with the 25,000,000 shares of preferred stock authorized in
the articles of incorporation, the Mid-State board of directors has sole
authority to determine the terms of any one or more series of preferred stock,
including voting rights, conversion rates, and liquidation preferences.
COMPARISON OF MID-STATE COMMON STOCK
AND CITY COMMERCE BANK COMMON STOCK
City Commerce Bank is a California banking corporation and the rights of its
shareholders are governed by the California Financial Code, the California
General Corporation Law, and its articles of incorporation and bylaws. As
shareholders of Mid-State, you will have, in some cases, different rights since
the rights of Mid-State shareholders are governed by the California General
Corporation Law and Mid-State's articles of incorporation and bylaws.
The following subsections discuss certain differences between rights of
holders of Mid-State common stock and City Commerce Bank common stock.
CLASSIFICATION OF BOARD OF DIRECTORS AND FILING VACANCIES
City Commerce Bank's articles of incorporation do not permit its board of
directors to be divided into classes with any class having a term of office of
longer than one year. Each director of City Commerce Bank must be elected
annually. City Commerce Bank's bylaws also provide that any vacancy occurring in
the board, except in the case of removal, may be filled by a majority of the
remaining directors. The shareholders may elect a director or directors at any
time to fill any vacancy or vacancies not filled by the directors, including a
vacancy created by removal, at a meeting of shareholders or otherwise by their
unanimous written consent.
Upon Mid-State becoming a "listed corporation" on Nasdaq's National Market,
it became eligible to "classify" its board of directors. The board of directors
of Mid-State was divided at its annual meeting in May of this year into three
classes, each of which contains approximately one-third of the whole number of
the members of the board. The members of each class are 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. Mid-State's articles of incorporation also provide that any
vacancy occurring in the board, including a vacancy created by an increase in
the
58
<PAGE>
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 shareholders at which the term of the class to which
the director has been chosen expires.
VOTING RIGHTS
Holders of City Commerce Bank common stock are entitled to one vote, in
person or by proxy, for each share of stock held of record in the shareholder's
name on the books of City Commerce Bank as of the record date on any matter
submitted to the vote of the shareholders. In connection with the election of
directors, shares of City Commerce Bank common stock are entitled to be voted
cumulatively if a candidate's or candidates' name(s) have been properly placed
in nomination prior to the voting and a shareholder present at the shareholders'
meeting has given notice of his or her intention to vote his or her shares
cumulatively. If a shareholder has given such notice, all shareholders may
cumulate their votes for candidates in nomination. Cumulative voting entitles a
shareholder to give one nominee as many votes as is equal to the number of
directors to be elected multiplied by the number of shares of City Commerce Bank
common stock owned by such shareholder, or to distribute his or her votes on the
same principle between two or more nominees as he or she deems appropriate.
Holders of Mid-State common stock are also entitled to one vote for each
share of stock held. However, cumulative voting does not apply in connection
with the election of Mid-State directors and the candidates receiving the
highest number of affirmative votes up to the number of directors to be elected
will be elected.
VOTE ON BUSINESS COMBINATIONS
Under California law, 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 and any other affected class
of stock.
This majority vote requirement applies to (1) any business combination
involving City Commerce Bank and (2) any business combination involving
Mid-State which does not involve a "Related Person."
Mid-State's articles of incorporation change the majority vote requirement
and require the approval of the holders of at least 66 2/3% of Mid-State's
outstanding shares of voting stock to approve certain "Business Combinations"
(as defined in the articles of incorporation) involving a "Related Person" (as
defined in the articles of incorporation) except in cases where the proposed
transaction has been approved in advance by a majority of those members of
Mid-State'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 Mid-State or Mid-State
Bank) which owns beneficially or controls, directly or indirectly, 10% or more
of the outstanding shares of voting stock of Mid-State or an affiliate of such
person or entity. This provision of Mid-State's articles of incorporation
applies to any "Business Combination," which is defined to include:
- any merger or consolidation of Mid-State with or into any Related Person;
- any sale, lease, exchange, mortgage, transfer, or other disposition of 25%
or more of the assets of Mid-State or combined assets of Mid-State and its
subsidiaries to a Related Person;
- any merger or consolidation of a Related Person with or into Mid-State or
a subsidiary of Mid-State;
- any sale, lease, exchange, transfer, or other disposition of 25% or more
of the assets of a Related Person to Mid-State or a subsidiary of
Mid-State;
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- the issuance of any securities of Mid-State or a subsidiary of Mid-State
to a Related Person;
- the acquisition by Mid-State or a subsidiary of Mid-State of any
securities of a Related Person;
- any reclassification of common stock of Mid-State or any recapitalization
involving the common stock of Mid-State; or
- any agreement or other arrangement providing for any of the foregoing.
NUMBER OF DIRECTORS
Although the Corporations Code does not require Mid-State or City Commerce
Bank to maintain any specific range of number of directors, the number of
directors of Mid-State and City Commerce 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 City Commerce Bank bylaws currently
provide that the number of directors on its board of directors may not be fewer
than seven nor more than 10, and the current number of members on the board of
directors has been fixed at eight. Mid-State's bylaws currently provide that the
number of directors on its board of directors may not be fewer than nine nor
more than 17, and the current number of members on Mid-State's board of
directors has been fixed at 10.
At the effective time of the merger, (i) the number of directors for
Mid-State will be increased to 11 and (ii) a current member of the board of
directors of City Commerce Bank will be added to the Mid-State and Mid-State
Bank boards of directors.
DIVIDEND RESTRICTIONS
Since City Commerce 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 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
- the bank's retained earnings; or
- 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
the bank to the shareholders of the bank during such period.
Notwithstanding the previous provision, a bank may, with the prior approval
of the Commissioner of Financial Institutions make a distribution to the
shareholders of the bank in an amount not exceeding the greatest of (1) its
retained earnings; (2) its net income for its last fiscal year; or (3) the net
income of the bank for its current fiscal year. If the Commissioner finds that
the shareholders' equity of a bank is inadequate or that the making of a
distribution by a bank would be unsafe or unsound, the Commissioner may order
the bank to refrain from making a proposed distribution.
The ability of Mid-State to pay cash dividends is limited by the provisions
of Section 500 of the California General Corporation Law, which prohibits the
payment of dividends unless
- the retained earnings of the corporation immediately prior to the
distribution exceeds the amount of the distribution;
- the assets of the corporation exceed 1 1/4 times its liabilities; or
- 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 1 1/4 times its current liabilities.
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The ability of Mid-State to pay cash dividends is almost wholly dependent on
the ability of Mid-State Bank to pay dividends to Mid-State. The ability of
Mid-State Bank to pay dividends is subject to the same California Financial Code
provisions as are applicable to City Commerce Bank.
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS
Amendments to the articles of incorporation of City Commerce Bank, in
general, require the approval of the board of directors and a majority of the
outstanding voting shares. Amendments to the bylaws may be adopted by the board
of directors or the shareholders.
Mid-State's articles of incorporation provide that amendments to Mid-State's
articles 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 is required to amend or repeal certain provisions of
Mid-State's articles, including the provisions relating to approval of certain
business combinations, the number and classification of directors, director and
officer indemnification by Mid-State and amendment of Mid-State's bylaws and
Mid-State's articles. Mid-State 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 shareholders.
DISSENTERS' RIGHTS
Pursuant to the General Corporation Law of California, holders of City
Commerce Bank 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 General
Corporation Law) except to the extent limited by the California Financial Code.
The California General Corporation Law generally does not require
dissenters' rights with respect to shares which, immediately prior to the merger
are:
- listed on any national securities exchange certified by the California
Commissioner of Corporations, or
- listed on the list of over-the-counter margin stock issued by the Board of
Governors of the Federal Reserve System.
Mid-State common stock is listed on the list of over-the-counter margin stock
issued by the Board of Governors of the Federal Reserve System. However,
dissenters' right could apply in future "reorganizations" involving Mid-State if
holders of five percent or more of the outstanding shares make a written demand
on Mid-State in accordance with Chapter 13.
ANTI-TAKEOVER PROVISIONS IN MID-STATE'S ARTICLES OF INCORPORATION AND BYLAWS
Mid-State's articles of incorporation and bylaws contain certain provisions
that deal with matters of corporate governance and certain rights of
shareholders which are different from those of City Commerce Bank inasmuch as
they might be deemed to have a potential "anti-takeover" effect. These
provisions may have the effect of discouraging a future takeover attempt which
is not approved by the board of directors but which individual Mid-State
shareholders may deem to be in their best interest or in which shareholders may
receive a substantial premium for their shares over then current market prices.
As a result, Mid-State 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 an incumbent board of directors or management of Mid-State
more difficult.
The following description of certain of the provisions of the articles of
incorporation and bylaws of Mid-State is necessarily general, and reference
should be made in each case to such documents, which are contained as exhibits
to Mid-State's previous filings with the Securities and Exchange Commission.
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See "HOW YOU CAN OBTAIN FURTHER INFORMATION" as to how to obtain a copy of these
documents.
BOARD OF DIRECTORS
As discussed in "Classification of Board of Directors and Vacancies,"
Mid-State has a "classified" board of directors divided into three classes so
that approximately one-third of the total number of directors are elected each
year. The classified board of directors is intended to provide for continuity of
the Mid-State board of directors and to make it more difficult and time
consuming for a shareholder group to fully use its voting power to gain control
of the board of directors without consent of the incumbent board of directors of
Mid-State.
CUMULATIVE VOTING
Mid-State's articles of incorporation no longer permit cumulative voting in
the election of directors. Cumulative voting may assist a shareholder or group
of shareholders to elect a representative or representatives to the board of
directors in order to express their views.
AUTHORIZED SHARES
Mid-State's 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 to provide Mid-State's board of
directors with as much flexibility as possible to effect, among other
transactions, 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 Mid-State. 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 Mid-State, and thereby assist members of management to retain their
positions. Mid-State's board has no present plans for the issuance of additional
shares, other than the issuance of shares of Mid-State common stock upon
exercise of stock options and in the merger.
SHAREHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATION WITH PRINCIPAL
SHAREHOLDERS
As discussed above, Mid-State's articles of incorporation require the
approval of the holders of at least 66 2/3% of Mid-State's outstanding shares of
voting stock to approve certain "Business Combinations" involving a "Related
Person" except in cases where the proposed transaction has been approved in
advance by a majority of those members of Mid-State'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 above. The
increased shareholder vote required to approve this kind of business combination
may have the effect of foreclosing mergers and other business combinations which
a majority of shareholders deem desirable and place the power to prevent such a
merger or combination in the hands of a minority of shareholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
Amendments to Mid-State 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, including the provisions relating to
approval of certain business combinations, the number and classification of
directors, director and officer indemnification by Mid-State and
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amendment of Mid-State's bylaws and articles of incorporation. Mid-State 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 shareholders.
SHAREHOLDER NOMINATIONS
Mid-State's bylaws require a shareholder 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 Mid-State.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF MID-STATE'S ARTICLES OF INCORPORATION
The board of directors of Mid-State believes that the provisions described
above are prudent and will reduce Mid-State'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 Mid-State and its shareholders. In the judgment of the
board of directors, Mid-State's board will be in the best position to determine
the true value of Mid-State and to negotiate more effectively for what may be in
the best interest of its shareholders. Accordingly, the board of directors
believes that it is in the best interest of Mid-State and its shareholders to
encourage potential acquirors to negotiate directly with the board of directors
of Mid-State 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 Mid-State
and which is in the best interest of all shareholders.
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 shareholders 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 Mid-State and its shareholders, with due
consideration given to matters such as the management and business of the
acquiring corporation and maximum strategic development of Mid-State'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, shareholders may
be presented with the 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 shareholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive
Mid-State's remaining shareholders of benefits of certain protective provisions
of the Securities Exchange Act of 1934, if the number of beneficial owners
became less than the 300 thereby allowing for Exchange Act deregistration.
Despite the belief of Mid-State as to the benefits to shareholders of these
provisions of Mid-State's articles of incorporation, these provisions may also
have the effect of discouraging a future takeover attempt which would not be
approved by Mid-State's board of directors, but pursuant to which shareholders
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 any opportunity to do so. Such provisions will also
render the removal of Mid-State's board of directors and of management more
difficult. The board of directors of Mid-State, however, has concluded that the
potential benefits outweigh the possible disadvantages.
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INFORMATION ABOUT MID-STATE
GENERAL
Mid-State Bancshares is a California corporation incorporated November 12,
1996 and is registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended. As a bank holding company, Mid-State is allowed to
acquire or invest in the securities of companies that are engaged in banking or
in activities closely related to banking as authorized by the Board of Governors
of the Federal Reserve System.
Mid-State's principal asset is all of the issued and outstanding shares of
Mid-State Bank. At March 31, 1999, Mid-State had total consolidated assets of
$1.22 billion, consolidated deposits of $1.07 billion, and consolidated
shareholders' equity of $136.23 million.
MID-STATE BANK
Mid-State Bank was founded in 1961 and operates a full service commercial
banking business serving its customers on the Central Coast of California. It is
headquartered in Arroyo Grande and operates 28 offices in communities throughout
San Luis Obispo and Santa Barbara counties. Based on data supplied by banks in
its trade area, Mid-State Bank is the 2nd largest bank in terms of total assets
of the 12 independent banks headquartered in these counties. Mid-State Bank
operates two wholly owned subsidiaries--MSB Properties and Mid Coast Land
Company.
ACQUISITIONS
On January 29, 1998, Mid-State Bank entered into an Agreement to Merge and
Plan of Reorganization with BSM Bancorp and its wholly owned subsidiary Bank of
Santa Maria, Santa Maria, California pursuant to which, among other things,
- Bank of Santa Maria was merged with and into Mid-State Bank,
- BSM Bancorp became the bank holding company for Mid-State Bank and changed
its name to Mid-State Bancshares, and
- the shareholders of Mid-State Bank became shareholders of Mid-State
Bancshares (as renamed) in accordance with the exchange ratio set forth in
the agreement.
The merger closed on July 10, 1998 and at such date the former shareholders of
Mid-State Bank owned approximately 69.54% of the outstanding common stock of
Mid-State Bancshares. The merger was accounted for on a pooling-of-interest
basis and, as a result, prior periods were combined and restated as if the two
banks were historically one unit.
Mid-State expects to continue to take advantage of the consolidation of the
financial services industry by developing its franchise through the acquisition
of financial institutions and related businesses. Such acquisitions may entail
the payment by Mid-State of consideration in excess of the book value of the
underlying net assets acquired, may result in the issuance of additional shares
of Mid-State stock or the incurring of indebtedness by Mid-State, and could have
a dilutive effect on the per share earnings or book value of Mid-State common
stock. Moreover, such acquisitions sometimes result in a significant front-end
charge against earnings, although costs savings, especially incident to
in-market acquisitions, also may be anticipated.
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ADDITIONAL INFORMATION CONCERNING MID-STATE
Information concerning:
- directors and executive officers,
- executive compensation,
- principal stockholders,
- certain relationships and related transactions,
- and other related matters concerning Mid-State
is included or incorporated by reference in its annual report on Form 10-K for
the year ended December 31, 1998. Additionally, financial statements and
information as well as management's discussion and analysis thereof are included
in the Form 10-K for the year ended December 31, 1998 and in the Form 10-Q for
the quarter ended March 31, 1999. These reports are incorporated by reference
into this proxy statement/prospectus. If you want to obtain copies of these
documents or other information concerning Mid-State, please see "WHERE YOU CAN
FIND MORE INFORMATION" at page 99.
INFORMATION ABOUT CITY COMMERCE BANK
GENERAL
City Commerce Bank is a California community bank located in Santa Barbara,
California. In addition to its headquarters, City Commerce Bank maintains three
branches and an Operations Center in Santa Barbara and Ventura counties. City
Commerce Bank commenced operations as a California state chartered bank on
September 11, 1978. City Commerce Bank is licensed by the California Department
of Financial Institutions. Its deposits are insured up to the maximum legal
limits by the FDIC. As with many state-chartered banks of its size in
California, it is not a member of the Federal Reserve System. City Commerce Bank
is also subject to certain other federal laws and regulations. As of March 31,
1999, City Commerce Bank had total assets of approximately $149.6 million, total
deposits of $131 million, and total stockholders' equity of $17.3 million.
City Commerce Bank conducts a general commercial banking business that
serves individuals, professionals and small to medium-sized businesses. City
Commerce Bank offers a full range of lending activities, including commercial
loans, various types of consumer and real estate loans, term loans, construction
financing, and asset based lending and leasing activities. In the area of
deposit services, City Commerce Bank offers checking and savings deposits, money
market accounts and time deposits, and other non-deposit banking services,
including merchant processing services, ACH origination and Electronic Cash
Management services.
City Commerce Bank's main office and administrative headquarters are both
located at the Downtown Office, 33 East Carrillo Street, Santa Barbara,
California 93101, and its telephone number is (805) 963-5871. City Commerce Bank
maintains three additional branch offices: the Cottage office, located at 2222
Bath Street, Santa Barbara, California 93105; the Goleta Valley Office, located
at 5340 Hollister Avenue, Santa Barbara, California 93111; and the Ventura
Regional Office, located at 445 Esplanade Drive, Suite 110, Oxnard, California
93030. City Commerce Bank also maintains a facility housing its Data Processing,
Finance, Human Resources, and Card Services Departments located at 911 Olive
Street, Santa Barbara, California 93101.
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BUSINESS STRATEGY
City Commerce Bank's business strategy is to support the banking needs of
small businesses, mainly in the Santa Barbara and Ventura county areas served by
its offices. To this end, City Commerce Bank offers an array of business lending
services including SBA and other government guaranteed loans, term loans,
commercial notes, commercial real estate financing, construction loans, domestic
letters of credit, and business checking, savings, money market and time deposit
accounts. City Commerce Bank has focused on marketing efforts to implement its
business strategy of continuing to increase its core deposits through business
development efforts, diversifying its customer base, enhancing its product lines
and providing superior customer service.
These efforts include obtaining increased loan and deposit business from
existing customers, word-of-mouth referrals, a focused direct mail marketing
program and personal solicitation of customers by officers and directors.
Management assigns responsibility to all loan and business development officers
to make regular calls on potential customers and obtain referrals from existing
customers. City Commerce Bank directs promotional efforts toward professionals
and small-to-medium sized businesses.
City Commerce Bank has not engaged in any material research activities
relating to the development of new services or the improvement of existing City
Commerce Bank services.
There has been no significant change in the types of services offered by
City Commerce Bank since its inception, except in connection with new types of
accounts allowed by statute or regulation in recent years. City Commerce Bank
has no present plans regarding "a new line of business" requiring the investment
of a material amount of total assets.
Most of City Commerce Bank's business originates from Santa Barbara and
Ventura counties, and there is no emphasis on foreign sources and application of
funds. City Commerce Bank's business, based upon performance to date, does not
appear to be seasonal. Except as described above, a material portion of City
Commerce Bank's loans is not concentrated within a single industry or group of
related industries, nor is City Commerce Bank dependent upon a single customer
or group of related customers for a material portion of its deposits. Management
of City Commerce Bank is unaware of any material effect upon City Commerce
Bank's capital expenditures, earnings or competitive position as a result of
federal, state or local environmental regulation.
City Commerce Bank holds no patents, licenses (other than licenses obtained
from regulatory authorities), franchises or concessions.
PROPERTIES
The following table sets forth information about City Commerce Bank's
banking offices.
<TABLE>
<CAPTION>
LOCATION TYPE OWNED/LEASED SIZE SINCE
- ----------------------------------------------------------- --------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
33 East Carrillo Street, SB................................ Main Branch Owned 13,970 sq/ft 1984
2222 Bath Street, SB....................................... Branch Owned 1,488 sq/ft 1980
5340 Hollister Avenue, SB.................................. Branch Leased 4,972 sq/ft 1986
445 Esplanade Dr, Oxnard................................... Branch Leased 2223 sq/ft 1995
911 Olive Street, SB....................................... Operations Leased 9607 sq/ft 1993
</TABLE>
Aggregate annual rental for City Commerce Bank for leased premises was
$230,252 for the year ended December 31, 1998. City Commerce Bank considers its
present facilities to be more than sufficient for its current operations.
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EMPLOYEES
As of March 31, 1999, City Commerce Bank had a total of 68 full-time
employees and 14 part-time employees. The management of City Commerce Bank
believes that its employee relations are satisfactory.
COMPETITION
The banking and financial services business is highly competitive with
respect to both loans and deposits and is dominated by a relatively small number
of major banks which have many offices operating over wide geographic areas. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial service providers.
City Commerce Bank competes for loans and deposits and customers for
financial services with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, insurance companies,
finance companies, money market funds, credit unions, and other nonbank
financial service providers. Among the advantages certain of these institutions
have over City Commerce Bank are their ability to finance extensive advertising
campaigns, to allocate their investment assets to regions of highest yield and
demand, and to allocate significant resources to improved technology. Many of
these competitors are much larger in total assets and capitalization, have
greater access to capital markets and offer a broader array of financial
services than City Commerce Bank.
In order to compete with the other financial service providers, City
Commerce Bank principally relies upon local promotional activities, direct mail,
personal relationships established by officers, directors and employees with its
customers, and personalized services tailored to meet its customers' needs. For
clients whose loan demands exceed City Commerce Bank's lending limits, City
Commerce Bank attempts to arrange for these loans on a participation basis with
other banks and financial institutions.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by City Commerce Bank on its deposits
and other borrowings, and the interest rate received on loans extended to its
customers and securities held in City Commerce Bank's portfolio comprise the
major portion of City Commerce Bank's earnings. These rates are highly sensitive
to many factors that are beyond the control of City Commerce Bank. Accordingly,
the earnings and growth of City Commerce Bank are influenced by domestic and
foreign economic conditions, including inflation, recession and unemployment.
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) via
its open-market operations in United States Government securities. This is
accomplished by adjusting the required level of reserves for financial
institutions 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 City Commerce Bank
loans, investment 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
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in
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Congress, in the California legislature and before various bank regulatory and
other professional agencies.
LEGAL PROCEEDINGS
City Commerce Bank is, from time to time, subject to various pending and
threatened legal actions arising out of the normal course of its business. In
the opinion of management, no such pending or threatened litigation is likely to
have a material adverse effect on City Commerce Bank's financial condition or
results of operations.
CITY COMMERCE BANK--MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
In the following pages, management presents an analysis of the City Commerce
Bank's (the "Bank") financial condition and results of operations as of December
31, 1998 and 1997, and for the years then ended, and as of March 31, 1999 and
for the three-month periods ended March 31, 1999 and 1998. This discussion is
designed to provide stockholders with a more comprehensive review of the
operating results and financial position than could be obtained from an
examination of the financial statements alone. This analysis should be read in
conjunction with the financial statements and related footnotes and the selected
financial data included elsewhere in this document.
COMPARISION OF RESULTS OF OPERATIONS
NET INCOME
Net income for the year ended December 31, 1998 totaled $1,975,000,
increasing $751,000, or 61.4% over the year ended December 31, 1997 net income
of $1,224,000. Similarly, basic and diluted earnings per share, restated to
reflect stock dividends, increased $0.44 and $0.46 from $0.73 and $0.68 in 1997
to $1.17 and $1.14 in 1998. Return on average assets was 1.47% and 0.94% for
1998 and 1997, while return on average equity was 11.54% and 7.85% over the same
two years. The increase in net income in 1998 was due to an increase in net
interest income and other income. The components of these changes are discussed
in more detail later in this analysis.
Net income for the three-months ended March 31, 1999 was $456,000 an
increase of $126,000, or 38.2%, over net income of $330,000 for the three-months
ended March 31, 1998. This increase was due to the combination of increased net
interest income and reduced non-interest expenses, partly offset by a decrease
in non-interest income. Basic and diluted earnings per share totaled $0.28 and
$0.27 for the three months ended March 31, 1999 compared to $0.19 and $0.19 for
the three months ended March 31, 1998.
NET INTEREST INCOME
Net interest income represents the amount by which interest income on
interest-earning assets exceeds interest paid on interest-bearing liabilities.
Net interest income is the largest component of the Bank's income and is
affected by the interest rate environment and the volume and composition of
interest-earning assets and interest-bearing liabilities.
Net interest income was $8,473,000 for the year ended December 31, 1998
compared to $7,315,000 for the year ended December 31, 1997. The $1,158,000
increase in 1998 over 1997 was the result of an increase in the average yield
earned on a higher average balance of interest-earning assets combined with a
decrease in the average yield paid on interest-bearing liabilities. Despite the
aforementioned changes, growth in net interest income was partly constrained as
the ratio of average interest-earning assets to average interest-bearing
liabilities decreased from 152.2% in 1997 to 143.03% in 1998. The
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average yield earned on interest-earning assets increased as a larger proportion
of average earning assets were invested in higher yielding loans rather than
securities and federal funds sold as was the case in the prior year. The yields
earned on such investments may be limited in the foreseeable future due to a 50
basis point reduction in the discount rate by the Board of Governors of the
Federal Reserve System during the fourth quarter.
As a result of the aforementioned shifts in the components of
interest-earning assets and interest-bearing liabilities, as well as movements
in market interest rates, the Bank's net interest margin, which is calculated by
dividing net interest income by average interest-earning assets, increased from
6.18% in 1997 to 6.93% in 1998.
Net interest income increased $201,000 from $1,958,000 for the three months
ended March 31, 1998 to $2,159,000 for the three months ended March 31, 1999.
The increase was due to an increase in the average level of interest-earning
assets partially offset by an increase in the average level of interest-bearing
liabilities. The average yield earned on interest-earning assets decreased over
the comparable periods as a result of a general decline in market rates. The
average rate paid on interest-bearing liabilities also decreased due to a
general decline in market rates combined with a shift in the make-up of the
interest-bearing deposit portfolio. During the three months ended March 31,
1999, lower yielding savings, NOW and money market accounts made up a larger
average proportion of the portfolio compared to the same period in 1998. The
Bank's net interest margin remained fairly stable over the comparable three
month periods decreasing from 6.37% for the three months ended March 31, 1998 to
6.33% for the three months ended March 31, 1999.
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YIELDS EARNED AND RATES PAID
The following table sets forth certain information relating to the Bank's
average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of interest-earning assets or
interest-bearing liabilities, for the periods presented. Average balances are
derived from daily balances, which include nonaccruing loans in the loan
portfolio (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------- ----------------------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST
--------- ----------- ----------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities(2)
Taxable..................... $ 6,253 $ 90 5.76% $ 10,122 $ 560 5.53% $ 10,513 $ 555
Tax-exempt(4)............... 2,842 44 6.19% 4,009 251 6.26% 5,324 343
Federal funds sold............ 3,710 40 4.31% 6,963 360 5.17% 7,195 390
Interest-bearing deposits..... 2,669 36 5.40% 979 57 5.82% 353 18
Loans(1)...................... 120,906 2,892 9.57% 100,250 10,694 10.67% 94,999 9,509
--------- ----------- --------- ----------- --------- -----------
Total interest-earning
assets.................... 136,380 3,102 9.10% 122,323 11,922 9.75% 118,384 10,815
Non-interest-earning assets..... 12,053 12,145 11,492
--------- --------- ---------
Total assets................ $ 148,883 $ 134,468 $ 129,876
--------- --------- ---------
--------- --------- ---------
Interest-bearing liabilities
Savings deposits(3)........... $ 70,337 $ 580 3.30% $ 65,606 $ 2,338 3.56% $ 62,799 $ 2,243
Time deposits................. 28,166 362 5.14% 19,790 1,104 5.58% 14,948 1,254
Short-term borrowings......... 89 1 4.49% 127 7 5.51% 47 3
--------- ----------- --------- ----------- --------- -----------
Total interest-bearing
liabilities............... 98,592 943 3.83% 85,523 3,449 4.03% 77,794 3,500
----------- ----------- -----------
Non-interest-bearing
liabilities................... 33,061 31,832 36,491
--------- --------- ---------
Total liabilities........... 131,653 117,355 114,285
Stockholders' equity............ 17,230 17,113 15,591
--------- --------- ---------
Total liabilities and
stockholders' equity...... $ 148,883 $ 134,468 $ 129,876
--------- --------- ---------
--------- --------- ---------
Net interest income............. $ 2,159 $ 8,473 $ 7,315
----------- ----------- -----------
----------- ----------- -----------
Interest rate spread(5)......... 5.27% 5.72%
Net interest margin(6).......... 6.33% 6.93%
Average interest-earning assets/
average interest-bearing
liabilities................... 138.33% 143.03%
<CAPTION>
AVERAGE
YIELD
-----------
<S> <C>
Interest-earning assets:
Securities(2)
Taxable..................... 5.28%
Tax-exempt(4)............... 6.44%
Federal funds sold............ 5.42%
Interest-bearing deposits..... 5.10%
Loans(1)...................... 10.01%
Total interest-earning
assets.................... 9.14%
Non-interest-earning assets.....
Total assets................
Interest-bearing liabilities
Savings deposits(3)........... 3.57%
Time deposits................. 8.39%
Short-term borrowings......... 6.38%
Total interest-bearing
liabilities............... 4.50%
Non-interest-bearing
liabilities...................
Total liabilities...........
Stockholders' equity............
Total liabilities and
stockholders' equity......
Net interest income.............
Interest rate spread(5)......... 4.64%
Net interest margin(6).......... 6.18%
Average interest-earning assets/
average interest-bearing
liabilities................... 152.18%
</TABLE>
- ------------------------------
(1) Average loans are calculated net of unearned income and allowance for loan
losses and include non-accrual loans.
(2) Average balance includes unrealized gains and losses while yield is based on
amortized cost.
(3) Savings deposits includes savings, NOW, and money market deposit accounts.
(4) Interest on tax-exempt securities is reported on a historical basis without
tax-equivalent adjustment. Interest on tax exempt securities on a
tax-equivalent basis was $75 for the three months ended March 31, 1998, $427
for 1998 and $583 for 1997.
(5) Net interest rate spread is the difference between the yield on
interest-earning assets and interest-bearing liabilities.
(6) Net interest margin is net interest income divided by average interest
earning assets.
70
<PAGE>
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (1) changes in
volume (multiplied by prior year rate); (2) changes in rate (multiplied by prior
year volume); and, (3) total changes in rate and volume. Changes not solely
attributable to rate or volume have been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the changes in
each (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
THREE MONTHS ENDED DECEMBER 31, 1998 DECEMBER 31, 1997
MARCH 31, 1999 VERSUS VERSUS VERSUS
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------- --------------------------------- ----------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN DUE TO CHANGE IN
----------------------------------- --------------------------------- ----------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME
--------- ----------- ----- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities:
Taxable........................... $ 254 $ (331) $ (77) $ 26 $ (21) $ 5 $ 3 $ 17
Tax-exempt........................ 68 (93) (25) (9) (83) (92) (14) (129)
Federal funds sold.................. 37 (64) (27) (18) (12) (30) 16 (99)
Interest-bearing deposits........... (74) 92 18 3 36 39 -- 18
Loans............................... (1,637) 1,981 344 644 541 1,185 (250) 1,452
--------- ----------- ----- --------- ----- --------- --------- -----------
Total interest income............. (1,352) 1,585 233 646 461 1,107 (245) 1,259
INTEREST-BEARING LIABILITIES:
Savings deposits.................... (259) 287 28 (5) 100 95 (299) 524
Time deposits....................... (132) 138 6 (489) 339 (150) 412 (58)
Short-term borrowings 2 (4) (2) -- 4 4 -- 2
--------- ----------- ----- --------- ----- --------- --------- -----------
Total interest expense............ (389) 421 32 (494) 443 (51) 114 468
--------- ----------- ----- --------- ----- --------- --------- -----------
Net-interest income............... $ (963) $ 1,164 $ 201 $ 1,140 $ 18 $ 1,158 $ (359) $ 791
--------- ----------- ----- --------- ----- --------- --------- -----------
--------- ----------- ----- --------- ----- --------- --------- -----------
<CAPTION>
TOTAL
---------
<S> <C>
INTEREST-EARNING ASSETS:
Securities:
Taxable........................... $ 20
Tax-exempt........................ (143)
Federal funds sold.................. (83)
Interest-bearing deposits........... 18
Loans............................... 1,202
---------
Total interest income............. 1,014
INTEREST-BEARING LIABILITIES:
Savings deposits.................... 225
Time deposits....................... 355
Short-term borrowings 2
---------
Total interest expense............ 582
---------
Net-interest income............... $ 432
---------
---------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses is determined by management as the amount to
be added to the allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level which is considered adequate to
absorb losses inherent in the loan portfolio. The amount of the provision is
based on management's regular review of the loan portfolio and consideration of
such factors as historical loss experience, general prevailing economic
conditions, changes in the size and composition of the loan portfolio and
specific borrower considerations, including the ability of the borrower to repay
the loan and the estimated value of the underlying collateral.
The provision for loan losses totaled $75,000 in 1997, while no provision
for loan losses was recorded in 1998. The decrease resulted as management
believes that despite the growth in loans, the quality of the loan portfolio has
improved over the comparable years as a result of sound underwriting policies
and procedures. See "Allowance for Loan Losses" for further information.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Total non-interest income increased $481,000, or 35.0%, in 1998 compared to
1997. The increase was primarily due to a $1,004,000 nonrecurring gain realized
on the sale of a parcel of real estate owned in 1998. This gain was somewhat
offset by $440,000 in net realized losses on securities sold in 1998. The
majority of this loss was due to the liquidation of a $5.0 million equity
investment. Card
71
<PAGE>
services income decreased $190,000 as the Bank outsourced its merchant card
processing. Due to the outsourcing of this process the Bank began to recognize
fees on a net basis as opposed to the prior method of recognizing gross card
service fee income and the off-setting gross card servicing expense. Service
charges and other fees increased $106,000 as a result of an overall increase in
the deposit base.
Total non-interest income decreased $141,000 from $366,000 for the three
month period ending March 31, 1998 to $225,000 for the same period in 1999. This
decrease resulted primarily from the outsourcing of merchant card processing as
discussed above.
Non-interest expense totaled $6,777,000 for 1998 compared to $6,786,000 for
1997. Despite remaining fairly stable over the comparable periods, the
components of non-interest expense experienced fluctuation. Increases in
salaries and employee benefits and advertising and promotion expense were offset
by decreases in occupancy and card services expense. Salaries and employee
benefits increased as a result of normal, annual merit increases while
advertising and promotion expense increased as a result of the implementation of
an expanded comprehensive advertising campaign. Occupancy expense decreased as a
result of favorable negotiation of lease renewals, while card services expense
decreased as a result of the outsourcing of the card processing function as
discussed above.
Non-interest expense for the three month period ending March 31, 1999 was
$1,599,000, decreasing $198,000 from $1,797,000 for the same period in 1998. A
decrease in salaries and benefits, related to staff reductions, accounted for
$110,000 of this decrease. The Bank also experienced a $142,000 in card services
expense, related to the outsourcing of the card processing function as discussed
above. Advertising and promotion expense increased $51,000 as the continuing
result of the advertising campaign discussed above. Other changes in
non-interest expense were not significant.
INCOME TAXES
The change in income tax expense is primarily attributable to the change in
income before income taxes. The Bank's income tax provisions were $1,576,000 for
1998 and $604,000 for 1997 resulting in effective tax rates of 44.5% in 1998 and
33.1% in 1997.
Income tax provisions were $314,000 for the three months ended March 31,
1999 and $197,000 for the three months ended March 31, 1998 resulting in
effective tax rates of 40.8% and 37.4%, respectively.
ANALYSIS OF FINANCIAL CONDITION
The Bank's assets totaled $154.4 million at December 31, 1998 compared to
$136.9 million on December 31, 1997, an increase of $17.5 million, or 12.8%. The
growth in assets was the result of increased deposits that were invested in
loans. The Bank also reinvested a portion of the funds provided from sales and
principal repayments of securities into higher yielding loans.
Cash and due from banks and federal funds sold increased from $11.9 million
at December 31, 1997 to $17.8 million at December 31, 1998 as a result of
reduced balances in investment securities with proceeds redirected into
short-term bank certificates of deposit and non-interest bearing deposits with
other financial institutions. On December 31, 1998, a large portion of funds
were held in one of the Bank's non-interest bearing correspondent bank accounts
in order to meet the minimum account balance requirements and minimize account
charges. Subsequent to year-end, the funds were invested in federal funds sold.
The Bank's assets totaled at $149.6 million at March 31, 1999 compared to
$154.4 million at December 31, 1998, a decrease of $4.8 million or 3.1%. The
decrease was the result of decreases in loans and excess liquidity which were
used to fund a $4.8 million outflow of deposits during the quarter.
72
<PAGE>
SECURITIES PORTFOLIO
The following is a schedule of the carrying value of securities as of the
dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Securities available for sale (at fair value)
U.S. Treasury and Government agencies......................... $ 6,447 $ 6,495 $ 8,005
States and political subdivisions............................. 2,910 3,004 4,614
----------- --------- ---------
Total debt securities....................................... 9,357 9,499 12,619
Mutual funds.................................................. -- -- 4,578
----------- --------- ---------
Total..................................................... $ 9,357 $ 9,499 $ 17,197
----------- --------- ---------
----------- --------- ---------
</TABLE>
Total securities decreased $7.7 million, or 44.8%, from December 31, 1997 to
December 31, 1998 primarily due to the Bank's liquidation of its mutual fund
investment and the call of numerous municipal securities during 1998. The mutual
fund investment was sold because management believed that although there was
limited credit risk, the market risk had reached an unacceptable level and
wanted to preclude further market value deterioration.. The Bank invests
primarily in U.S. Treasury notes, Obligations of U.S. Government agencies and
municipal bonds. Management classifies securities as available for sale to
provide the Bank with the flexibility to move funds into loans as demand
warrants. The Bank held no derivative securities or structured notes during any
period presented.
Total securities remained fairly stable, with little change in the
composition of the portfolio, during the period from December 31, 1998 and March
31, 1999.
Excluding holdings of U.S. Treasury securities and other agencies and
corporations of the U.S. Government, there were no investments in securities of
any one issuer exceeding 10% of the Bank's stockholders' equity at March 31,
1999, December 31, 1998 or December 31, 1997. The Bank's mutual fund investment
held as of December 31, 1997 was invested in U.S. Government agency securities.
Securities may be pledged to meet security requirements imposed as a
condition to receipt of deposits of public funds and other purposes. At December
31, 1998 and 1997, and at March 31, 1999 the carrying values of securities
pledged to secure public deposits and other purposes were $3,032,000, $3,954,000
and $2,992,000, respectively.
73
<PAGE>
The following is a schedule of maturities for each category of debt
securities and the related weighted-average yield of such securities as of the
dates indicated: (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------------------------------
AVAILABLE FOR SALE
-----------------------------------------------------------
AFTER FIVE
AFTER ONE BUT BUT
WITHIN ONE WITHIN FIVE WITHIN TEN
YEAR YEARS YEARS
---------------------- ---------------------- -----------
AMOUNT YIELD AMOUNT YIELD AMOUNT
--------- ----- --------- ----- -----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and Government agencies............................. $ -- 0% $ 6,447 5.92% $ --
States and political Subdivisions................................. 1,159 6.42% 1,127 6.63% 624
--------- --------- -----
Total............................................................. $ 1,159 6.42% $ 7,574 6.27% $ 624
--------- --------- -----
--------- --------- -----
<CAPTION>
YIELD
-----
<S> <C>
U.S. Treasury and Government agencies............................. 0%
States and political Subdivisions................................. 4.91%
Total............................................................. 4.91%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------
AVAILABLE FOR SALE
---------------------------------------------------------------
AFTER FIVE
AFTER ONE BUT BUT
WITHIN ONE WITHIN FIVE WITHIN TEN
YEAR YEARS YEARS
------------------------ ------------------------ -----------
AMOUNT YIELD AMOUNT YIELD AMOUNT
----------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and Government agencies.......................... $ 500 5.01% $ 5,995 5.85% $ --
States and political Subdivisions.............................. 1,104 4.86% 1,273 6.30% 627
----------- ----------- -----
Total.......................................................... $ 1,604 4.93% $ 7,268 6.07% $ 627
----------- ----------- -----
----------- ----------- -----
<CAPTION>
YIELD
-----
<S> <C>
U.S. Treasury and Government agencies.......................... 0%
States and political Subdivisions.............................. 5.08%
Total.......................................................... 5.08%
</TABLE>
The weighted-average yields are calculated using amortized cost of
securities and are based on coupon rates for securities purchased at par value
and on effective interest rates considering amortization or accretion if the
securities were purchased at a premium or discount. The weighted-average yield
on tax-exempt obligations is presented without tax-equivalent adjustment.
LOAN PORTFOLIO
The following table set forth the components of total loans outstanding in
each category as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
----------- -------------- --------------
<S> <C> <C> <C>
TYPES OF LOANS
Commercial and industrial...................... $ 42,104 $ 43,737 $ 35,879
Real estate construction....................... 15,097 19,920 5,358
Real estate mortgage........................... 43,454 37,267 51,148
Installment and other consumer loans........... 20,137 22,077 10,278
Lease financing................................ 679 700 134
----------- -------------- --------------
Total loans.................................. $ 121,471 $ 123,701 $ 102,797
----------- -------------- --------------
----------- -------------- --------------
</TABLE>
At December 31, 1998 and March 31, 1999, there were no concentrations of
loans greater than 10% of total loans which are not otherwise disclosed as a
category of loans in the table above.
Total loans increased $20.9 million, or 20.3%, from December 31, 1997 to
December 31, 1998. Total loans decreased $2.2 million, or 1.8%, from December
31, 1998 to March 31, 1999. The components of these changes are discussed below.
74
<PAGE>
Certain risks are involved in granting loans, primarily related to the
borrowers' ability and willingness to repay the debt. Before the Bank extends a
new loan to a customer, these risks are assessed through a review of the
borrower's cash flow, past and current credit history, the collateral being used
to secure the transaction in case the customer does not repay the debt, the
borrower's character and other factors. Once the decision has been made to
extend credit, the Bank's loan review function and responsible credit officer
monitors these factors throughout the life of the loan. Any loan identified as a
problem credit by management or during the loan review is assigned to the Bank's
"watch loan list," and is subject to ongoing monitoring by the loan review
function to ensure appropriate action is taken if deterioration has occurred.
Commercial and industrial loans increased $7.9 million, or 21.9%, as a
result of a focused effort in business development targeting to this type of
customer. The decrease from December 31, 1998 to March 31, 1999 is attributed to
construction project completion and related repayments. Commercial and
industrial loans consist of credit lines for operating needs, loans for
equipment purchases and working capital, and various other business purposes.
Such loans are made to small businesses primarily based on their ability to
repay the loan from the business's cash flow. Such loans are typically secured
by business assets such as equipment and inventory. When the borrower is not an
individual, the Bank generally obtains the personal guarantee of the business
owner. As compared to consumer lending, which includes single-family residence,
personal installment loans and automobile loans, commercial lending entails
significant additional risks. These loans typically involve larger loan balances
and are generally dependent on the business's cash flow and, thus, may be
subject to adverse conditions in the general economy or in a specific industry.
Management reviews the borrower's cash flows when deciding whether to grant the
credit to evaluate whether estimated future cash flows will be adequate to
service principal and interest of the new obligation in addition to existing
obligations.
Real estate construction loans increased 271.8% from December 31, 1997 to
December 31, 1998 as a result of the dedication of a lender with specific
construction loan background and focus. This was in response to the aggressive
expansion taking place in Santa Barbara and Ventura County. This also led to the
rapid absorption of space as construction was completed, which resulted in
significant construction loan repayments during the first quarter of 1999. Real
estate construction loans are generally composed of commitments to customers
within the Bank's market area for construction of custom, semi-custom single
family residences, and industrial buildings. Construction loans are secured by
residential and business real estate, generally occupied by the borrower on
completion. The Bank's construction lending program is established in a manner
to minimize risk of this type of lending by not making a significant amount of
loans on speculative projects. While not contractually required to do so, the
Bank frequently provides the permanent loan at the end of the construction
phase. Construction loans also are generally made in amounts of 65% or less of
the value of collateral on commercial projects and 70% or less of the value of
collateral on residential projects.
Real estate mortgage loans decreased 27.1% from December 31, 1997 to
December 31, 1998 as a result of the significant drop in market rates and the
aggressive financing competition from conduit lenders. During the first quarter
of 1999, many of these markets have retreated, which resulted in renewed
strength in the real estate mortgage program with the Bank. Real estate mortgage
loans, which consist primarily of loans to the Bank's depositors secured by
trust deeds on commercial and residential real estate. Commercial real estate
loans are generally originated with a loan-to-value ratio of 65% or less.
Management performs much the same analysis when deciding whether to grant a
commercial real estate loan as a commercial loan, but with additional emphasis
on rental stability and stand-alone repayment ability of the project on income
properties. Residential real estate loans are made based on the borrower's
ability to make repayment from employment and other income. Management assesses
the borrower's ability to repay the debt through review of credit history and
ratings, verification of employment and other income, review of debt-to-income
ratios and other measures of repayment ability. The Bank generally makes these
loans in amounts of 70% or less of the value of
75
<PAGE>
collateral. An appraisal is obtained from a qualified real estate appraiser for
substantially all loans secured by real estate.
Installment and other consumer loans increased $11.8 million, or 114.8%, as
a result of the purchase of a second mortgage portfolio from a Los Angeles based
financial institution in December of 1998. The reductions during the first
quarter of 1999 is primarily related to early repayments against the purchased
portfolio due to the low real estate rates available. Installment and other
consumer loans include a range of traditional consumer loan products offered by
the Bank such as home equity and personal lines of credit and loans to finance
purchases of autos, boats, recreational vehicles, and various other consumer
items. This type of credit is not a major component of the business lines
offered by the Bank. As such, the Bank does not generally have standard product
offerings, but generally customizes the financing as an accommodation to
existing business customers. Overdraft protection loans are unsecured personal
lines of credit to individuals of demonstrated good credit character with
reasonably assured sources of income and satisfactory credit histories.
Installment and other consumer loans generally involve more risk than
residential mortgage loans because of the type and nature of collateral and, in
certain types of consumer loans, the absence of collateral. Since these loans
are generally repaid from ordinary income of an individual or family unit,
repayment may be adversely affected by job loss, divorce, ill health or by
general decline in economic conditions. The Bank assesses the borrower's ability
to make repayment through a review of credit history, credit ratings,
debt-to-income ratios and other measures of repayment ability.
Another way the Bank meets the needs of its customers is through its
lease-financing program. The Bank's leasing program involves leasing equipment
to individuals and businesses. The Bank provides only finance leases, thereby
eliminating the risk of residual values.
76
<PAGE>
The following tables schedule maturities of commercial and industrial and
real estate construction loans based on contractual terms and assuming no
amortization or prepayments as of March 31, 1999 and December 31, 1998. Demand
loans and loans having no stated schedule of repayments and no stated maturity
are reported as due in one year or less.
<TABLE>
<CAPTION>
MARCH 31, 1999
MATURING
----------------------------------------------
ONE YEAR ONE THROUGH AFTER FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FIXED RATE
Commercial and industrial............................ $ 2,574 $ 5,004 $ 154 $ 7,732
Real estate construction............................. -- -- -- --
--------- ----------- ----------- ---------
Total.............................................. $ 2,574 $ 5,004 $ 154 $ 7,732
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
VARIABLE RATE
Commercial and industrial............................ $ 20,129 $ 6,794 $ 7,449 $ 34,372
Real estate construction............................. 10,511 4,586 -- 15,097
--------- ----------- ----------- ---------
Total.............................................. $ 30,640 $ 11,380 $ 7,449 $ 49,469
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
MATURING
----------------------------------------------
ONE YEAR ONE THROUGH AFTER FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FIXED RATE
Commercial and industrial............................ $ 2,455 $ 4,435 $ -- $ 6,890
Real estate construction............................. -- -- -- --
--------- ----------- ----------- ---------
Total.............................................. $ 2,455 $ 4,435 $ -- $ 6,890
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
VARIABLE RATE
Commercial and industrial............................ $ 23,806 $ 8,640 $ 4,401 $ 36,847
Real estate construction............................. 16,212 3,708 -- 19,920
--------- ----------- ----------- ---------
Total.............................................. $ 40,018 $ 12,348 $ 4,401 $ 56,767
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
NON-PERFORMING ASSETS
The following schedule summarizes nonaccrual, past due and restructured
loans as of the dates indicated (dollars in thousands).
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Non-accrual loans...................................................................... $ 114 $ 120 $ 472
Accruing loans more than 90 days past due.............................................. 22 9 --
Troubled debt restructurings........................................................... -- -- --
----- --------- ---------
$ 136 $ 129 $ 472
----- --------- ---------
----- --------- ---------
</TABLE>
The accrual of interest on loans is ceased when management believes that
collection of interest is doubtful or when loans are past due as to principal
and interest 90 days or more, except that in certain circumstances interest
accruals are continued on loans deemed by management to be fully collectible.
77
<PAGE>
In such cases, loans are individually evaluated in order to determine whether to
continue income recognition after 90 days beyond the due dates. When loans are
placed on non-accrual, any accrued interest is charged against interest income.
Interest income foregone on non-accrual loans was approximately $97,000 in
1998 and $110,000 in 1997. No payments received on non-accrual loans were
included in interest income during the three months ended March 31, 1999.
Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include residential first mortgage and construction loans secured by
one- to four-family residences and consumer loans. Commercial loans and mortgage
loans secured by other properties are evaluated individually for impairment.
Loans are classified as impaired when analysis of borrower operating results and
financial condition indicates that borrower's underlying cash flows are not
adequate to meet its debt service requirements. Impaired loans are carried at
the present value of expected cash flows, discounted at the loan's effective
interest rate or at fair value of collateral, if the loan is collateral
dependent. A portion of the allowance for loan losses is allocated to impaired
loans. Impaired loans, or portions thereof, are charged off when deemed
uncollectible.
Loans considered impaired under SFAS No. 114 totaled $120,000 at December
31, 1998, $472,000 at December 31, 1997 and $114,000 at March 31, 1999, which
are included as non-accrual loans above. Such impaired loans had a valuation
allowance of $120,000 on December 31, 1998, $395,000 on December 31, 1997 and
$114,000 on March 31, 1999. The Bank recognized no interest on impaired loans in
1998 or 1997 or during the three months ended March 31, 1999.
At December 31, 1998 and March 31, 1999, no loans were identified which
management has serious doubts about the borrowers' ability to comply with
present loan repayment terms and which are not included in the above table.
Real estate acquired, or deemed acquired, by the Bank as a result of
foreclosure proceedings is classified as real estate owned ("REO") until it is
sold. When property is so acquired, or deemed to have been acquired, it is
initially recorded by the Bank at the fair value of the real estate, less
estimated costs to sell. Interest accrual, if any, ceases no later than the date
of acquisition of the real estate. Any reduction in fair value is reflected in a
valuation allowance account established by a charge to income. Costs incurred to
carry other real estate are charged to expense. The Bank did not hold any other
real estate owned at March 31, 1999 or December 31, 1998. Other real estate
owned totaled $1.7 million at December 31, 1997.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is a valuation allowance, increased
by the provision for loan and lease losses and decreased by charge-offs, less
recoveries. Management estimates the allowance balance required based on past
loan loss experience, known and inherent risks in the portfolio, information
about specific borrower situations and estimated collateral values, economic
conditions and other factors. In making this judgment, management reviews
selected large loans as well as impaired loans, other delinquent, non-accrual
and problem loans and loans to industries experiencing economic difficulties.
The collectibility of these loans is evaluated after considering current
operating results and financial position of the borrower, estimated market value
of collateral, guarantees and the Bank's collateral position versus other
creditors. Judgments, which are necessarily subjective, as to probability and
amount of loss are formed on these loans, as well as other loans taken together.
In addition, both Federal and state regulators, as an integral part of their
examination process, periodically review the Bank's allowance for loan and lease
losses and may recommend additions based upon their evaluation of the portfolio
at the time of their examination. The allowance for loan and lease losses is
reviewed monthly by management and the Board of Directors. While the Board of
Directors believes that it uses the best information available to determine the
allowance for loan and lease losses, unforeseen market
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conditions could result in material adjustments, and net earnings could be
significantly adversely affected, if circumstances differ substantially from the
assumptions used in making the final determination.
The allowance for loan and lease losses decreased from $1,699,000 at
December 31, 1997 to $1,540,000 at December 31, 1998 and $1,567,000 at March 31,
1999. The allowance as a percent of gross loans and leases was 1.65%, 1.24% and
1.29% at those same dates. Nonperforming loans, defined as loans on nonaccrual
status plus accruing loans past due 90 days or more, were $129,000, or 0.10% of
gross loans, at December 31, 1998 compared to $472,000, or 0.46% of gross loans,
at December 31, 1997. At March 31, 1999, such loans totaled $136,000, or 0.11%
of gross loans. Nonperforming loans have been considered in management's
analysis of the allowance for loan and losses. The allowance was 1,152%, 1,194%
and 360% of nonperforming loans at March 31, 1999 and December 31, 1998 and
1997, respectively. Management believes the allowance for loan and lease losses
is currently at an adequate level to provide for potential losses in the Bank's
loan portfolio as the quality of the loan portfolio has improved considerably as
a result of sound underwriting policies and procedures.
The following table summarizes, for the years indicated, changes in the
allowances for loan losses arising from loans charged-off, recoveries on loans
previously charged-off, and additions to the allowance which have been charged
to operating expenses and certain ratios relating to the allowance for loan and
lease losses (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Loans and Leases Outstanding, Period End(1)................... $ 121,471 $ 123,701 $ 102,797
Average Amount of Loans and Leases Outstanding(1)............. $ 120,906 $ 100,250 $ 94,999
Allowance for Loans and Lease Losses Balance,
Beginning of Period......................................... $ 1,540 $ 1,699 $ 1,420
Charge-offs
Domestic
Commercial, financial & agricultural.................. -- (135) --
Real estate--construction............................. -- -- --
Real estate--mortgage................................. -- -- --
Consumer loans........................................ (13) (58) (86)
Lease financing....................................... -- -- --
--------- --------- ---------
(13) (193) (86)
Recoveries
Domestic
Commercial, financial & agricultural.................. 10 24 273
Real estate--construction............................. -- -- --
Real estate--mortgage................................. -- -- --
Consumer loans........................................ 15 10 17
Lease financing....................................... -- -- --
--------- --------- ---------
25 34 290
--------- --------- ---------
Net (charge-offs)/Recoveries.................................. 12 (159) 204
Provision for Loan and Lease Losses........................... 15 -- 75
--------- --------- ---------
Allowance for Loan and Lease Losses Balance at Period End..... $ 1,567 $ 1,540 $ 1,699
--------- --------- ---------
--------- --------- ---------
Ratio of Net Charge-offs/(Recoveries) During the Year to
Average Loans and Leases Outstanding During the Period...... (0.01)% 0.16% (0.21)%
Ratio of Allowance for Loan and Lease Losses to Loans and
Leases at Period End........................................ 1.29% 1.24% 1.65%
</TABLE>
- ------------------------
(1) Loans, net of unearned income
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The following table summarizes the allocation of the allowance for loan
losses by loan type for the years indicated and the percent of loans in each
category to total loans. While management's periodic analysis of the adequacy of
allowance for loan losses may allocate portions of the allowance for specific
problem-loan situations, the entire allowance is available for any loan
charge-offs that occur. (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER
MARCH 31, 1999 DECEMBER 31, 1998 31, 1997
------------------------------ ------------------------------ -----------
<S> <C> <C> <C> <C> <C>
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO ALLOWANCE
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT
----------- ----------------- ----------- ----------------- -----------
Commercial and industrial................ $ 549 34.7% $ 297 35.4% $ 265
Real estate construction................. 99 12.4% 149 16.1% 39
Real estate.............................. 331 35.8% 317 30.1% 627
Installment, other consumer loans and
leases................................. 229 17.1% 282 18.4% 230
Unallocated.............................. 359 N/A 496 N/A 538
----------- ----- ----------- ----- -----------
Total.................................. $ 1,567 100.0% $ 1,540 100.0% $ 1,699
----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- -----------
<CAPTION>
<S> <C>
PERCENT OF
LOANS IN EACH
CATEGORY TO
TOTAL LOANS
-----------------
Commercial and industrial................ 34.9%
Real estate construction................. 5.2%
Real estate.............................. 49.8%
Installment, other consumer loans and
leases................................. 10.1%
Unallocated.............................. N/A
-----
Total.................................. 100.0%
-----
-----
</TABLE>
FUNDING
Deposits are the Bank's primary source of funds. Total deposits increased
$17.2 million, or 14.5%, from $118.6 million at December 31, 1997 to $135.8
million at December 31, 1998. Noninterest-bearing deposits increased $2.9
million, or 9.3%, while interest-bearing deposits increased $14.3 million, or
16.4%. The majority of the growth was in savings, Now and money market accounts
which increased $12.9 million. The increase was the result of aggressive deposit
pricing for local deposits, but primarily from the acquisition of a block of
brokered deposits to match fund the purchase of the second mortgage portfolio
purchased in December of 1998. At December 31, 1998, $13.4 million in deposits
were obtained from outside the Bank's traditional market area through financial
intermediaries. As such, these deposits are not considered "core" deposits and
create a degree of liquidity risk as such deposits tend to migrate based on
interest rates offered by other financial institutions. If interest rates rise,
management may have to increase the rates offered by the Bank to retain these
deposits. Doing so would have a negative impact on the Bank's net interest
margin.
Total deposits decreased $4.9 million, or 3.6%, from $135.8 million at
December 31, 1998 to $130.9 million at March 31, 1998. The Bank's deposit mix
included 48.3% in time and savings deposits, 27.4% in money market and NOW
deposits, and 24.3% in non-interest-bearing demand deposits at March 31, 1999.
Changes in deposit balances over the period were consistent with seasonal
fluctuations typical of the first quarter of the year.
The Bank also uses federal funds purchased from time to time as an
additional source of funding. On March 31, 1999, December 31, 1998 and December
31, 1997, there were no federal funds purchased outstanding.
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<PAGE>
The following table summarizes the distribution of average deposits and the
average rates paid for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
FOR PERIOD ENDED
MARCH 31, 1999 1998 1997
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits............ $ 31,407 -- $ 29,769 -- $ 27,979 --
Savings deposits(1)............................. 70,337 3.30% 65,606 3.56% 62,799 3.57%
Time deposits................................... 28,182 5.14% 19,790 5.58% 14,948 8.39%
---------- ---------- ----------
Total deposits.............................. $ 129,926 2.90% $ 115,165 2.99% $ 105,726 3.31%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) Savings deposits include Savings, NOW, and Money Market deposit accounts.
The scheduled maturity distribution of the Bank's time deposits of $100,000
or greater, as of the dates indicated, were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less.................................................................... $ 5,195 $ 2,740
Over three through six.................................................................. 1,874 2,051
Over six through twelve months.......................................................... 6,566 1,150
Over twelve months...................................................................... 7,389 11,891
----------- ------------
$ 21,024 $ 17,832
----------- ------------
----------- ------------
</TABLE>
CAPITAL RESOURCES
Stockholder's equity increased by $1,309,000, or 8.2%, from $16,058,000 at
December 31, 1997 to $17,367,000 at December 31, 1998, primarily through the
retention of earnings. It is the objective of management to maintain adequate
capital for future growth through retention of earnings. In 1998, City Commerce
Bank paid a 10% stock dividend payable in the fourth quarter of 1998, and in
1997, City Commerce Bank paid a 5% stock dividend also payable in the fourth
quarter of 1997.
Stockholders' equity was $17,310,000 on March 31, 1999, a $117,000, or
0.67%, decrease from the December 31,1998. This reduction in equity is the
result of the continuation of the Bank's stock repurchase plan, partially
off-set by the normal retention of earnings.
In January, 1998, the Bank began a stock repurchase plan as a means to
reduce excess capital. Under the Bank's stock repurchase plan, the number of
shares purchased and the price paid depends upon the availability of shares, the
prevailing market prices and any other considerations which may, in the opinion
of the Bank's Board of Directors or management, affect the advisability of
purchasing shares. Once purchased, the shares are retired. The cost of shares
repurchased and retired was $399,479 during the three months ended March 31,
1999 and $1.5 million during the year ended December 31, 1998.
The Bank is subject to regulations issued by the Department of Financial
Institutions and the FDIC which require maintenance of a certain level of
capital. These regulations impose two capital standards: a risk-based capital
standard and a leverage capital standard.
Under the risk-based capital guidelines, assets reported on an institution's
balance sheet and certain off-balance items are assigned to risk categories,
each of which has an assigned risk weight. Capital
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ratios are calculated by dividing the institution's qualifying capital by its
period-end risk-weighted assets. The guidelines establish two categories of
qualifying capital: Tier 1 Capital (defined to include common stockholders'
equity and noncumulative perpetual preferred stock) and Tier 2 Capital defined
to include limited life (and in the case of bank, cumulative) preferred stock,
mandatory convertible securities, subordinated debt, and a limited amount of
reserves for loan and lease losses. Each institution is required to maintain a
risk-based capital ratio (including Tier 1 and Tier 2 capital) of 8%, of which
at least half must be Tier 1 capital.
Under the leverage capital standard an institution is required to maintain a
minimum ratio of Tier 1 capital to the sum of its quarterly average total assets
and quarterly average reserve for loan losses, less intangibles not included in
Tier 1 capital. Period-end assets may be used in place of quarterly average
total assets on a case-by-case basis. A minimum leverage ratio of 3% is required
for institutions which have been determined to be in the highest of five
categories used by regulators to rate financial institutions and which are not
experiencing or anticipating significant growth. All other organizations are
required to maintain leverage ratios of at least 100 to 200 basis points above
the 3% minimum. The following table indicates the requirement is 4.0% because
that is the level that the prompt corrective action regulations require to be
considered adequately capitalized.
The table below represents the capital and leverage ratios of City Commerce
Bank as of March 31, 1999, December 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
CAPITAL NEEDED
------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PURPOSES PROMPT CORRECTIVE
ACTUAL PROVISIONS
-------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999
Total capital to risk-weighted assets................... $ 18,806 13.49% $ 11,136 8.0% $ 13,920 10.0%
Tier 1 capital to risk-weighted assets.................. 17,205 12.36% 5,568 4.0% 8,352 6.0%
Tier 1 capital to average assets........................ 17,205 11.51% 5,979 4.0% 7,474 5.0%
As of December 31, 1998
Total capital to risk-weighted assets................... $ 18,807 13.28% $ 11,307 8.0% $ 14,134 10.0%
Tier 1 capital to risk-weighted assets.................. 17,227 12.19% 5,654 4.0% 8,480 6.0%
Tier 1 capital to average assets........................ 17,227 11.17% 6,168 4.0% 7,710 5.0%
As of December 31, 1997
Total capital to risk-weighted assets................... $ 17,427 14.35% $ 9,715 8.0% $ 12,144 10.0%
Tier 1 capital to risk-weighted assets.................. 15,713 12.94% 4,858 4.0% 7,286 6.0%
Tier 1 capital to average assets........................ 15,713 11.58% 5,432 4.0% 6,789 5.0%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
substantially revises banking regulation and establishes a framework for
determination of capital adequacy of financial institutions. Under the FDICIA,
financial institutions are placed into one of five capital adequacy categories
as follows: (1) "well capitalized" consisting of institutions with a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based ratio of 6% or
greater and a leverage ratio of 5% or greater, and the institution is not
subject to an order, written agreement, capital directive or prompt corrective
action directive; (2) "adequately capitalized" consisting of institutions with a
total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of 4% or greater and a leverage ratio of 4% or greater, and the
institution does not meet the definition of a "well-capitalized" institution;
(3) "under capitalized" consisting of institutions with a total risk-based
ration of less than 4%; (4) "significantly undercapitalized" consisting of
institutions with a total risk-based capital ratio of less than 6%, Tier 1
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risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%;
and (5) "critically undercapitalized" consisting of an institution with a ratio
of tangible equity to total assets that is equal to or less than 2%.
Financial institutions classified as under capitalized or below are subject
to various limitations including, among other matters, certain supervisory
actions by bank regulatory authorities and restrictions relating to (i) growth
of assets, (ii) payment of interest on subordinated indebtedness, (iii) payment
of dividends or other capital distributions, and (vi) payment of management fees
to a parent holding company. The FDICIA requires regulatory authorities to
initiate corrective action regarding financial institutions, which fail to meet
minimum capital requirements. Such actions may, among other matters, require
that the financial institution augment capital and reduce total assets.
Critically undercapitalized financial institutions may also be subject to
appointment of a receiver or conservator unless the financial institution
submits an adequate capitalization plan.
LIQUIDITY AND INTEREST RATE SENSITIVITY
LIQUIDITY. Liquidity is the ability of the Bank to fund customers' needs
for borrowing and deposit withdrawals. The purpose of liquidity management is to
assure sufficient cash flow to meet all of the financial commitments and to
capitalize on opportunities for business expansion. This ability depends on the
institution's financial strength, asset quality and types of deposit and
investment instruments offered by the Bank to its customers. The Bank's
principal sources of funds are deposits, loan and securities repayments,
maturities of securities, sales of securities available for sale and other funds
provided by operations. While scheduled loan repayments and maturing investments
are relatively predictable, deposit flows are more influenced by interest rates,
general economic conditions and competition. The Bank maintains investments in
liquid assets based upon management's assessment of (1) need for funds, (2)
expected deposit flows, (3) yields available on short-term liquid assets and (4)
objectives of the Bank's asset/liability management program. Management assesses
the likelihood of projected funding requirements by reviewing historical funding
patterns, current and forecasted economic conditions and individual client
funding needs. Commitments to fund loans and outstanding letters of credit were
$48.4 million at March 31, 1999, $47.3 million at December 31, 1998, and $34.8
million at December 31, 1997. Such commitments relate primarily to revolving
lines of credit, construction loans, and other commercial loans.
City Commerce Bank's sources of liquidity consist of its deposits with other
banks, overnight funds sold to correspondent banks and unpledged short-term,
marketable investments. On December 31, 1998, liquid assets totaled $21.6
million or 14.0% of total assets as compared to $14.0 million or 10.3% of total
assets on December 31, 1997. On March 31, 1999 liquid assets totaled $15.3
million or 10.2% of total assets. In addition to liquid assets, City Commerce
Bank maintains lines of credit with correspondent banks available on a
short-term basis. Informal agreements are also in place with various other banks
to purchase participations in loans, if necessary.
As summarized in the Statements of Cash Flows, the most significant
transactions which affected the Bank's level of cash and cash equivalents, cash
flows and liquidity during 1998 were the net increase in loans of $20.7 million;
the receipt of proceeds from sales, maturities and repayments of securities of
$16.2 million; securities purchases of $8.7 million and the net increase in
deposits of $15.8 million.
INTEREST RATE SENSITIVITY. Interest rate sensitivity is a measure of the
exposure to fluctuations in the Bank's future earnings caused by fluctuation in
interest rates. Such fluctuations result from the mismatch in repricing
characteristics of assets and liabilities at a specific point in time. This
mismatch, or interest rate sensitivity gap, represents the potential mismatch in
the change in the rate of accrual of interest revenue and interest expense from
a change in market interest rates. Mismatches in interest rate repricing among
assets and liabilities arise primarily from the interaction of various customer
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<PAGE>
businesses (i.e. types of loans versus the types of deposits maintained) and
from management's discretionary investment and funds gathering activities. The
Bank attempts to manage its exposure to interest rate sensitivity, but due to
its size and direct competition from the major banks, it must offer products
which are competitive in the market place, even if less than optimum with
respect to its interest rate exposure.
The table below sets forth the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities as of December 31,
1998, using the interest rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate sensitive with a
specified period when it can be repriced or matures within it contractual terms
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------------------------------
THREE OVER THREE OVER ONE
MONTHS THROUGH THROUGH OVER FIVE NON-INTEREST
OR LESS 12 MONTHS FIVE YEARS YEARS BEARING TOTAL
--------- ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits in banks....... $ 2,573 $ 99 $ -- $ -- $ -- $ 2,672
Federal funds sold....................... -- -- -- -- -- --
Investment securities.................... 1,268 3,918 4,043 270 -- 9,499
Net loans and leases..................... 81,710 2,794 26,393 11,264 -- 122,161
Non-interest-bearing assets.............. -- -- -- -- 20,038 20,038
--------- ----------- ----------- ----------- ------------ ----------
Total assets............................. 85,551 6,811 30,436 11,534 $ 20,038 $ 154,370
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest-bearing deposits............ -- -- -- -- 34,113 34,113
Interest-bearing deposits................ 83,538 10,178 7,975 -- -- 101,691
Other liabilities........................ -- -- -- -- 1,199 1,199
Stockholders' Equity..................... -- -- -- -- 17,367 17,367
--------- ----------- ----------- ----------- ------------ ----------
Total Liabilities and Stockholders'
Equity................................. 83,538 10,178 7,975 -- $ 52,679 $ 154,370
--------- ----------- ----------- ----------- ------------ ----------
------------ ----------
Interest Rate Sensitivity Gap............ $ 2,013 $ (3,367) $ 22,461 $ 11,534
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Cumulative Interest Rate Sensitivity
Gap.................................... $ 2,013 $ (1,354) $ 21,107 $ 32,641
</TABLE>
Management attempts to maintain the short-term (up to 18 months) Gap fairly
neutral. Historically this has been accomplished with a deposit mix that is
heavily skewed to non-interest bearing deposits and personal and business
savings products. Similarly, with the exception of fixed rate real estate
mortgage loans, loan terms are generally provided on a floating or variable rate
basis.
Management believes no events have occurred since December 31, 1998 which
would significantly change the Bank's interest rate sensitivity gap ratio at
March 31, 1999 over each of the various repricing periods shown on the above
table.
YEAR 2000 ISSUE
OVERVIEW. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. As a
result, date-sensitive software and/or hardware may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or other disruption of operations and impede normal business activities.
In June 1996, the Federal Financial Institutions Examination Council
("FFIEC") alerted the banking industry of the serious challenges that would be
encountered with Year 2000 issues. The Federal Deposit Insurance Corporation
("FDIC") has also implemented a plan to require compliance with Year 2000 issues
and regularly examines our progress.
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<PAGE>
STATE OF READINESS OF CITY COMMERCE BANK.
OVERALL PLAN. City Commerce Bank has initiated an enterprise-wide program
to prepare the bank's computer systems and applications for the year 2000. The
bank has examined its primary integrated bank operating system, ITI's Premier
and Premier II and has been advised by the vendor that the software is year 2000
compliant. This advice was validated with test results conducted by the
Information Services Department. Y2K Regulatory and Technical Consultants
reviewed the test results on November 24, 1998.
VENDORS. City Commerce Bank relies exclusively on outside vendors to
provide the hardware and software used in its computer operations. To determine
the readiness of vendors, City Commerce Bank has sent a letter to each vendor
inquiring about its compliance with Year 2000. Many of the vendors have
responded that they are Year 2000 compliant. City Commerce Bank has determined
that some vendors will not have a material impact on the bank's operations,
whether or not they are Year 2000 compliant. In these two situations, no further
work is performed. For those vendors that have responded they are working
towards Year 2000 compliance and that City Commerce Bank has determined to be
significant, the bank is following up on a regular basis through 1999. Most of
these vendors have advised City Commerce Bank that they expect to be Year 2000
compliant prior to December 31, 1999. If critical vendors do not demonstrate
compliance by a certain date, City Commerce Bank will seek other alternatives in
accordance with its contingency plan. This may include seeking replacement
vendors.
CUSTOMERS. To determine the readiness of customers, City Commerce Bank has
personally met with, and interviewed by way of a questionnaire, each of its
significant borrowers and depositors to determine the extent of risk created by
any failure by them to remediate their own Year 2000 issues. Each borrower and
depositor is categorized as to its level of readiness and risk based on its
response to the questionnaire. New borrowers and large depositors are screened
utilizing the same questionnaire approach. In August, and November of 1998 and
March of 1999, City Commerce Bank communicated by letter, to each of its
depositors and borrowers, information about Year 2000 issues and problems, and
furnished sources of information that they might utilize to address these issues
and problems. Additional written communication is planned for 1999. Management
and staff of City Commerce Bank have also served as speakers at community forums
to raise the level of awareness of Year 2000 issues.
COSTS TO ADDRESS YEAR 2000 ISSUES FOR CITY COMMERCE BANK. Some of City
Commerce Bank's computer hardware and software applications were modified or
replaced in order to maintain their functionality as the year 2000 approaches.
City Commerce Bank has spent approximately $357,496 as of December 31, 1998 to
address Year 2000 issues and estimates its total costs over the three-year
period 1998 - 2000 to be approximately $500,000. In addition, staff time of
approximately 1,560 hours has been devoted to these matters, with an additional
300 hours of time expected during the remainder of 1999. These costs have been
paid for out of general operating funds. City Commerce Bank does not anticipate
that any of these costs will materially impact its results of operations in any
one reporting period.
RISKS OF YEAR 2000 ISSUES FOR CITY COMMERCE BANK. Ultimately, the potential
impact of the Year 2000 issue on City Commerce Bank will depend on a series of
complex factors, including the following:
- the corrective measures undertaken by City Commerce Bank itself;
- the measures undertaken by third-party vendors to become Year 2000
compliant;
- the accuracy of representations made by third-party vendors to City
Commerce Bank concerning their state of readiness;
- the degree of compliance by governmental agencies, businesses (including
telephone companies), and other entities which engage in essential
communications with City Commerce Bank; and
- the degree of compliance of customers.
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<PAGE>
At worst, City Commerce Bank's customers and vendors will face severe Year
2000 issues. In this case, City Commerce Bank may be unable to service its
customers, and borrowers may become unable to pay back their loans. City
Commerce Bank may also be required to replace non-compliant vendors with more
expensive Year 2000-compliant vendors. At this time City Commerce Bank cannot
determine the financial effect on it if significant customer or vendor
remediation efforts are not resolved in a timely manner.
CONTINGENCY PLANS OF CITY COMMERCE BANK. City Commerce Bank has developed a
business continuation contingency plan to provide service to customers should
there be an environment in which electrical and communication services may not
be available for a brief period of time after the century date change. The
bank's data processing system and other mission critical systems have been
tested and are Year 2000 compliant. In the event its computer system or other
mission critical system should fail, City Commerce Bank has alternate procedures
to achieve a successful resumption of business. These alternative procedures
include reverting to manual systems for processing some forms of work as well as
contractual arrangements with Year 2000 compliant outside vendors for data
processing.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" --SFAS 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS 133 does not allow hedging of a security which is
classified as held to maturity, accordingly, upon adoption of SFAS 133,
companies may reclassify any security from held to maturity to available for
sale if they wish to be able to hedge the security in the future. This statement
currently has an effective date of January 1, 2000, however there is currently a
one year deferral being considered. Management does not expect the adoption SFAS
133 to have a significant impact on the Bank's financial statements.
SFAS NO. 134 "ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE
SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING
ENTERPRISE" --SFAS 134 changes the way companies involved in mortgage banking
account for certain securities and other interests they retain after
securitizing mortgage loans that were held for sale. SFAS 134 allows any
retained mortgage-backed securities after a securitization of mortgage loans
held for sale to be classified based on holding intent in accordance with SFAS
115 except in cases where the retained mortgage-backed security is committed to
be sold before or during the securitization process in which case it must be
classified as trading. Previously, all retained mortgage-backed securities were
required to be classified as trading. SFAS 134 became effective on January 1,
1999, however, the Bank does not currently engage in mortgage banking
operations.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes included herein have been prepared in
accordance with generally accepted accounting principles ("GAAP"). Presently,
GAAP requires the Bank to measure financial position and operating results
primarily in terms of historic dollars. Changes in the relative value of money
due to inflation or recession are generally not considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are greatly influenced by changes in the
inflation rate, they do not change at the same rate or in the same magnitude as
the inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies.
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PROPOSAL 2
ELECTION OF CITY COMMERCE BANK DIRECTORS
BOARD OF DIRECTORS
The persons named below, all of who are present members of the board of
directors of City Commerce Bank, will be nominated for election to serve until
the earlier of (1) the closing of the merger or (2) the next annual meeting of
shareholders and until their successors are elected and have qualified. Votes
will be cast pursuant to the enclosed proxy in such a way as to effect the
election of said eight (8) nominees, or as many thereof as possible under
applicable voting rules. In the event that any of the nominees should be unable
to serve as a director, it is intended that the proxy will be voted for the
election of such substitute nominee, if any, as shall be designated by the board
of directors. Management has no reason to believe that any nominee will become
unavailable to serve as a director of City Commerce Bank.
At the effective time of the merger, Mid-State and Mid-State Bank will elect
of one (1) member of the current City Commerce Bank board to the boards of
directors of Mid-State and Mid-State Bank.
The table below sets forth certain information, as of July 6, 1999, with
respect to members of the board of directors of City Commerce Bank.
<TABLE>
<CAPTION>
DIRECTOR OF
NAME AND POSITION BANK SINCE AGE PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
- -------------------------------------------------- ------------- --- -------------------------------------------
<S> <C> <C> <C>
William J. Blythe, Director....................... 1978 65 Dentist
Roger P. Duncan, Director......................... 1996 62 President, Rusty's Pizza Parlors, Inc.
Betty M. Hatch, Director.......................... 1996 61 Executive, La Belle Foundation
H. Edward Heron, Director......................... 1996 58 Vice President, Coldwell Banker-- John
Douglas Company
Carl E. Lindros, Director, Chairman............... 1979 63 President and Chief Executive Officer,
Santa Barbara Securities, Inc.
John R. Mackall, Director;........................ 1996 49 Attorney, Seed, Mackall & Cole, LLP
C. Brian O'Gorman, Director....................... 1978 58 Attorney, O'Gorman & O'Gorman
Eloy U. Ortega, President, Chief Executive Officer
and Director.................................... 1998 48 Banker(1)
</TABLE>
- ------------------------
(1) Mr. Ortega has been the President and Chief Executive Officer of City
Commerce Bank since 1998. Mr. Ortega replaced Mr. Terry Downard, who
resigned for personal reasons. Prior to that time, Mr. Ortega served as
Executive Vice President and Chief Financial Officer of City Commerce Bank
from 1996 until 1998. Mr. Ortega previously served as Senior Vice President
and Senior Operations Officer of City Commerce Bank from 1993 to 1996, Mr.
Ortega has served City Commerce Bank as an officer since 1991, and Mr.
Ortega has over 27 years of banking experience.
None of the directors or executive officers of City Commerce Bank were
selected pursuant to any arrangement or understanding, other than with the
directors and executive officers of City Commerce Bank, acting within their
capacities as such. There are no family relationships between the directors and
executive officers of City Commerce Bank, and none of the directors or executive
officers of City Commerce 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.
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<PAGE>
None of the directors or executive officers of City Commerce Bank have,
during the last five years, been involved in any legal proceedings that are
material to an evaluation of the ability or integrity of any director or
executive officer of City Commerce Bank.
THE BOARD OF DIRECTORS AND COMMITTEES
City Commerce Bank has, among other committees, a standing Loan and
Investment Committee composed of Messrs. Blythe, Heron, O'Gorman, Ortega, Kum
and Glass. During the fiscal year ended December 31, 1998, the Loan and
Investment Committee held a total of forty six (46) meetings. The purpose of the
Loan and Investment Committee is to establish loan limits for lending personnel,
approve all loan in excess of those limits, and to review reports of all loans
made. In addition, the committee reviews liquidity, deposit, loan and investment
pricing, and investment sales and purchases.
During the fiscal year ended December 31, 1998, the Audit Committee held a
total of three (3) meetings and its members are Messrs. Mackall, Duncan and
Heron. The purpose of the Audit Committee is to employ outside auditors of City
Commerce Bank in order to fulfill the legal and technical requirements necessary
to adequately protect the directors, shareholders, employees and depositors of
City Commerce Bank. The Audit Committee also meets with City Commerce Bank's
internal auditor to review City Commerce Bank's internal auditing program. It is
also the responsibility of the Audit Committee to recommend to the Board of
Directors the selection of independent accountants and to make certain that the
independent accountants have the necessary freedom and independence to freely
examine all City Commerce Bank records.
City Commerce Bank also has a standing Personnel Committee, a Strategic
Planning Committee, and a Sales Incentive Compensation Committee. City Commerce
Bank does not have a Standing Nominating Committee; however, the procedures for
nominating directors, other than by the Board of Directors itself, are set forth
in the bylaws and in the notice of annual meeting of shareholders.
During the fiscal year ended December 31, 1998, the Board of Directors held
a total of sixteen (16) meetings. Each incumbent director of City Commerce Bank
who was a director during 1998 attended at least 75% of the aggregate of (1) the
total number of such board meetings and (2) the total number of meetings held by
all committees of the board on which such director served during 1998.
COMPENSATION OF NON-EXECUTIVE DIRECTORS
Directors who were not executive officers of City Commerce Bank were paid
the following in 1998:
(a) For each board meeting attended, the Chairman of the Board was paid
$1,600 and the other Directors were each paid $1,000;
(b) For each committee meeting attended, the Committee Chairman was paid
$275 and the other Committee members were each paid $200.
No additional compensation was paid to executive officers of City Commerce
Bank for attendance at board or committee meetings. For the fiscal year ended
December 31, 1998, the total paid to all other Directors for board and committee
meetings attended was $162,575.
On February 15, 1996, City Commerce Bank executed four retired director's
compensation agreements with four directors who were retiring. Such agreements
provided for payments to such retired director for a period of ten years.
However, the payments would cease upon the death of such director, the
director's resumption of a position as a director of City Commerce Bank, or a
change of control. The proposed transaction with Mid-State qualifies as a change
of control and payments will cease upon
88
<PAGE>
the completion of the merger. The following chart provides the name of such
retired director and the amount of the monthly payment.
<TABLE>
<CAPTION>
NAME MONTHLY PAYMENT
- ------------------------------------------------------------------------ ----------------
<S> <C>
Jerry Harwin............................................................ $ 300.00
Harry Heron............................................................. $ 800.00
Willard W. McEwen, Jr................................................... $ 300.00
Syble Roberts........................................................... $ 300.00
</TABLE>
EXECUTIVE OFFICERS
The following table sets forth as to each of the persons who are currently
executive officers of City Commerce Bank, such person's age as of July 6, 1999,
and the principal occupation during the past five (5) years.
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE YEAR FIRST APPOINTED
NAME AGE DURING PAST FIVE YEARS AS EXECUTIVE OFFICER
- ------------------------------------------ --- ------------------------------------------ ---------------------
<S> <C> <C> <C>
Eloy U. Ortega............................ 48 President and Chief Executive Officer(1) 1993
C. G. Kum................................. 45 Executive Vice President and Chief Credit 1993
Officer(2)
Peggy K. Shoemaker........................ 43 Senior Vice President and Senior 1998
Operations Officer(3)
</TABLE>
- ------------------------
(1) Mr. Ortega has been the President and Chief Executive Officer of City
Commerce Bank since 1998. Mr. Ortega replaced Mr. Terry Downard, who
resigned for personal reasons. Prior to that time, Mr. Ortega served as
Executive Vice President and Chief Financial Officer of City Commerce Bank
from 1996 until 1998. Mr. Ortega previously served as Senior Vice President
and Senior Operations Officer of City Commerce Bank from 1993 to 1996. Mr.
Ortega has served City Commerce Bank as an officer since 1991, and Mr.
Ortega has over 27 years of banking experience.
(2) Mr. Kum has been the Executive Vice President and Chief Credit Officer of
City Commerce Bank since February 1996. Mr. Kum previously served as Senior
Vice President and Credit Administrator of City Commerce Bank from May 1993
to February 1996 and Mr. Kum has over 20 years of banking experience.
(3) Ms. Shoemaker has been the Senior Vice President and Senior Operations
Officer of City Commerce Bank since 1998. Ms. Shoemaker was the Vice
President, Operations Supervisor of City Commerce Bank from 1996 to 1998.
Ms. Shoemaker was a Customer Service Assistant of City Commerce Bank from
1990 to 1996, and Ms. Shoemaker has over 21 years of banking experience.
(4) As used throughout this Proxy Statement/Prospectus the term "executive
officer" means the President and Chief Executive Officer, the Executive Vice
President and Chief Credit Officer, and the Senior Vice President and Senior
Operations Officer.
89
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth information as of July 6, 1999 pertaining to
beneficial ownership (as defined below) of City Commerce Bank's no par value
common stock, by (i) persons known to City Commerce Bank to own more than 5% of
its common stock, and (ii) individually, each of the executive officers(4) (as
defined below) of City Commerce Bank, its current directors and nominees for the
office of director, and (iii) all directors and executive officers of City
Commerce Bank as a group. The information contained herein has been obtained
from City Commerce Bank's records and from information furnished to City
Commerce Bank by each individual or entity. Management knows of no persons who
own, beneficially or of record, either individually or with associates, more
than five percent of City Commerce Bank's common stock, except as set forth
below.
The number of shares "beneficially owned" by a given shareholder are
determined under Securities and Exchange Commission Rules, and the designation
of ownership set forth below is not necessarily indicative of ownership for any
other purpose. In general, the beneficial ownership as set forth below includes
shares over which a director, director nominee, principal shareholder or
executive officer has sole or shared voting or investment power and certain
shares which such person has a vested right to acquire, under the stock options
or otherwise, within 60 days of the date hereof.
SECURITY OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL
NAME & ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) PERCENT OF CLASS
- ---------------------------------------------------------------- -------------------------------- -----------------
<S> <C> <C>
William J. Blythe, Director(2).................................. 85,693 5.24%
Roger P. Duncan, Director(2).................................... 16,127 0.99%
Betty M. Hatch, Director(2)..................................... 2,541 0.00%
H. Edward Heron, Director(2).................................... 34,064(3) 2.08%
Carl E. Lindros, Director(2).................................... 164,521 10.05%
John R. Mackall Director(2)..................................... 2,000 0.00%
C. Brian O'Gorman, Director(2).................................. 38,619 2.36%
Eloy U. Ortega, President and Chief Executive Officer,
Director(2)................................................... 12,782(4) 0.78%
C. G. Kum, Executive Vice President and Chief Credit
Officer(2).................................................... 17,396(5) 1.06%
Peggy Shoemaker, Senior Vice President and Senior Operations
Officer(2).................................................... 2,460(6) 0.00%
All Directors and Executive Officers(7) as a group (10
persons)...................................................... 376,203(8) 22.95%
</TABLE>
- ------------------------
(1) Includes shares beneficially owned by the named shareholder, together with
"associates" (as defined under applicable law), subject to community
property laws and shared voting and investment power with a spouse, if
applicable. The persons listed have sole voting and investment power unless
otherwise noted.
(2) The address of this individual is 33 East Carrillo Street, Santa Barbara,
California 93102.
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<PAGE>
(3) Of the 34,064 shares of City Commerce Bank stock beneficially owned, Mr.
Heron has sole voting and investment power of 20,369 shares, and shared
voting and investment power of 13,695 shares with Mary Shea Heron.
(4) Includes 11,384 vested option shares of 18,041 total option shares granted
under the 1989 Stock Option Plan.
(5) Includes 17,396 vested option shares of 35,394 total option shares granted
under the 1989 Stock Option Plan.
(6) Includes 682 vested option shares of 2,255 total option shares granted under
the 1989 Stock Option Plan.
(7) As used through this proxy statement/prospectus, the term "executive
officer" means and President and Chief Executive Officer, the Executive Vice
President and Chief Credit Officer, and the Senior Vice President and Senior
Operations Officer.
(8) Includes 29,462 vested option shares of 55,690 total option shares granted
under the 1989 Stock Option Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP(1) PERCENT OF CLASS
- ------------------------------------ ------------------------------------ ---------------------- -----------------
<S> <C> <C> <C>
Common Stock........................ Harry Heron 181,709 11.10%
c/o P.O. Box 1560
Santa Barbara, CA
Common Stock........................ James O. Birchfield 142,949 8.74%
c/o P.O. Box 1560
Santa Barbara, CA
</TABLE>
(1) Includes shares beneficially owned by the named shareholder, together with
"associates" (as defined under applicable law), subject to community
property laws and shared voting and investment power with a spouse, if
applicable. The persons listed have sole voting power unless otherwise
noted.
EXECUTIVE COMPENSATION
Any executive officer serving as a director of City Commerce Bank does not
receive additional compensation for attending board and committee meetings, and
such attendance is remunerated by the compensation of such person in his or her
capacity as an executive officer of City Commerce Bank. For the fiscal year
ended December 31, 1998, the aggregate cash compensation paid to or accrued for
all executive officers of City Commerce Bank, as a group (3 persons), for
services rendered to City Commerce Bank in all capacities was $333,496.
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<PAGE>
The following table sets forth the cash compensation of the executive
officers of City Commerce Bank that had cash compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- ------------- ALL OTHER
(B) (E) AWARDS COMPENSATION
(A) FISCAL (C) (D) OTHER ANNUAL STOCK -------------
NAME & PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS # ($)
- ------------------------------------------- ----------- ---------- --------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eloy U. Ortega(1).......................... 1998 $ 116,850 $ 83,928 0 0 $ 35,566(2)
President and 1997 $ 106,200 $ 12,240 0 0 $ 29,381(3)
Chief Executive Officer 1996 $ 98,014 $ 10,026 0 10,000 $ 15,429(4)
C. G. Kum.................................. 1998 $ 111,300 $ 83,928 24,000 10,000 $ 27,175(5)
Executive Vice President 1997 $ 106,000 $ 12,240 0 0 $ 21,520(6)
and Chief Credit Officer 1996 $ 98,519 $ 10,026 0 15,000 $ 7,860(7)
</TABLE>
- ------------------------
(C) Total base salary paid for fiscal years 1998, 1997 and 1996 for City
Commerce Bank.
(D) The chart reflects the following bonuses earned in 1996 and paid in 1997:
Mr. Kum ($10,026). In 1996, Mr. Ortega was provided with a pre-paid bonus
($75,000) which was to be earned over the following three to five year
period. Therefore, Mr. Ortega did not receive calculated bonus payments for
1996 and 1997, and only a partial payment ($39,215) in 1998. The chart also
reflects the following bonuses earned in 1997 and paid in 1998: Mr. Kum
($12,240). The following bonuses were earned in 1998 and paid in 1999: Mr.
Ortega ($39,215) and Mr. Kum ($83,928). In addition, in 1998 Mr. Kum was
provided with a pre-paid guaranteed retention bonus ($45,000) that will be
earned equally in 1999, 2000 and 2001.
(E) Represents the dollar value of other annual compensation not properly
categorized as salary or bonus; including (i) perquisites and other personal
benefits, securities or property unless the aggregate amount of such
compensation is the lesser of either $50,000 or 10% of the total annual
salary and bonus reported for the named executive officer in columns (C) and
(D); (ii) above-market or preferential earnings on restricted stock,
options, stock appreciation rights ("SARs") or deferred compensation paid
during the fiscal year or payable during that period but deferred at the
election of the named executive officer; (iii) earnings on long-term
incentive plan ("LTIP") compensation paid during the fiscal year or payable
during that period but deferred at the election of the named executive
officer; (iv) amounts reimbursed during the fiscal year for the payment of
taxes; and (v) the dollar value of the difference between the price paid by
a named executive officer for any security of City Commerce Bank purchased
from City Commerce Bank (through deferral of salary or bonus, or otherwise),
and the fair market value of such security at the date of purchase, unless
that discount is available generally, either to all security holders or to
all salaried employees of the registrant. Except for Mr. Kum, none of the
named officers had other annual compensation in excess of 10% of the total
annual salary and bonus reported for any of the last three fiscal years. In
1998, Mr. Kum received a cash payment ($24,000) in lieu of certain executive
perquisites that was granted as part of his retention agreement in 1998.
(1) Mr. Ortega has been the President and Chief Executive Officer of City
Commerce Bank since 1998. Mr. Ortega replaced Mr. Terry Downard, who
resigned for personal reasons. Prior to that time, Mr. Ortega served as
Executive Vice President and Chief Financial Officer of City Commerce Bank
from 1996 until 1998. Mr. Ortega previously served as Senior Vice President
and Senior Operations Officer of City Commerce Bank from 1993 to 1996, Mr.
Ortega has served City Commerce Bank as an officer since 1991, and Mr.
Ortega has over 27 years of banking experience.
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<PAGE>
(2) Includes $14,976 received from City Commerce Bank as salary continuation
agreement accruals, $8,657 in health, dental, and life insurance premiums,
$5,258 in matching 401(k) contributions, and $6,675 in automobile allowance.
(3) Includes $13,896 received from City Commerce Bank as salary continuation
agreement accruals, $8,254 in health, dental, and life insurance premiums,
$3,031 in matching 401(k) contributions, and $4,200 in automobile allowance.
(4) Includes $0 received from City Commerce Bank as salary continuation
agreement accruals, $8,145 in health, dental, and life insurance premiums,
$3,084 in matching 401(k) contributions, and $4,200 in automobile allowance.
(5) Includes $10,260 received from City Commerce Bank as salary continuation
agreement accruals, $5,356 in health, dental, and life insurance premiums,
$5,559 in matching 401(k) contributions, and $6,000 in automobile allowance.
(6) Includes $9,516 received from City Commerce Bank as salary continuation
agreement accruals, $5,440 in health and life insurance premiums, $1,149 in
matching 401(k) contributions, and $5,415 in automobile allowance.
(7) Includes $0 received from City Commerce Bank as salary continuation
agreement accruals, $5,466 in health, dental, and life insurance premiums,
$1,074 in matching 401(k) contributions, and $1,320 in automobile allowance.
INCENTIVE COMPENSATION PROGRAMS
City Commerce Bank has established certain incentive compensation programs
in connection with the compensation of its executive officers, its calling
officers and its other non-officers, selected officers and supervisors.
In connection with the City Commerce Bank's executive incentive plan, which
includes Mr. Ortega, Mr. Kum and Ms. Shoemaker, the executive bonus pool is
established based upon overall bank performance against the standard goal
performance incentive program objectives. City Commerce Bank's net after tax
earnings are multiplied by the bonus factor established for each participant in
the program. For fiscal year 1999, if the Bank achieves between 80% to 100% of
the goal performance incentive program objectives, then the President will
receive 2.4% to 3% of the net after tax earnings, the Chief Credit Officer will
receive between 1.6% to 2% of net after tax earnings, and the Senior Operations
Officer will receive between 0.6% to 0.75% of the net after tax earnings. If
earnings exceed 100% of the goal performance incentive program objectives, then
additional bonus dollars will be awarded and the President will receive 10% of
earnings in excess of such goal, the Chief Credit Officer will receive 5% of
earnings in excess of the goal, and the Senior Operations Officer will receive
2.5% of earnings in excess of the goal. All participants must be an employee of
City Commerce Bank at the time of the bonus payment. In 1998, only Mr. Ortega
and Mr. Kum participated in the executive bonus pool which was calculated at 3%
of net after tax earnings after adjustment to eliminate certain extraordinary
income and expense items, plus additional monies as described below. Ms.
Shoemaker participated in the standard officer goal performance plan in 1996,
1997, and 1998. In 1997, the Bank failed to meet the earnings goal pursuant to
the executive incentive plan, however, Mr. Ortega and Mr. Kum were granted a
discretionary bonus of $12,240 each. An additional $12,240 each was placed in
the 1998 executive incentive pool with the understanding that should the Bank
reach 120% of the 1998 earnings goal, that Mr. Ortega and Mr. Kum would be paid
the additional $12,240 each in addition to the calculated incentive payment. In
1996, Mr. Kum participated in the standard officer goal performance plan and Mr.
Ortega was provided with a discretionary pre-paid incentive to be earned over
1996, 1997, and 1998.
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<PAGE>
The board of directors has also approved an incentive program for business
development officers of the Bank. Participating officers are paid a bonus
calculated at 2% of earnings up to their cumulative minimum production goal,
plus a bonus calculated at 20% of earnings in excess of the accumulative minimum
production goal. Participants must be in the employee of City Commerce Bank at
the time of the bonus payment. During 1998, the Bank paid $110,386 pursuant to
this incentive program.
The City Commerce Bank has also established a goal performance compensation
program for all non-officers, selected officers and supervisors who are not
active participants in other incentive programs. Incentive compensation under
this program is based on two factors applied to a given percentage of an
individual's salary level as of December 31 of the program year. A bonus pool is
established based upon a defined percentage of the participants' annual
salaries. This percentage is based upon achievement of 100% of the goal. For
nonexempt employees, the defined percentage is 5%, and for exempt employees the
defined percentage is 10%. At the beginning of each year, the board of directors
establishes an earnings goal against which the Bank's results will be measured.
Funding of all incentive payments is based upon a graduated percentage of this
benchmark. Minimum funding will occur at 80% of this factor and will increase to
120% of the pre-established goal. The net income figure used will be net income
after bonus accruals and taxes. Partial funding begins at 80% of this goal and
will be calculated on a linear basis up to 120% of the pre-established goal. The
second factor is based upon an employee's last performance evaluation. By
applying this factor to an individual's performance, the bonus is also linked to
personal achievements as well as to City Commerce Bank's performance. An
individual must be actively employed for benefits to accrue under this plan. For
1998, $160,607.41 in bonus payments under this program were made to
participants.
SEVERANCE AGREEMENTS
As of January 1, 1999, Eloy Ortega, C. G. Kum, and Peggy Shoemaker entered
into agreements with City Commerce Bank that generally provides that if a change
of control of City Commerce Bank should occur while the executive is an employee
of the Bank, and the executive is terminated as defined in the agreement within
two years of the public announcement of the signing of an agreement for a change
of control or eighteen (18) months from consummation thereof, executive shall be
entitled to an amount equal to executive's monthly based salary at the highest
rate in effect during the twelve month period immediately preceding the date of
termination, multiplied by 18. Under the terms of such agreements, the merger
with Mid-State will result in a change in control of City Commerce Bank. If Mr.
Ortega is terminated pursuant to the agreement, he will be entitled to a
severance payment of $202,500. If Mr. Kum is terminated pursuant to the
agreement, Mr. Kum will be entitled to a severance payment in the amount of
$166,950. If Ms. Shoemaker is terminated pursuant to the terms of her severance
agreement, then Ms. Shoemaker will be entitled to a severance payment in the
amount of $43,488.
As of January 1, 1999, Jeanette Cademartori-Shinsky also entered into an
agreement with City Commerce Bank that generally provides that if a change of
control of City Commerce Bank should occur while she is an employee of the Bank,
and she is terminated as defined in the agreement within two years of the public
announcement of the signing of an agreement for a change of control or eighteen
(18) months from consummation thereof, she shall be entitled to an amount equal
to her monthly based salary at the highest rate in effect during the twelve
month period immediately preceding the date of termination, multiplied by 6.
Under the terms of such agreement, the merger with Mid-State will result in a
change in control of City Commerce Bank. If Ms. Cademartori-Shinsky is
terminated pursuant to the agreement, she will be entitled to a severance
payment of $31,860.
94
<PAGE>
The executive will also be entitled to such payments if the executive's
employment is terminated for "good reason." A "good reason" may mean any of the
following:
- The assignment to the executive of any duties inconsistent with or a
diminution of executive's positions with City Commerce Bank, or a change
in executive's titles or offices as in effect immediately prior to a
change in control of City Commerce Bank, or any removal of the executive
from, or any failure to reelect executive to, any of such positions;
- A reduction by City Commerce Bank in the executive's base salary in effect
immediately prior to the change in control of City Commerce Bank;
- Failure by City Commerce Bank to continue in effect any pension, life
insurance, health or accident or disability plan in which executive is
participating or is eligible to participate at the time of a change of
control of City Commerce Bank;
- The failure by City Commerce Bank to pay executive an award under any cash
or stock incentive compensation plan or arrangement similar in nature to
that last paid to executive under any said plan prior to a change of
control of City Commerce Bank;
- The relocation of executive's office to, or require an executive to be
based in, a location which is more than 50 miles from City Commerce Bank's
principal executive office, or, in the event executive consents to any
such relocation, the failure by City Commerce Bank to pay all reasonable
moving expenses incurred by executive relating to a change of executive's
principal residence;
- Any material breach by City Commerce Bank of any provision of the
agreement; and
- Any purported termination of executive's employment by City Commerce Bank
which is not effective pursuant to a notice of termination set aside in
the requirements contained in the agreement.
STOCK OPTION PLAN
The 1989 Stock Option Plan of City Commerce Bank adopted by the Board of
Directors on March 23, 1989 and approved by the shareholders on April 18, 1989
(the "1989 Plan"), was intended to advance the interests of City Commerce Bank
by encouraging stock ownership on the part of its officers and directors.
According to its terms, the 1989 Plan terminated on April 18, 1999.
Since the term of the 1989 Plan expired on April 18, 1999, stock options may
no longer be granted under the 1989 Plan. However, options previously granted
and not exercised as of April 18, 1999 may not have expired on that date.
The 1989 Plan provides for the grant of incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
non-qualified options, which are options not intended to qualify as incentive
stock options. Under the 1989 Plan, options for the acquisition of shares of
City Commerce Bank's common stock may be granted to directors, officers and
employees of City Commerce Bank. Incentive stock options may not be granted to
non-employee directors. The 1989 Plan was administered by the full board of
directors acting as the Stock Option Committee which has sole discretion and
authority, consistent with the provisions of the 1989 Plan, to determine which
eligible participants will receive options, the time when options will be
granted, the terms of options granted and the number of shares which will be
subject to options granted under the applicable 1989 Plan.
During fiscal year 1998, 22,750 options were granted to officers of City
Commerce Bank at an average weighted exercise price of $17.83. During the same
period, 85,160 shares were exercised by officers at an average weighted exercise
price of $6.63. At December 31, 1998, 128,248 option shares
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<PAGE>
were outstanding, 43,187 shares were exercisable and 31,937 shares were
available for grant under the 1989 Plan. At December 31, 1998, the range of
exercise prices and weighted average remaining contractual life of outstanding
options was $5.37--$16.36 and 2.89 years, respectively. The options that were
exercisable as of December 31, 1998 had a weighted average exercise price of
$9.32.
AGGREGATED OPTION(1) EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 12/31/98(#) AT 12/31/98 ($)(2)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ ------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eloy U Ortega............................. 1,398 N/A 11,384 6,657 $ 98,731 $ 71,625
C. G. Kum................................. 0 N/A 17,396 17,998 $ 131,193 $ 83,805
</TABLE>
- ------------------------
(1) City Commerce Bank has no plans pursuant to which stock appreciation rights
may be granted.
(2) Value of unexercised "in-the-money" options is the difference between the
fair market value of the securities underlying the options and the exercise
or base price of the options at exercise or fiscal year-end, respectively.
401(K) PLAN
In 1987, City Commerce Bank's Board adopted a 401(k) Plan (the "401(k)
Plan"), which is a defined contribution plan. The 401(k) Plan is a "qualified"
pension plan (as defined in the Employee Retirement Income Security Act of 1974)
for the exclusive benefit of eligible employees and their beneficiaries. The
401(k) Plan is intended to provide death, disability or retirement income to
participating employees and their beneficiaries. Under the 401(k) Plan, an
employee must complete a minimum of one year of service and attain the age of
eighteen (18) years before he or she is eligible to participate in the 401(k)
Plan. Eligible employees may elect to defer not more than 15% of their annual
salary. City Commerce Bank makes matching contributions equal to 50% of the
employee share on employee deferrals up to a maximum 3% of their eligible
compensation. These matching contributions are monthly, discretionary amounts
which may vary from month to month. The annual expense to City Commerce Bank of
its contributions to the Plan was $94,712 in 1998 and $42,704 in 1997.
In 1998, City Commerce Bank modified the employer match levels, entry date
and vesting schedules to the 401(k) Plan. Under the modified 401(k) Plan, all
employees who work 20 or more hours a week may participate in the 401(k) Plan at
the first entry date following their date of hire. Entry dates into the Plan are
the first day of each calendar quarter. City Commerce Bank will match 100% of
the employees' contribution up to 3% of their eligible compensation and 50% of
the employees contribution from 3% to 6% of eligible compensation. All employees
hired to January 1, 1998 are 100% vested in any employer contribution. Employees
hired on or after January 1, 1998 are subjected to the following schedule:
<TABLE>
<CAPTION>
COMPLETED YEARS OF SERVICE PERCENTAGE VESTED
- ------------------------------------------------------------------------ -----------------
<S> <C>
Less than 1 year........................................................ 0%
1 year.................................................................. 0%
2 years................................................................. 25%
3 years................................................................. 50%
4 years................................................................. 75%
5 years................................................................. 100%
</TABLE>
96
<PAGE>
SALARY CONTINUATION AGREEMENTS
On January 16, 1997, City Commerce Bank approved a salary continuation
agreement for Mr. Ortega and Mr. Kum effective January 16, 1997 that would each
provide an annual sum of $62,500 in equal monthly installments over a fifteen
(15) year period upon his retirement at age 65. City Commerce Bank has purchased
single premium life insurance to cover the retirement benefits. City Commerce
Bank must accrue increasing amounts every year in order to fund various
provisions of the salary continuation agreement, including provisions regarding
death after retirement, death prior to retirement, and disability prior to
retirement provisions. In 1998, City Commerce Bank accrued $14,976 for Mr.
Ortega's benefit, and City Commerce Bank has accrued a total of $28,872 through
December 31, 1998 for Mr. Ortega's benefit. In 1998, City Commerce Bank accrued
$10,260 for Mr. Kum's benefit, and City Commerce Bank has accrued a total of
$19,776 through December 31, 1998 for Mr. Kum's benefit. If Mr. Ortega and/or
Mr. Kum voluntarily terminate their employment, Mr. Ortega and/or Mr. Kum will
receive the accrued amount under the Agreement. If Mr. Ortega and/or Mr. Kum are
involuntarily terminated as defined in the agreement, Mr. Ortega and/or Mr. Kum
will receive the present value of the amount accrued in the year of termination
in one lump sum on February 1 of the calendar year following the year in which
Mr. Ortega and/or Mr. Kum was involuntarily terminated, unless Mr. Ortega and/or
Mr. Kum elects to have the amount paid commencing on his 65th birthday over 15
years. Mr. Ortega and/or Mr. Kum will receive no benefits under the agreement if
Mr. Ortega's and/or Mr. Kum's employment is terminated for cause.
As a means to fund the current and future liabilities under these
agreements, City Commerce Bank has purchased various life insurance policies,
the cash surrender value of which is included in the reported balance of other
assets at December 31, 1998 and 1997. Related to these agreements, City Commerce
Bank has accrued liabilities in the amount of $112,501 for the year ended
December 31, 1998 and $80,649 for the year ended December 31, 1997.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the City Commerce Bank's directors and executive officers and their
immediate families, as well as the companies with which they are associated, are
customers of, or have had banking transactions with, City Commerce Bank in the
ordinary course of City Commerce Bank's business, and City Commerce Bank expects
to have banking transactions with such persons in the future. In management's
opinion, all loans and commitments to lend included in such transactions were
made in the ordinary course of business, 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, in the opinion of management, did not involve more than a
normal risk of repayment or presented other unfavorable features. The total
amount of indebtedness owed to City Commerce Bank by the principal officers and
current directors of City Commerce Bank (including associated companies) as of
December 31, 1998 was approximately $2,327,837.
Directors C. Brian O'Gorman and John R. Mackall, attorneys, have rendered
certain legal services to the Bank from time to time. It is the opinion of
management of City Commerce Bank that the fees charged and paid for such
services were no less favorable to the Bank than those which would have been
charged for comparable legal services by non-affiliated persons. In 1998, the
City Commerce Bank paid legal fees of approximately $48,964 to the law firms
with which the directors are affiliated.
97
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
The common stock of City Commerce 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
March 31, 1999, there were approximately 300 shareholders. The management of
City Commerce Bank is aware of one securities dealer who maintains an inventory
and makes a market in City Commerce Bank common stock--Sutro & Co., Big Bear
Lake, California.
The following quarterly summary of market activity is furnished by Sutro.
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:
<TABLE>
<CAPTION>
CITY COMMERCE BANK
COMMON STOCK
------------------------------------------
BID ASK
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1st Quarter 1997...................................................... $ 14.125 $ 13.00 $ 14.875 $ 13.875
2nd Quarter 1997...................................................... $ 16.25 $ 14.00 $ 17.25 $ 14.625
3rd Quarter 1997...................................................... $ 16.375 $ 16.00 $ 17.375 $ 17.00
4th Quarter 1997...................................................... $ 17.875 $ 16.50 $ 19.00 $ 17.50
1st Quarter 1998...................................................... $ 18.75 $ 17.375 $ 19.375 $ 17.75
2nd Quarter 1998...................................................... $ 19.125 $ 18.50 $ 20.00 $ 19.00
3rd Quarter 1998...................................................... $ 19.50 $ 17.00 $ 20.00 $ 18.00
4th Quarter 1998...................................................... $ 18.50 $ 17.00 $ 20.00 $ 17.375
1st Quarter 1999...................................................... $ 17.00 $ 16.375 $ 18.00 $ 17.75
</TABLE>
On April 16, 1999, the last trading day before the announcement of the
merger, the closing bid/ask price for a share of City Commerce Bank stock was
$17.00 bid/$18.00 ask. On July 8, 1999, the closing bid/ask price for a share of
City Commerce Bank common stock was $21.25 bid/$24.00 ask. The most recent trade
was June 11, 1999 in which 100 shares were traded at $20.375 per share.
Since 1990, and except for 1993, City Commerce Bank has consistently paid
either a 5% or 10% annual stock dividend to its shareholders. The following
table sets forth information concerning all annual stock dividends paid since
January 1, 1990. As part of the agreement with Mid-State Bancshares and
Mid-State Bank, City Commerce Bank is prohibited from paying cash or stock
dividends.
<TABLE>
<CAPTION>
YEAR STOCK DIVIDEND
- -------------------------------------------------------------------------- -------------------
<S> <C>
1990...................................................................... 5%
1991...................................................................... 10%
1992...................................................................... 10%
1994...................................................................... 10%
1995...................................................................... 10%
1996...................................................................... 10%
1997...................................................................... 5%
1998...................................................................... 10%
</TABLE>
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
City Commerce Bank has not yet selected its independent public accountants
for the fiscal year ending December 31, 1999. KPMG LLP audited City Commerce
Bank's financial statements for the year ended December 31, 1998. It is
anticipated that a representative of KPMG LLP will be present at the annual
meeting and will be available to respond to appropriate questions from
shareholders. All
98
<PAGE>
professional services rendered by KPMG LLP during 1998 were furnished at
customary rates and terms.
OTHER BUSINESS
We are not aware of any business to come before the annual meeting other
than those matters described in this proxy statement/prospectus. However, if any
other matters should properly come before the annual meeting, it is intended
that the proxies solicited hereby will be voted with respect to those other
matters in accordance with the judgment of the persons voting the proxies.
LEGAL MATTERS
Certain legal matters with respect to Mid-State, including the validity of
the shares of Mid-State common stock to be issued in connection with the merger,
will be passed upon for Mid-State by Reitner & Stuart, San Luis Obispo,
California. As of the date of this proxy statement/prospectus, members of
Reitner & Stuart owned an aggregate of approximately 5,000 shares of Mid-State
common stock.
EXPERTS
The consolidated balance sheets of Mid-State as of December 31, 1998 and
1997 and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ending December
31, 1998 incorporated in this proxy statement/prospectus by reference from
Mid-State's annual report on Form 10-K for the year ended December 31, 1998 have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto and are incorporated herein in
reliance upon the authority of said firm as experts in giving said reports.
The financial statements of City Commerce Bank as of December 31, 1998 and
1997, and for each of the years in the two-year period ended December 31, 1998,
have been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Mid-State files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information that Mid-State files at the
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Commission at (800) SEC-0330 for further
information on the public reference rooms. The Commission also maintains an
Internet World Wide Web site at "http://www.sec.gov" at which reports, proxy and
information statements and other information regarding Mid-State are available.
In addition, reports, proxy statements and other information concerning
Mid-State also may be inspected at the offices of The Nasdaq Stock Market, 1735
K Street, Washington, D.C. 20006.
Mid-State has filed with the Securities and Exchange Commission a
registration statement on Form S-4 under the Securities Act of 1933 relating to
the shares of Mid-State common stock to be issued in connection with the merger.
This proxy statement/prospectus also constitutes the prospectus of Mid-State
filed as part of the registration statement but does not contain all the
information set forth in the registration statement and exhibits thereto. You
may copy and read the registration statement and its exhibits at the public
reference facilities maintained by the Securities and Exchange Commission at the
address set forth above.
99
<PAGE>
The Securities and Exchange Commission allows Mid-State to "incorporate by
reference" information into this proxy statement/prospectus, which means that
Mid-State can disclose important information to you by referring you to another
document filed separately with the Commission. The information incorporated by
reference is deemed to be part of this proxy statement/prospectus, except for
any information superseded by information contained directly in this proxy
statement/prospectus. This proxy statement/prospectus incorporates by reference
the documents set forth below that Mid-State has previously filed with the
Commission. These documents contain important information about Mid-State and
its financial condition.
<TABLE>
<CAPTION>
MID-STATE COMMISSION FILINGS
(FILE NO. 333-16951) PERIOD
- ----------------------------------------------------- -----------------------------------
<S> <C>
Annual Report on Form 10-K........................... Year ended December 31, 1998
Quarterly Report on Form 10-Q........................ Quarter ended March 31, 1999
Current Reports on Form 8-K.......................... Dated: November 17, 1998
February 18, 1999
April 27, 1999
Proxy Statement...................................... Dated: April 23, 1999
Registration Statement on Form 8-A................... Dated: March 18, 1998
</TABLE>
Mid-State incorporates by reference any additional documents that it may
file with the Commission between the date of this proxy statement/prospectus and
the date of the meeting. These include periodic reports, such as annual reports
on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as
well as proxy statements.
Mid-State has supplied all information contained or incorporated by
reference in the proxy statement/prospectus relating to Mid-State and City
Commerce Bank has supplied all such information relating to City Commerce Bank.
This proxy statement/prospectus incorporates by reference documents relating
to Mid-State which are not presented in this proxy statement/prospectus or
delivered herewith. Those documents are available from Mid-State without charge,
excluding all exhibits unless specifically incorporated by reference in this
proxy statement/prospectus, by requesting them in writing or by telephone from:
Mr. James G. Stathos
Executive Vice President
Mid-State Bancshares
1026 Grand Avenue
Arroyo Grande, California 93420
(805) 473-7700
If you would like to request documents, please do so by August 3, 1999 to
receive them before the meeting.
In deciding how to vote on the merger, you should rely only on the
information contained or incorporated by reference in this proxy
statement/prospectus. Neither Mid-State nor City Commerce Bank has authorized
any person to provide you with any information that is different from what is
contained in this proxy statement/prospectus. This proxy statement/prospectus is
dated July 9, 1999. You should not assume that the information contained in this
proxy statement/prospectus is accurate as of any date other than such date, and
neither the mailing to you of this proxy statement/prospectus nor the issuance
to you of shares of Mid-State common stock will create any implication to the
contrary. This proxy statement/prospectus does not constitute an offer to sell
or a solicitation of any offer to buy any securities, or the solicitation of a
proxy in any jurisdiction in which, or to any person to whom, it is unlawful.
100
<PAGE>
CITY COMMERCE BANK
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Financial Statements
INTERIM FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1999
(Unaudited)
Balance Sheets............................................................................................. F-2
Statements of Operations................................................................................... F-3
Condensed Statements of Changes in Stockholders' Equity and Comprehensive Income........................... F-4
Condensed Statements of Cash Flows......................................................................... F-5
Notes to the Condensed Financial Statements................................................................ F-6
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 & 1997
Independent Auditors' Report............................................................................... F-10
Balance Sheets............................................................................................. F-11
Statements of Operations................................................................................... F-12
Statements of Changes in Stockholders' Equity and Comprehensive Income..................................... F-13
Statements of Cash Flows................................................................................... F-14
Notes to the Financial Statements.......................................................................... F-15
</TABLE>
F-1
<PAGE>
CITY COMMERCE BANK
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................................... $ 11,504,192 $ 17,796,099
Federal funds sold............................................................... 3,500,000 --
-------------- --------------
Total cash and cash equivalents................................................ 15,004,192 17,796,099
Securities available for sale, at fair value..................................... 9,356,521 9,498,842
Loans and leases, net............................................................ 121,471,426 123,700,895
Less allowance for loan and lease losses......................................... (1,567,361) (1,540,105)
-------------- --------------
Net loans and leases........................................................... 119,904,065 122,160,790
Premises and equipment, net...................................................... 2,871,779 2,867,261
Accrued interest receivable and other assets..................................... 2,441,942 2,046,556
-------------- --------------
Total assets................................................................. $ 149,578,499 $ 154,369,548
-------------- --------------
LIABILITIES
Deposits
Noninterest-bearing demand..................................................... $ 31,733,933 $ 34,112,830
Savings, NOW and money market.................................................. 68,662,375 76,442,013
Time deposits under $100,000................................................... 9,523,086 7,417,240
Time deposits of $100,000 or more.............................................. 21,024,422 17,831,650
-------------- --------------
Total deposits............................................................... 130,943,816 135,803,733
Accrued interest payable and other liabilities................................... 1,333,005 1,198,435
-------------- --------------
Total liabilities............................................................ 132,276,821 137,002,168
STOCKHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares authorized, 1,636,301 and 1,663,795
shares issued and outstanding at March 31, 1999 and December 31, 1998,
respectively................................................................... 15,443,811 15,927,074
Undivided profits................................................................ 1,795,263 1,338,905
Accumulated other comprehensive income, net of tax............................... 62,604 101,401
-------------- --------------
Total stockholders' equity................................................... 17,301,678 17,367,380
-------------- --------------
Total liabilities and stockholders' equity................................... $ 149,578,499 $ 154,369,548
-------------- --------------
-------------- --------------
</TABLE>
See notes to the condensed financial statements.
F-2
<PAGE>
CITY COMMERCE BANK
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
INTEREST INCOME
Loans, including fees.............................................. $2,892,394 $2,548,259
Securities......................................................... 169,755 253,803
Federal funds sold................................................. 40,318 66,744
--------- ---------
Total interest income............................................ 3,102,467 2,868,806
--------- ---------
INTEREST EXPENSE
Deposits........................................................... 941,961 907,797
Borrowings......................................................... 1,118 2,553
--------- ---------
Total interest expense........................................... 943,079 910,350
--------- ---------
NET INTEREST INCOME.................................................. 2,159,388 1,958,456
Provision for loan losses............................................ 15,000 --
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS.................... 2,144,388 1,958,456
OTHER INCOME
Card services...................................................... 78,107 221,209
Service charges and fees........................................... 134,128 128,800
Securities gains (losses), net..................................... -- 484
Other.............................................................. 13,011 15,115
--------- ---------
Total other income............................................... 225,248 365,608
OTHER EXPENSE
Salaries and other employee benefits............................... 875,563 985,174
Occupancy.......................................................... 154,106 156,152
Other.............................................................. 569,624 655,665
--------- ---------
Total other expense.............................................. 1,599,293 1,796,991
--------- ---------
INCOME BEFORE INCOME TAXES........................................... 770,341 527,073
Provision for income taxes........................................... 313,983 197,251
--------- ---------
NET INCOME........................................................... $ 456,358 $ 329,822
--------- ---------
--------- ---------
EARNINGS PER COMMON SHARE--BASIC..................................... $ 0.28 $ 0.19
--------- ---------
EARNINGS PER COMMON SHARE--DILUTED................................... $ 0.27 $ 0.19
--------- ---------
</TABLE>
See notes to the condensed financial statements.
F-3
<PAGE>
CITY COMMERCE BANK
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Balance at beginning of period..................................... $17,367,380 $16,057,785
Options exercised, including tax benefit of nonqualified shares,
1,076 and 53,327 shares in 1999 and 1998 respectively............ 5,950 325,872
Comprehensive income:
Net income....................................................... 456,358 329,822
Reclassification adjustment for amounts realized on securities
sales or calls included in net income, net of tax of $(199) in
1998........................................................... -- (285)
Other comprehensive income (loss), net of tax of $(26,696) in
1999 and $(3,067) in 1998...................................... (38,797) (3,522)
---------- ----------
Total comprehensive income......................................... 417,561 326,015
Stock purchased and retired, 28,570 and 12,760 shares in 1999 and
1998, respectively............................................... (489,213) (221,309)
---------- ----------
Balance at end of period........................................... $17,301,678 $16,488,363
---------- ----------
---------- ----------
</TABLE>
See notes to the condensed financial statements.
F-4
<PAGE>
CITY COMMERCE BANK
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES........................... $ 207,042 $ 366,543
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases...................................................... (1,500,000) (2,500,000)
Maturities and repayments...................................... 1,570,000 4,218,360
Net change in loans............................................ 2,379,944 6,163,234
Premises and equipment expenditures............................ (105,713) (25,629)
---------- ----------
Net cash from investing activities........................... 2,344,231 7,855,965
Cash flows from financing activities
Net change in deposits........................................... (4,859,917) (2,819,093)
Proceeds from stock options exercised, including tax benefit..... 5,950 325,872
Purchase of bank stock for retirement............................ (489,213) (221,309)
---------- ----------
Net cash from financing activities............................. (5,343,180) (2,714,530)
---------- ----------
Net change in cash and cash equivalents............................ (2,791,907) 5,507,978
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................... 17,796,099 11,879,668
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $15,004,192 $17,387,646
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest........................................... $ 768,073 $ 935,333
Cash paid for income taxes....................................... -- 70,000
NONCASH TRANSACTIONS:.............................................. $ -- $ --
</TABLE>
See notes to the condensed financial statements.
F-5
<PAGE>
CITY COMMERCE BANK
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect
all adjustments which, in the opinion of management, are necessary to present
fairly the financial position of City Commerce Bank (the "Bank") at March 31,
1999, and its results of operations and cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
financial statements have been prepared in accordance with the instructions of
Form 10-QSB and, therefore, do not purport to contain all necessary financial
disclosures required by generally accepted accounting principles that might
otherwise be necessary in the circumstances, and should be read in conjunction
with financial statements, and notes thereto, of the Bank for the year ended
December 31, 1998, included in its 1998 annual report. Refer to the accounting
policies of the Bank described in the notes to financial statements contained in
the Bank's 1998 annual report. The Bank has consistently followed these policies
in preparing this document.
On April 19, 1999, the Bank's Board of Directors signed a definitive
agreement to merge with Mid-State Bancshares subject to shareholder and
regulatory approval. The combination is expected to be completed during the
fourth quarter of 1999.
The Bank's revenues, operating income and assets are primarily from the
banking industry and internal financial information is primarily reported and
aggregated solely in the line of business of banking. The Bank's market area
consists primarily of the communities of Santa Barbara and Ventura. The Bank
offers commercial, real estate, construction and installment loans in addition
to asset based lending and leasing activities. Loan customers include a wide
range of individuals, businesses and other organizations. Major portions of
loans are secured by various forms of collateral including real estate, business
assets, consumer property and other items. The Bank's primary funding source is
deposits from customers within and outside its market area. The Bank's deposit
products include demand and savings accounts as well as time deposits.
To prepare financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions based on
available information. These estimates and assumptions affect amounts reported
in the financial statements and disclosures provided; future results could
differ. The collectibility of loans, fair value of financial instruments and
status of contingencies are particularly subject to change.
Income tax expense is the sum of current-year income tax due or refundable
and change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary differences
between carrying amounts and tax bases of assets and liabilities computed using
enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized.
Comprehensive income is reported for all periods. Comprehensive income
includes both net income and other comprehensive income. Other comprehensive
income includes the change in unrealized gains and losses on securities
available for sale.
Basic earnings per share ("EPS") is based on net income divided by the
weighted average number of shares outstanding during the period. Diluted EPS
includes the dilutive effect of stock options
F-6
<PAGE>
CITY COMMERCE BANK
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
granted using the treasury stock method. The weighted-average number of common
shares outstanding for basic and diluted earnings per share computations were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Weighted-average shares outstanding--Basic............. 1,646,749 1,696,834
Effect of stock options................................ 46,335 66,555
--------- ---------
Weighted-average shares outstanding--Diluted........... 1,693,084 1,763,389
--------- ---------
--------- ---------
</TABLE>
NOTE 2--SECURITIES
The amortized cost and estimated fair values of securities available for
sale were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities......................... $ 494,619 $ 14,911 $ -- $ 509,530
U.S. Government and agency securities............ 5,941,197 19,380 (23,547) 5,937,030
Obligations of states and political
subdivisions................................... 2,814,318 95,643 -- 2,909,961
--------- ----------- ----------- ---------
Total........................................ $9,250,134 $ 129,934 $ (23,547) $9,356,521
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities......................... $ 494,308 $ 29,442 $ -- $ 523,750
U.S. Government and agency securities............ 5,942,797 28,726 -- 5,971,523
Obligations of states and political
subdivisions................................... 2,889,857 113,712 -- 3,003,569
--------- ----------- ----- ---------
Total........................................ $9,326,962 $ 171,880 $ -- $9,498,842
--------- ----------- ----- ---------
--------- ----------- ----- ---------
</TABLE>
At March 31, 1999, there were no holdings of securities of any one issuer,
other than the U.S. government and its agencies, in an amount greater than 10%
of stockholders' equity.
The amortized cost and estimated fair value of debt securities at March 31,
1999, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because issuers may have the right to call or prepay
obligations.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
Due in one year or less........................................... $ 1,140,786 $ 1,159,396
Due after one through five years.................................. 7,520,310 7,573,541
Due after five through ten years.................................. 589,038 623,584
------------ ------------
Total......................................................... $ 9,250,134 $ 9,356,521
------------ ------------
------------ ------------
</TABLE>
F-7
<PAGE>
CITY COMMERCE BANK
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SECURITIES (CONTINUED)
There were no sales of securities during the three months ended March 31,
1999 or 1998. The Bank realized gross gains of $484 from the call of securities
during the three months ended March 31, 1998. There were no gains or losses
realized on calls of securities during the three months ended March 31, 1999.
NOTE 3--LOANS AND LEASES
Loans and leases consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
Commercial................................................... $ 42,104,420 $ 43,736,881
Real estate.................................................. 43,454,163 37,267,036
Installment.................................................. 20,136,885 22,076,945
Real estate construction..................................... 15,096,880 19,919,559
Lease financing.............................................. 679,078 700,474
-------------- --------------
Total loans.............................................. $ 121,471,426 $ 123,700,895
-------------- --------------
-------------- --------------
</TABLE>
At March 31, 1999 and December 31, 1998, unamortized net loan origination
fees of $390,099 and $430,805 were included as part of the total loan balance.
Activity in the allowance for losses on loans was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Beginning balance.................................... $1,540,105 $1,699,491
Provision for loan losses............................ 15,000 --
Charge-offs.......................................... (12,632) (6,604)
Recoveries........................................... 24,888 4,817
--------- ---------
Ending balance....................................... $1,567,361 $1,697,704
--------- ---------
--------- ---------
</TABLE>
Loans considered impaired under the provisions of SFAS No. 114 were not
material during any of the periods presented.
NOTE 4--CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK
Various contingent liabilities are not reflected in the financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on financial condition or results of operations.
The Bank's lending activities are conducted in the State of California. The
Bank currently focuses on the origination of commercial, real estate,
construction and installment loans. The largest concentration of the Bank's loan
portfolio is located in Santa Barbara County. The ability of the Bank's
borrowers to repay their commitments is contingent on several factors, including
economic conditions in the
F-8
<PAGE>
CITY COMMERCE BANK
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK (CONTINUED)
borrowers geographic region, primarily California, market interest rates and
upon the individual financial condition of the borrower. Most loans are secured
by specific items of collateral including business assets, consumer assets and
real estate.
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet financing needs of its customers. The
contract amount of these instruments are not included in the consolidated
financial statements.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment. At March
31, 1999 and December 31, 1998, the contract amount of these instruments,
totaled $46,733,000 and $45,577,000. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since many
of the commitments are expected to expire without being used, the total
commitments do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments to guarantee a
customer's performance to a third party. At March 31, 1999 and December 31,
1998, the Bank had standby letter-of-credit commitments totaling $1,642,000 and
$1,737,000.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to make loans and lines and
letters of credit is represented by the contractual amount of those instruments.
The Bank follows the same credit policy to make such commitments as is followed
for those loans recorded in the financial statements. In management's opinion,
these commitments represent normal banking transactions and no material losses
are expected to result therefrom. Collateral obtained upon exercise of the
commitments is determined using management's credit evaluations of the borrower
and may include real estate, business or consumer assets.
The Bank was required to have $841,000 and $845,000 of cash on hand or on
deposit with the Federal Reserve to meet regulatory reserve requirements at
March 31, 1999 and December 31, 1998, respectively. These balances do not earn
interest.
NOTE 5--OTHER EXPENSES
Other expenses are comprised of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Advertising and promotion............................... $ 131,289 $ 80,493
Furniture and equipment................................. 69,175 60,119
Card services........................................... 33,416 175,748
Communications.......................................... 44,240 47,849
Data processing......................................... 46,068 59,938
Regulatory assessments.................................. 8,090 9,540
Directors' fees......................................... 46,406 37,852
Other................................................... 190,940 184,126
--------- ---------
Total............................................... $ 569,264 $ 655,665
--------- ---------
--------- ---------
</TABLE>
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of City Commerce Bank:
We have audited the accompanying balance sheets of City Commerce Bank (the
Bank) as of December 31, 1998 and 1997 and the related statements of operations,
changes in stockholders' equity and comprehensive income and cash flows for the
years then ended. 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 City Commerce Bank as of
December 31, 1998 and 1997 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
KPMG LLP
January 20, 1999
(except as to note 17,
which is as of April 19, 1999)
Los Angeles, California
F-10
<PAGE>
CITY COMMERCE BANK
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Cash and due from banks (note 2)................................................. $ 17,796,099 $ 9,879,668
Federal funds sold............................................................... -- 2,000,000
Securities available-for-sale (note 3)........................................... 9,498,842 17,197,192
Loans, net (notes 4 and 10)...................................................... 122,160,790 101,097,976
Other real estate owned.......................................................... -- 1,707,977
Premises and equipment, net (note 5)............................................. 2,867,261 2,885,331
Accrued interest receivable and other assets (notes 6 and 8)..................... 2,046,556 2,092,231
-------------- --------------
Total assets............................................................... $ 154,369,548 $ 136,860,375
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 15):
Demand....................................................................... $ 34,112,830 $ 31,238,382
Savings...................................................................... 76,442,013 63,495,703
Time deposits under $100,000................................................. 7,417,240 11,487,605
Time deposits of $100,000 or more............................................ 17,831,650 12,410,679
-------------- --------------
Total deposits............................................................. 135,803,733 118,632,369
Accrued interest payable and other liabilities (note 6)........................ 1,198,435 2,170,221
-------------- --------------
Total liabilities.......................................................... 137,002,168 120,802,590
-------------- --------------
Commitments and contingencies (note 11)
Stockholders' Equity (notes 7, 9, and 13):
Common stock, no par value; authorized 10,000,000 shares; issued and
outstanding 1,663,795 and 1,505,543 shares at December 31, 1998 and 1997,
respectively................................................................. $ 15,927,074 $ 13,893,777
Undivided profits.............................................................. 1,338,905 2,299,751
Accumulated other comprehensive income (loss):
Net unrealized gain (loss) on securites available for sale, net of tax effect
of $70,479, and $(94,330), respectively.................................... 101,401 (135,743)
-------------- --------------
Total stockholders' equity................................................. 17,367,380 16,057,785
-------------- --------------
Total liabilities and stockholders' equity................................. $ 154,369,548 $ 136,860,375
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CITY COMMERCE BANK
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans....................................................... $ 10,694,144 $ 9,508,648
Interest on securities........................................................... 867,862 915,854
Interest on Federal funds sold................................................... 359,707 390,414
------------- -------------
Total interest income.......................................................... 11,921,713 10,814,916
------------- -------------
INTEREST EXPENSE:
Interest on savings deposits..................................................... 2,337,763 2,242,687
Interest on time deposits under $100,000......................................... 647,277 733,802
Interest on time deposits of $100,000 or more.................................... 455,997 520,775
Interest on other obligations.................................................... 7,363 3,036
------------- -------------
Total interest expense......................................................... 3,448,400 3,500,300
------------- -------------
Net interest income................................................................ 8,473,313 7,314,616
Provision for loan losses (note 4)............................................... -- 75,000
------------- -------------
Net interest income after provision for loan losses................................ 8,473,313 7,239,616
------------- -------------
OTHER INCOME:
Card services.................................................................... 675,493 864,926
Service charges and fees......................................................... 553,371 446,735
Securities gains (losses), net................................................... (440,434) 5,623
Gain on sale of real estate owned................................................ 1,003,739 --
Other income..................................................................... 62,486 57,208
------------- -------------
Total other income............................................................. 1,854,655 1,374,492
------------- -------------
OTHER EXPENSES:
Salaries and employee benefits (note 8).......................................... 3,741,730 3,613,963
Occupancy expense (notes 5 and 11)............................................... 870,905 1,001,887
Other expense (notes 10 and 14).................................................. 2,164,448 2,169,748
------------- -------------
Total other expenses........................................................... 6,777,083 6,785,598
------------- -------------
INCOME BEFORE INCOME TAXES......................................................... 3,550,885 1,828,510
Income taxes expense (note 6).................................................... 1,576,349 604,476
------------- -------------
NET INCOME......................................................................... $ 1,974,536 $ 1,224,034
------------- -------------
------------- -------------
BASIC NET INCOME PER SHARE (note 9)................................................ $ 1.17 $ 0.73
DILUTED NET INCOME PER SHARE....................................................... $ 1.14 $ 0.68
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CITY COMMERCE BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
------------------------- OTHER
NUMBER UNDIVIDED COMPREHENSIVE
OF SHARES AMOUNT PROFITS INCOME (LOSS) TOTAL
---------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996............... 1,430,870 $ 12,622,029 $ 2,330,489 $ (122,686) $ 14,829,832
Options exercised, gross of tax benefit
of directors options exercised....... 3,153 20,148 -- -- 20,148
Comprehensive income
Net income........................... 1,224,034 1,224,034
Other comprehensive income (loss).... (13,057) (13,057)
-------------
Total comprehensive income............. 1,210,977
Stock dividend (note 7)................ 71,520 1,251,600 (1,251,600) -- --
Cash paid for fractional shares (note
7)................................... (3,172) (3,172)
---------- ------------- ------------- -------------- -------------
BALANCE, December 31, 1997............... 1,505,543 13,893,777 2,299,751 (135,743) 16,057,785
Options exercised, gross of tax benefit
of directors options exercised....... 85,160 565,245 -- -- 565,245
Comprehensive income
Net income........................... 1,974,536 1,974,536
Other comprehensive income (loss).... 237,144 237,144
-------------
Total comprehensive income............. 2,211,680
Stock dividend (note 7)................ 154,347 2,932,593 (2,932,593 -- --
Cash paid for fractional shares (note
7)................................... -- -- (2,789) -- (2,789)
Stock repurchased and retired.......... (81,255) (1,464,541) -- -- (1,464,541)
---------- ------------- ------------- -------------- -------------
BALANCE, December 31, 1998............... 1,663,795 $ 15,927,074 $ 1,338,905 $ 101,401 $ 17,367,380
---------- ------------- ------------- -------------- -------------
---------- ------------- ------------- -------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
CITY COMMERCE BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................................... $ 1,974,536 $ 1,224,034
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses........................................................ -- 75,000
Loss on sale of available-for-sale securities.................................... 444,890 --
Gain on the call of available-for-sale-securities................................ (4,456) (5,623)
Gain on sale of other real estate owned.......................................... (1,003,739) --
Depreciation and amortization.................................................... 381,402 493,099
Amortization of net deferred loan origination fees............................... (360,300) (220,209)
Amortization of bond premium..................................................... 30,156 35,951
Deferred income taxes............................................................ 23,365 (72,123)
Changes in operating assets and liabilities:
Interest receivable............................................................ (173,778) 13,865
Other assets................................................................... 219,453 (536,218)
Interest payable............................................................... 44,907 16,025
Other liabilities.............................................................. (1,016,694) 131,452
------------- -------------
Net cash provided by operating activities.......................................... 559,742 1,155,253
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities........................................ (8,734,765) (4,920,896)
Proceeds from maturities of available-for-sale securities........................ 2,192,010 3,070,000
Proceeds from call of available-for-sale securities.............................. 9,490,000 1,415,000
Proceeds from sale of available-for-sale securities.............................. 4,555,110 --
Increase in loans, net........................................................... (20,702,514) (11,119,878)
Purchase of fixed assets......................................................... (420,864) (255,914)
Proceeds from sale of other real estate owned.................................... 2,708,433 --
------------- -------------
Net cash used in investing activities.............................................. (10,912,590) (11,811,688)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in demand and savings deposits, net..................................... 15,820,758 6,392,273
Decrease in certificates of deposit under $100,000............................... (4,070,365) (3,765,784)
Increase in certificates of deposit of $100,000 or more.......................... 5,420,971 4,545,934
Proceeds from stock options exercised, including tax benefit..................... 565,245 20,148
Purchase of bank stock for retirement............................................ (1,464,541) --
Cash paid for fractional shares.................................................. (2,789) (3,172)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......................................... 16,269,279 7,189,399
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................... 5,916,431 (3,467,036)
------------- -------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................................... 11,879,668 15,346,704
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................................... $ 17,796,099 $ 11,879,668
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest......................................................................... $ 3,493,308 $ 3,484,275
Income taxes..................................................................... 1,590,000 606,972
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTMENT AND FINANCING ACTIVITIES:
Transfer from loans to real estate owned and assumption of related mortgage
liability...................................................................... $ -- $ 1,707,977
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS--City Commerce Bank (the Bank) services the Santa
Barbara and Ventura communities by providing traditional banking services,
including lending, deposit taking, card processing and fiduciary services. The
Bank offers commercial, real estate, construction, installment loans, in
addition to asset based lending and leasing activities. The Bank's deposit
products include demand and savings accounts as well as time deposits. The
majority of the Bank's branches and customers are located in the community of
Santa Barbara.
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles (GAAP) and general practice within the banking
industry. Certain reclassifications have been made to the 1997 balances to
conform to current year presentation. Management of the Bank has made a number
of estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
statements in conformity with GAAP. Actual results could differ from those
estimates. The following are descriptions of the more significant accounting
policies.
SECURITIES--The Bank's debt securities may be classified into three
categories as follows:
HELD-TO-MATURITY SECURITIES--Debt securities that the Bank has the
positive intent and ability to hold to maturity. These securities are
reported at amortized cost.
TRADING SECURITIES--Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term. These
securities are to be reported at fair value with unrealized gains and losses
included in earnings.
AVAILABLE-FOR-SALE SECURITIES--Debt and equity securities not classified
as either held-to-maturity or trading securities. These securities are
reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity (net
of tax effects).
Gain and losses on sales of securities are determined using the
specific-identification method. The Bank considers a security to be impaired
when it appears that any unrealized holding losses are other than temporary. Any
such impairment is recognized as a charge to earnings and the security is
written down to the estimated fair value. Unrealized gains and losses, net of
tax effect, on securities available for sale are reported as a separate
component of other comprehensive income until realized.
LOANS--Loans are carried at principal amounts advanced, less principal
payments collected. Interest is calculated using the simple-interest method.
Accrual of interest on a loan is generally discontinued when the loan becomes 90
days past due as to principal or interest (unless the loan is well secured and
in the process of collection) or when, in management's opinion, the full timely
collection of principal or interest becomes uncertain. When a loan is placed on
nonaccrual status, all previously accrued but uncollected interest is reversed
and charged to interest income on loans on the date the loan is placed on
nonaccrual. Loans are returned to accrual status if brought current and after
demonstrating satisfactory performance for a period of at least six months.
Loan origination fees and certain direct loan origination costs are deferred
and amortized over the life of the related loans as a yield adjustment. The
unamortized net loan origination fee or cost is recorded as part of the loan
balance to which it relates.
F-15
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Bank considers a loan to be impaired when it is probable that a creditor
will be unable to collect all amounts due (principal and interest) according to
the contractual terms of the loan agreement. Measurement of impairment can be
based on the expected future cash flows of an impaired loan which are to be
discounted at the loan's effective interest rate, or impairment, can be measured
by reference to an observable market price, if one exists, or the fair value of
the collateral for a collateral-dependent loan. The bank selects the measurement
method on a loan-by-loan basis except that collateral-dependent loans, for which
foreclosure is probable, are measured at the fair value of the collateral. Cash
receipts on impaired loans receivable are applied to principal and interest in
accordance with the terms of the loan. The Bank reviews all loans greater than
$100,000 for impairment.
ALLOWANCE FOR LOAN AND LEASE LOSSES--The allowance for loan and lease losses
is established through provisions for loan and lease losses which are included
in the accompanying statements of operations. Loans and leases are charged
against the allowance for losses when management determines that collectibility
of the principal is unlikely. Recoveries on loans and leases previously charged
off are credited to the allowance. The accompanying financial statements require
the use of management estimates to calculate the allowance for loan losses which
depend on the outcome of inherently uncertain future events. Management's
estimates are based upon previous loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, the value of
collateral and other relevant factors. Regulatory examiners may require the Bank
to recognize additions to the allowances based upon their judgment about
information available to them at the time of their examination. Management has
considered these factors in calculating the allowance for loan and lease losses
and believes the level of the allowance as of December 31, 1998 and 1997 is
adequate to absorb losses both known and inherent in the loan and lease
portfolio.
OTHER REAL ESTATE OWNED--Real estate properties acquired through, or in lieu
of, loan foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell. Revenue
and expenses from operations and changes in the valuation allowance are included
in loss on foreclosed real estate.
CARD SERVICES INCOME--A portion of card processing fees earned and all
direct costs associated with such fees are recognized upon the initial
processing of the transactions. The remaining card processing fees are
recognized upon the completion of the respective transaction.
PREMISES AND EQUIPMENT--Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation expense is charged to
income over the estimated useful lives of the assets by the use of the
straight-line method. Leasehold improvements are amortized over the estimated
useful lives of the improvements or the terms of the leases, including renewal
option periods, whichever is shorter.
The estimated useful lives of premises and equipment are as follows:
<TABLE>
<S> <C>
20-40
Building and improvements....................................... years
Furniture, fixtures and equipment............................... 3-25 years
</TABLE>
F-16
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
YEAR 2000--The Bank is aware of the issues associated with the programming
code in existing computer systems as the millennium (Year 2000) approaches. The
Year 2000 matter is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to
"00." The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Bank is utilizing both internal and external resources to identify,
correct or reprogram and test its systems for the Year 2000 compliance. Bank
management anticipates that all reprogramming efforts will be completed prior to
the Year 2000 such that adequate time for testing will exist. To date,
confirmations are being processed and received by the Bank from its primary
processing vendors that plans are being developed to address processing of
transactions in the Year 2000.
This Year 2000 issue creates risks for the Bank from unforeseen problems in
its own computer systems and from third parties with whom the Bank deals on
financial transactions both domestically and internationally. Such failures of
the Bank's and/or third parties computer systems could have a material impact on
the Bank's ability to conduct its business, and especially to process and
account for the transfer of funds and transactions electronically. Incomplete or
untimely resolution of the Year 2000 issue represents an uncertainty that is
reasonably likely to affect the future financial results of the Bank, or cause
current reported financial information not to be indicative of future operating
results or future financial condition. The Bank's management estimates that
costs associated with achieving Year 2000 compliance will approximate $398,137.
The Bank's policy is to expense all Year 2000 related costs as incurred. For the
year ended December 31, 1998, the Bank recognized $52,769 in Year 2000 related
expenses.
INCOME TAXES--Under the asset and liability method utilized by the Bank,
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
STOCK OPTIONS--On January 1, 1996, the Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and to provide disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Bank has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
EARNINGS PER SHARE--In February 1997, Financial Accounting Standards Board
(FASB) issued SFAS No. 128, "Earnings per Share," which supersedes APB Opinion
No. 15, "Earnings per Share," and specifies the computation, presentation and
disclosure requirements for earnings per share (EPS)
F-17
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for entities with common stock such as the Bank. The Bank adopted SFAS No. 128
effective December 31, 1997.
SFAS No. 128 replaces primary EPS with basic EPS and fully diluted EPS with
diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in issuance of common stock
that then shared in earnings. SFAS No. 128 also requires dual presentation of
basic and diluted EPS on the face of the income statement and a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation.
RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
CREDIT RISK--Credit risk of a financial instrument is the possibility that a
loss may result from the failure of another party to perform in accordance with
the terms of the contract. The most significant credit risk associated with the
Bank's financial instruments is concentrated in loans receivable. Additionally,
the Bank is subject to credit risk on certain off-balance sheet financial
instruments. The Bank utilizes a loan monitoring system to evaluate the level of
credit risk on its loan portfolio and utilizes a similar process for Bank
standby letters of credit.
MARKET RISK--Market risk of a financial instrument is the possibility that
future changes in market prices may reduce the value of a financial instrument
or increase the contractual obligations of the Bank. The Bank's market risk is
concentrated in its portfolios of securities available-for-sale and loans
receivable. The Bank's securities available-for-sale are traded in active
markets. The values of those securities are susceptible to fluctuations in the
general market. When a borrower fails to meet the contractual requirements of
his loan agreement, the Bank is subject to the market risk of the collateral
securing the loan.
INTEREST RATE RISK--Financial instruments are subject to interest rate risk
to the extent that they reprice on a frequency, degree or basis that varies from
market repricing. The Bank is subject to interest rate risk to the degree that
its interest-earning assets reprice on a different frequency or schedule than
its interest-bearing liabilities. The Bank closely monitors the pricing
sensitivity of its financial instruments and utilizes asset/liability techniques
to mitigate the impact of interest rate risk. Concentrations of Credit Risk--The
Bank's lending activities are conducted in the state of California. The Bank
currently focuses on the origination of commercial, real estate, and
construction loans. The largest concentration of the Bank's loan portfolio is
located in Santa Barbara County. The ability of the Bank's borrowers to repay
their commitments is contingent on several factors, including economic
conditions in the borrowers geographic region, primarily California, market
interest rates and upon the individual financial condition of the borrower.
STATEMENT OF CASH FLOWS--For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks and Federal funds sold. Generally,
Federal funds are sold for one-day periods.
F-18
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME--On January 1, 1998, the Bank adopted SFAS No. 130,
"Reporting Comprehensive Income" (SFAS No. 130). SFAS 130 establishes standards
for reporting and presentation of comprehensive income and its components in a
full set of general purpose financial statements. Comprehensive income consists
of net income and net unrealized gains (losses) on securities available for sale
and are presented in the accompanying statement of changes in shareholders'
equity and comprehensive income. The statement requires only additional
disclosures in the financial statements; it does not affect the Bank's financial
position or results of operations. Prior year periods have been reclassified to
conform to the requirements of SFAS No. 130.
PENSION AND OTHER POSTRETIREMENT PLANS--Effective January 1, 1998, the Bank
adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. SFAS No. 132 does not change the
method of accounting for such plans.
RECENT ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No. 133). This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. This
statement is effective for fiscal years beginning after June 15, 1999. The Bank
does not believe that the implementation will have a significant impact on the
Bank's financial position, net income or comprehensive income.
(2) RESERVE REQUIREMENT
All depository institutions are required by law to maintain reserves on
transaction accounts. These reserves can be in the form of balances at the
Federal Reserve Bank or in cash held by the Bank. The average reserve
requirement for the Bank was $845,000 in 1998 and $801,000 in 1997.
(3) SECURITIES
At December 31, 1998 and 1997, all securities were classified as
available-for-sale. The amortized cost and fair values of securities at December
31 are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities.................................. $ 494,308 $ 29,442 -- $ 523,750
U.S. Government agency securities......................... 5,942,797 28,726 -- 5,971,523
Obligations of states and political subdivisions.......... 2,889,857 113,712 -- 3,003,569
------------- ----------- ----------- -------------
Total securities.......................................... $ 9,326,962 $ 171,880 -- $ 9,498,842
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
F-19
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(3) SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
1997
------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities.................................. $ 993,211 $ 7,573 $ -- $ 1,000,784
U.S. Government agency securities......................... 6,998,839 4,812 -- 7,003,651
Obligations of states and political subdivisions.......... 4,435,215 179,169 -- 4,614,384
Mutual funds (invested in U.S. Government agency
securities)............................................. 5,000,000 -- (421,627) 4,578,373
------------- ----------- ----------- -------------
Total securities.......................................... $ 17,427,265 $ 191,554 $ (421,627) $ 17,197,192
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
Gross realized gains from the call of securities available-for-sale were
$4,456 and $5,623 for the year ended December 31, 1998 and 1997. Gross realized
losses from the sales of securities were $444,890 for the year ended December
31, 1998. There were no sales of securities for the year ended December 31,
1997.
During the year ended December 31, 1998, $13,994 of unrealized losses
($7,781 net of tax effect of $6,213) arose and are included in other
comprehensive income, and $440,434 of previously unrealized losses ($244,925 net
of tax effect of $195,509) were realized in net income.
During the year ended December 31, 1997, $13,883 of unrealized losses
($9,293 net of tax effect of $4,590) arose and are included in other
comprehensive income, and $5,623 of previously unrealized gains ($3,764 net of
tax effect of $1,859) were realized in net income.
Securities having an aggregate carrying value of approximately $3,031,918
and $3,953,508 at December 31, 1998 and 1997, respectively, were pledged to
secure public deposits and for other purposes required or permitted by law.
Securities as of December 31, 1998 mature as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
Due in one year or less........................................... $ 1,581,322 $ 1,604,236
Due in one to five years.......................................... 7,155,470 7,267,862
Due in five to ten years.......................................... 590,170 626,744
------------ ------------
Total securities.................................................. $ 9,326,962 $ 9,498,842
------------ ------------
------------ ------------
</TABLE>
F-20
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(4) LOANS
The loan portfolio consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Commercial................................................... $ 43,736,881 $ 35,879,442
Real estate.................................................. 37,267,036 51,147,993
Installment.................................................. 22,076,945 10,277,995
Real estate construction..................................... 19,919,559 5,358,228
Lease financing.............................................. 700,474 133,809
-------------- --------------
Total loans.................................................. 123,700,895 102,797,467
Allowance for loan and lease losses.......................... (1,540,105) (1,699,491)
-------------- --------------
Loans, net................................................... $ 122,160,790 $ 101,097,976
-------------- --------------
-------------- --------------
</TABLE>
At December 31, 1998 and 1997, unamortized net loan origination fees of
$430,805 and $497,385, respectively, were included as part of the total loan
balance.
At December 31, 1998, the Bank had $14,716,000 of loans in process,
$9,124,000 of which related to variable interest rate loans and $5,592,000 which
related to fixed rate loans.
Transactions in the allowance for loan and lease losses account are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Balance, beginning of year........................................ $ 1,699,491 $ 1,419,547
Provision for loan losses......................................... -- 75,000
Loans charged off................................................. (193,424) (85,936)
Recoveries on loans previously charged off........................ 34,038 290,880
------------ ------------
Balance, end of year.............................................. $ 1,540,105 $ 1,699,491
------------ ------------
------------ ------------
</TABLE>
The following is a summary of nonaccrual loans and interest that is
receivable on those loans but has not been accrued in the financial statements
as of December 31:
<TABLE>
<CAPTION>
NONACCRUAL UNRECORDED
YEAR LOANS INTEREST
- -------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1998................................................................ $ 120,375 $ 96,580
1997................................................................ $ 472,106 $ 110,323
</TABLE>
The Bank considers all nonaccrual loans to be impaired. At December 31, 1998
and 1997, the total recorded investment in impaired loans was $120,375 and
$472,106 with a related impairment allowance totaling $120,375 and $394,752,
respectively. All such provisions for losses are recorded as part of the
provision for loan and lease losses. During the years ended December 31, 1998
and 1997, the Bank's average investment in impaired loans was $250,350 and
$1,012,211, respectively, and there was no interest income recorded on impaired
loans during the years ended December 31, 1998 and 1997. There was no accrued
interest related to impaired loans included in the December 31, 1998 and 1997
balances of accrued interest receivable. Payments made on impaired loans are
applied first to the
F-21
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(4) LOANS (CONTINUED)
principal balance until fully recovered and then to any foregone interest. The
Bank has no commitments to lend additional funds to debtors whose terms have
been modified in a troubled debt restructuring.
(5) PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Land............................................................ $ 535,000 $ 535,000
Building and improvements....................................... 2,887,260 2,880,214
Leasehold improvements.......................................... 522,288 520,572
Furniture, fixtures and equipment............................... 2,218,217 1,900,021
Construction in progress........................................ 5,860 --
------------- -------------
Total cost...................................................... 6,168,625 5,835,807
Accumulated depreciation and amortization....................... (3,301,364) (2,950,476)
------------- -------------
Premises and equipment, net..................................... $ 2,867,261 $ 2,885,331
------------- -------------
------------- -------------
</TABLE>
For the years ended December 31, 1998 and 1997, the Bank recognized
depreciation and amortization expense of $381,402 and $493,099, respectively.
(6) INCOME TAXES
The components of income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Current:
Federal........................................................... $ 1,131,562 $ 437,573
State............................................................. 421,422 239,026
------------ ----------
Total current....................................................... 1,552,984 676,599
------------ ----------
Deferred:
Federal........................................................... 8,929 (34,106)
State............................................................. 14,436 (38,017)
------------ ----------
Total deferred...................................................... 23,365 (72,123)
------------ ----------
Total income tax expense............................................ $ 1,576,349 $ 604,476
------------ ----------
------------ ----------
</TABLE>
F-22
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(6) INCOME TAXES (CONTINUED)
A reconciliation of total income taxes and the amount computed by applying
the statutory Federal corporate income tax rate to earnings before income taxes
follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
PERCENTAGE PERCENTAGE
OF PRETAX OF PRETAX
AMOUNT EARNINGS AMOUNT EARNINGS
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Computed "expected" income taxes.............................. $ 1,207,301 34.0% $ 621,704 34.0%
Increase (decrease) in tax resulting from:
State franchise taxes, net of Federal benefit............... 255,837 7.2 130,821 7.2
Tax-exempt bond interest.................................... (78,064) (2.2) (106,360) (5.8)
Increase (Reduction) of valuation allowance................. 183,092 5.2 (55,486) (3.0)
Other....................................................... 8,193 0.3 13,797 .7
------------ --- ----------- ---
$ 1,576,349 44.5% $ 604,476 33.1%
------------ --- ----------- ---
------------ --- ----------- ---
</TABLE>
Deferred taxes result from temporary differences in the recognition of
revenues and expenses for financial and tax reporting purposes. Principal items
resulting in deferred tax assets and liabilities at December 31, 1998 and 1997
are shown below:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Assets:
Loan loss allowance................................................ $ 215,285 $ 215,285
Capital loss carryforward.......................................... 183,092 --
Unrealized loss on securities available-for-sale................... -- 94,330
Nonaccrual interest recognized for tax............................. 39,747 45,403
States taxes....................................................... 127,192 81,269
----------- ----------
Total gross deferred tax assets.................................. 565,316 436,287
Valuation allowance.................................................. $ (183,092) --
----------- ----------
Deferred tax assets, net............................................. 382,224 436,287
----------- ----------
Liabilities:
Depreciation....................................................... $ 277,275 $ 262,761
Unrealized gain on securities available for sale................... 70,479 --
Prepaid expenses, expensed for tax................................. 144,755 95,844
Other.............................................................. 1,281 1,070
----------- ----------
Total gross deferred tax liabilities............................. 493,790 359,675
----------- ----------
Net deferred tax asset (liability)............................... $ (111,566) $ 76,612
----------- ----------
----------- ----------
</TABLE>
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the net
deferred tax assets.
Other liabilities included $150,128 in income taxes payable at December 31,
1997, and other assets included $136,736 of income taxes receivable at December
31, 1998.
F-23
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(7) STOCKHOLDERS' EQUITY
In 1998 and 1997, a stock dividend of 10% and 5%, respectively, was
declared. Earnings per share data have been adjusted for all periods to give
retroactive effect to the stock dividend.
In 1989, the Bank adopted a stock option plan (the Plan) pursuant to which
the Bank's Board of Directors may grant stock options to officers and key
employees. At December 31, 1998, the Plan was authorized to grant options to
purchase up to 160,186 shares of authorized, but unissued, common stock. Stock
options are granted with an exercise price equal to the stock's fair market
value at the date of grant. All stock options have a 5 1/4-year term and vest
and become fully exercisable after five years from the date of grant.
The Bank applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Bank determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123, the
Bank's net income would have been reduced by the cost measured under SFAS No.
123 (net of the related tax effect) as reflected on the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net income as reported............................................ $ 1,974,536 $ 1,224,034
Pro forma net income.............................................. $ 1,928,382 1,178,390
Pro forma basic net income per share.............................. $ 1.14 $ 0.71
Proforma dilluted net income per share............................ $ 1.11 $ 0.66
</TABLE>
Pro forma net income reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented because compensation cost is reflected over the options' vesting
period of five years and compensation cost for options granted prior to January
1, 1995 is not considered.
The effects on the Bank's earnings of applying compensation cost based on
the fair value at the date of grant for its stock options under SFAS 123 in the
current and prior year may not be representative of the effects on reported net
income for future years.
F-24
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(7) STOCKHOLDERS' EQUITY (CONTINUED)
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
----------- -----------
<S> <C> <C>
Balance at January 1, 1997............................................. 179,470 $ 8.85
Granted.............................................................. 12,300 13.63
Exercised............................................................ (3,153) 6.08
Forfeited............................................................ -- --
Expired.............................................................. -- --
Canceled............................................................. -- --
Additional shares associated with stock dividend..................... 9,431 --
----------- -----------
Balance at January 1, 1998............................................. 198,048 8.75
Granted.............................................................. 22,750 17.83
Exercised............................................................ (85,160) 6.63
Forfeited............................................................ (19,050) 10.03
Expired.............................................................. -- --
Canceled............................................................. -- --
Additional shares associated with stock dividend..................... 11,660 --
----------- -----------
Balance at December 31, 1998........................................... 128,248 $ 11.00
----------- -----------
----------- -----------
</TABLE>
The balance at December 31, 1998 includes 128,248 shares for incentive stock
options and no shares for nonqualified stock options.
At December 31, 1998 and 1997, the range of exercise prices and weighted
average remaining contractual life of outstanding options was $5.37 to $16.36
and 2.89 years, and $6.08 to $12.98 and 2.45 years, respectively.
At December 31, 1998 and 1997, the number of options exercisable was 43,187
and 87,796, respectively, and the weighted average exercise price of those
options was $9.32 and $7.43, respectively.
At December 31, 1998 and 1997, there were 31,937 and 33,440 additional
shares available for grants under the Plan, respectively.
The per share weighted average fair value of stock options granted during
1998 and 1997 was $5.06 and $3.60, respectively, on the date of grant using the
following weighted average assumptions: 1997 risk-free interest rate of 6.1% and
an expected life of five years; 1998 risk-free interest rate of 6.3% and an
expected life of five years. The 1998 and 1997 assumed rate of volatility was
17.3% and 8.7%, respectively.
During the year ended December 31, 1997, the Bank's Board of Directors
approved a stock repurchase plan. Under the terms of the Plan, the Bank may
repurchase up to 10% of the outstanding shares of the Bank. The repurchase is
projected to occur over the next two years; however, the Plan does not establish
an automatic expiration date should the full 10% not be repurchased with the
designated two year time frame. All shares subject to repurchase are to be
acquired at a price not to
F-25
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(7) STOCKHOLDERS' EQUITY (CONTINUED)
exceed the market price at the time of acquisition. All transactions will be in
the form of cash purchases, negotiated on the open market, and all stock
acquired will be immediately retired. For the year ended December 31, 1998, a
total of 81,255 shares were repurchased at an average price of $18.02 per share.
For the year ended December 31, 1997, there was no activity under this plan.
(8) EMPLOYEE BENEFIT PLAN
In 1987, the Bank adopted a defined contribution profit sharing plan. Under
this plan, authorized under Section 401(k) of the Internal Revenue Code, all
full-time employees of the Bank who have one year of service and are age 18 and
older may defer up to 15% of their compensation. The Bank matches 50% of the
employees' contributions up to a maximum 3% of their eligible compensation.
Also, the plan provides for the Bank to make additional discretionary
contributions if certain profitability levels are achieved.
In 1998, the Bank modified the employer match levels, entry date, and
vesting schedule to the Plan. Under the modified Plan, all employees who work 20
or more hours a week may participate in the Plan at the first entry date
following their date of hire. Entry dates into the Plan are the first day of
each calendar quarter. The Bank will match 100% of the employees' contribution
up to 3% of their eligible compensation and 50% of the employees' contribution
from 3% to 6% of eligible compensation. All employees hired prior to January 1,
1998 are 100% vested in any employer contribution. Employees hired on or after
January 1, 1998 are subjected to the following vesting schedule:
<TABLE>
<CAPTION>
COMPLETED YEARS OF SERVICE PERCENTAGE VESTED
- ---------------------------------------------------------------------------- -------------------
<S> <C>
Less than 1 year............................................................ 0%
1 year...................................................................... 0%
2 years..................................................................... 25%
3 years..................................................................... 50%
4 years..................................................................... 75%
5 years..................................................................... 100%
</TABLE>
The Bank's matching contributions to the Plan were $94,712 in 1998 and
$42,704 in 1997.
The Bank has entered into salary continuation agreements with some of its
key officers. The vesting periods for these agreements have varying dates with
respect to commencement of vesting. As a means to fund the current and future
liabilities under these agreements, the Bank has purchased various Company owned
life insurance policies (COLI) the cash surrender value of which is included in
the reported balance of other assets at December 31, 1998 and 1997. Related to
these agreements, the Bank had accrued liabilities in the amount of $112,501 and
$80,649 for the years ended December 31, 1998 and 1997, respectively.
F-26
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(9) EARNINGS PER SHARE
The following is a summary of the calculation of net income per share:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net Income............................................................................ $ 1,974,536 $ 1,224,034
Weighted average shares:
(retroactively restated for stock dividends)
Basic weighted average number of shares outstanding................................. 1,689,724 1,671,076
Dilutive effect of outstanding common stock equivalents............................. 45,578 120,389
Diluted weighted average number of shares outstanding............................... 1,735,302 1,791,465
------------ ------------
------------ ------------
Per share data
Basic income per share.............................................................. 1.17 $ 0.73
Diluted income per share............................................................ 1.14 $ 0.68
------------ ------------
------------ ------------
</TABLE>
(10) RELATED PARTIES
The Bank has engaged in certain banking transactions with its directors,
officers, their immediate families and affiliated companies in the ordinary
course of business. Bank management believes the terms and conditions of these
transactions were consistent with those generally available to nonaffiliated
customers.
Loans outstanding to such related parties on December 31, 1998 and 1997
amounted to approximately $2,327,837 and $4,631,389, respectively.
Legal fees of approximately $48,964 and $44,904 in 1998 and 1997,
respectively, were paid to a law firm with which a director is affiliated.
(11) COMMITMENTS AND CONTINGENCIES
The Bank leases office premises under operating leases which expire at
various dates through 2003. Certain office premise leases, which expire in 2000
and 2003, have three and two successive options of five years each,
respectively. Future minimum commitments under these leases are as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 236,561
2000.............................................................. 217,818
2001.............................................................. 194,254
2002.............................................................. 135,181
2003.............................................................. 123,365
---------
Total........................................................... $ 907,179
---------
---------
</TABLE>
The total rental expense for the years ended December 31, 1998 and 1997
under the Bank's operating leases was $230,252 and $229,153, respectively.
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These instruments involve, to varying degrees,
F-27
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheets. The Bank uses the same credit policies in making commitments
and conditional commitments as it does for extending loan facilities to
customers. The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The Bank's exposure to credit loss in the event of nonperformance by its
customers to commitments to extend credit and to standby letters of credit is
represented by the contractual notional amount of those instruments. At December
31, 1998, the Bank had commitments to extend credit of approximately $45,576,783
and obligations under standby letters of credit of approximately $1,736,768.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent market and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments.
CASH AND DUE FROM BANKS, AND FEDERAL FUNDS SOLD
The carrying amounts reported on the balance sheets approximate those
assets' fair values.
SECURITIES
The fair values of securities are obtained from quotes from independent
security dealers.
LOANS RECEIVABLE
The fair values of loans receivable are estimated using discounted cash flow
analysis, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The carrying amounts of the loans
receivable conform to regulatory loan receivable classification definitions.
DEPOSITS
The fair values disclosed for demand accounts are, by definition, equal to
the amount payable on demand at the reporting date (i.e., their carrying value
amounts). The fair values of savings accounts and time deposits are estimated
using a discounted cash flow calculation that applies current interest rates
being offered on such accounts to a schedule of aggregated expected monthly
maturities of the outstanding accounts.
F-28
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. These commitments relate to unused balances on revolving lines
of credit. The fair value of standby letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties.
Based on the minimal fees and costs associated with these instruments, the
estimated fair value is considered insignificant.
The carrying amounts and fair values of the Bank's financial instruments
consisted of the following at December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and due from banks.......................................... $ 17,796 $ 17,796 $ 9,880 $ 9,880
Federal funds sold............................................... -- -- 2,000 2,000
Securities available-for-sale.................................... 9,499 9,499 17,197 17,197
Loans receivable:................................................ 123,701 129,989 102,797 104,337
---------- ---------- ---------- ----------
$ 150,996 $ 157,244 $ 131,874 $ 133,414
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Deposits:
Demand......................................................... $ 34,113 $ 34,113 $ 31,238 $ 31,238
Savings........................................................ 76,442 76,442 63,496 63,496
Time deposits under $100,000................................... 7,417 7,484 11,488 11,554
Time deposits of $100,000 or more.............................. 17,832 18,261 12,411 12,413
---------- ---------- ---------- ----------
$ 135,804 $ 136,300 $ 118,633 $ 118,701
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The carrying amounts of the loans receivable presented above conform to
regulatory loan receivable classification definitions.
(13) REGULATORY MATTERS
California banking law places the following restrictions on the availability
of surplus and undivided profits for dividend purposes without prior approval of
the State Banking Department:
A bank may not make distribution to its shareholders in excess of the
lesser of (1) retained earnings, or (2) net income for its last three fiscal
years, less the amount of any such distributions made by the bank to the
shareholders of the bank during such period.
Under this law, the Bank could, as of December 31, 1998, declare and pay
dividends of approximately $1,338,905 without the approval of the State Banking
Department. Additionally, the Bank must
F-29
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(13) REGULATORY MATTERS (CONTINUED)
maintain specified capital ratios, as discussed below, which could further
restrict the payment of dividends.
The Bank is required to maintain minimum amounts of capital to average total
assets and total "risk-weighted" assets, as defined by the banking regulators.
The following table sets forth various Federal capital ratios for the Bank at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
ACTUAL DECEMBER 31
------------------------------------------------------
1998 1997
MINIMUM -------------------------- --------------------------
REQUIREMENT PERCENTAGE AMOUNT PERCENTAGE AMOUNT
----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Capital ratios:
Tier 1 risk-based to risk-weighted
assets................................... 4% 12.19% $ 17,226,695 12.94% $ 15,712,974
Total risk-based to risk-weighted assets... 8 13.28 18,806,804 14.35 17,426,525
Leverage to total average assets........... 4 11.17 17,226,695 11.58 15,712,974
</TABLE>
At December 31, 1998 and 1997, the Bank exceeded the regulatory requirements
for a "well-capitalized" institution, the highest regulatory standard. The
Bank's management does not believe that any conditions or events have occurred
which would have changed the Bank's status at December 31, 1998.
(14) OTHER EXPENSES
Other expenses are comprised of the following for the year ended December
31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Advertising and promotion......................................... $ 310,064 $ 188,137
Card services..................................................... 476,779 716,517
Communications.................................................... 191,883 167,167
Data processing................................................... 251,940 207,765
Regulatory assessments............................................ 31,542 46,108
Directors' expense................................................ 183,400 124,922
Other expenses.................................................... 718,840 719,133
------------ ------------
$ 2,164,448 $ 2,169,749
------------ ------------
------------ ------------
</TABLE>
(15) DEPOSITS
Included in the total deposit balance at December 31, 1998 were $1,796,914
in deposits of related parties and $13,358,442 in deposits obtained from outside
the Bank's traditional market area through financial intermediaries.
F-30
<PAGE>
CITY COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(15) DEPOSITS (CONTINUED)
At December 31, 1998, the maturity distribution of the Bank's time deposits
was as follows:
<TABLE>
<S> <C>
1999........................................................... $17,091,874
2000........................................................... 4,000,427
2001........................................................... 2,047,205
2002........................................................... 103,009
2003........................................................... 2,006,37
----------
$25,248,890
----------
----------
</TABLE>
(16) LEGAL MATTERS
The Bank is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Bank's financial position, results of operations or liquidity.
(17) SUBSEQUENT EVENT
On April 19, 1999, the Bank's Board of Directors signed a definitive
agreement to merge with Mid-State Bancshares subject to shareholder and
regulatory approval. The combination is expected to be completed during the
fourth quarter of 1999.
F-31
<PAGE>
APPENDIX A
<PAGE>
AGREEMENT TO MERGE
AND PLAN OF REORGANIZATION
DATED AS OF APRIL 19, 1999
BY AND AMONG
MID-STATE BANK
MID-STATE BANCSHARES
AND
CITY COMMERCE BANK
<PAGE>
AGREEMENT TO MERGE
AND PLAN OF REORGANIZATION
THIS AGREEMENT TO MERGE AND PLAN OF REORGANIZATION ("AGREEMENT") is entered
into as of April 19, 1999, among Mid-State Bank, a banking company organized
under the laws of California ("BANK"), being located in Arroyo Grande,
California, Mid-State Bancshares, a corporation and registered bank holding
company organized under the laws of California ("ACQUIROR") located in Arroyo
Grande, California, and City Commerce Bank, a banking company organized under
the laws of California ("TARGET"), located in Santa Barbara, California.
R E C I T A L S:
A. Bank is a wholly owned subsidiary of Acquiror.
B. Acquiror, Bank and Target believe that it would be in their respective
best interests and in the best interests of their respective shareholders for
Target to merge with and into Bank (the "Bank Merger"), and for the shareholders
of Target to become shareholders of Acquiror, all in accordance with the terms
set forth in this Agreement and applicable law.
C. The respective Boards of Directors of Bank and Target have adopted by
majority vote resolutions approving and authorizing the Bank Merger upon the
terms and conditions set forth in this Agreement and the Board of Directors of
Acquiror has adopted by majority vote resolutions approving the Bank Merger,
this Agreement and the transactions contemplated herein.
D. Acquiror, Bank and Target desire to make certain representations,
warranties, covenants and agreements in connection with the transactions
contemplated by this Agreement.
E. Concurrently herewith, Acquiror and Target are entering into a stock
option agreement (the "Stock Option Agreement"), to be dated the date hereof,
whereby Target will grant to Acquiror the option to purchase up to 19.9% of the
outstanding shares of Target's Common Stock upon the occurrence of certain
events.
F. It is the intention of the parties to this Agreement that the business
combination contemplated hereby be accounted for under the "pooling of
interests" accounting method and be treated as a "reorganization" under Section
368 of the Internal Revenue Code of 1986, as amended (the "Code").
A G R E E M E N T
IN CONSIDERATION of the premises and mutual covenants hereinafter contained,
Bank, Acquiror and Target agree as follows:
ARTICLE 1
DEFINITIONS AND DETERMINATIONS
1.1 DEFINITIONS. Capitalized terms used in this Agreement shall have the
meanings set forth below:
"Agreement of Merger" means the Agreement of Merger substantially in the
form attached hereto as Exhibit A.
"Affiliate" means a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the person specified.
"Acquiror" shall have the meaning given such term in the introductory
clause.
"Acquiror Benefit Arrangement" means the Benefit Arrangements maintained or
otherwise contributed to by Acquiror or Bank.
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<PAGE>
"Acquiror Corporate Governance Changes" shall have the meaning given such
term in Section 2.1(d).
"Acquiror Property" shall have the meaning given such term in Section 3.10.
"Acquiror Stock" means the common stock, no par value, of Acquiror.
"Acquiror Stock Option" means any option issued pursuant to the Acquiror
Stock Option Plan.
"Acquiror Stock Option Plan" means the Acquiror 1996 Stock Option Plan.
"Average Closing Price" means the average of the daily closing price of a
share of Acquiror's Stock reported over NASDAQ National Market during the twenty
(20) consecutive trading days that Acquiror's Stock trades ending at the end of
the fifth trading day immediately preceding the Effective Day.
"Bank" shall have the meaning given such term in the introductory clause.
"Bank Corporate Governance Changes" shall have the meaning given such term
in Section 2.1(b).
"Bank Merger" shall have the meaning given such term in the Recitals.
"Bank Stock" means the common stock, no par value, of Bank.
"Benefit Arrangement" means any plan or arrangement maintained or
contributed to by a Party, including an "employee benefit plan" within the
meaning of ERISA, (but exclusive of base salary and base wages) which provides
for any form of current or deferred compensation, bonus, stock option, profit
sharing, benefit, retirement, incentive, group health or insurance, welfare or
similar plan or arrangement for the benefit of any employee, officer or director
or class of employee, officer or director, whether active or retired, of a
Party.
"BHC Act" means the Bank Holding Company Act of 1956, as amended.
"Business Day" means any day other than a Saturday, Sunday or day on which
commercial banks in California are authorized or required to be closed.
"Certificates" shall have the meaning given such term in Section 2.5.
"CFC" means the California Financial Code.
"CGCL" means the California General Corporation Law.
"Charter Documents" means, with respect to any business organization, any
certificate or articles of incorporation or articles of association, and any
bylaws, each as amended to date, that regulate the basic organization of the
business organization and its internal relations.
"Closing" means the consummation of the Bank Merger on the Effective Day at
the main office of Bank or at such other place as may be agreed upon by the
Parties.
"Code" means the United States Internal Revenue Code of 1986, as amended,
and all regulations thereunder.
"Commissioner" means the Commissioner of Financial Institutions, State of
California.
"Competing Transaction" shall have the meaning given such term in Section
6.12.
"Computer System" shall have the meaning given such term in Section 3.16.
"Confidential Information" means all information exchanged heretofore or
hereafter between Target, its affiliates and agents, on the one hand, and
Acquiror and Bank, their affiliates and agents, on the other hand, which is
information related to the business, financial position or operations of the
Person responsible for furnishing the information or an Affiliate of such Person
(such information to
A-2
<PAGE>
include, by way of example only and not of limitation, client lists, company
manuals, internal memoranda, strategic plans, budgets, forecasts/ projections,
computer models, marketing plans, files relating to loans originated by such
Person, loans and loan participation purchased by such Person from others,
investments, deposits, leases, contracts, employment records, minutes of board
of directors meetings (and committees thereof) and stockholder meetings, legal
proceedings, reports of examination by any Governmental Entity, and such other
records or documents such Person may supply to the other Party pursuant to the
terms of this Agreement or as contemplated hereby). Notwithstanding the
foregoing, "Confidential Information" shall not include any information that (i)
at the time of disclosure or thereafter is generally available to and known by
the public (other than as a result of a disclosure directly or indirectly by the
recipients or any of their officers, directors, employees or other
representatives or agents), (ii) was available to the recipients on a
nonconfidential basis from a source other than Persons responsible for
furnishing the information, PROVIDED that such source is not and was not bound
by a confidentiality agreement with respect to the information, or (iii) has
been independently acquired or developed by the recipients without violating any
obligations under this Agreement.
"Consents" means every required consent, approval, absence of disapproval,
waiver or authorization from, or notice to, or registration or filing with, any
Person.
"Disclosure Letter" means a disclosure letter from the Party making the
disclosure and delivered to the other Party.
"DPC Property" means voting securities, other personal property and real
property acquired by foreclosure or otherwise, in the ordinary course of
collecting a debt previously contracted for in good faith, retained with the
object of sale for any applicable statutory holding period, and recorded in the
holder's business records as such.
"Effective Day" means the day on which the Effective Time occurs.
"Effective Time" shall have the meaning given such term in Section 2.2.
"Encumbrances" means any option, pledge, security interest, lien, charge,
encumbrance, mortgage, assessment, claim or restriction (whether on voting,
disposition or otherwise), whether imposed by agreement, understanding, law or
otherwise.
"Environmental Laws" shall have the meaning given such term in Section 3.10.
"Equity Securities" means capital stock or any options, rights, warrants or
other rights to subscribe for or purchase capital stock, or any plans, contracts
or commitments that are exercisable in such capital stock or that provide for
the issuance of, or grant the right to acquire, or are convertible into, or
exchangeable for, such capital stock.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and all regulations thereunder.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means ChaseMellon Shareholder Services or such other
financial institution appointed by Acquiror to reflect the exchange contemplated
by section 2.5 hereof.
"Exchange Fund" shall have the meaning given such term in Section 2.5.
"Exchange Ratio" means the number of shares of Acquiror Stock into which a
share of Target Stock shall be converted which shall be equal to the amount (to
the nearest ten thousandth) as set forth hereinbelow:
(i) If the Average Closing Price is not less than $26.60 and is not more
than $30.91, the Exchange Ratio shall be .7791;
A-3
<PAGE>
(ii) If the Average Closing Price is more than $30.91, the Exchange
Ratio shall be calculated by (A) dividing $30.91 by the Average Closing
Price and (B) multiplying such product by .7791 ($30.91/Average Closing
Price X .7791); and
(iii) If the Average Closing Price is less than $26.60, then the Exchange
Ratio shall be .7791 unless at Acquiror's option, which shall be provided in
writing to Target in the manner set forth in Section 11.12 of the Agreement,
the purchase price shall become fixed at $20.72 per share, and the Exchange
Ratio shall then be calculated by dividing $20.72 by the Average Closing
Price; provided, however, that if Acquiror does not so elect and the Average
Closing Price is less than $26.60, Target shall have the right to terminate
the Agreement as set forth in Section 10.1(h) subject to Acquiror's rights
as set forth therein.
"Expenses" shall have the meaning given such term in Section 11.1.
"Executive Officer" means with respect to any company a natural Person who
participates or has the authority to participate (other than solely in the
capacity of a director) in major policy making functions of the company, whether
or not such Person has a title or is serving with salary or compensation.
"FDIC" means the Federal Deposit Insurance Corporation.
"Financial Statements of Acquiror" means the audited consolidated financial
statements and notes thereto of Acquiror and the related opinions thereon for
the years ended December 31, 1996, 1997 and 1998.
"Financial Statements of Target" means the audited financial statements and
notes thereto of Target and the related opinions thereon for the years ended
December 31, 1996 and 1997, 1998.
"FRB" shall mean the Board of Governors of the Federal Reserve System.
"GAAP" means generally accepted accounting principles.
"Governmental Entity" means any court or tribunal in any jurisdiction or any
United States federal, state, district, domestic, or other administrative
agency, department, commission, board, bureau or other governmental authority or
instrumentality.
"Hazardous Materials" shall have the meaning given such term in Section
3.10.
"Immediate Family" shall mean a Person's spouse, parents, in-laws, children
and siblings.
"IRS" shall mean the Internal Revenue Service.
"Investment Securities" means any equity security or debt security as
defined in Statement of Financial Accounting Standard No. 115.
"Operating Loss" shall have the meaning given such term in Section 4.24.
"Party" means any of Acquiror, Bank or Target.
"Permit" means any United States federal, foreign, state, local or other
license, permit, franchise, certificate of authority, order of approval
necessary or appropriate under applicable Rules.
"Person" means any natural person, corporation, trust, association,
unincorporated body, partnership, joint venture, Governmental Entity,
statutorily or regulatory sanctioned unit or any other person or organization.
"Proxy Statement" means the proxy statement that is included as part of the
S-4 and used to solicit proxies for the Target Shareholders' Meeting and to
offer and sell the shares of Acquiror Stock to be issued in connection with the
Bank Merger.
A-4
<PAGE>
"Related Group of Persons" means Affiliates, members of an Immediate Family
or Persons the obligation of whom would be attributed to another Person pursuant
to the regulations promulgated by the SEC.
"Rule" means any statute or law or any judgment, decree, injunction, order,
regulation or rule of any Governmental Entity.
"S-4" means the registration statement on Form S-4, and such amendments
thereto, that is filed with the SEC to register the shares of Acquiror Stock to
be issued in the Bank Merger under the Securities Act and includes the Proxy
Statement which will be used to solicit proxies for the Target Shareholders'
Meeting.
"SEC" means the Securities and Exchange Commission.
"SEC Reports" mean all reports filed by a Party hereto pursuant to the
Exchange Act with the SEC or other Governmental Entity.
"Securities Act" means the Securities Act of 1933, as amended.
"Stock Option Agreement" shall have the meaning given the term in Recital E
and in the certain Stock Option Agreement entered into by the parties
concurrently with this Agreement.
"Surviving Bank" means the Bank as the California state-chartered bank
surviving the Bank Merger of Target with and into Bank.
"Tank" shall have the meaning given such term in Section 3.10.
"Third Party Consent" shall have the meaning given such term in subsection
(b) of Section 5.7.
"Target" Shall have the meaning given such term in the introductory clause.
"Target Benefit Arrangement" shall have the meaning given such term in
Section 4.18.
"Target's Directors Agreement" shall mean an agreement, substantially in the
form attached as Exhibit 2.6.
"Target Dissenting Shares" means shares of Target Stock held by "dissenting
shareholders" within the meaning of Chapter 13 of the CGCL.
"Target Perfected Dissenting Shares" means Dissenting Shares which the
holders thereof have not withdrawn or caused to lose their status as Target
Dissenting Shares.
"Target Property" shall have the meaning given such term in Section 4.25.
"Target Scheduled Contracts" shall have the meaning given such term in
Section 4.30.
"Target Shareholders' Meeting" shall have the meaning given such term in
Section 6.6.
"Target Stock" means the common stock, no par value, of Target.
"Target Stock Options" shall have the meaning given such term in Section
4.2.
"Target Stock Option Plan" means Target's 1989 Stock Option Plan.
"To the knowledge" shall have the meaning given such term in Section 11.13.
"Year 2000 Readiness" shall have the meaning given such term in Section
3.16.
A-5
<PAGE>
ARTICLE 2
CONSUMMATION OF THE BANK MERGER
2.1 THE MERGER; PLAN OF REORGANIZATION.
(a) Subject to the terms and conditions of this Agreement and the Agreement
of Merger, at the Effective Time, Target shall merge with and into Bank under
the charter of Bank.
(b) The Charter Documents of Bank as in effect immediately prior to the
Effective Time shall continue in effect after the Bank Merger until thereafter
amended in accordance with applicable law and the members of the Board of
Directors and the Executive Officers of Bank immediately prior to the Bank
Merger shall continue in their respective positions after the Bank Merger and be
the Board of Directors and Executive Officers of the Surviving Bank; except that
Bank shall have taken prior to the Effective Time all necessary steps so that at
the Effective Time (i) the number of authorized directors of Bank shall be
expanded by one and (ii) one of the current directors of Target (who shall be
mutually acceptable to Acquiror and Target) shall be added to the Board of
Directors of Bank and shall serve until the earlier of his resignation or
removal or until his successor is duly elected and qualified. [clause (i) and
(ii) being hereinafter collectively referred to as the "Bank Corporate
Governance Changes"].
(c) At the Effective Time, the corporate existence of Target shall be merged
and continued in the Surviving Bank. All assets, rights, franchises, titles and
interests of Bank and Target, in and to every type of property (real, personal
and mixed) and chooses in action shall be transferred to and vested in the
Surviving Bank by virtue of the Bank Merger without any deed or other transfer,
and the Surviving Bank, without any order or action on the part of any court or
otherwise, shall hold and enjoy all rights of property, franchises and
interests, including appointments, designations and nominations, and all other
rights and interests as trustee, executor, administrator, registrar of stocks
and bonds, guardian of estates, assignee or receiver and in every other
fiduciary capacity in the same manner and to the same extent that such rights,
franchises and interests were held by Bank and Target at the Effective Time. At
the Effective Time, the Surviving Bank shall be liable for all liabilities of
Bank and Target and all deposits, debts, liabilities, obligations and contracts
of Bank and Target, matured or unmatured, whether accrued, absolute, contingent
or otherwise, and whether or not reflected or reserved against on balance
sheets, books of accounts or records of Bank and Target, shall be those of the
Surviving Bank; and all rights of creditors or other obligees and all liens on
property of Bank and Target shall be preserved unimpaired.
(d) The Charter Document of Acquiror as in effect immediately prior to the
Effective Time shall continue in effect after the Bank Merger until thereafter
amended in accordance with applicable law, the members of the Board of Directors
and the Executive Officers of Acquiror immediately prior to the Bank Merger
shall continue in their respective positions after the Bank Merger and be the
Board of Directors and Executive Officers of Acquiror and the operations of
Acquiror shall continue in effect after the Bank Merger; except that Acquiror
shall have taken prior to the Effective Time all necessary steps so that at the
Effective Time (i) the number of authorized directors of Acquiror shall be
expanded by one and (ii) one of the current directors of Target (who shall be
mutually acceptable to Acquiror and Target) shall be added to the Board of
Directors of Acquiror and shall serve until the earlier of his resignation or
removal or until his respective successor is duly elected and qualified.
[clauses (i) and (ii) being hereinafter collectively referred to as the
"Acquiror Corporate Governance Changes"].
2.2 EFFECTIVE TIME. The Closing shall take place as soon as practicable
following the satisfaction or waiver of the conditions set forth in Sections
8.1, 8.2 and 8.3, and the Parties shall use best efforts to cause the Closing to
occur as soon as possible after receipt of approval of the Bank Merger from the
Commissioner and the FDIC and the expiration of all required waiting periods, or
such later time and
A-6
<PAGE>
date as to which the Parties may agree. The Bank Merger shall be effective upon
the filing by the Commissioner of the Agreement of Merger as specified in the
CFC. Such time is referred to herein as the "Effective Time."
2.3 CONVERSION OF SHARES. At the Effective Time and pursuant to the
Agreement of Merger:
(a) Subject to the exceptions and limitations in Section 2.4, each
outstanding share of Target Stock shall, without any further action on the
part of Target or the holders of any of such shares, be converted into
shares of Acquiror Stock in accordance with the Exchange Ratio.
(b) Each outstanding share of Acquiror Stock shall remain outstanding
and shall not be converted or otherwise affected by the Bank Merger.
2.4 CERTAIN EXCEPTIONS AND LIMITATIONS. (A) Any shares of Target Stock
held by Acquiror or any subsidiary of Acquiror (other than shares held in a
fiduciary capacity or as DPC Property) will be canceled at the Effective Time;
(B) Target Perfected Dissenting Shares shall not be converted into shares of
Acquiror Stock, but shall, after the Effective Time, be entitled only to such
rights as are granted them by Chapter 13 of the CGCL (each dissenting
shareholder who is entitled to payment for his shares of Target Stock shall
receive such payment in an amount as determined pursuant to Chapter 13 of CGCL),
and (C) no fractional shares of Acquiror Stock shall be issued in the Bank
Merger and, in lieu thereof, each holder of Target Stock who would otherwise be
entitled to receive a fractional share shall receive an amount in cash equal to
the product (calculated to the nearest ten thousandth) obtained by multiplying
such fractional share interest by the Average Closing Price.
2.5 EXCHANGE PROCEDURES.
(a) As of the Effective Time, Acquiror shall have deposited with the
Exchange Agent for the benefit of the holders of shares of Target Stock, for
exchange in accordance with this Section 2.5 through the Exchange Agent,
certificates representing the shares of Acquiror Stock issuable pursuant to
Section 2.3 in exchange for shares of Target Stock outstanding immediately prior
to the Effective Time, and funds in an amount not less than the amount of cash
payable in lieu of fractional shares of Acquiror Stock which would otherwise be
payable in connection with Section 2.3 hereof, but for the operation of Section
2.4 of this Agreement (collectively, the "Exchange Fund").
(b) Acquiror shall direct the Exchange Agent to mail promptly after the
Effective Time, to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented outstanding shares of Target
Stock (the "Certificates") whose shares were converted into the right to receive
shares of Acquiror Stock pursuant to Section 2.3 hereof: (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent, and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for certificates representing
shares of Acquiror Stock. Upon surrendering of a Certificate for cancellation to
the Exchange Agent or to such other agent or agents as may be appointed by
Target, together with such letters of transmittal, duly executed, the holder of
such Certificate shall be entitled to receive in exchange therefor that amount
of cash and a certificate representing that number of whole shares of Acquiror
Stock which such holder has the right to receive pursuant to the provisions of
Sections 2.3 and 2.4 hereof, and the Certificate so surrendered shall forthwith
be canceled. In the event a Certificate is surrendered representing Target
Stock, the transfer of ownership which is not registered in the transfer records
of Target, a certificate representing the proper number of shares of Acquiror
Stock may be issued to a transferee if the Certificate representing such Target
Stock is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
2.5 and except as provided in subsection (g) hereof, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the certificate representing shares of
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<PAGE>
Acquiror Stock and cash in lieu of any fractional shares of stock as
contemplated by this Section 2.5. Notwithstanding anything to the contrary set
forth herein, if any holder of shares of Target should be unable to surrender
the Certificates for such shares, because they have been lost or destroyed, such
holder may deliver in lieu thereof, in the discretion of Acquiror, such bond in
form and substance and with surety reasonably satisfactory to Acquiror and shall
be entitled to receive the certificate representing the proper number of shares
of Acquiror Stock and cash in lieu of fractional shares in accordance with
Sections 2.3 and 2.4 hereof.
(c) No dividends or other distributions declared or made after the Effective
Time with respect to Acquiror Stock with a record date after the Effective Time
shall be paid to the holder of any unsurrendered Certificate with respect to the
shares of Acquiror Stock represented thereby and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section 2.4 until
the holder of record of such Certificate shall surrender such Certificate.
Subject to the effect of applicable laws, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole shares of Acquiror Stock issued in exchange thereof, without
interest, (i) at the time of such surrender, the amount of any cash payable in
lieu of a fractional share of Acquiror Stock to which such holder is entitled
pursuant to Section 2.4 and the amount of dividends or other distribution with a
record date after the Effective Time theretofore paid with respect to such whole
shares of Acquiror Stock, and (ii) at the appropriate payment date, the amount
of dividends or other distributions with a record date after the Effective Time
but prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of Acquiror Stock.
(d) All shares of Acquiror Stock issued upon the surrender for exchange of
Target Stock in accordance with the terms hereof (including any cash paid
pursuant to Section 2.4) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Target Stock, and there
shall be no further registration of transfers on the stock transfer books of the
Surviving Bank of the shares of Target Stock which were outstanding immediately
prior to the Effective Time. If after the Effective Time, Certificates are
presented to Acquiror for any reason, they shall be canceled and exchanged as
provided in this Agreement.
(e) Any portion of the Exchange Fund which remains undistributed to the
shareholders of Target following the passage of six months after the Effective
Time shall be delivered to Acquiror, upon demand, and any shareholders of Target
who have not theretofore complied with this Section 2.5 shall thereafter look
only to Acquiror for payment of their claim for Acquiror Stock, any cash in lieu
of fractional shares of Acquiror Stock and any dividends or distributions with
respect Target Stock.
(f) Neither Acquiror nor Target shall be liable to any holder of shares of
Target Stock for such shares (or dividends or distributions with respect
thereto) or cash from the Exchange Fund delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law.
(g) The Exchange Agent shall not be entitled to vote or exercise any rights
of ownership with respect to the shares of Acquiror Stock held by it from time
to time hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares of Acquiror Stock
for the account of the Persons entitled thereto. Former shareholders of record
of Target shall be entitled to vote after the Effective Time at any meeting of
Acquiror shareholders the number of whole shares of Acquiror Stock into which
their respective shares of Target Stock are converted, regardless of whether
such holders have exchanged their Certificates for certificates representing
Acquiror Stock in accordance with the provisions of this Agreement.
2.6 DIRECTORS' AGREEMENTS. Concurrently with the execution of this
Agreement, Target shall cause each of its respective directors to enter into a
Target's Directors' Agreement.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND BANK
Acquiror and Bank represent and warrant to Target as follows:
3.1 INCORPORATION, STANDING AND POWER. Acquiror has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
State of California and is registered as a bank holding company under the BHC
Act. Bank has been duly incorporated and is validly existing as a banking
company under the laws of California and is authorized by the Commissioner to
conduct a general banking business. Bank's deposits are insured by the FDIC in
the manner and to the extent provided by law. Acquiror and Bank have all
requisite corporate power and authority to own, lease and operate their
respective properties and assets and to carry on their respective businesses as
presently conducted. Neither the scope of the business of Acquiror or Bank nor
the location of any of their respective properties requires that Acquiror or
Bank be licensed to do business in any jurisdiction other than in California
where the failure to be so licensed would, individually or in the aggregate,
have a materially adverse effect on the financial condition, results of
operation or business of Acquiror on a consolidated basis.
3.2 CAPITALIZATION. As of the date of this Agreement, the authorized
capital stock of Acquiror consists of 50,000,000 shares of Acquiror Stock, of
which 10,099,032 shares are outstanding and 25,000,000 shares of Preferred
Stock, of which no shares are outstanding. As of the date of this Agreement, the
authorized capital stock of Bank consists of 10,125,000 shares of Bank Stock, of
which 100 shares are outstanding and are owned by Acquiror without Encumbrance.
All the outstanding shares of Acquiror Stock and Bank Stock are duly authorized,
validly issued, fully paid, nonassessable and without preemptive rights. Except
for Acquiror Stock Options covering shares of Acquiror Stock granted pursuant to
the Acquiror Stock Option Plan and except as set forth in Acquiror's Disclosure
Letter, there are no outstanding options, warrants or other rights in or with
respect to the unissued shares of Acquiror Stock or Bank Stock or any other
securities convertible into such stock, and neither Acquiror nor Bank is
obligated to issue any additional shares of its capital stock or any options,
warrants or other rights in or with respect to the unissued shares of its
capital stock or any other securities convertible into such stock.
3.3 SUBSIDIARIES. Except as set forth in Acquiror's Disclosure Letter,
neither Acquiror nor Bank own, directly or indirectly, any outstanding stock,
Equity Securities or other voting interest in any corporation, partnership,
joint venture or other entity or Person, other than DPC Property.
3.4 FINANCIAL STATEMENTS. Acquiror has previously furnished to Target a
copy of the Financial Statements of Acquiror. The Financial Statements of
Acquiror: (a) present fairly the consolidated financial condition of Acquiror as
of the respective dates indicated and its consolidated results of operations and
cash flow for the respective periods indicated; and (b) have been prepared in
accordance with GAAP. The audits of Acquiror have been conducted in accordance
with generally accepted auditing standards. The books and records of Acquiror
and Bank are being maintained in material compliance with applicable legal and
accounting requirements. Except to the extent (i) reflected in the Financial
Statements of Acquiror and (ii) of liabilities incurred since December 31, 1998
in the ordinary course of business and consistent with past practice, neither
Acquiror nor Bank has any liabilities, whether absolute, accrued, contingent or
otherwise.
3.5 AUTHORITY OF ACQUIROR AND BANK. The execution and delivery by Acquiror
and Bank of this Agreement and, subject to the requisite approval of Acquiror as
the sole shareholder of Bank, the consummation of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate action
on the part of Acquiror and Bank, and this Agreement is a valid and binding
obligation of Acquiror and Bank enforceable in accordance with its terms, except
as the
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enforceability thereof may be limited by bankruptcy, liquidation, receivership,
conservatorship, insolvency, moratorium or other similar laws affecting the
rights of creditors generally and by general equitable principles and by Section
8(b)(6)(D) of the Federal Deposit Insurance Act, 12 U.S.C. Section
1818(b)(6)(D). Except as set forth in Acquiror's Disclosure Letter, neither the
execution and delivery by Acquiror and Bank of this Agreement, the consummation
of the Bank Merger or the transactions contemplated herein, nor compliance by
Acquiror and Bank with any of the provisions hereof, will: (a) violate any
provision of their respective Charter Documents; (b) constitute a breach of or
result in a default (or give rise to any rights of termination, cancellation or
acceleration, or any right to acquire any securities or assets) under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
franchise, license, permit, agreement, Encumbrances or other instrument or
obligation to which Acquiror or Bank is a party, or by which Acquiror or Bank or
any of their respective properties or assets is bound, if in any such
circumstances, such event could have consequences materially adverse to Acquiror
on a consolidated basis; or (c) violate any Rule applicable to Acquiror or Bank
or any of their respective properties or assets. No Consent of any Governmental
Entity having jurisdiction over any aspect of the business or assets of Acquiror
or Bank, and no Consent of any Person, is required in connection with the
execution and delivery by Acquiror and Bank of this Agreement or the
consummation by Acquiror and Bank of the Bank Merger and the transactions
contemplated hereby, except (i) the approval of this Agreement and the
transactions contemplated hereby by Acquiror as the sole shareholder of Bank;
(ii) such approvals or notices as may be required by the FRB, the Commissioner
and the FDIC; (iii) the declaring effective of the S-4 by the SEC and the
approvals of all necessary blue sky administrators; and (iv) as otherwise set
forth in Acquiror's Disclosure Letter.
3.6 LITIGATION. To the knowledge of Acquiror and Bank, neither Acquiror
nor Bank is a party to any pending or, to the knowledge of any of the officers,
threatened legal, administrative or other claim, action, suit, investigation,
arbitration or proceeding challenging the validity or propriety of any of the
transactions contemplated by this Agreement.
3.7 COMPLIANCE WITH LAWS AND REGULATIONS. Except as set forth in
Acquiror's Disclosure Letter, neither Acquiror nor Bank is in default under or
in breach of any provision of its Charter Documents or any Rule promulgated by
any Governmental Entity having authority over it, where such default or breach
would have a material adverse effect on the business, financial condition or
results of operations of Acquiror or Bank.
3.8 BROKERS AND FINDERS. Except as provided in Acquiror's Disclosure
Letter with copies of any such agreements attached, neither Acquiror nor Bank is
not a party to or obligated under any agreement with any broker or finder
relating to the transactions contemplated hereby, and neither the execution of
this Agreement nor the consummation of the transactions provided for herein or
therein will result in any liability to any broker or finder.
3.9 ABSENCE OF MATERIAL CHANGE. Since December 31, 1998, the businesses of
Acquiror and Bank have been conducted only in the ordinary course, in
substantially the same manner as theretofore conducted, and, except as set forth
in Acquiror's Disclosure Letter, there has not occurred since December 31, 1998
any event that has had or may reasonably be expected to have a material adverse
effect on the business, financial condition or results of operation of Acquiror
or Bank.
3.10 ENVIRONMENTAL MATTERS. Except as set forth in Acquiror's Disclosure
Letter, to the knowledge of Acquiror and Bank, (i) each of Acquiror and Bank is
in compliance with all Environmental Laws; (ii) there are no Tanks on or about
Acquiror Property; (iii) there are no Hazardous Materials on, below or above the
surface of, or migrating to or from Acquiror Property; (iv) neither Acquiror nor
Bank has loans outstanding secured by real property that is not in compliance
with Environmental Laws or which has a leaking Tank or upon which there are
Hazardous Materials on or migrating to or from; and (v) without limiting the
foregoing representations and warranties contained in clauses (i) through (iv),
as of the date of this Agreement, there is no claim, action, suit, or proceeding
or notice
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thereof before any Governmental Entity pending against Acquiror or Bank or
concerning property securing Acquiror and Bank loans and there is no outstanding
judgment, order, writ, injunction, decree, or award against or affecting
Acquiror Property or property securing Acquiror or Bank loans, relating to the
foregoing representations (i)-(iv), in each case the noncompliance with which,
or the presence of which would have a material adverse effect on the business,
financial condition, results of operations or prospects of Acquiror or Bank. For
purposes of this Agreement, the term "Environmental Laws" shall mean all
applicable statutes, regulations, rules, ordinances, codes, licenses, permits,
orders, approvals, plans, authorizations, concessions, franchises, and similar
items of all Governmental Entities and all applicable judicial, administrative,
and regulatory decrees, judgments, and orders relating to the protection of
human health or the environment, including, without limitation: all
requirements, including, but not limited to those pertaining to reporting,
licensing, permitting, investigation, and remediation of emissions, discharges,
releases, or threatened releases of Hazardous Materials, chemical substances,
pollutants, contaminants, or hazardous or toxic substances, materials or wastes
whether solid, liquid, or gaseous in nature, into the air, surface water,
groundwater, or land, or relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling of chemical
substances, pollutants, contaminates, or hazardous or toxic substances,
materials, or wastes, whether solid, liquid, or gaseous in nature and all
requirements pertaining to the protection of the health and safety of employees
or the public. "Acquiror Property" shall mean real estate currently owned,
leased, or otherwise used by Acquiror or Bank, or in which Acquiror or Bank has
an investment or security interest by mortgage, deed of trust, sale and
lease-back or otherwise, including without limitation, properties under
foreclosure and properties held by Acquiror or Bank in its capacity as a trustee
or otherwise. "Tank" shall mean treatment or storage tanks, sumps, or water, gas
or oil wells and associated piping transportation devices. "Hazardous Materials"
shall mean any substance the presence of which requires investigation or
remediation under any federal, state, or local statute, regulation, ordinance,
order, action, policy or common law, or which is or becomes defined as a
hazardous waste, hazardous substance, hazardous material, used oil, pollutant or
contaminant under any federal, state or local statute, regulation, rule or
ordinance or amendments thereto including without limitation, the Comprehensive
Environmental Response; Compensation and Liability Act (42 U.S.C. Section 9601,
ET SEQ.); the Resource Conservation and Recovery Act (42 U.S.C. Section 6901, ET
SEQ.); the Clean Air Act, as amended (42 U.S.C. Section 7401, ET SEQ.); the
Federal Water Pollution Control Act, as amended (33 U.S.C. Section 1251, ET
SEQ.); the Toxic Substances Control Act, as amended (15 U.S.C. Section 9601, et
seq.); the Occupational Safety and Health Act, as amended (29 U.S.C. Section
65); the Emergency Planning and Community Right-to-Know Act of 1986 (42 U.S.C.
Section 11001, ET SEQ.); the Mine Safety and Health Act of 1977, as amended (30
U.S.C. Section 801, ET SEQ.); the Safe Drinking Water Act (42 U.S.C. Section
300f, ET SEQ.); and all comparable state and local laws, including without
limitation, the Carpenter-Presley-Tanner Hazardous Substance Account Act (State
Superfund), the Porter-Cologne Water Quality Control Action, Section 25140,
25501 (j) and (k); 25501.1.25281 and 25250.1 of the California HEALTH AND SAFETY
CODE and/or Article I of Title 22 of the California CODE OF REGULATIONS,
Division 4, Chapter 30; laws of other jurisdictions or orders and regulations;
or the presence of which causes or threatens to cause a nuisance, trespass or
other common law tort upon real property or adjacent properties or poses or
threatens to pose a hazard to the health or safety of persons or without
limitation, which contains gasoline, diesel fuel or other petroleum
hydrocarbons; polychlorinated biphenyls (PCB's), asbestos or urea formaldehyde
foam insulation.
3.11 COMMUNITY REINVESTMENT ACT. Bank received a rating of "satisfactory"
or better in its most recent examination or interim review with respect to the
Community Reinvestment Act. Neither Acquiror nor Bank has been advised of any
concerns regarding compliance with the Community Reinvestment Act by any
Governmental Entity or by any other Person.
3.12 POOLING OF INTERESTS. It is intended that the Bank merger be
accounted for on a pooling of interests basis, and no event has occurred to the
knowledge of Acquiror or Bank or is reasonably
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foreseeable (including any transaction contemplated by this Agreement) that
could alter such treatment.
3.13 SEC REPORTS. As of the respective dates, since December 31, 1996,
none of Acquiror's SEC Reports contained at the time of filing any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstance under which they were made, not misleading.
3.14 TRUST ADMINISTRATION. Acquiror and Bank do not presently exercise
trust powers, including, but not limited to, trust administration, and have not
exercised such trust powers for a period of at least 3 years prior to the date
hereof. The term "trusts" as used in this Section 3.31 includes (i) any and all
common law or other trusts between an individual, corporation or other entities
and Acquiror or Bank, as trustee or co-trustee, including, without limitation,
pension or other qualified or nonqualified employee benefit plans, compensation,
testamentary, inter vivos, charitable trust indentures; (ii) any and all
decedents' estates where Acquiror or Bank are serving or have served as a
co-executor or sole executor, personal representative or administrator,
administrator de bonis non, administrator de bonis non with will annexed, or in
any similar fiduciary capacity; (iii) any and all guardianships,
conservatorships or similar positions where Acquiror or Bank are serving or have
served as a co-grantor or a sole grantor or a conservator or a co-conservator of
the estate, or any similar fiduciary capacity; and (iv) any and all agency
and/or custodial accounts and/or similar arrangements, including plan
administrator for employee benefit accounts, under which Acquiror or Bank are
serving or have served as an agent or custodian for the owner or other party
establishing the account with or without investment authority.
3.15 REGULATORY APPROVALS. To the knowledge of Acquiror and Bank, except
as described in Acquiror's Disclosure Letter, Acquiror and Bank have no reason
to believe that they would not receive all required approvals from any
Governmental Entity of any application to consummate the transactions
contemplated by this Agreement without the imposition of a materially burdensome
condition in connection with the approval of any such application.
3.16 YEAR 2000 READINESS. Except as described in Acquiror's Disclosure
Letter, Acquiror and Bank are taking all reasonable steps to correct their
respective computer programs and applications so that they will not fail or will
create erroneous results by or at the Year 2000 and neither Acquiror nor Bank
has been advised of any concerns regarding readiness with Year 2000 issues by
any Governmental Entity or by any other Person. Further, except as described in
Acquiror's Disclosure Letter, (i) Acquiror's and Bank's computer software and
related hardware (the "Computer System") used for the storage and processing of
data are or will be prior to the year 2000 Year 2000 Readiness; (ii) to the best
of Acquiror's knowledge after the inquiry, none of Acquiror's and Bank's
Computer System, operations or business functions of Acquiror or Bank will be
materially adversely affected by any third party's failure to be Year 2000
Readiness and to the best of Acquiror's knowledge after due inquiry, all of
Acquiror's and Bank's suppliers, customers and third party providers are, or
will be prior to year 2000, Year 2000 Readiness; and (iii) Acquiror and Bank are
taking or have taken, all necessary and appropriate action to address and remedy
any deficiencies in their Computer System which would keep it from becoming Year
2000 Readiness. As used herein, "Year 2000 Readiness" shall mean the ability of
a Computer System to provide the following functions, without human
intervention, individually and in combination with other products or systems:
(i) consistently handle, record, store, process and present dates and
date-related information before, during and after January 1, 2000, including but
not limited to accepting date input, performing calculations on dates or portion
of dates, and providing date output; (ii) function accurately in accordance with
the published specifications and without undue interruption, before, during, and
after January 1, 2000 (including leap year computations) without any adverse
change in operation associated with the advent of the year 2000; (iii) respond
to two-digit or four-digit dates and date-related input in a way that resolves
any ambiguity as to the year 2000 in a disclosed, defined and predetermined
manner, and store and provide output of dates and date-related
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information in ways that are unambiguous as to the year 2000; and (iv) suitably
interact with other software and related hardware in a way which does not
compromise its year 2000 readiness capability.
3.17 PERFORMANCE OF OBLIGATIONS. Acquiror and Bank has each performed all
of the obligations required to be performed by it to date and is not in material
default under or in breach of any term or provision of any material contract,
and no event has occurred that, with the giving of notice or the passage of time
or both, would constitute such default or breach. To Acquiror's and Bank's
knowledge, no party with whom either has an agreement that is material to its
business is in default thereunder.
3.18 LICENSES AND PERMITS. Each of Acquiror and Bank has all licenses and
permits that are necessary for the conduct of its businesses, and such licenses
are in full force and effect, except for any failure to be in full force and
effect that would not, individually or in the aggregate, have a material adverse
effect on the business, financial condition or results of operations of
Acquiror. The properties and operations of Acquiror and Bank are and have been
maintained and conducted, in all material respects, in compliance with all
applicable Rules.
3.19 UNDISCLOSED LIABILITIES. Except as set forth in Acquiror's Disclosure
Letter neither Acquiror nor Bank has any liabilities or obligations, either
accrued or contingent, that are material to it and that have not been:(a)
reflected or disclosed in the Financial Statements of Acquiror or (b) incurred
subsequent to December 31, 1998 in the ordinary course of business. Neither
Acquiror nor Bank knows of any basis for the assertion against it of any
liability, obligation or claim (including, without limitation, that of any
Governmental Entity) that is likely to result in or cause a material adverse
change in the business, financial condition or results of operations of Acquiror
that is not fairly reflected in the Financial Statements of Acquiror or
otherwise disclosed in this Agreement.
3.20 ACCOUNTING RECORDS. Each of Acquiror and Bank maintains accounting
records which fairly and validly reflect, in all material respects, its
transactions and accounting controls sufficient to provide reasonable assurances
that such transactions are (i) executed in accordance with its management's
general or specific authorization, and (ii) recorded as necessary to permit the
preparation of financial statements in conformity with GAAP. Such records, to
the extent they contain material information pertaining to Acquiror or Bank
which is not easily and readily available elsewhere, have been duplicated, and
such duplicates are stored safely and securely.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF TARGET
Target represents and warrants to Acquiror and Bank as follows:
4.1 INCORPORATION, STANDING AND POWER. Target has been duly incorporated
and is validly existing as a banking company under the laws of California and is
authorized by the Commissioner to conduct a general banking business. Target is
not a member bank of the Federal Reserve System and its deposits are insured by
the FDIC in the manner and to the extent provided by law. Target has all
requisite corporate power and authority to own, lease and operate its properties
and assets and to carry on its business as presently conducted. Neither the
scope of the business of Target nor the location of any of its properties
requires that Target be licensed to do business in any jurisdiction other than
in California where the failure to be so licensed would, individually or in the
aggregate, have a materially adverse effect on the financial condition, results
of operation or business of Target.
4.2 CAPITALIZATION. As of the date of this Agreement, the authorized
capital stock of Target consists of 10,000,000 shares of Target Stock, of which
1,637,606 shares are outstanding. All the outstanding shares of Target Stock are
duly authorized, validly issued, fully paid, nonassessable and without
preemptive rights. Except for Target stock options covering 127,172 shares of
Target Stock granted pursuant to the Target Stock Option Plan ("Target Stock
Options") and except as set forth in Target's Disclosure Letter, there are no
outstanding options, warrants or other rights in or with respect to the
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unissued shares of Target Stock or any other securities convertible into such
stock, and Target is not obligated to issue any additional shares of its capital
stock or any options, warrants or other rights in or with respect to the
unissued shares of its capital stock or any other securities convertible into
such stock.
4.3 SUBSIDIARIES. Except as set forth in Target's Disclosure Letter,
Target does not own, directly or indirectly, any outstanding stock, Equity
Securities or other voting interest in any corporation, partnership, joint
venture or other entity or Person, other than DPC Property.
4.4 FINANCIAL STATEMENTS. Target has previously furnished to Bank and
Acquiror a copy of the Financial Statements of Target. The Financial Statements
of Target: (a) present fairly the financial condition of Target as of the
respective dates indicated and its results of operations and cash flow for the
respective periods indicated; and (b) have been prepared in accordance with
GAAP. The audits of Target have been conducted in accordance with generally
accepted auditing standards. The books and records of Target are being
maintained in material compliance with applicable legal and accounting
requirements. Except to the extent (i) reflected in the Financial Statements of
Target and (ii) of liabilities incurred since December 31, 1998 in the ordinary
course of business and consistent with past practice, Target has no liabilities,
whether absolute, accrued, contingent or otherwise.
4.5 AUTHORITY OF TARGET. The execution and delivery by Target of this
Agreement and, subject to the requisite approval of the shareholders of Target,
the consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action on the part of Target, and
this Agreement is a valid and binding obligation of Target, enforceable in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, liquidation, receivership, conservatorship, insolvency,
moratorium or other similar laws affecting the rights of creditors generally and
by general equitable principles and by Section 8(b)(6)(D) of the Federal Deposit
Insurance Act, 12 U.S.C. Section 1818(b)(6)(D). Except as set forth in Target's
Disclosure Letter, neither the execution and delivery by Target of this
Agreement, the consummation of the Bank Merger or the transactions contemplated
herein, nor compliance by Target with any of the provisions hereof, will: (a)
violate any provision of its Charter Documents; (b) constitute a breach of or
result in a default (or give rise to any rights of termination, cancellation or
acceleration, or any right to acquire any securities or assets) under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
franchise, license, permit, agreement, Encumbrance or other instrument or
obligation to which Target is a party, or by which Target or any of its
properties or assets is bound, if in any such circumstances, such event could
have consequences materially adverse to Target; or (c) violate any Rule
applicable to Target or any of its properties or assets. No Consent of any
Governmental Entity having jurisdiction over any aspect of the business or
assets of Target, and no Consent of any Person, is required in connection with
the execution and delivery by Target of this Agreement or the consummation by
Target of the Bank Merger and the transactions contemplated hereby, except (i)
the approval of this Agreement and the transactions contemplated hereby by the
shareholders of Target; (ii) such approvals or notices as may be required by the
FRB, the Commissioner and the FDIC; (iii) the declaring effective of the S-4 by
the SEC and the approvals of all necessary blue sky administrators; and (iv) as
otherwise set forth in Target's Disclosure Letter.
4.6 INSURANCE. Target has policies of insurance and bonds covering its
assets and businesses against such casualties and contingencies and in such
amounts, types and forms as are customary in the banking industry for its
businesses, operations, properties and assets. All such insurance policies and
bonds are in full force and effect. Except as set forth in Target's Disclosure
Letter, Target has not received notice from any insurer that any such policy or
bond has canceled or indicating an intention to cancel or not to renew any such
policy or bond or generally disclaiming liability thereunder. Except as set
forth in Target's Disclosure Letter, Target is not in default under any such
policy or bond and all material claims thereunder have been filed in a timely
fashion. Target's Disclosure Letter sets forth a list of all policies of
insurance carried and owned by Target, showing the name of the insurance
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company, the nature of the coverage, the policy limit, the annual premiums and
the expiration dates. The existing insurance carried by Target is sufficient for
compliance by Target with all material requirements of law and regulations and
agreements to which Target is subject or is a party.
4.7 TITLE TO ASSETS. Target's Disclosure Letter sets forth a summary of
all items of personal property and equipment with a book value of $50,000 or
more, or having an annual lease payment of $15,000 or more, owned or leased by
Target. Target has good and marketable title to all its properties and assets,
other than real property, owned or stated to be owned by Target, free and clear
of all Encumbrances except: (a) as set forth in the Financial Statements of
Target; (b) Encumbrances for current taxes not yet due; (c) Encumbrances
incurred in the ordinary course of business, if any, that, to the knowledge of
Target, (i) are not substantial in character, amount or extent, (ii) do not
materially detract from the value, (iii) do not interfere with present use, of
the property subject thereto or affected thereby, and (iv) do not otherwise
materially impair the conduct of business of Target; or (d) as set forth in
Target's Disclosure Letter.
4.8 REAL ESTATE. Target's Disclosure Letter sets forth a list of all real
property, including leaseholds, owned by Target, together with (i) a description
of the locations thereof, (ii) a description of each real property lease,
sublease, installment purchase, or similar arrangement to which Target is a
party, and (iii) a description of each contract for the purchase, sale or
development of real estate to which Target is a party. Target has good and
marketable title to the real property, and valid leasehold interests in the
leaseholds, set forth in Target's Disclosure Letter, free and clear of all
Encumbrances, except (a) for rights of lessors, co-lessees or sublessees in such
matters that are reflected in the lease; (b) Encumbrances for current taxes not
yet due and payable; (c) Encumbrances incurred in the ordinary course of
business, if any, that, to the knowledge of Target, (i) are not substantial in
character, amount or extent, (ii) do not materially detract from the value,
(iii) do not interfere with present use, of the property subject thereto or
affected thereby, and (iv) do not otherwise materially impair the conduct of
business of Target; or (d) as set forth in Target's Disclosure Letter. Target,
as lessee, has the right under valid and subsisting leases to occupy, use and
possess all property leased by it, as identified in Target's Disclosure Letter,
and, to the knowledge of Target, there has not occurred under any such lease any
breach, violation or default. Except as set forth in Target's Disclosure Letter
and except with respect to deductibles under insurance policies set forth in
Target's Disclosure Letter, Target has not experienced any uninsured damage or
destruction with respect to the properties identified in Target's Disclosure
Letter. To the knowledge of Target, all properties and assets used by Target are
in good operating condition and repair, suitable for the purposes for which they
are currently utilized, and comply with all applicable Rules related thereto.
Target enjoys peaceful and undisturbed possession under all leases for the use
of real or personal property under which it is the lessee, and, to the knowledge
of Target, all leases to which Target is a party are valid and enforceable in
all material respects in accordance with the terms thereof except as may be
limited by bankruptcy, insolvency, moratorium or other similar laws affecting
creditors' rights and except as may be limited by the exercise of judicial
discretion in applying principles of equity. Target is not in default with
respect to any such lease, and to the knowledge of the officers of Target no
event has occurred which with the lapse of time or the giving of notice, or
both, would constitute a default under any such lease. Copies of each such lease
are attached to Target's Disclosure Letter.
4.9 LITIGATION. Except as set forth in Target's Disclosure Letter, to the
knowledge of Target, there is no private or governmental suit, claim, action,
investigation or proceeding pending, nor to Target's knowledge threatened,
against Target or against any of its directors, officers or employees relating
to the performance of their duties in such capacities or against or affecting
any properties of Target. Also, except as disclosed in Target's Disclosure
Letter, there are no judgments, decrees, stipulations or orders against Target
enjoining it or any of its directors, officers or employees in respect of, or
the effect of which is to prohibit, any business practice or the acquisition of
any property or the conduct of business in any area of Target. To the knowledge
of Target, Target is not a party to any
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pending or, to the knowledge of any of the officers, threatened legal,
administrative or other claim, action, suit, investigation, arbitration or
proceeding challenging the validity or propriety of any of the transactions
contemplated by this Agreement.
4.10 TAXES. Except as set forth in Target's Disclosure Letter, Target had
filed all federal and foreign income tax returns, all state and local franchise
and income tax, real and personal property tax, sales and use tax, premium tax,
excise tax and other tax returns of every character required to be filed by it
and have paid all taxes, together with any interest and penalties owing in
connection therewith, shown on such returns to be due in respect of the periods
covered by such returns, other than taxes which are being contested in good
faith and for which adequate reserves have been established. Except as set forth
in Target's Disclosure Letter, Target has filed all required payroll tax
returns, has fulfilled all tax withholding obligations and have paid over to the
appropriate governmental authorities the proper amounts with respect to the
foregoing. The tax and audit positions taken by Target in connection with the
tax returns described in the preceding sentence were reasonable and asserted in
good faith. Adequate provision has been made in the books and records of Target
and, to the extent required by generally accepted accounting procedures,
reflected in the Financial Statements of Target, for all tax liabilities,
including interest or penalties, whether or not due and payable and whether or
not disputed, with respect to any and all federal, foreign, state, local and
other taxes for the periods covered by such financial statements and for all
prior periods. Target's Disclosure Letter sets forth (i) the date or dates
through which the IRS has examined the federal tax returns of Target and the
date or dates through which any foreign, state, local or other taxing authority
has examined any other tax returns of Target; (ii) a complete list of each year
for which any federal, state, local or foreign tax authority has obtained or has
requested an extension of the statute of limitations from Target and lists each
tax case of Target currently pending in audit, at the administrative appeals
level or in litigation; and (iii) the date and issuing authority of each
statutory notice of deficiency, notice of proposed assessment and revenue
agent's report issued to Target within the last twelve (12) months. Except as
set forth in Target's Disclosure Letter, to the knowledge of Target, neither the
IRS nor any foreign, state, local or other taxing authority has, during the past
three years, examined or is in the process of examining any federal, foreign,
state, local or other tax returns of Target. To the knowledge of Target, neither
the IRS nor any foreign, state, local or other taxing authority is now asserting
or threatening to assert any deficiency or claim for additional taxes (or
interest thereon or penalties in connection therewith) except as set forth in
Target's Disclosure Letter.
4.11 COMPLIANCE WITH LAWS AND REGULATIONS. Except as set forth in Target's
Disclosure Letter, Target is not in default under or in breach of any provision
of its Charter Documents or any Rule promulgated by any Governmental Entity
having authority over it, where such default or breach would have a material
adverse effect on the business, financial condition or results of operations of
Target.
4.12 PERFORMANCE OF OBLIGATIONS. Target has performed all of the
obligations required to be performed by it to date and is not in material
default under or in breach of any term or provision of any material contract,
and no event has occurred that, with the giving of notice or the passage of time
or both, would constitute such default or breach. To Target's knowledge, no
party with whom Target has an agreement that is material to the business of
Target is in default thereunder.
4.13 EMPLOYEES. Except as set forth in Target's Disclosure Letter, there
are no controversies pending or threatened between Target and any of its
employees that are likely to have a material adverse effect on the business,
financial condition or results of operation of Target. Target is not a party to
any collective bargaining agreement with respect to any of its employees or any
labor organization to which its employees or any of them belong.
4.14 BROKERS AND FINDERS. Except as provided in Target's Disclosure Letter
with copies of any such agreements attached, Target is not a party to or
obligated under any agreement with any broker or finder relating to the
transactions contemplated hereby, and neither the execution of this Agreement
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nor the consummation of the transactions provided for herein or therein will
result in any liability to any broker or finder.
4.15 ABSENCE OF MATERIAL CHANGE. Since December 31, 1998, the business of
Target has been conducted only in the ordinary course, in substantially the same
manner as theretofore conducted, and, except as set forth in Target's Disclosure
Letter, there has not occurred since December 31, 1998, any event that has had
or may reasonably be expected to have a material adverse effect on the business,
financial condition or results of operation of Target.
4.16 LICENSES AND PERMITS. Target has all licenses and permits that are
necessary for the conduct of its businesses, and such licenses are in full force
and effect, except for any failure to be in full force and effect that would
not, individually or in the aggregate, have a material adverse effect on the
business, financial condition or results of operations of Target. The properties
and operations of Target are and have been maintained and conducted, in all
material respects, in compliance with all applicable Rules.
4.17 UNDISCLOSED LIABILITIES. Except as set forth in Target's Disclosure
Letter Target has no liabilities or obligations, either accrued or contingent,
that are material to Target and that have not been: (a) reflected or disclosed
in the Financial Statements of Target or (b) incurred subsequent to December 31,
1998 in the ordinary course of business. Target does not know of any basis for
the assertion against it of any liability, obligation or claim (including,
without limitation, that of any Governmental Entity) that is likely to result in
or cause a material adverse change in the business, financial condition or
results of operations of Target that is not fairly reflected in the Financial
Statements of Target or otherwise disclosed in this Agreement.
4.18 EMPLOYEE BENEFIT PLANS.
(a) Except as set forth in Target's Disclosure Letter, Target has no
"employee benefit plan," as defined in Section 3(3) of ERISA.
(b) Target's Disclosure Letter sets forth copies or descriptions of each
Benefit Arrangement maintained or otherwise contributed to by Target (such plans
and arrangements being collectively referred to herein as "Target Benefit
Arrangements"). Except as set forth in Target's Disclosure Letter, all Target
Benefit Arrangements which are in effect have been in effect for substantially
all of 1998. Except as set forth in Target's Disclosure Letter, there has been
no material amendment thereof or increase in the cost thereof or benefits
payable thereunder since December 31, 1998. Except as set forth in Target's
Disclosure Letter, there has been no material increase in the compensation of or
benefits payable to any senior executive employee of Target since December 31,
1998, nor any employment, severance or similar contract entered into with any
such employee, nor any amendment to any such contract, since December 31, 1998.
Except as set forth in Target's Disclosure Letter, there is no contract,
agreement or benefit arrangement covering any employee of Target which
individually or collectively could give rise to the payment of any amount which
would constitute an "excess parachute payment," as such term is defined in
Section 280(G) of the Code.
(c) With respect to all Target Benefit Arrangements, Target is in
substantial compliance (other than noncompliance the cost or liability for which
is not material) with the requirements prescribed by any and all statutes,
governmental or court orders, or governmental rules or regulations currently in
effect, applicable to such plans or arrangements.
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(d) Except for the contracts set forth in Target's Disclosure Letter, each
Target Benefit Arrangement and each personal services contract, fringe benefit,
consulting contract or similar arrangement with or for the benefit of any
officer, director, employee or other person can be terminated by Target within a
period of 30 days following the Effective Time of the Bank Merger, without
payment of any amount as a penalty, bonus, premium, severance pay or other
compensation for such termination.
4.19 CORPORATE RECORDS. The Charter Documents of Target and all amendments
thereto to the date hereof (true, correct and complete copies of which are set
forth in Target's Disclosure Letter) are in full force and effect as of the date
of this Agreement. The minute books of Target, together with the documents and
other materials incorporated therein by reference, reflect all meetings held and
contain complete and accurate records of all corporate actions taken by the
board of directors of Target (or any committees thereof) and stockholders.
Except as reflected in such minute books, there are no minutes of meetings or
consents in lieu of meetings of the board of directors (or any committees
thereof) or of the stockholders of Target.
4.20 ACCOUNTING RECORDS. Target maintains accounting records which fairly
and validly reflect, in all material respects, its transactions and accounting
controls sufficient to provide reasonable assurances that such transactions are
(i) executed in accordance with its management's general or specific
authorization, and (ii) recorded as necessary to permit the preparation of
financial statements in conformity with GAAP. Such records, to the extent they
contain material information pertaining to Target which is not easily and
readily available elsewhere, have been duplicated, and such duplicates are
stored safely and securely.
4.21 OFFICES AND ATMS. Set forth in Target's Disclosure Letter is a list
of the headquarters of Target (identified as such) and each of the offices and
automated teller machines ("ATMs") maintained and operated (or to be maintained
and operated) by Target (including, without limitation, representative and loan
production offices and operations centers) and the location thereof. Except as
set forth in Target's Disclosure Letter, Target maintains no other office or ATM
and conducts business at no other location, and Target has not applied for nor
received permission to open any additional branch nor operate at any other
location.
4.22 LOAN PORTFOLIO. Target's Disclosure Letter sets forth a description
of: (a) by type and classification, all loans, leases, other extensions and
commitments to extend credit of Target of $25,000 or more, that have been
classified by itself, its bank examiners or auditors (external or internal) as
"Watch List," "Substandard," "Doubtful," "Loss" or any comparable
classification; and (b) all loans due to Target as to which any payment of
principal, interest or any other amount is 30 days or more past due. Target's
allowance for loan losses is and will be at the Effective Time adequate and in
accordance with GAAP in all materials respects and in accordance with all
applicable regulatory requirements of any Governmental Entity.
4.23 POWER OF ATTORNEY. Except as set forth in Target's Disclosure Letter,
Target has not granted any Person a power of attorney or similar authorization
that is presently in effect or outstanding.
4.24 OPERATING LOSSES. Target's Disclosure Letter sets forth any Operating
Loss which has occurred at Target during the period after December 31, 1998. To
the knowledge of Target, no action has been taken or omitted to be taken by an
employee of Target that has resulted in the incurrence by Target of an Operating
Loss or that might reasonably be expected to result in an Operating Loss after
December 31, 1998, which, net of any insurance proceeds payable in respect
thereof, would exceed $25,000. "Operating Loss" means any loss resulting from
cash shortages, lost or misposted items, disputed clerical and accounting
errors, forged checks, payment of checks over stop payment orders, counterfeit
money, wire transfers made in error, theft, robberies, defalcations, check
kiting, fraudulent use of credit cards or electronic teller machines or other
similar acts or occurrences.
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4.25 ENVIRONMENTAL MATTERS. Except as set forth in Target's Disclosure
Letter, to the knowledge of Target, (i) Target is in compliance with all
Environmental Laws; (ii) there are no Tanks on or about Target Property; (iii)
there are no Hazardous Materials on, below or above the surface of, or migrating
to or from Target Property; (iv) Target has no loans outstanding secured by real
property that is not in compliance with Environmental Laws or which has a
leaking Tank or upon which there are Hazardous Materials on or migrating to or
from; and (v) without limiting the foregoing representations and warranties
contained in clauses (i) through (iv), as of the date of this Agreement, there
is no claim, action, suit, or proceeding or notice thereof before any
Governmental Entity pending against Target or concerning property securing
Target loans and there is no outstanding judgment, order, writ, injunction,
decree, or award against or affecting Target Property or property securing
Target loans, relating to the foregoing representations (i)-(iv), in each case
the noncompliance with which, or the presence of which would have a material
adverse effect on the business, financial condition, results of operations or
prospects of Target. "Target Property" shall mean real estate currently owned,
leased, or otherwise used by Target, or in which Target has an investment or
security interest by mortgage, deed of trust, sale and lease-back or otherwise,
including without limitation, properties under foreclosure and properties held
by Target in its capacity as a trustee or otherwise.
4.26 COMMUNITY REINVESTMENT ACT. Target received a rating of
"satisfactory" or better in its most recent examination or interim review with
respect to the Community Reinvestment Act. Target has not been advised of any
concerns regarding Target's compliance with the Community Reinvestment Act by
any Governmental Entity or by any other Person.
4.27 DERIVATIVES. Target is not currently a party to any interest rate
swap, cap, floor, option agreement, other interest rate risk management
arrangement or agreement or derivative-type security or derivative arrangement
or agreement.
4.28 POOLING OF INTERESTS. It is intended that the Bank Merger be
accounted for on a pooling of interest basis and to the knowledge of Target no
event has occurred or is reasonable foreseeable (including any transaction
contemplated by this Agreement that could alter such treatment.)
4.29 SEC REPORTS. Target is not currently required to file any reports
pursuant to the Exchange Act.
4.30 MATERIAL CONTRACTS. Except as set forth in Target's Disclosure Letter
(all items listed or required to be listed in Target's Disclosure Letter as a
result of this Section being referred to herein as "Target Scheduled
Contracts"), Target is not a party or otherwise subject to:
(a) any employment, deferred compensation, bonus or consulting contract;
(b) any advertising, brokerage, licensing, dealership, representative or
agency relationship or contract;
(c) any contract or agreement that would restrict Acquiror or the
Surviving Bank after the Effective Time from competing in any line of
business with any Person or using or employing the services of any Person;
(d) any collective bargaining agreement or other such contract or
agreement with any labor organization;
(e) any lease of real or personal property providing for annual lease
payments by or to Target in excess of $25,000 per annum other than financing
leases entered into in the ordinary course of business in which Target is
lessor and leases of real property presently used by Target as banking
offices.
(f) any mortgage, pledge, conditional sales contract, security
agreement, option, or any other similar agreement with respect to any
interest of Target (other than as mortgagor or pledgor in the
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ordinary course of their banking business or as mortgagee, secured party or
deed of trust beneficiary in the ordinary course of their business) in
personal property having a value of $25,000 or more;
(g) any stock purchase, stock option, stock bonus, stock ownership,
profit sharing, group insurance, bonus, deferred compensation, severance
pay, pension, retirement, savings or other incentive, welfare or employment
plan or material agreement providing benefits to any present or former
employees, officers or directors of Target;
(h) any agreement to acquire equipment or any commitment to make capital
expenditures of $25,000 or more;
(i) other than agreements entered into in the ordinary course of
business with respect to DPC Property, any agreement for the sale of any
property or assets in which Target has an ownership interest or for the
grant of any preferential right to purchase any such property or asset;
(j) any agreement for the borrowing of any money (other than liabilities
or interbank borrowings made in the ordinary course of their banking
business and reflected in the financial records of Target);
(k) any restrictive covenant contained in any deed to or lease of real
property owned or leased by Target (as lessee) that materially restricts the
use, transferability or value of such property;
(l) any guarantee or indemnification which involves the sum of $25,000
or more, other than letters of credit or loan commitments issued in the
normal course of business;
(m) any supply, maintenance or landscape contracts not terminable by
Target without penalty on 30 days or less notice and which provides for
payments in excess of $25,000 per annum;
(n) other than as disclosed with reference to subparagraph (k) of this
Section 4.30, any agreement which would be terminable other than by Target
or as a result of the consummation of the transactions contemplated by this
Agreement;
(o) any contract of participation with any other bank in any loan
entered into by Target subsequent to December 31, 1998 in excess of $25,000
or any sales of assets of Target with recourse of any kind to Target except
the sale of mortgage loans, servicing rights, repurchase or reverse
repurchase agreements, securities or other financial transactions in the
ordinary course of business;
(p) any other agreement of any other kind, including for data processing
and similar services, which involves future payments or receipts or
performances of services or delivery of items requiring aggregate payment of
$25,000 or more to or by Target other than payments made under or pursuant
to loan agreements, participation agreements and other agreements for the
extension of credit in the ordinary course of their business;
(q) any material agreement, arrangement or understanding not made in the
ordinary course of business;
(r) any agreement, arrangement or understanding relating to the
employment, election, retention in office or severance of any present or
former director, officer or employee of Target;
(s) any agreement, arrangement or understanding pursuant to which any
payment (whether severance pay or otherwise) became or may become due to any
director, officer or employee of Target upon execution of this Agreement or
upon or following consummation of the transactions contemplated hereby
(either alone or in connection with the occurrence of any additional acts or
events); or
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(t) any written agreement, supervisory agreement, memorandum of
understanding, consent order, cease and desist order, capital order, or
condition of any regulatory order or decree with or by the Commissioner,
FDIC, FRB or any other regulatory agency.
True copies of all Target Scheduled Contracts, including all amendments and
supplements thereto, are attached to Target's Disclosure Letter.
4.31 TRUST ADMINISTRATION. Target does not presently exercise trust
powers, including, but not limited to, trust administration, and has not
exercised such trust powers for a period of at least 3 years prior to the date
hereof. The term "trusts" as used in this Section 4.31 includes (i) any and all
common law or other trusts between an individual, corporation or other entities
and Target, as trustee or co-trustee, including, without limitation, pension or
other qualified or nonqualified employee benefit plans, compensation,
testamentary, inter vivos and charitable trust indentures; (ii) any and all
decedents' estates where Target is serving or has served as a co-executor or
sole executor, personal representative or administrator, administrator de bonis
non, administrator de bonis non with will annexed, or in any similar fiduciary
capacity; (iii) any and all guardianships, conservatorships or similar positions
where Target is serving or has served as a co-grantor or a sole grantor or a
conservator or a co-conservator of the estate, or any similar fiduciary
capacity; and (iv) any and all agency and/or custodial accounts and/or similar
arrangements, including plan administrator for employee benefit accounts, under
which Target is serving or has served as an agent or custodian for the owner or
other party establishing the account with or without investment authority.
4.32 REGULATORY APPROVALS. To the knowledge of Target, except as described
in Target's Disclosure Letter, Target has no reason to believe that it would not
receive all required approvals from any Governmental Entity of any application
to consummate the transaction contemplated by this Agreement without the
imposition of a materially burdensome condition in connection with the approval
of any such application.
4.33 YEAR 2000 READINESS. Except as described in Target's Disclosure
Letter, Target is are taking all reasonable steps to correct its respective
computer programs and applications so that they will not fail or will create
erroneous results by or at the Year 2000 and Target has not been advised of any
concerns regarding readiness with Year 2000 issues by any Governmental Entity or
by any other Person. Further, except as described in Target's Disclosure Letter,
(i) Target's Computer System used for the storage and processing of data are or
will be prior to the year 2000 Year 2000 Readiness; (ii) to the best of Target's
knowledge after due inquiry, none of Target's Computer System, operations or
business functions of Target will be materially adversely affected by any third
party's failure to be Year 2000 Readiness and to the best of Target's knowledge
after due inquiry, all of its suppliers, customers and third party providers
are, or will be prior to year 2000, Year 2000 Readiness; and (iii) Target is
taking or has taken, all necessary and appropriate action to address and remedy
any deficiencies in its Computer System which would keep it from becoming Year
2000 Readiness.
ARTICLE 5
AGREEMENTS WITH RESPECT TO CONDUCT OF
ACQUIROR AND BANK AFTER THE DATE HEREOF
Acquiror and Bank covenant and agree with Target as follows:
5.1 ACCESS.
(a) Acquiror and Bank will authorize and permit Target, its representatives,
accountants and counsel, to have access during normal business hours, on notice
and in such manner as will not unreasonably interfere with the conduct of the
businesses of either Acquiror or Bank, to all properties, books, records, branch
operating reports, branch audit reports, operating instructions and procedures,
tax returns, tax settlement letters, contracts and documents, and all other
information with respect to
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their business affairs, financial condition, assets and liabilities as Target
may from time to time reasonably request. Acquiror and Bank shall permit Target,
its representatives, accountants and counsel to make copies of such books,
records and other documents and to discuss the business affairs, condition
(financial and otherwise), assets and liabilities of Acquiror and Bank with such
third Persons, including, without limitation, its directors, officers,
employees, accountants, counsel and creditors, as Target considers necessary or
appropriate for the purposes of familiarizing itself with the businesses and
operations of Acquiror and Bank, obtaining any necessary orders, consents or
approvals of the transactions contemplated by this Agreement by any Governmental
Entity and conducting an evaluation of the assets and liabilities of Acquiror
and Bank. Acquiror and Bank will cause Arthur Anderson LLP ("AA") to make
available to Target, its accountants, counsel and other agents, such personnel,
work papers and other documentation of AA relating to its work papers and its
audits of the books and records of Acquiror and Bank as may be requested by
Target in connection with its review of the foregoing matters.
(b) The Chairman of the Board of Target or in his absence another
representative of Target selected by him shall be invited by Acquiror and Bank
to attend all regular and special Board of Directors' and Executive Committee
meetings of Acquiror or Bank from the date hereof until the Effective Time.
Acquiror and Bank shall inform Target of all such Board meeting at least 5
Business Days in advance of each such meeting; provided, however, that the
attendance of such representative of Target shall not be permitted at any
meeting, or portion thereof, for the sole purpose of discussing the transaction
contemplated by this Agreement or the obligations of either Acquiror or the Bank
under this Agreement.
5.2 MATERIAL ADVERSE CHANGES; REPORTS; FINANCIAL STATEMENTS; FILINGS.
(a) Acquiror and Bank will promptly notify Target (i) of any event of which
Acquiror or Bank obtains knowledge which may materially and adversely affect the
business, financial condition, or results of operations of either Acquiror or
Bank; (ii) in the event Acquiror or Bank determine that it is possible that the
conditions to the performance of Target set forth in Sections 8.1 and 8.3 may
not be satisfied; or (iii) any event, development or circumstance that, to the
best knowledge of Acquiror or Bank, will or, with the passage of time or the
giving of notice or both, is reasonably expected to result in the loss to
Acquiror or Bank of the services of any Executive Officer of Acquiror or Bank.
(b) Acquiror and Bank will furnish to Target, as provided in Section 11.12
of this Agreement, as soon as practicable, and in any event within 5 Business
Days after it is prepared or becomes available to either Acquiror or Bank, (i) a
copy of any report submitted to the board of directors of either Acquiror or
Bank and access to the working papers related thereto and copies of other
operating or financial reports prepared for management of any of its businesses
and access to the working papers related thereto provided, however, that
Acquiror and Bank need not furnish Target any privileged communications of or
memoranda prepared by its legal counsel in connection with the transactions
contemplated by, and the rights and obligations of Acquiror and Bank under, this
Agreement; (ii) quarterly unaudited consolidated balance sheets and statements
of operations, changes in stockholders' equity and cash flow for Acquiror and
Bank; (iii) monthly unaudited consolidated balance sheets and, statements of
operations for Acquiror and Bank; (iv) as soon as available, all letters and
communications sent by Acquiror to its shareholders and all reports filed by
Acquiror or Bank with the SEC, the FRB, the FDIC, the Commissioner and any other
Person; and (v) such other reports as Target may reasonably request relating to
Acquiror or Bank.
(c) Each of the financial statements delivered pursuant to subsection (b)
shall be (i) prepared in accordance with GAAP on a basis consistent with that of
the Financial Statements of Acquiror, except that such financial statements may
omit statements of cash flows and footnote disclosures required by GAAP; and
(ii) accompanied by a certificate of the chief financial officer to the effect
that such consolidated financial statements fairly present the financial
condition and results of operations of
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Acquiror and Bank for the period covered, and reflect all adjustments (which
consist only of normal recurring adjustments) necessary for a fair presentation.
5.3 CONDUCT OF BUSINESS.
(a) Between the date hereof and the Effective Time, except (i) as
contemplated by this Agreement and subject to requirements of law and regulation
generally applicable to bank holding companies and banks, Acquiror or Bank shall
not, without prior written consent of Target (which consent shall not be
unreasonably withheld and which consent shall be deemed granted if within five
(5) Business Days of Target's receipt of written notice of a request for prior
written consent, written notice of objection is not received by Acquiror and
Bank):
(1) amend, modify, terminate or fail to renew or preserve their material
Permits;
(2) issue, sell, or grant any Equity Securities of Acquiror or Bank
(except pursuant to the Acquiror Stock Option Plan), any other securities
(including long term debt), or any rights, options or securities to acquire
any Acquiror Stock Option or any Equity Securities of Acquiror or any other
securities (including long term debt) of Acquiror;
(3) declare, issue or pay any dividend or other distribution of assets,
whether consisting of money, other personal property, real property or other
things of value, to the shareholders of Acquiror, or split, combine or
reclassify any shares of its capital stock or other Equity Securities except
for quarterly cash dividends payable by Acquiror to its shareholders in
accordance with past practice and not to exceed $.20 per share per quarter;
(4) purchase, redeem or otherwise acquire any Equity Securities, or
other securities of Acquiror or Bank or any rights, options, or securities
to acquire any Equity Securities of Acquiror or Bank;
(5) amend or modify its Charter Documents except as contemplated hereby;
(6) agree or make any commitment to take any actions prohibited by this
Section 5.3;
(7) take any action which would or is reasonably likely to (i) adversely
affect the ability of Acquiror, Bank or Target to obtain any necessary
approval of any Governmental Entity required for the transactions
contemplated hereby; (ii) adversely affect Acquiror or Bank's ability to
perform their covenants and agreements under this Agreement; or (iii) result
in any of the conditions to the performance of Acquiror, Bank or Target's
obligations hereunder, as set forth in Article 8 herein not being satisfied;
(8) knowingly take or cause to be taken any action which would
disqualify the Bank Merger as a "reorganization" within the meaning of
Section 368 of the Code or prevent Target from accounting for the business
combination to be effected by the Bank Merger as a pooling-of-interests;
(b) Between the date hereof and the Effective Time, Acquiror and Bank shall:
(1) duly observe and conform in all material respects to all lawful
requirements applicable to its business;
(2) maintain their assets and properties in good condition and repair,
normal wear and tear excepted;
(3) promptly upon learning of such information, advise Target in writing
of any event or any other transaction within its knowledge whereby any
Person or Related Group of Persons acquires, directly or indirectly, record
or beneficial ownership or control (as defined in Rule 13d-3 promulgated by
the SEC under the Exchange Act) of five percent (5%) or more of the
outstanding
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Acquiror Stock prior to the record date fixed for the Acquiror Shareholders'
Meeting or any adjourned meeting thereof to approve this Agreement and the
transaction contemplated herein;
(4) Use their best efforts consistent with this Agreement to maintain
and preserve in tact their business organization and to maintain and
preserve the relationship and good will with account customers, employees,
vendors, and others having business relationships with Acquiror and Bank;
(5) provide to Target, as soon as they become available, the proposed
final draft of the opinions referred to in Sections 8.1(g) and (h) of this
Agreement.
5.4 CERTAIN LOANS AND OTHER EXTENSIONS OF ACQUIROR AND BANK. Acquiror and
Bank will promptly inform Target of the amounts and categories of any loans,
leases or other extensions of credit that have been classified by any
Governmental Entity or by any internal or external loan reviewer of Acquiror or
Bank as "Watch List," "Substandard," "Doubtful," "Loss" or any comparable
classification. Acquiror and Bank will furnish to Target, as soon as
practicable, and in any event within 10 days after the end of each calendar
month, schedules including a listing of the following:
(a) classified credits, showing with respect to each such credit in
amount equal to or exceeding $250,000, the classification category, credit
type, and office, and with respect to all other such credits, by credit type
and office, the aggregate dollar amount;
(b) nonaccrual credits, showing with respect to each such credit in
amount equal to or exceeding $250,000, the credit type and office, and with
respect to all other such credits, by credit type and office, the aggregate
dollar amount;
(c) accrual exception credits that are delinquent 90 or more days and
have not been placed on nonaccrual status, showing with respect to each such
credit in amount equal to or exceeding $250,000, the credit type and office,
and with respect to all other such credits, by credit type and office, the
aggregate dollar amount;
(d) delinquent credits showing with respect to each such credit in
amount equal to or exceeding $250,000, the credit type, office and an aging
schedule broken down into 30-59, 60-89, 90+ day categories, and with respect
to all other such credits, by credit type, office and by aging category, the
aggregate dollar amount;
(e) loans or leases charged off during the previous month, showing with
respect to each such loan or lease, the credit type and office;
(f) loans or leases written down during the previous month, including
with respect to each the original amount, the writeoff amount, credit type
and office;
(g) other real estate or assets owned, stating with respect to each its
credit type;
(h) a reconciliation of the allowance for loan and lease losses,
identifying specifically the amount and sources of all additions and
reductions to the allowance (which may be by reference to specific portions
of another schedule furnished pursuant to this Section 5.4 and, in the case
of unallocated adjustments, shall disclose the methodology and calculations
through which the amount of such adjustment was determined).
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5.5 DISCLOSURE LETTER. Promptly in the case of material matters, and not
less than monthly in the case of all other matters, Acquiror and Bank shall
amend or supplement the Acquiror Disclosure Letter provided for herein
pertaining to Acquiror and Bank as necessary so that the information contained
therein accurately reflects the then current status of Acquiror and Bank and
shall transmit copies of such amendments or supplements to Target in accordance
with Section 11.12 of this Agreement.
5.6 BANK SHAREHOLDER APPROVAL. Bank will promptly take action necessary in
accordance with applicable law and its Charter Documents to convene a meeting of
its shareholder to be held as soon as practicable, for the purpose of voting on
the Bank Merger, this Agreement and related matters. Acquiror shall vote all
shares of Bank Stock which it owns at such meeting in favor of the Bank Merger,
this Agreement and related matters.
5.7 CONSENTS AND APPROVALS.
(a) Acquiror and Bank will cooperate with Target in the preparation of all
filings, applications, notices and requests for waiver for Consents necessary or
desirable for the consummation of the Bank Merger, and the other transactions
contemplated in this Agreement. Acquiror's and Bank's cooperation hereunder
shall include, but not be limited to, providing all information concerning
Acquiror or Bank and their respective shareholders as may be required for such
filings, applications, notices and requests for Consents and signing, to the
extent required, all such filings, applications, notices and requests.
(b) To the extent that the consent of a third party ("Third Party Consent")
with respect to any contract, agreement, license, franchise, lease, commitment,
arrangement, Permit or release that is material to the business of Acquiror or
Bank or that is contemplated in this Agreement is required in connection with
the Bank Merger or the transactions contemplated in this Agreement, Acquiror and
Bank shall use its best efforts to obtain such consent prior to the Effective
Time.
5.8 COMPLIANCE WITH RULES. Acquiror and Bank shall comply with the
requirements of all applicable Rules, the noncompliance with which would
materially and adversely affect the assets, liabilities, business, financial
condition or results of operations or prospects of Acquiror or Bank.
5.9 AGREEMENT OF MERGER. As soon as practicable, Acquiror and Bank shall
execute the Agreement of Merger.
5.10 AFFILIATE AND FIVE PERCENT SHAREHOLDER AGREEMENTS. Within thirty (30)
days of the execution of this Agreement, (a) Acquiror and Bank shall deliver to
Target a letter identifying all persons who are then "affiliates" of Acquiror or
Bank under the Securities Act and (b) Acquiror shall advise the persons
identified in such letter of the sale restrictions imposed under the pooling of
interest accounting rules and shall use reasonable efforts to obtain from each
person identified in such letter a written agreement substantially in the form
attached hereto as Exhibit 5.10. At least 10 Business Days prior to the issuance
of the opinion to be provided for in Section 8.1(h), Acquiror shall use its best
efforts to cause each person or group of persons who holds more than five
percent (5%) of the Acquiror Stock to deliver to AA, KPMG and Knecht & Hansen, a
letter stating that such shareholder(s) has no present plan or intention to
dispose of Acquiror Stock and committing that such shareholder(s) will not
dispose of Acquiror Stock in a manner to cause a violation of the "continuity of
shareholder interest" requirements of Treasury Regulation 1.368-1.
5.11 INSURANCE.
(a) Acquiror and Bank shall permit Target to extend the discovery period of
its directors' and officers' liability insurance for a period of forty-eight
(48) months with respect to all matters arising from facts or events which
occurred before the Effective Time for which Target would have had an obligation
to indemnify its directors and officers; PROVIDED, HOWEVER, that the total costs
of the premiums for such extension shall not exceed $30,968.00.
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(b) If Acquiror or Bank or any of its successors or assigns (i) shall
consolidate with or merge into any other corporation or entity and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) shall transfer all or substantially all of its properties and
assets to any individual, corporation or other entity, then and in each such
case, Acquiror or Bank shall take no action to impair the rights provided in
this Section 5.11.
(c) The provisions of this Section are intended to be for the benefit of,
and shall be enforceable by, each director or officer of Target and his or her
heirs and representatives.
ARTICLE 6
AGREEMENTS WITH RESPECT TO CONDUCT OF
TARGET AFTER THE DATE HEREOF
Target covenant and agree with Acquiror and Bank as follows:
6.1 ACCESS.
(a) Target will authorize and permit Acquiror, its representatives,
accountants and counsel, to have access during normal business hours, on notice
and in such manner as will not unreasonably interfere with the conduct of the
businesses of Target, to all properties, books, records, branch operating
reports, branch audit reports, operating instructions and procedures, tax
returns, tax settlement letters, contracts and documents, and all other
information with respect to its business affairs, financial condition, assets
and liabilities as Acquiror may from time to time reasonably request. Target
shall permit Acquiror, its representatives, accountants and counsel to make
copies of such books, records and other documents and to discuss the business
affairs, condition (financial and otherwise), assets and liabilities of Target
with such third Persons, including, without limitation, its directors, officers,
employees, accountants, counsel and creditors, as Acquiror considers necessary
or appropriate for the purposes of familiarizing itself with the businesses and
operations of Target, obtaining any necessary orders, consents or approvals of
the transactions contemplated by this Agreement by any Governmental Entity and
conducting an evaluation of the assets and liabilities of Target. Target will
cause KPMG Peat Marwick LLP ("KPMG") to make available to Acquiror, its
accountants, counsel and other agents, such personnel, work papers and other
documentation of KPMG relating to its work papers and its audits of the books
and records, including, but not limited to, all tax records of Target as may be
requested by Acquiror in connection with its review of the foregoing matters.
(b) The President of Acquiror or in his absence another representative of
Acquiror selected by him shall be invited by Target to attend all regular and
special Board of Directors' and Executive Committee meetings of Target from the
date hereof until the Effective Time. Target shall inform Acquiror of all such
Board meeting at least 2 Business Days in advance of each such meeting;
PROVIDED, HOWEVER, that the attendance of such representative of Acquiror shall
not be permitted at any meeting, or portion thereof, for the sole purpose of
discussing the transaction contemplated by this Agreement or the obligations of
Target under this Agreement.
6.2 MATERIAL ADVERSE CHANGES; REPORTS; FINANCIAL STATEMENTS; FILINGS.
(a) Target will promptly notify Acquiror (i) of any event of which Target
obtains knowledge which may materially and adversely affect the business,
financial condition, or results of operations of either Target; (ii) in the
event Target determine that it is possible that the conditions to the
performance of Acquiror set forth in Sections 8.1 and 8.2 may not be satisfied;
(iii) of the opening or closing of any branch or other office of Target at which
business is conducted; or (iv) any event, development or circumstance that, to
the best knowledge of Target, will or, with the passage of time or the giving of
notice or both, is reasonably expected to result in the loss to Target of the
services of any Executive Officer of Target.
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(b) Target will furnish to Acquiror as provided in Section 11.12 of this
Agreement, as soon as practicable, and in any event within 5 Business Days after
it is prepared or becomes available to either Target, (i) a copy of any report
submitted to the board of directors of either Target and access to the working
papers related thereto and copies of other operating or financial reports
prepared for management of any of its businesses and access to the working
papers related thereto, PROVIDED, HOWEVER, that Target need not furnish Acquiror
any privileged communications of or memoranda prepared by its legal counsel in
connection with the transactions contemplated by, and the rights and obligations
of Target under, this Agreement; (ii) quarterly unaudited balance sheets and
statements of operations, changes in stockholders' equity and cash flow for
Target; (iii) monthly unaudited balance sheets and, statements of operations for
Target; (iv) as soon as available, all letters and communications sent by Target
to its shareholders and all reports filed by Target with the SEC, the FRB, the
FDIC, the Commissioner and any other Person; and (v) such other reports as
Acquiror may reasonably request relating to Target.
(c) Each of the financial statements delivered pursuant to subsection (b)
shall be (i) prepared in accordance with GAAP on a basis consistent with that of
the Financial Statements of Target except that such financial statements may
omit statements of cash flows and footnote disclosures required by GAAP; and
(ii) accompanied by a certificate of the chief financial officer to the effect
that such financial statements fairly present the financial condition and
results of operations of Target for the period covered, and reflect all
adjustments (which consist only of normal recurring adjustments) necessary for a
fair presentation.
6.3 CONDUCT OF BUSINESS.
(a) Between the date hereof and the Effective Time, except (i) as
contemplated by this Agreement, and subject to requirements of law and
regulation generally applicable to bank holding companies and banks, Target
shall not, without prior written consent of Acquiror (which consent shall not be
unreasonably withheld and which consent [except with respect to subparagraph
(29) of this Section 6.3(a)] shall be deemed granted if within five (5) Business
Days of Acquiror's receipt of written notice of a request for prior written
consent, written notice of objection is not received by Target):
(1) amend, modify, terminate or fail to renew or preserve their material
Permits;
(2) amend or modify in any material respect, or, except as they may
expire in accordance with their terms, terminate any Target Scheduled
Contract or any other material contract or agreement to which Target is a
party, or materially default in the performance of any of its obligations
under any such contract or agreement;
(3) enter into any agreement or contract that would be required to be
included as a Target Scheduled Contract.
(4) terminate or unilaterally fail to renew any existing insurance
coverage or bonds;
(5) make any loan or other extension of credit, or enter into any
commitment to make any loan or other extension of credit to any director,
officer, employee or shareholder holding 5% or more of the outstanding
shares of Target Stock except for any loan, extension of credit or
commitment made after the date hereof not exceeding $50,000, to any such
person; PROVIDED, HOWEVER, that the aggregate of all loans, extensions of
credit or commitments made after the date hereof to any such person shall
not exceed $50,000;
(6) grant any general or uniform increase in the rate of pay to any
employee or employee benefit or profit sharing plan or increase the salary
or employee benefits of any non-exempt employee or agent or pay any bonus,
severance or similar payment to any Person, except in the ordinary course of
business and consistent with past practice or established practices;
(7) grant any promotion or any increase in the rate of pay to any exempt
employee, profit sharing plan or increase in any employee benefits or pay
any bonus, severance or similar payment
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to any exempt employee except Target may pay immediately prior to the
Effective Time to officers and employees then employed by Target or their
respective accounts pro rata bonuses and matching 401(k) payments (pro rated
through the Effective Date) which bonuses and matching payments have been
calculated in accordance with Target's existing bonus compensation program
and for which regular monthly accruals have been made on the books of
Target;
(8) sell, transfer, mortgage, encumber or otherwise dispose of any
assets or release or waive any claim, except in the ordinary course of
business and consistent with past practice or as required by any existing
contract or for ordinary repairs, renewals or replacements or as
contemplated in this Agreement;
(9) issue, sell, or grant any Equity Securities of Target (except
pursuant to the exercise of Target options outstanding as of the date
hereof), any other securities (including long term debt), or any rights,
options or securities to acquire any Target Stock Option or any Equity
Securities of Target or any other securities (including long term debt) of
Target;
(10) declare, issue or pay any dividend or other distribution of assets,
whether consisting of money, other personal property, real property or other
things of value, to the shareholders of Target, or split, combine or
reclassify any shares of its capital stock or other Equity Securities;
(11) purchase, redeem or otherwise acquire any Equity Securities, or
other securities of Target or any rights, options, or securities to acquire
any Equity Securities of Target;
(12) amend or modify its Charter Documents;
(13) make their credit underwriting policies, standards or practices
relating to the making of loans and other extensions of credit, or
commitments to make loans and other extensions of credit, less stringent
than those in effect on December 31, 1998;
(14) make any capital expenditures, or commitments with respect thereto,
in excess of $ 50,000 except in the ordinary course of business and
consistent with past practice;
(15) make extraordinary payments to any Person other than as
contemplated, or as disclosed, in this Agreement;
(16) make any investment by purchase of stock or securities (including an
Investment Security), contributions to capital, property transfers or
otherwise in any other Person, except for federal funds or obligations of
the United States Treasury or an agency of the United States Government the
obligations of which are entitled to or implied to have the full faith and
credit of the United States government and which have an original maturity
not in excess of one year, or bank qualified investment grade municipal
bonds, and except in any case, in the ordinary course of business consistent
with the past practices, and which are not designated as trading;
(17) compromise or otherwise settle or adjust any assertion or claim of a
deficiency in taxes (or interest thereon or penalties in connection
therewith); file any appeal from an asserted deficiency except in a form
previously approved by Acquiror in writing; file or amend any United States
federal, foreign, state or local tax return without Acquiror's prior written
approval, which approval shall not be unreasonably withheld; or make any tax
election or change any method or period of accounting unless required by
GAAP or applicable law;
(18) enter into or consent to any new employment agreement or other
Benefit Arrangement, or amend or modify any employment agreement or other
Target Benefit Arrangement in effect on the date of this Agreement to which
either Target is a party or bound except Target may pay immediately prior to
the Effective Time to officers and employees then employed by Target or
their respective accounts pro rata bonuses and matching 401(k) payments (pro
rated through the Effective Date) which bonuses and matching payments have
been calculated in accordance with
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Target's existing bonus compensation program and for which regular monthly
accruals have been made on the books of Target;
(19) grant any Person a power of attorney or similar authority except in
accordance with a written policy previously disclosed to Acquiror;
(20) agree or make any commitment to take any actions prohibited by this
Section 6.3;
(21) change any of Target's basic policies and practices with respect to
liquidity management and cash flow planning, marketing, deposit origination,
lending, budgeting, profit and tax planning, personnel practices or any
other material aspect of Target's business or operations, except such
changes as may be required in the opinion of Target's management to respond
to economic or market conditions or as may be required by any Governmental
Entity;
(22) take any action which would or is reasonably likely to (i) adversely
affect the ability of Target, Bank or Acquiror to obtain any necessary
approval of any Governmental Entity required for the transactions
contemplated hereby; (ii) adversely affect Target's ability to perform their
covenants and agreements under this Agreement; or (iii) result in any of the
conditions to the performance of Target, Bank or Acquiror's obligations
hereunder, as set forth in Article 8 herein not being satisfied;
(23) reclassify any Investment Security from hold-to-maturity or
available for sale to trading;
(24) sell any Investment Security prior to maturity, except in the
ordinary course of business;
(25) knowingly take or cause to be taken any action which would
disqualify the Bank Merger as a "reorganization" within the meaning of
Section 368 of the Code or prevent Acquiror from accounting for the business
combination to be effected by the Bank Merger as a pooling-of-interests;
(26) settle any claim, action or proceeding involving any material
liability for monetary damages or enter into any settlement agreement
containing material obligations;
(27) make, acquire a participation in, or reacquire an interest in a
participation sold of, any loan that is not in compliance with its normal
credit underwriting standards, policies and procedures as in effect as of
the date of this Agreement; or renew, extend the maturity of, or alter any
of the material terms of any such loan for a period of greater than six
months;
(28) incur any indebtedness for borrowed money or assume, guaranty,
endorse or otherwise as an accommodation become responsible for the
obligations of any other Person, except for (i) in connection with banking
transactions with banking customers in the ordinary course of business, or
(ii) short-term borrowings made at prevailing market rates and terms; and
(29) grant, renew or commit to grant or renew any extension of credit if
such extension of credit, together with all other credit then outstanding to
the same Person and all Affiliated Persons, would exceed $250,000 on an
unsecured basis and $500,000 on a secured basis. Consent shall be deemed
granted if within two Business Days of written notice delivered to Bank's
Chief Credit Officer, written notice of objection is not received by Target.
(b) Between the date hereof and the Effective Time, Target shall:
(1) duly observe and conform in all material respects to all lawful
requirements applicable to its business;
(2) maintain its assets and properties in good condition and repair,
normal wear and tear excepted;
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(3) promptly upon learning of such information, advise Acquiror in
writing of any event or any other transaction within its knowledge whereby
any Person or Related Group of Persons acquires, directly or indirectly,
record or beneficial ownership or control (as defined in Rule 13d-3
promulgated by the SEC under the Exchange Act) of five percent (5%) or more
of the outstanding Target Stock prior to the record date fixed for the
Target Shareholders' Meeting or any adjourned meeting thereof to approve
this Agreement and the transaction contemplated herein;
(4) promptly notify Acquiror regarding receipt from any tax authority of
any notification of the commencement of an audit, any request to extend the
statute of limitations, any statutory notice of deficiency, any revenue
agent's report, any notice of proposed assessment, or any other similar
notification of potential adjustments to the tax liabilities of Target, or
any actual or threatened collection enforcement activity by any tax
authority with respect to tax liabilities of Target; and
(5) maintain an allowance for loan and lease losses consistent with
practices and methodology as in effect on the date of the execution of this
Agreement, and shall not, notwithstanding any recoveries received with
respect to loans previously charged off, reduce the allowance for loan and
lease losses below the amount in effect on the date of the execution of this
Agreement.
6.4 CERTAIN LOANS AND OTHER EXTENSIONS OF TARGET. Target will promptly
inform Acquiror of the amounts and categories of any loans, leases or other
extensions of credit that have been classified by any Governmental Entity or by
any internal or external loan reviewer of Target as "Watch List," "Substandard,"
"Doubtful," "Loss" or any comparable classification. Target will furnish to
Acquiror, as soon as practicable, and in any event within 10 days after the end
of each calendar month, schedules including a listing of the following:
(a) classified credits, showing with respect to each such credit in
amount equal to or exceeding $50,000, the classification category, credit
type, and office, and with respect to all other such credits, by credit type
and office, the aggregate dollar amount;
(b) nonaccrual credits, showing with respect to each such credit in
amount equal to or exceeding $50,000, the credit type and office, and with
respect to all other such credits, by credit type and office, the aggregate
dollar amount;
(c) accrual exception credits that are delinquent 90 or more days and
have not been placed on nonaccrual status, showing with respect to each such
credit in amount equal to or exceeding $50,000, the credit type and office,
and with respect to all other such credits, by credit type and office, the
aggregate dollar amount;
(d) delinquent credits showing with respect to each such credit in
amount equal to or exceeding $50,000, the credit type, office and an aging
schedule broken down into 30-59, 60-89, 90 + day categories, and with
respect to all other such credits, by credit type, office and by aging
category, the aggregate dollar amount;
(e) loan and lease participations, stating, with respect to each,
whether it is purchased or sold, the loan or lease type, and the office;
(f) loans or leases (including any commitments) by Target to any
director, officer, or employee of Target, or any shareholder holding 5% or
more of the capital stock of Target, including with respect to each such
loan or lease, the identity and, to the best knowledge of Target, the
relation of the borrower to Target, the loan or lease type and the
outstanding and undrawn amounts;
(g) letters of credit, showing with respect to each letter of credit in
an amount equal to or exceeding $50,000, the credit type and office, and
showing with respect to all other such letters of credit, by credit type and
office, the aggregate dollar amount;
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(h) loans or leases charged off during the previous month, showing with
respect to each such loan or lease, the credit type and office;
(i) loans or leases written down during the previous month, including
with respect to each the original amount, the writeoff amount, credit type
and office;
(j) other real estate or assets owned, stating with respect to each its
credit type;
(k) a reconciliation of the allowance for loan and lease losses,
identifying specifically the amount and sources of all additions and
reductions to the allowance (which may be by reference to specific portions
of another schedule furnished pursuant to this Section 6.4 and, in the case
of unallocated adjustments, shall disclose the methodology and calculations
through which the amount of such adjustment was determined);
(l) extensions of credit whether unsecured or secured in amount equal to
or exceeding $100,000, originated on or after the date of the schedule
previously provided to Acquiror (or if it is the first such schedule, the
date of this Agreement) and before the date of the schedule in which
reported, showing with respect to each, the credit type and the office; and
(m) renewals or extensions of maturity of outstanding extensions of
credit whether unsecured or secured in amount equal to or exceeding
$100,000, showing with respect to each, the credit type and the office.
6.5 DISCLOSURE LETTER. Promptly in the case of material matters, and not
less than monthly in the case of all other matters, Target shall amend or
supplement the Target Disclosure Letter provided for herein pertaining to Target
as necessary so that the information contained therein accurately reflects the
then current status of Target and shall transmit copies of such amendments or
supplements to Acquiror in accordance with Section 11.12 of this Agreement.
6.6 SHAREHOLDER APPROVAL. Target will promptly take action necessary in
accordance with applicable law and its Charter Documents to convene a meeting of
its shareholders (the "Target Shareholders' Meeting") to be held as soon as
practicable, for the purpose of voting on the Bank Merger, this Agreement and
related matters. In connection with the Target Shareholders' Meeting, (i) the
Board of Directors of Target shall, subject to fiduciary duty, recommend
shareholder approval of the Bank Merger, this Agreement and related matters; and
(ii) Target shall use its best efforts to obtain such shareholder approval by
the largest possible percentage.
6.7 CONSENTS AND APPROVALS.
(a) Target will cooperate with Acquiror in the preparation of all filings,
applications, notices and requests for waiver for Consents necessary or
desirable for the consummation of the Bank Merger, and the other transactions
contemplated in this Agreement. Target's and Bank's cooperation hereunder shall
include, but not be limited to, providing all information concerning Target and
its shareholders as may be required for such filings, applications, notices and
requests for Consents and signing, to the extent required, all such filings,
applications, notices and requests.
(b) To the extent that a Third Party Consent with respect to any contract,
agreement, license, franchise, lease, commitment, arrangement, Permit or release
that is material to the business of Target or that is contemplated in this
Agreement is required in connection with the Bank Merger or the transactions
contemplated in this Agreement, Target shall use its best efforts to obtain such
consent prior to the Effective Time.
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6.8 PRESERVATION OF EMPLOYMENT RELATIONS PRIOR TO EFFECTIVE TIME. Target
will use its best efforts consistent with current employment practices and
policies to maintain the services of the officers and employees of Target
through the Effective Time.
6.9 COMPLIANCE WITH RULES. Target shall comply with the requirements of
all applicable Rules, the noncompliance with which would materially and
adversely affect the assets, liabilities, business, financial condition or
results of operations or prospects of Target.
6.10 TARGET BENEFIT ARRANGEMENTS. Subject to Section 9.1(d) hereof, Target
and any effected officers, directors or employees shall mutually terminate all
Target Benefit Arrangements without the imposition of any liability therefor to
Acquiror or any other Party.
6.11 AGREEMENT OF MERGER. As soon as practicable, Target shall execute the
Agreement of Merger.
6.12 NO SHOP. Neither Target nor any of its Affiliates shall, on or before
the earlier of the Effective Time or the date of termination of this Agreement,
initiate, solicit or encourage (including by way of furnishing information or
assistance), or take any other action to facilitate, any inquiries or the making
of any proposal which constitutes, or may reasonably be expected to lead to any
Competing Transaction (as such term is defined below), or negotiate with any
Person in furtherance of such inquiries or to obtain a Competing Transaction, or
agree to or endorse any Competing Transaction, or authorize or permit any of its
officers, directors or employees or any investment banker, financial advisor,
attorney, accountant or any other representative retained by it or any of its
Affiliates to take any such action, and Target shall promptly notify Acquiror
(orally and in writing) of all of the relevant details relating to all inquiries
and proposals which they may receive relating to any of such matters. For
purposes of this Agreement, "Competing Transaction" shall mean any of the
following involving Target: any merger, consolidation, share exchange or other
business combination; a sale, lease, exchange, mortgage, pledge, transfer or
other disposition of assets of Target representing twenty-five percent (25%) or
more of the asset of Target; a sale of shares of capital stock (or securities
convertible or exchangeable into or otherwise evidencing, or any agreement or
instrument evidencing, the right to acquire capital stock) or other Equity
Security, representing ten percent (10%) or more of the voting power of Target,
a tender offer or exchange offer for at least twenty-five percent (25%) of the
outstanding shares of Target Stock; a solicitation of proxies in opposition to
approval of the Bank Merger by Target shareholders; or a public announcement of
an unsolicited BONA FIDE proposal, plan, or intention to do any of the
foregoing. Notwithstanding any other provision in this Section 6.12 or elsewhere
in this Agreement, the obligations of Target in this Agreement are subject to
the continuing fiduciary duties of its Board of Directors. In the event the
Board of Directors of Target receives a bona fide offer for a Competing
Transaction with another entity, and reasonably determines, upon written advice
of counsel, that as a result of such offer, any duty to act or to refrain from
doing any act pursuant to this Agreement, is inconsistent with the continuing
fiduciary duties of said Board of Directors to their shareholders, such failure
to act or refrain from doing any act shall not constitute the failure of any
condition, breach of any covenant or otherwise constitute any breach of this
Agreement, except that any such failure to act or refrain from doing any act
shall entitle Acquiror to terminate this Agreement pursuant to Section 10.1(f)
hereof, and in no event shall this sentence or the previous sentence operate to
excuse or modify the obligations of Target under Section 11.1(c) hereof or under
the Stock Option Agreement.
6.13 AFFILIATES AND FIVE PERCENT SHAREHOLDER AGREEMENTS. Within thirty
(30) days of the execution of this Agreement, (a) Target shall deliver to
Acquiror a letter identifying all persons who are then "affiliates" of Target
for purposes of Rule 145 under the Securities Act and (b) Target shall advise
the persons identified in such letter of the resale restrictions imposed by
applicable securities laws and shall use reasonable efforts to obtain from each
person identified in such letter a written agreement substantially in the form
attached hereto as Exhibit 6.13. Target shall use reasonable efforts to obtain
from any person who becomes an affiliate of Target after Target's delivery of
the letter referred to above, and on
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or prior to the date of the Target Shareholders' Meeting to approve this
Agreement, a written agreement substantially in the form attached as Exhibit
6.13 hereto as soon as practicable after obtaining such status. At least 10
Business Days prior to the issuance of the opinion to be provided for in Section
8.1(h), Target shall use its best efforts to cause each person or group of
persons who holds more than five percent (5%) of the Target Stock (regardless of
whether such person is an "affiliate" under Rule 145) to deliver to AA, KPMG and
Reitner & Stuart, a letter stating that such shareholder(s) has no present plan
or intention to dispose of Target Stock and committing that such shareholder(s)
will not dispose of Target Stock in a manner to cause a violation of the
"continuity of shareholder interest" requirements of Treasury Regulation
1.368-1.
ARTICLE 7
FURTHER COVENANTS OF ACQUIROR, BANK AND TARGET
7.1 S-4 AND PROXY STATEMENT.
(a) As promptly as practicable, Acquiror and Target shall cooperate with
each other and exercise their best efforts to prepare and file with the SEC the
S-4, in which the Proxy Statement will be included as a prospectus. The Parties
hereto agree to provide the information necessary for inclusion in the Proxy
Statement and S-4. Each of the parties will use its respective best efforts to
have the S-4 declared effective under the Securities Act as promptly as
practicable after it is filed. Acquiror shall pay all third party costs (except
Target's legal and accounting fees) associated with the preparation and filing
of the S-4, including the filing fees with the SEC and Blue Sky regulators as
well as the costs of printing and mailing the Proxy Statement.
(b) After the date of the filing of the S-4 with the SEC, each of the
Parties agrees promptly to notify the other of and to correct any information
furnished by such Party that shall have become false or misleading in any
material respect and to cooperate with the other to take all steps necessary to
file with the SEC and have declared effective or cleared by the SEC any
amendment or supplement to the S-4 so as to correct such information and to
cause the Proxy Statement as so corrected to be disseminated to the shareholders
of Acquiror and Target to the extent required by applicable Rules. All documents
that the Parties file with the SEC or any other Governmental Entity in
connection with this Agreement will comply as to form in all material respects
with the provisions of applicable Rules.
(c) Acquiror shall take all required action with appropriate Governmental
Entities under state securities or blue sky laws in connection with the issuance
of Acquiror Stock pursuant to this Agreement.
7.2 FILINGS. The Parties agree that through the Effective Time, each of
its reports, registration statements and other filings required to be filed with
any applicable Governmental Entity will comply in all material respects with the
applicable statutes, rules and regulations enforced or promulgated by the
Governmental Entity with which it will be filed and none will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Any financial
statement contained in any such report, registration statement or other filing
that is intended to represent the financial position of the entities or entity
to which it relates will fairly present the financial position of such entities
or entity and will be prepared in accordance with GAAP consistently applied
during the periods involved.
7.3 APPLICATIONS. Acquiror will promptly prepare and file or cause to be
prepared and filed (i) an application for approval of the Bank Merger with the
FDIC; (ii) an application for approval of the Bank Merger with the Commissioner;
(iii) if required, a request for waiver from the FRB; and (iv) any other
applications or notices necessary to consummate the transactions contemplated
hereby.
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Acquiror shall afford Target a reasonable opportunity to review all such
applications and all amendments and supplements thereto before the filing
thereof. The Parties covenant and agree that the S-4 and the Proxy Statement and
all applications to the appropriate Governmental Entities for approval or
consent to the Bank Merger, with respect to information relating to it, will
comply in all material respects with the provisions of applicable law. Acquiror
will use its best efforts to obtain all regulatory approvals or consents
necessary to effect the Bank Merger and Target shall cooperate with Acquiror and
Bank in such efforts.
7.4 STOCK OPTIONS.
(a) At and as of the Effective Time and without further action by any Party,
the Stock Option Plan of Target shall terminate. The Acquiror Stock Option Plan
shall not be terminated at the Effective Time and outstanding Acquiror Stock
Options at the Effective Time shall continue in effect.
(b) As of the Effective Time Acquiror shall grant substitute stock options
to each person who has at the Effective Time an outstanding Target Stock Option.
Each and every substitute stock option so granted by Acquiror to replace a
Target Stock Option shall be 100% vested and shall be exercisable for that
number of whole shares of Acquiror Stock equal to the product of (A) the number
of shares of Target Stock that were purchasable under such Target Stock Option
immediately prior to the Effective Time multiplied by (B) the Exchange Ratio,
rounded down to the nearest whole number of shares of Acquiror Stock. Further,
each and every substitute stock option so granted by Acquiror to replace a
Target Stock Option shall provide for a per share exercise price which shall be
equal to the quotient determined by dividing (A) the exercise price per share of
Target Stock at which such Target Stock Option was exercisable immediately prior
to the Effective Time by (B) the Exchange Ratio. At the Effective Time, Acquiror
shall issue to each holder of an outstanding Target Stock Option a substitute
stock option providing for the terms discussed above.
(c) Acquiror shall use its best effort to assure that each holder of an
Target Stock Option which qualified as a incentive stock option prior to the
Effective Time shall receive a substitute stock option which will qualify as an
incentive stock option.
7.5 FURTHER ASSURANCES. Acquiror/Bank and Target agree that from time to
time, whether before, at or after the Effective Time, they will execute and
deliver such further instruments of conveyance and transfer and to take such
other action as may be reasonable or necessary to consummate the Bank Merger and
the transactions contemplated in this Agreement. Acquiror, Bank and Target agree
to take such further action as may reasonably be requested to facilitate
consummation of the Bank Merger and the transactions contemplated in this
Agreement and that are not inconsistent with the other provisions of this
Agreement.
7.6 REMOVAL OF CONDITIONS. In the event of the imposition of a condition
to any consent of, the Commissioner, the FDIC or other Government Entity which
any Party deems to materially adversely affect it or to be materially burdensome
as provided in Section 8.1(c), the Parties shall use their respective best
efforts to obtain the removal of such condition.
7.7 CORPORATE GOVERNANCE. (a) Prior to the Effective Time, Acquiror shall
take all necessary steps to effect the Acquiror and Bank Corporate Governance
Changes at the Effective Time.
7.8 LISTING OF ACQUIROR STOCK. Acquiror and Bank shall take all reasonable
steps to have the shares of Acquiror Stock to be issued in the Bank Merger
listed on the NASDAQ National Market as the Effective Date or as soon thereafter
as is practicable.
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ARTICLE 8
CONDITIONS TO THE PARTIES' OBLIGATIONS TO CLOSE
8.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO CLOSE. The respective
obligations of Acquiror and Bank, on the one hand, and Target, on the other, to
consummate the Bank Merger and the other transactions contemplated hereby are
subject to the satisfaction or waiver at or prior to the Effective Time of each
of the following conditions:
(a) The Agreement and the transactions contemplated hereby shall have
received all requisite approvals of the shareholders of Target.
(b) No judgment, decree, injunction, order or proceeding shall be
outstanding or threatened by any Governmental Entity which prohibits or
restricts the effectuation of, or threatens to invalidate or set aside, the
Bank Merger substantially in the form contemplated by this Agreement, unless
counsel to the party again whom such action or proceeding was instituted or
threatened renders to the other Parties hereto a favorable opinion that such
judgment, decree, injunction, order or proceeding is without merit.
(c) On or before September 30, 1999, (i) the Parties shall have received
any required Consent from the FRB, the Commissioner, the FDIC, and, at or
prior to the Effective Time, this Agreement and the transactions
contemplated hereby shall have been approved by any other Governmental
Entity whose Consent is required for consummation of the transactions
contemplated in this Agreement and (ii) no final FASB ruling is adopted
prohibiting the use of "pooling of interest" accounting treatment in this
transaction or which otherwise limits the benefits to Acquiror of the
"pooling of interest" accounting rules as they exist as of the date hereof,
in each case either unconditionally or without the imposition of conditions
or limitations that are applicable to any Party or would become applicable
to Acquiror or the Surviving Bank after the Bank Merger that Acquiror
reasonably and in good faith concludes would materially adversely affect the
financial condition or operations of any Party or otherwise would be
materially burdensome to any Party and all such Consents shall be in effect
at the Effective Time, which Consents shall permit the Bank Merger and
permit the Surviving Bank to acquire and conduct all direct and indirect
activities as previously conducted by Target and Bank, at or prior to the
Effective Time, and all required waiting periods shall have expired.
(d) No Rule shall be outstanding or threatened by any Governmental
Entity which prohibits or materially restricts the consummation of, or
threatens to invalidate or set aside, the Bank Merger substantially in the
forms contemplated by this Agreement or which would not permit the
businesses presently carried on by Target, Acquiror or Bank to continue
materially unimpaired following the Effective Time, unless counsel to the
Party or Parties against whom such action or proceeding was instituted or
threatened renders to the other Party or Parties hereto a favorable opinion
that such Rule is without merit and counsel to the other Party concurs with
such opinion.
(e) All Third Party Consents necessary to permit the Parties to
consummate the transactions contemplated in the Agreement shall have been
obtained prior to the Effective Time, unless the failure to obtain any such
Third Party Consent would not have a material adverse effect on the
business, financial condition, or results of operations of Acquiror on a
consolidated basis.
(f) The S-4 shall have been declared effective by the SEC and shall not
be the subject of any stop order or proceedings seeking or threatening a
stop order. Acquiror shall have received all state securities or "Blue Sky"
permits and other authorization necessary to issue the Acquiror Stock to
consummate the Bank Merger.
(g) Target and Acquiror shall have received from AA, an opinion
reasonably satisfactory to each of them to the effect that the Bank Merger
shall not result in the recognition of gain or loss
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for federal income tax purposes to Target, Acquiror or Bank, nor shall the
issuance of Acquiror Stock result in the recognition of gain or loss by the
holders of Target Stock who receive such stock in connection with the Bank
Merger, nor shall a holder of an outstanding stock option granted under
Target's stock option plan recognize income, gain or loss as a result of the
granting of a substitute option nor shall the granting of such substitutes
be deemed to be a modification of any incentive stock option granted under
Target's stock option plan, dated prior to the date of the Proxy Statement
is first mailed to the shareholders of Acquiror and Target and such opinions
shall not have been withdrawn or modified in any material respect.
(h) Prior to the Effective Time, AA shall have delivered a written
opinion to Target and Acquiror that the Bank Merger and the other
transactions contemplated hereby will qualify for pooling-of-interest
accounting treatment. In making its determination that the Bank Merger will
qualify for such treatment, AA shall be entitled to assume that cash will be
paid with respect to all shares held of record by any holder of Dissenting
Shares.
8.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF ACQUIROR AND BANK TO
CLOSE. The obligations of Acquiror and Bank to consummate the Bank Merger and
the other transactions contemplated hereby are subject to the satisfaction or
waiver at or prior to the Effective Time of each of the following conditions:
(a) All actions necessary to authorize the execution, delivery and
performance of the Agreement by Target, the consummation of the Bank Merger
by Target and the consummation of the Agreement of Merger by Target shall
have been duly and validly taken by the board of directors and shareholders
of Target, as the case may be.
(b) The representations and warranties of Target contained in Article 4
of this Agreement shall have been true and correct in all material respects
(i) on the date of this Agreement; and (ii) at and as of the Effective Time
as though all such representations and warranties had been made on and as of
the Effective Time, except with respect to representations and warranties
that, by their terms, speak as of a different time; and Acquiror and Bank
shall have received a certificate to that effect dated the Effective Time
and executed on behalf of Target by its chief executive officer and chief
financial officer. It is understood and acknowledged that the
representations made on and as of the date of the Agreement shall be true
and correct as of the date of the Agreement without giving effect to any
update with respect to the Disclosure Letter pertaining to Target as updated
in accordance with Section 6.5.
(c) Each of the covenants and agreements of Target contained in this
Agreement to be performed at or before the Effective Time shall have been so
performed in all material respects; and Acquiror and Bank shall have
received a certificate to that effect dated the Effective Time and executed
by the chief executive officer and chief financial officer of Target.
(d) During the period from the date of this Agreement to the Effective
Time, there shall not have occurred any event related to the business,
condition (financial or otherwise), capitalization or properties of Target
that has had or could reasonably be expected to have a material adverse
effect on the business, financial condition, or results of operations of
Target after consummation of the Bank Merger, whether or not such event,
change or effect is reflected in Target's Disclosure Letter to this
Agreement, as amended or supplemented, after the date of this Agreement; and
Acquiror and Bank shall have received a certificate to that effect dated the
Effective Time and signed by the chief executive officer and chief financial
officer of Target.
(e) Target shall have delivered to Acquiror and Bank a written opinion
of Knecht & Hansen dated as of the Effective Time substantially in the form
attached to this Agreement as Exhibit 8.2(e).
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(f) Acquiror shall have received a letter from First Security Van Kasper
dated as of a date within five (5) Business Days of the mailing of the Proxy
Statement to the shareholders of Target to the effect that the transactions
contemplated by this Agreement are fair from a financial point of view to
the shareholders of Acquiror.
(g) Concurrently with the execution of this Agreement, each director of
Target shall have executed and delivered to Acquiror an Target Directors'
Agreement substantially in the form of Exhibit 2.6.
(h) Within 30 days of the execution of this Agreement, Acquiror shall
have received from each person named in the letter or otherwise referred to
in Section 6.13 of this Agreement an executed copy of the agreement required
by Section 6.13.
(i) Acquiror shall have received satisfactory evidence that all of
Target's Benefit Arrangements have been treated as provided in Articles 6
and 9 of this Agreement.
(j) Acquiror shall have received the written resignation of each
director of Target dated as of the Effective Date; provided, however, that
such resignations shall not effect Acquiror's and Bank's obligations to make
the Acquiror and Bank Corporate Governance Changes.
(k) As of the month end preceding the Effective Date, Target's
shareholders' equity and allowance for credit losses shall not be less than
$17,858,000 (including not to exceed $100,000 of legal, accounting and
investment advisor fees and expenses relating to the transactions
contemplated by this Agreement) and $1,600,000, respectively, and Target
shall have received a certificate, dated as of the Effective Date, signed on
behalf of Target by its Chief Financial Officer to such effect.
8.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF TARGET TO CLOSE. The
obligations of Target to consummate the Bank Merger and the other transactions
contemplated herein is subject to the satisfaction or waiver, at or prior to the
Effective Time, of each of the following conditions:
(a) All actions necessary to authorize the execution, delivery and
performance of the Agreement, consummation of the Bank Merger by Acquiror
and Bank and the consummation of the Agreement of Merger by Acquiror and
Bank shall have been duly and validly taken by the respective boards of
directors and shareholders of Acquiror and Bank, as the case may be.
(b) The representations and warranties of Acquiror and Bank contained in
Article 3 of this Agreement shall be true and correct in all material
respects (i) on the date of this Agreement; and (ii) at and as of the
Effective Time as though all such representations and warranties had been
made at and as of such time, except with respect to representations and
warranties that, by their terms, speak as of a different time; and Target
shall have received a certificate to that effect dated the Effective Time
and executed on behalf of Acquiror and Bank by their respective chief
executive officers and chief financial officers. It is understood and
acknowledged that the representations made on and as of the Effective Time
shall be made without giving effect to any update with respect to the
Disclosure Letters pertaining to Acquiror and Bank as updated in accordance
with Section 5.5.
(c) The covenants and agreements of Acquiror and Bank to be performed at
or before the Effective Time shall have been duly performed in all material
respects; and Target shall have received one or more certificates to that
effect dated the Effective Time and executed by the respective chief
executive officers and chief financial officers of Acquiror and Bank.
(d) During the period from the date of this Agreement to the Effective
Time, there shall not have occurred any event related to the business,
condition (financial or otherwise), capitalization or properties of Acquiror
or Bank that has had or could reasonably be expected to have a material
adverse effect on the business, financial condition, or results of
operations of the Surviving Bank
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or Acquiror after consummation of the Bank Merger, whether or not such
event, change or effect is reflected in Acquiror's Disclosure Letters to
this Agreement, as amended or supplemented, after the date of this
Agreement; and Target shall have received a certificate to that effect dated
the Effective Time and signed by the chief executive officer and chief
financial officer of Acquiror and Bank.
(e) Acquiror and Bank shall have delivered to Target a written opinion
of Reitner & Stuart dated the Effective Time substantially in the form
attached to this Agreement as Exhibit 8.3(e).
(f) Target shall have received a letter from the Findley Companies dated
as of a date within five (5) Business Days of the mailing of the Proxy
Statement to the shareholders of Target, to the effect that the transactions
contemplated by this Agreement are fair from a financial point of view to
the shareholders of Target.
(g) Within 30 days of the execution of this Agreement, Target shall have
received from each person named in the letter or otherwise referred to in
Section 5.10 of this Agreement an executed agreement required by Section
5.10.
(h) All necessary action shall have been taken by Acquiror, to effect
the Acquiror Corporate Governance Changes.
ARTICLE 9
EMPLOYEE BENEFITS
9.1 EMPLOYEE BENEFITS.
(a) All employees of Target at the Effective Time shall be entitled to
participate in the Acquiror Benefit Arrangements on the same basis as other
similarly situated employees of Bank. Each of these employees will be credited
for eligibility, participation and vesting purposes (provided that no more than
sixty (60) days of sick leave may be carried over into Acquiror's sick leave
program), with such employee's respective years of past service with Target (or
other prior service so credited by Target) as though they had been employees of
Acquiror.
(b) Target, Bank and Acquiror have agreed as set forth on Exhibit 9.1(b) to
a severance policy by which all employees of Target who are not offered
employment or who are terminated within twelve months following the Effective
Time and who satisfy the requirements of the severance plan currently being
considered for adoption by Acquiror will receive severance benefits otherwise.
(c) Provided such agreement is listed on the Target Disclosure List and a
complete copy of such agreement has been provided to Acquiror prior to the date
hereof, Acquiror hereby agrees to honor, in accordance with their terms, any
existing individual employment, severance, deferred compensation, and similar
agreements between Target and the Executive Officers of Target listed on Exhibit
9.1(c)(1). Notwithstanding any other provision of this Agreement, no employee
shall receive duplicative benefits by reason of this Section.
(d) From the date hereof, Target, Bank and Acquiror shall cooperate to
determine the appropriate treatment of Target Benefit Arrangements, such as
termination, merger into a plan, etc., and shall take such actions as shall be
reasonably requested by Acquiror with respect to Target Benefit Arrangements,
provided that Acquiror, Bank and Target shall not be required to take any action
that would be in breach of the fiduciary duties of the Plan trustees or
administrators.
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ARTICLE 10
TERMINATION OF AGREEMENT; WAIVER OF CONDITIONS
10.1 TERMINATION OF AGREEMENT. Anything herein to the contrary
notwithstanding, this Agreement and the transactions contemplated hereby
including the Bank Merger may be terminated at any time before the Effective
Time, whether before or after approval by the shareholders of Target as follows,
and in no other manner:
(a) By mutual consent of Acquiror and Bank, on the one hand, and Target,
on the other;
(b) By Acquiror, Bank or Target (i) if any conditions set forth in
Section 8.1 shall not have been met by September 30, 1999, or (ii) upon the
expiration of 20 Business Days after any Governmental Entity denies or
refuses to grant any approval, consent or authorization required to be
obtained in order to consummate the transaction contemplated by this
Agreement unless, within said 20 Business Day period after such denial or
refusal, all Parties hereto agree to resubmit the application to the
Governmental Entity that has denied, or refused to grant the approval,
consent or authorization requested;
(c) By Acquiror and Bank if any conditions set forth in Section 8.2
shall not have been met, or by Target if any conditions set forth in section
8.3 shall not have been met, by September 30, 1999, or such earlier time as
it becomes apparent that such condition cannot be met;
(d) By Acquiror or Bank, if Target should materially default in the
observance or in the due and timely performance of any of its covenants and
agreements herein contained and such default shall not have been fully cured
within 20 Business Days from the date of delivery of written notice
specifying the alleged default;
(e) By Target, if Acquiror or Bank should materially default in the
observance or in the due and timely performance of any of their covenants
and agreements herein contained and such default shall not have been fully
cured within 20 Business Days from the date of delivery of written notice
specifying the alleged default;
(f) By Acquiror and Bank, if Target shall have failed to act or refrain
from doing any act pursuant to Section 6.12;
(g) By Acquiror, if Acquiror elects not to consummate the transaction
contemplated by this Agreement because it enters into a transaction to be
acquired by another financial institution; or
(h) By Target at any time during the two day period following the
calculation of the Average Closing Price, if the Average Closing Price is
less than $26.60 and if Acquiror has failed to notify Target of its election
to fix the purchase price at $20.72, Target shall have the right to
terminate this Agreement, subject however, to the following provisions. If
Target elects to exercise its termination right pursuant to the immediately
preceding sentence, it shall give prompt written notice to Acquiror;
provided that such notice may be withdrawn by Target at any time within said
two day period. During the two-day period commencing on the day after
receipt of such notice, Acquiror shall again have the option of adjusting
the Exchange Ratio to provide shareholders of Target a price in shares of
Acquiror Common Stock equal to $20.72 (as a result the Exchange Ratio shall
then be calculated by dividing $20.72 by the Average Closing Price). If
Acquiror makes an election contemplated by the preceding sentence, within
such two-day period, it shall give prompt written notice to Target of such
election and the revised Exchange Ratio, whereupon no termination shall have
occurred pursuant to this subsection and this Agreement shall remain in
effect in accordance with its terms (except the Exchange Ratio shall have
been modified), and any references in this Agreement to "Exchange Ratio"
shall thereafter be deemed to refer to the Exchange Ratio as adjusted
pursuant to this subsection.
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10.2 EFFECT OF TERMINATION. In the event that this Agreement shall be
terminated pursuant to Section 10.1 hereof, all further obligations of the
Parties hereto under this Agreement shall terminate without further liability of
any Party to another; provided, however, that no termination of this Agreement
under Section 10.1 for any reason or in any manner shall release, or be
construed as so releasing, any Party from its obligations under Sections 11.1,
11.9 or 11.10, hereof and notwithstanding the foregoing if such termination
shall result from the willful failure of a Party to fulfill a condition to the
performance of the obligations of any other Party or to perform a covenant of
such Party in this Agreement, such Party shall, subject to the provision of
Section 11.1, be fully liable for any and all damages, costs and expenses
(including, but not limited to, reasonable attorneys' fees sustained or incurred
by the other Party or Parties in connection with negotiating and implementing
the transactions contemplated in this Agreement).
10.3 WAIVER OF CONDITIONS. If any of the conditions specified in Section
8.2 has not been satisfied, Acquiror and Bank may nevertheless, at their
election, proceed with the transactions contemplated in this Agreement. If any
of the conditions specified in Section 8.3 has not been satisfied, Target may
nevertheless, at its election, proceed with the transactions contemplated in
this Agreement. If any Party elects to proceed pursuant to the provisions
hereof, the conditions that are unsatisfied immediately prior to the Effective
Time shall be deemed to be satisfied, as evidence by a certificate delivered by
the electing Party.
ARTICLE 11
GENERAL
11.1 EXPENSES.
(a) Target hereby agrees that if this Agreement is terminated by Acquiror or
Bank pursuant to Section 10.1(c), including the failure of Target shareholders
to approve the Agreement and the transactions contemplated hereby, or pursuant
to Section 10.1(d), Target shall promptly, and in any event within seven
Business Days after such termination, pay Acquiror and Bank all Expenses (as
defined below) of Acquiror and Bank but not to exceed $250,000.
(b) Acquiror and Bank hereby agree that if this Agreement is terminated by
Target pursuant to Section 10.1(c) or pursuant to Section 10.1(e), Acquiror
shall promptly, and in any event within seven Business Days after such
termination, pay (or cause Bank to pay) Target all Expenses (as defined below)
of Target but not to exceed $250,000.
(c) As an inducement to Acquiror to enter into this Agreement, in the event
this Agreement is terminated by Acquiror pursuant to Section 10.1(f) and Target
enters into an agreement for a Competing Transaction prior to termination of
this Agreement or during the twelve-month period immediately following
termination of this Agreement, Target shall pay Acquiror, in addition to
Acquiror's rights under the Stock Option Agreement, $250,000 plus an amount
equal to all of Acquiror's reasonably documented expenses up to a maximum of
$100,000 which amounts represent (i) Target's direct costs and expenses
(including, but not limited to, fees and expenses of financial or other
consultants, printing costs, accountants and counsel) incurred in negotiating
and undertaking to carry out the transactions contemplated by this Agreement,
including Acquiror's management time devoted to negotiation and preparation for
the transactions contemplated by this Agreement; (ii) Acquiror's indirect costs
and expenses incurred in connection with the transactions contemplated by this
Agreement; and (iii) Acquiror's loss as a result of the transactions
contemplated by this Agreement not being consummated.
(d) As an inducement to Acquiror to enter into this Agreement, in the event
this Agreement is terminated by Acquiror pursuant to Section 10.1(g) Acquiror
shall promptly, and in any event within seven Business Days after Target
terminates the Agreement pay Target $500,000 plus an amount equal
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to all of Target's reasonably documented expenses up to a maximum of $100,000
which amount represents (i) Target's direct costs and expenses (including, but
not limited to, fees and expenses of financial or other consultants, printing
costs, accountants and counsel) incurred in negotiating and undertaking to carry
out the transactions contemplated by this Agreement, including Target's
management time devoted to negotiation and preparation for the transactions
contemplated by this Agreement; (ii) Target's indirect costs and expenses
incurred in connection with the transactions contemplated by this Agreement; and
(iii) Target's loss as a result of the transactions contemplated by this
Agreement not being consummated.
(e) Except as otherwise provided herein and in Section 7.1, all Expenses
incurred by Acquiror/ Bank or Target in connection with or related to the
authorization, preparation and execution of this Agreement, the solicitation of
shareholder approvals and all other matters related to the closing of the
transaction contemplated hereby, including, without limitation of the generality
of the foregoing, all fees and expenses of agents, representatives, counsel, and
accountants employed by either of the Parties or its affiliates, shall be borne
solely and entirely by the Party which has incurred the same.
(f) "Expenses" as used in this Agreement shall include all reasonable
out-of-pocket expenses (including all fees and expenses of attorneys,
accountants, investment bankers, experts and consultants to the Party and its
Affiliates) incurred by the Party or on its behalf in connection with or related
to the authorization, preparation and execution of this Agreement, the
solicitation of shareholder approvals and all other matters related to the
closing of the transaction contemplated hereby.
11.2 AMENDMENTS. To the fullest extent permitted by law, this Agreement
may be amended by agreement in writing of the Parties hereto at any time prior
to the Effective Time, whether before or after approval of this Agreement by the
shareholders of Target.
11.3 DISCLOSURE LETTER; EXHIBITS; INTEGRATION. Each Disclosure Letter,
exhibit and letter delivered pursuant to this Agreement shall be in writing and
shall constitute a part of the Agreement, although Disclosure Letters and other
letters need not be attached to each copy of this Agreement. This Agreement,
together with such Disclosure Letters, exhibits and letters, and the Stock
Option Agreement constitutes the entire agreement between the Parties pertaining
to the subject matter hereof and supersedes all prior agreements and
understanding of the Parties in connection therewith.
11.4 BEST EFFORTS. Each Party will use its best efforts to cause all
conditions to the obligations of the Parties to be satisfied.
11.5 GOVERNING LAW. This Agreement and the legal relations between the
Parties shall be governed by and construed in accordance with the laws of
California except to the extent that the provisions of federal law are
mandatorily applicable.
11.6 NO ASSIGNMENT. Neither this Agreement nor any rights, duties or
obligations hereunder shall be assignable by Acquiror/Bank or Target, in whole
or in part, without the prior written consent of the other Party. Any attempted
assignment in violation of this prohibition shall be null and void. Subject to
the foregoing, all of the terms and provisions hereof shall be binding upon, and
inure to the benefit of, the successors and assigns of the Parties hereto.
11.7 HEADINGS. The descriptive headings contained in this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
11.8 COUNTERPARTS. This Agreement and any exhibit hereto may be executed
in one or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts have been
signed by each Party hereto and delivered to each Party hereto.
11.9 PUBLICITY AND REPORTS. Acquiror and Target shall coordinate all
publicity relating to the transactions contemplated by this Agreement and no
Party shall issue any press release, publicity
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statement or other public notice relating to this Agreement or any of the
transactions contemplated hereby without obtaining the prior consent of the
other Party, except to the extent that legal counsel to any Party shall deliver
a written opinion to the other Party to the effect that a particular action is
required by applicable Rules.
11.10 CONFIDENTIALITY. All Confidential Information disclosed heretofore
or hereafter by any Party to this Agreement to any other Party to this Agreement
shall be kept confidential by such other Party and shall not be used by such
other Party otherwise than as herein contemplated, except to the extent that (a)
it is necessary or appropriate to disclose to the Commissioner, the FDIC or any
other Governmental Entity having jurisdiction over any of the Parties or as may
be otherwise be required by Rule (any disclosure of Confidential Information to
a Governmental Entity shall be accompanied by a request that such Governmental
Entity preserve the confidentiality of such Confidential Information): or (b) to
the extent such duty as to confidentiality is waived by the other Party. Such
obligation as to confidentiality and non-use shall survive the termination of
this Agreement pursuant to Article 10. In the event of such termination and on
request of another Party, each Party shall use all reasonable efforts to (1)
return to the other Parties all documents (and reproductions thereof) received
from such other Parties that contain Confidential Information (and, in the case
of reproductions, all such reproductions made by the receiving Party); and (2)
destroy the originals and all copies of any analyses, computations, studies or
other documents prepared for the internal use of such Party that included
Confidential Information.
11.11 SPECIFIC PERFORMANCE. Target, Bank and Acquiror each acknowledge
that, in view of the uniqueness of their respective businesses and the
transactions contemplated in this Agreement, each Party would not have an
adequate remedy at law for money damages in the event that this Agreement has
not been performed in accordance with its terms, and therefore each Party agrees
that the other shall be entitled to specific enforcement of the terms hereof in
addition to any other remedy to which it may be entitled, at law or in equity.
11.12 NOTICES. Any notice or communication required or permitted
hereunder, including, without limitation, supplemental Disclosure Letters shall
be deemed to have been given if in writing and (a) delivered in person, (b)
telexed, or (c) telecopied (provided that any notice given pursuant to clauses
(b) and (c) is also mailed by certified or registered mail, postage prepaid), as
follows:
If to Acquiror or Bank, addressed to:
Carrol R. Pruett
Chairman of the Board,
President & Chief Executive Officer
1026 Grand Avenue
Arroyo Grande, CA 93402
Fax No. (805) 473-7752
With a copy addressed to:
Barnet Reitner, Esq.
Reitner & Stuart
1319 Marsh Street
San Luis Obispo, CA 93401
Fax No. (805) 545-8599
A-42
<PAGE>
If to Target, addressed to:
Eloy Ortega
President & Chief Executive Officer
City Commerce Bank
33 East Carrillo Street
Santa Barbara, CA 93101
Fax No. (805) 564-4874
With a copy addressed to:
Loren P. Hansen, Esq.
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, CA 92660
Fax No. (949) 851-1732
or at such other address and to the attention of such other Person as a Party
may notice to the others in accordance with this Section 11.12. Notwithstanding
anything to the contrary contained herein, notice and/or delivery to Acquiror
shall be deemed notice and/or delivery to Bank.
11.13 KNOWLEDGE. Whenever any statement herein or in any Disclosure
Letter, certificate or other document delivered to any Party pursuant to this
Agreement is made "to the knowledge" or "to the best knowledge" of any Party or
other Person such Party or other Person shall make such statement only after
conducting an investigation reasonable under the circumstances of the subject
matter thereof, and each such statement shall constitute a representation that
such investigation has been conducted.
11.14 SEVERABILITY. If any portion of this Agreement shall be deemed by a
court of competent jurisdiction to be unenforceable, the remaining portions
shall be valid and enforceable only if, after excluding the portion deemed to be
unenforceable, the remaining terms hereof shall provide for the consummation of
the transactions contemplated herein in substantially the same manner as
originally set forth at the date this Agreement was executed.
11.15 ATTORNEYS' FEES. In the event any of the parties to this Agreement
brings an action or suit against any other party by reason of any breach of any
covenant, agreement, representation, warranty or other provision hereof, or any
breach of any duty or obligation created hereunder by such other party, the
prevailing party, as determined by the court or the body having jurisdiction,
shall be entitled to have and recover of and from the losing party, as
determined by the court or other party having jurisdiction, all reasonable costs
and expenses incurred or sustained by such prevailing party in connection with
such prevailing action, including, without limitation, legal fees and court
costs (whether or not taxable as such).
11.16 TERMINATION OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations, warranties and covenants of each Party contained herein or in
any certificate or other writing delivered by such party pursuant hereto or in
connection herewith shall not survive the Effective Time.
A-43
<PAGE>
WITNESS, the signature of Acquiror, as of the 19(th) day of April, 1999, set
by its President and attested to by its Secretary, pursuant to a resolution of
its Board of Directors, acting by a majority:
<TABLE>
<S> <C> <C>
MID-STATE BANCSHARES
By: /s/ CARROL R. PRUETT
-----------------------------------------
President
</TABLE>
WITNESS, the signature of Bank, as of the 19(th) day of April, 1999, set by
its President and attested to by its Secretary, pursuant to a resolution of its
Board of Directors, acting by a majority:
<TABLE>
<S> <C> <C>
MID-STATE BANK
By: /s/ CARROL R. PRUETT
-----------------------------------------
President
</TABLE>
WITNESS, the signature of Target, as of the 19(th) day of April, 1999, set
by its Chairman of the Board and attested to by its Secretary, pursuant to a
resolution of its Board of Directors, acting by a majority:
<TABLE>
<S> <C> <C>
CITY COMMERCE BANK
By: /s/ CARL E. LINDROS
-----------------------------------------
Chairman of the Board
</TABLE>
A-44
<PAGE>
APPENDIX B
<PAGE>
APPENDIX B
April 19, 1999
Members of the Board of Directors
City Commerce Bank
33 East Carillo Street
Santa Barbara, California 93101
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the shareholders of City Commerce Bank, Santa
Barbara, California ("CCB") of the terms of the proposed merger of CCB with
Mid-State Bancshares, Arroyo Grande, California ("MSB") and its wholly-owned
subsidiary, Mid-State Bank, Arroyo Grande, California ("MS Bank") and CCB
shareholders receiving shares of common stock of MSB as defined in the Agreement
to Merge and Plan of Reorganization (the "Agreement") entered into as of April
19, 1999. Pursuant to the Agreement and subject to the terms and conditions
therein, each share of CCB Stock issued and outstanding immediately prior to the
Effective Time of the Merger shall, on and at the Effective Time of the Merger,
pursuant to the Agreement and without any further action on the part of CCB or
the holders of CCB Stock, be exchanged for and converted into the right to
receive shares of MSB Stock which is equal to the Exchange Ratio. The Exchange
Ratio shall be 0.7791 if the Average Closing Price of MSB Stock, as defined in
the Agreement, shall be less than $30.91 and greater than $26.60. The Exchange
Ratio is modified pursuant to a calculation contained in the Agreement if the
Average Closing Price of MSB Stock is greater than $30.91 or less than $26.60.
As part of its investment banking business, The Findley Group is continually
engaged in the valuation bank, bank holding company and thrift securities in
connection with mergers and acquisitions nationwide. We have previously provided
financial advisory and consulting services to CCB.
In arriving at our opinion, we have reviewed and analyzed, among other
things, the following: (i) the Agreement; (ii) certain publicly available
financial and other data with respect to CCB and MSB, including consolidated
financial statements for recent years; (iii) certain other publicly available
financial and other information concerning CCB and MSB and the trading markets
for the publicly traded securities of CCB and MSB; (iv) publicly available
information concerning other banks and bank holding companies, the trading
markets for their securities and the nature and terms of certain other merger
transactions we believe relevant to our inquiry; and (v) evaluations and
analyses prepared and presented to the Board of Directors of CCB or a committee
thereof in connection with the Merger. We have held discussions with senior
management of CCB concerning their past and current operations, financial
condition and prospects.
We have reviewed with the senior management of CCB earnings projections for
CCB, provided by CCB, as a stand-alone entity, assuming the Merger does not
occur. We also reviewed with the senior management of CCB the earnings
projections for MSB that are publicly available and cost savings expected to be
achieved in each year resulting from the Merger. Certain financial projections
for the combined companies and for CCB as a stand-alone entity were derived by
us based partially upon the projections and information described above, as well
as our own assessment of general economic, market and financial conditions.
B-1
<PAGE>
In conducting our review and in arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of the same. We have relied upon the management of
CCB as to the reasonableness of the financial and operating forecasts,
projections and projected operating cost savings and earnings enhancement
opportunities (and the assumptions and bases therefor) provided to us, and we
have assumed that such forecasts, projections and projected operating cost
savings and earnings enhancement opportunities reflect the best currently
available estimates and judgements of CCB management. We have also assumed,
without assuming any responsibility for the independent verification of the
same, that the aggregate allowances for loan losses for CCB and MSB are adequate
to cover such losses. We have not made or obtained any evaluations or appraisals
of the property of CCB or MSB, nor have we examined any individual loan credit
files. For purposes of this opinion, we have assumed that the Merger will have
the tax, accounting and legal effects described in the Agreement and assumed the
accuracy of the disclosures set forth in the Agreement. Our opinion as expressed
herein is limited to the fairness, from a financial point of view, to the
holders of the shares of CCB Stock of the terms of the proposed merger of CCB
with and into MS Bank, with CCB shareholders receiving shares of MSB Stock and
does not address CCB's underlying business decision to proceed with the Merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of CCB
and MSB, including interest income, interest expense, net interest income, net
interest margin, provision for loan losses, non-interest income, non-interest
expense, earnings, dividends, internal capital generation, book value,
intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
CCB and MSB; (ii) the assets and liabilities of CCB and MSB, including the loan
and investment portfolios, deposits, other liabilities, historical and current
liability sources and costs and liquidity; and (iii) the nature and terms of
certain other merger transactions involving banks and bank holding companies. We
have also taken into account our assessment of general economic, market and
financial conditions and our experience in other transactions, as well as our
experience in securities valuation and our knowledge of the banking industry
generally. Our opinion is necessarily based upon conditions as they exist and
can be evaluated on the date hereof.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the terms of the Merger of CCB with and
into MS Bank, with CCB shareholders receiving MSB Stock as set forth in the
Agreement, are fair, from a financial point of view, to the holders of the
shares of CCB Stock.
This opinion may not be used or referred to by CCB or quoted or disclosed to
any person in any manner without our prior written consent, with the exception
of submission to the regulatory agencies as part of the applications and
included in the proxy materials provided to shareholders of CCB in relation to
approval of the Merger. This opinion is not intended to be and shall not be
deemed to be a recommendation to any shareholder of CCB as to how such
shareholder should vote with respect to the Merger.
Respectfully submitted,
THE FINDLEY GROUP
Gary Steven Findley
DIRECTOR
B-2
<PAGE>
APPENDIX C
<PAGE>
APPENDIX C
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13
DISSENTERS' RIGHTS
SECTION 1300.RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-term merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-term merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stocks split or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100
or (B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this
provision does apply to any shares with respect to which there exists any
restrictions on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of shareholders
entitled to vote on the reorganization and (A) were not voted in favor of
reorganization and (A) were not voted in favor of the reorganization or,
(B) if described in subparagraph (A) or (B) of paragraph (1) (without
regard to the provisos in that paragraph), were voted against the
reorganization, or which were held of record on the effective date of a
short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a
meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted the endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
C-1
<PAGE>
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares of cash, such corporation shall mail to each such shareholder a notice of
the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's rights under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subsection (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to vote the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates or appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. AGREED PRICE--TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after
C-2
<PAGE>
any statutory or contractual conditions to the reorganization are satisfied,
whichever is later, and in the case of certificated securities, subject to
surrender of the certificates therefor, unless provided otherwise by agreement.
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholder may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISERS' REPORT--PAYMENT--COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed,
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
C-3
<PAGE>
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT OF PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Section 1304 and 1305 shall be suspended until final determination of such
litigation.
C-4
<PAGE>
SECTION 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of transaction except upon 10 days' prior
notice to the corporation and upon a determination by the court that clearly no
other remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
C-5
<PAGE>
PART II INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
CALIFORNIA LEGISLATION
Mid-State Bancshares and its subsidiary, Mid-State Bank, are subject to the
California General Corporation Law (the "CGCL"), which provides a detailed
statutory framework covering indemnification of any officer or other agent of a
corporation who is made or threatened to be made a party to any legal proceeding
by reason of his or her services on behalf of such corporation.
With respect to indemnification, the CGCL provides that to the extent any
officer, director or other agent of a corporation is successful "on the merits"
in defense of any legal proceeding to which such person is a party or is
threatened to be made a party by reason of his or her service on behalf of such
corporation or in defense of any claim, issue, or matter therein, such agent
shall be indemnified against expenses actually and reasonably incurred by the
agent in connection therewith, but does not require indemnification in any other
circumstance. The CGCL also provides that a corporation may indemnify any agent
of the corporation, including officers and directors, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in a third party proceeding against such person by reason of his or her services
on behalf of the corporation, provided the person acted in good faith and in a
manner he or she reasonably believed to be in the best interests of such
corporation. The CGCL further provides that in derivative suites a corporation
may indemnify such a person against expenses incurred in such a proceeding,
provided such person acted in good faith and in a manner he or she reasonably
believed to be in the best interests of the corporation and its shareholders.
Indemnification is not available in derivative actions (i) for amounts paid or
expenses incurred in connection with a matter that is settled or otherwise
disposed of without court approval or (ii) with respect to matters for which the
agent shall have been adjudged to be liable to the corporation unless the court
shall determine that such person is entitled to indemnification.
The CGCL permits the advancing of expenses incurred in defending any
proceeding against a corporate agent by reason of his or her service on behalf
of the corporation upon the giving of a promise to repay any such sums in the
event it is later determined that such person is not entitled to be indemnified.
Finally, the CGCL provides that the indemnification provided by the statute is
not exclusive of other rights to which those seeking indemnification may be
entitled, by bylaw, agreement or otherwise, to the extent additional rights are
authorized in a corporation's articles of incorporation. The law further permits
a corporation to procure insurance on behalf of its directors, officers and
agents against any liability incurred by any such individual, even if a
corporation would not otherwise have the power under applicable law to indemnify
the director, officer or agent for such expenses.
The Bylaws of Mid-State Bancshares and Mid-State Bank contain provisions
substantial identical to the provisions of the CGCL.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
Mid-State Bancshares presently maintains a policy of directors' and
officers' liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
2.1 Agreement to Merge and Plan of Reorganization, dated April 19,
1999--Appendix A of Proxy Statement/Prospectus
3.1 Articles of Incorporation, as amended*
3.2 Bylaws*
4.1 Specimen Share Certificate for Common Stock*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
5.1 Opinion of Reitner & Stuart
8.1 Tax Opinion of Arthur Andersen LLP
10.1 Stock Option Plan, as amended*
10.2 Deferred Compensation Plan*
10.3 Profit Sharing and Salary Deferral 401 (K) Plan*
10.4 Change in Control Agreement for Carrol R. Pruett*
10.5 Change in Control Agreement for T.E. Reese*
10.6 Change in Control Agreement for James G. Stathos*
10.7 Change in Control Agreement for Steven Harding*
10.8 Change in Control Agreement for Michael Gibson*
10.9 Change in Control Agreement for Debbie Zimmer*
10.10 Change in Control Agreement for John Arellano*
10.11 Change in Control Agreement for Karen Campbell*
10.12 The Findley Group Fairness Opinion--Appendix B of Proxy
Statement/Prospectus
21.1 Subsidiary of Mid-State Bancshares--Mid-State Bank is the only subsidiary
of Mid-State Bancshares
23.1 Consent of the Findley Group
23.2 Consent of Arthur Andersen LLP
23.3 Consent of KPMG LLP
23.4 Consent of Reitner & Stuart (included in Exhibit 5.1)
24 Power of Attorney**
27 Financial Data Schedule**
99.1 City Commerce Bank--form of proxy
</TABLE>
- ------------------------
* previously filed by Mid-State Bancshares in other filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934
** previously filed in this Registration Statement (S-4, 333-81531)
(b) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because the required information is not applicable
or is included in the financial statements of Mid-State Bancshares and the
related notes.
(c) Not applicable.
ITEM 22. UNDERTAKINGS.
1. The undersigned registrant hereby undertake 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 of 1933;
(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;
<PAGE>
(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;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section do
not apply if the registration statement is on Form S-3, Form S-8 or Form F-3,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant 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.
3. The undersigned registrant hereby undertakes to supply by means 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Mid-State
Bancshares has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Arroyo Grande, State of California on July 7, 1999.
<TABLE>
<S> <C> <C>
MID-STATE BANCSHARES
By: /s/ CARROL R. PRUETT
-----------------------------------------
Carrol R. Pruett
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ JAMES G. STATHOS
-----------------------------------------
James G. Stathos
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<C> <S>
/s/ CARROL R. PRUETT
- ------------------------------ President and Chairman of
Carrol R. Pruett the Board
/s/ GRACIA B. BELLO*
- ------------------------------ Director
Gracia B. Bello
/s/ CLIFFORD H. CLARK*
- ------------------------------ Director
Clifford H. Clark
/s/ A. J. DIANI*
- ------------------------------ Director
A. J. Diani
/s/ DARYL L. FLOOD*
- ------------------------------ Director
Daryl L. Flood
/s/ WILLIAM A. HARES*
- ------------------------------ Director
William A. Hares
/s/ RAYMOND E. JONES*
- ------------------------------ Director
Raymond E. Jones
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
/s/ STEPHEN P. MAGUIRE*
- ------------------------------ Director
Stephen P. Maguire
<C> <S>
/s/ GREGORY R. MORRIS*
- ------------------------------ Director
Gregory R. Morris
/s/ WILLIAM L. SNELLING*
- ------------------------------ Director
William L. Snelling
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ CARROL R. PRUETT
-------------------------
Carrol R. Pruett
ATTORNEY-IN-FACT
</TABLE>
Date: July 7, 1999
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT PAGE
- ------------- --------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
2.1 Agreement to Merge and Plan of Reorganization, dated April 19, 1999-- Appendix A of Proxy
Statement/Prospectus.......................................................................
5.1 Opinion of Reitner & Stuart..................................................................
8.1 Tax Opinion of Arthur Andersen LLP...........................................................
10.12 The Findley Group Fairness Opinion--Appendix B of Proxy Statement/Prospectus.................
23.1 Consent of the Findley Group.................................................................
23.2 Consent of Arthur Andersen LLP...............................................................
23.3 Consent of KPMG LLP..........................................................................
23.4 Consent of Reitner & Stuart (included in Exhibit 5.1)........................................
99.1 City Commerce Bank--form of proxy............................................................
</TABLE>
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF REITNER & STUART]
July 7, 1999
Board of Directors
Mid-State Bancshares
1026 Grand Avenue
Arroyo Grande, CA 93420
RE: Registration Statement on Form S-4
Gentlemen:
At your request, we have examined the Registration Statement on Form S-4
(the "Registration Statement") being filed by Mid-State Bancshares (the
"Company") with the Securities & Exchange Commission in connection with the
registration under the Securities Act of 1933, as amended, of shares of the
Company's common stock, (the "Common Stock"), issuable pursuant to the merger of
City Commerce Bank with and into the Company's subsidiary, Mid-State Bank (the
"Merger").
In rendering this opinion, we have examined such documents and records as we
have deemed relevant. We have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
originals of all documents submitted to us as certified or reproduced copies.
Based upon the foregoing and such other and further review of fact and law as we
have deemed necessary or appropriate under the circumstances, and assuming that
the shares of Common Stock subject to the Registration Statement are issued
pursuant to and in accordance with the terms of the Merger, upon which
assumptions the following opinions are expressly conditioned, it is our opinion
that the shares of Common Stock that are the subject of the Registration
Statement will, when issued and sold in accordance with the terms of the Merger,
be validly issued, fully paid and non-assessable.
This opinion is issued to you solely for use in connection with the
Registration Statement and is not to be quoted or otherwise referred to in any
financial statements of the Company or related documents, nor is it to be filed
with or furnished to any government agency or other person, without the prior
written consent of this firm in each instance.
This firm hereby consents to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to the undersigned under the heading
"Legal Matters" therein and in any prospectus delivered pursuant to the Merger.
Respectfully submitted,
/s/ Reitner & Stuart
REITNER & STUART
<PAGE>
July 8, 1999
Mr. Carrol R. Pruett
President and Chairman
Mid-State Bancshares
1026 Grand Avenue
Arroyo Grande, California 93420
Mr. Eloy U. Ortega
President & Chief Executive Officer
City Commerce Bank
33 East Carrillo Street
Santa Barbara, California 93101
Dear Mr. Pruett and Mr. Ortega:
This opinion is being furnished to you in connection with the proposed merger of
City Commerce Bank with and into Mid-State Bank, a wholly owned subsidiary of
Mid-State Bancshares, with Mid-State Bank surviving the merger (the "Bank
Merger"), which is expected to be completed on or about September 1, 1999, ("the
Effective Date"). You have requested our opinion concerning the following:
- - That the Bank Merger will qualify as a reorganization under Sections
368(a)(1)(A) and (a)(2)(D) of the Internal Revenue Code of 1986, as amended
("the Code").(1)
- - That the exchange by the City Commerce Bank stockholders of their City
Commerce Bank stock solely for Mid-State Bancshares common stock will not
result in the recognition of any gain or loss for federal income tax
purposes to such stockholders.
RELIANCE ON CERTAIN FACTS, ASSUMPTIONS, AND REPRESENTATIONS
In rendering our opinion, we have relied upon the accuracy and completeness of
the facts and information as contained in the Agreement to Merge and Plan of
Reorganization dated as of April 19, 1999 ("the Agreement"), Form S-4
Registration Statement ("Form S-4") including all exhibits attached thereto, and
the representations included as an attachment to this memorandum. Duly
authorized officers of Mid-State Bancshares and City Commerce Bank have
represented that such facts, assumptions, and representations are true, correct,
and complete. However, we have not independently audited or otherwise verified
any of these facts, assumptions, or representations. A misstatement or omission
of any fact or a change or
- --------------------------------
(1) Unless otherwise noted herein, all Section references are to the Code or
Treasury Regulations ("Treas. Reg.") promulgated thereunder.
<PAGE>
Mr. Carrol R. Pruett
Mr. Eloy U. Ortega
July 8, 1999
amendment in any of the facts, assumptions, or representations upon which we
have relied may require a modification of all or a part of this Opinion.
In addition, the Opinion is based on such facts, assumptions, and
representations as represented to us as of the date of this Opinion. Any
changes in the facts, assumptions, or representations upon which we have relied
between the date of this Opinion and the actual closing of the Bank Merger may
require a modification of all or part of the Opinion. If needed, we will update
our Opinion as of the date of the Bank Merger. However, we will require a
representation that none of the facts or representations have changed between
the date of this Opinion letter and the date of the Bank Merger. Otherwise, we
have no responsibility to update this Opinion for events, transactions,
circumstances, or changes in any of such facts, assumptions, or representations
occurring after this date.
PROPOSED TRANSACTION
Our understanding of the proposed transaction, as described in the Agreement, is
as follows:
1. On the Effective Date, City Commerce Bank will be merged with and into
Mid-State Bank, with Mid-State Bank being the survivor, under
California State law. All assets, rights, franchises, titles and
interests of City Commerce Bank shall be transferred to and vested in
Mid-State Bank by virtue of the Bank Merger. The separate corporate
existence of City Commerce Bank will terminate.
2. On the Effective Date, the shareholders of City Commerce Bank will
exchange all of their shares of City Commerce Bank stock solely for
Mid-State Bancshares voting common stock, except for cash in lieu of
fractional shares and dissenters' shares. The exchange of common
stock will be in accordance with the "Exchange Ratio" as defined in
section 1.1 of the Agreement.
3. Mid-State Bancshares will grant substitute options pursuant to its
stock option plan to each person who has at the Effective Date an
outstanding option to purchase shares of City Commerce Bank common
stock.
4. Pursuant to Form S-4 and the Agreement, each substitute stock option
so granted by Mid-State Bancshares pursuant to its stock option plan
to replace a City Commerce Bank stock option will be 100% "vested" and
will be exercisable for that number of whole shares of Mid-State
Bancshares common stock equal to the product of (1) the number of
shares of City Commerce Bank common stock that were purchasable under
such City Commerce Bank stock option plan immediately prior to the
Effective Date, multiplied
-2-
<PAGE>
by (2) the Exchange Ratio, rounded down to the nearest whole number of
shares of Mid-State Bancshares common stock. Further, each and every
substitute stock option so granted shall provide for a per share
exercise price which shall be equal to the quotient determined by
dividing (A) the exercise price per share of City Commerce Bank common
stock at which such City Commerce Bank stock option was exercisable
immediately prior to the Effective Date by (B) the Exchange Ratio.
ADDITIONAL REPRESENTATIONS
Officers of Mid-State Bancshares and City Commerce Bank have made certain
representations to Arthur Andersen regarding the Bank Merger. The
representations are attached hereto. Mid-State Bancshares, Mid-State Bank and
City Commerce Bank understand and intend that Arthur Andersen LLP will rely on
these representations and assume them to be accurate as of the date hereof, and
the Effective Date of the Bank Merger, without further inquiry on its part, in
rendering its opinion with respect to the Bank Merger.
OPINION
Based upon the aforementioned, it is our opinion that:
a) The Bank Merger will qualify as a reorganization under Sections
368(a)(1)(A) and (a)(2)(D) of the Code. Mid-State Bancshares, Mid-State
Bank and City Commerce Bank each will be a "party to a reorganization"
within the meaning of Section 368(b) of the Code.
b) City Commerce Bank will recognize no gain or loss on the transfer of its
assets, subject to liabilities, to Mid-State Bank solely in exchange for
Mid-State Bancshares common stock and cash in lieu of fractional shares of
Mid-State Bancshares (Section 361(a)). In addition, City Commerce Bank
will recognize no gain or loss on the distribution to its shareholders of
the Mid-State Bancshares stock and cash in lieu of fractional share
interests received in the Bank Merger (Section 361(c)).
c) The tax basis of the City Commerce Bank assets in the hands of Mid-State
Bank will be the same as the tax basis of those assets in the hands of City
Commerce Bank immediately prior to the Bank Merger (Section 362(b)).
d) The holding period of the assets of City Commerce Bank in the hands of
Mid-State Bank will include the period during which such assets were held
by City Commerce Bank (Section 1223(2)).
-3-
<PAGE>
e) No gain or loss will be recognized to either Mid-State Bank or Mid-State
Bancshares on the receipt of the assets of City Commerce Bank in the Bank
Merger (Section 1032 and Treas. Reg. Section 1.1032-2).
f) No gain or loss will be recognized by a shareholder of City Commerce Bank
on the receipt solely of Mid-State Bancshares common stock in exchange for
their shares of City Commerce Bank common stock (Section 354(a)(1)).
g) The payment of cash to shareholders of City Commerce Bank in lieu of
fractional share interests of Mid-State Bancshares common stock will be
treated as if the fractional shares actually were distributed as part of
the exchange and then redeemed by Mid-State Bancshares. These cash
payments will be treated as having been received as a distribution in
redemption of that fractional share interest subject to the conditions and
limitations of Section 302 of the Code. If a fractional share interest in
Mid-State Bancshares common stock would have constituted a capital asset in
the hands of a redeeming shareholder, and the actual receipt and redemption
of such fractional interest would have qualified for sale or exchange
treatment, any resulting gain or loss should be characterized as capital
gain or loss in accordance with the provisions and limitations of
Subchapter P of Chapter 1 of the Code.
h) The tax basis of the shares of Mid-State Bancshares common stock to be
received by shareholders of City Commerce Bank pursuant to the Bank Merger
will be the same as the basis of the shares of City Commerce Bank common
stock surrendered in exchange therefor, decreased by the amount of basis
allocated to any fractional share of Mid-State Bancshares common stock that
is constructively received by the City Commerce Bank shareholder and
immediately redeemed for cash (Section 358(a)).
i) The holding period of the shares of Mid-State Bancshares common stock to be
received by shareholders of City Commerce Bank pursuant to the Bank Merger
will include the holding period of shares of City Commerce Bank common
stock exchanged therefor, provided that the shares of City Commerce Bank
common stock are held as capital assets on the Effective Date of the Bank
Merger (Section 1223(1)).
j) No gain or loss will be recognized for federal income tax purposes by the
holders of outstanding stock options granted under City Commerce Bank's
stock option plan as a result of the granting, pursuant to the Bank Merger,
of substitute options pursuant to Mid-State Bancshares's stock option plan.
-4-
<PAGE>
k) The granting of any substitute incentive stock option under the Mid-State
Bancshares stock option plan, to a holder of a City Commerce Bank stock
option, under the City Commerce Bank stock option plan, will not be deemed
a "modification" of City Commerce Banks' existing incentive stock option
plan under Code Section 424(h)(3), provided the requirements of Section
424(a)(1) and (2) are satisfied.
Except as stated in items "a" through "k" above, we express no opinion on the
impact, if any, of any other sections of the Code, including but not limited to
Section 382, and neither this opinion nor any prior statements are intended to
imply or to be an opinion on any other matters.
PREMISE OF OPINION
The Opinion is based solely on our interpretation of the Code; Treas. Regs.
thereunder; relevant judicial decisions; and guidance issued by the Internal
Revenue Service (the "Service") including revenue rulings and revenue
procedures; and other authorities that we deemed relevant; in each case as of
the date of this Opinion.
U.S. federal income tax laws and Treas. Regs., and the interpretations thereof,
are subject to change, which changes could adversely affect this Opinion. If
there is a change in the Code, the Treas. Regs. thereunder, the administrative
guidance issued thereunder, or in the prevailing judicial interpretation of the
foregoing, the Opinion expressed herein would necessarily have to be reevaluated
in light of any such changes. The Opinion is as of the date of this letter and
we have no responsibility to update this Opinion for changes in applicable law
or authorities occurring after this date, unless as mentioned above, you request
that we update our opinion as of the date of the Bank Merger.
The Opinion does not address the potential tax consequences of any transactions,
events, or circumstances other than the transaction as described herein. In
addition, the Opinion is limited to the U.S. federal income tax consequences set
forth below. It does not address any non-income, state, local, or foreign tax
consequences of the transaction. We also express no opinion on non-income tax
issues, such as corporate law or securities matters.
The Opinion does not address the U.S. federal income tax consequences of the
transaction to any City Commerce Bank common stockholder that has a special
status, including (without limitation) insurance companies; financial
institutions; broker-dealers; foreign corporations, estates and trusts not
subject to U.S. federal income tax on their income regardless of source, and
persons who are not citizens or residents of the United States; and persons who
acquired stock as the result of the exercise of an employee stock option,
pursuant to an employee stock
-5-
<PAGE>
purchase plan, or otherwise as compensation. Accordingly, any shareholders of
City Commerce Bank having such special status will need to consult with their
own independent tax advisors with respect to the tax treatment of the Bank
Merger.
The Opinion is not binding on the Service, and there can be no assurance that
the Service will not take positions contrary to the Opinion or will not be
successful in sustaining such contrary positions. However, should the Service
challenge the U.S. federal income tax treatment of the matters discussed herein,
the Opinion reflects our assessment of the probable outcome of litigation based
solely on an analysis of the existing authorities relating to such matters.
The Opinion is solely for the benefit of Mid-State Bancshares, Mid-State Bank
and City Commerce Bank, and their respective shareholders and is not intended to
be relied on by anyone other than those parties specified. Due to the individual
nature of the tax consequences of the Bank Merger, it is recommended that
Mid-State Bancshares and City Commerce Bank shareholders consult their own
independent tax advisor concerning the individual tax consequences to them. You
do hereby have our express consent to include copies of this letter as an
exhibit to the Agreement, as an exhibit in the Form S-4 for the Bank Merger and
by making reference to us and our opinion in the Proxy Statement-Prospectus
forming a part of the Registration Statement. Except to the extent expressly
permitted hereby, and without the prior written consent of this firm, this
letter may not be quoted in whole or in part or otherwise referred to in any
documents or delivered to any other person or entity.
Very truly yours,
ARTHUR ANDERSEN LLP
July 8, 1999
-6-
<PAGE>
EXHIBIT 23.1
[LETTERHEAD]
June 23, 1999
Mid-State Bancshares
1026 Grand Avenue
Arroyo Grande, California 93420
Gentlemen:
We hereby consent to the inclusion of the Fairness Opinion of The Findley
Group in the Amendment No. 1 to the Form S-4 Registration Statement of Mid-State
Bancshares in connection with the acquisition of City Commerce Bank. We also
consent to the references made in such Amendment No. 1 to the Form S-4
Registration Statement to The Findley Group.
Sincerely,
/s/ GARY STEVEN FINDLEY
Gary Steven Findley
DIRECTOR
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated January 21, 1999
included in Mid-State Bancshares' Form 10-K for the year ended December 31, 1998
and to all references to our Firm included in this registration statement.
ARTHUR ANDERSEN LLP
Los Angeles, California
July 8, 1999
<PAGE>
EXHIBIT 23.3
The Board of Directors
City Commerce Bank:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the registration statement.
KPMG LLP
Los Angeles, California
July 8, 1999
<PAGE>
PROXY CITY COMMERCE BANK PROXY
ANNUAL MEETING OF SHAREHOLDERS
AUGUST 10, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder acknowledges receipt of the Notice of Annual
Meeting of Shareholders of City Commerce Bank and the accompanying Proxy
Statement/Prospectus dated July 9, 1999, and revoking any proxy heretofore
given, hereby appoints Darcy Limosnero, Sara Pelaez, and Barbara McClain, or any
one of them, with full power to act alone, my true and lawful attorney(s),
agent(s) and proxy, with full power of substitution, for me and in my name,
place and stead to vote and act with respect to all shares of common stock of
the Bank which the undersigned would be entitled to vote at the Annual Meeting
of Shareholders to be held on August 10, 1999, at 6:00 p.m., at the Downtown
Office of City Commerce Bank, 33 East Carrillo Street, Santa Barbara, California
93101 and at any and all adjournment or adjournments thereof, with all the
powers that the undersigned would possess if personally present, as follows:
1. APPROVAL OF MERGER AGREEMENT. To approve the principal terms of the
Agreement to Merge and Plan of Reorganization dated April 19, 1999 among City
Commerce Bank, Mid-State Bancshares and Mid-State Bank and the transactions
contemplated thereby pursuant to which (i) City Commerce Bank will merge with
and into Mid-State Bank and Mid-State Bank will continue as the surviving bank,
(ii) Mid-State Bancshares will remain the bank holding company for Mid-State
Bank, and (iii) the shareholders of City Commerce Bank will become shareholders
of Mid-State Bancshares in accordance with the exchange ratio set forth in the
Agreement. The terms and conditions of the Agreement and the formulas for
calculating the number of shares of Mid-State Bancshares common stock to be
issued for each share of City Commerce Bank common stock are set forth in the
accompanying Proxy Statement/Prospectus dated July 9, 1999. Approval of the
principal terms of the Agreement requires the affirmative vote of a majority of
the outstanding shares of City Commerce Bank common stock.
/ / FOR / / AGAINST / / ABSTAIN
<PAGE>
2. ELECTION OF DIRECTORS.
To elect as directors the nominees set forth below:
/ / FOR all nominees listed below (except as indicated to the contrary
below).
/ / WITHHOLD AUTHORITY to vote for all nominees listed below.
<TABLE>
<S> <C>
William J. Blythe Carl E. Lindros
Roger P. Duncan John R. Mackall
Betty M. Hatch C. Brian O'Gorman
H. Edward Heron Eloy U. Ortega
</TABLE>
- --------------------------------------------------------------------------------
(Instruction: To withhold authority to vote for any individual nominee(s), write
the nominee(s) name in the space above.)
3. OTHER BUSINESS.
To transact such other business as may properly come before the meeting.
Execution of this proxy confers authority to vote "FOR" each proposal listed
above unless the shareholder directs otherwise. If any other business is
presented at said meeting, this proxy shall be voted in accordance with the
recommendations of the Board of Directors. When signing as attorney, executor,
administrator, trustee or guardian, please give full title. If more than one
trustee, all should sign. All joint owners SHOULD sign.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSALS.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE REVOKED
PRIOR TO ITS EXERCISE.
I/WE DO / / or I/WE DO NOT / / expect to attend the meeting.
<TABLE>
<S> <C>
Dated: , 1999 ----------------------------------
(Number of Shares)
----------------------------------
Signature of Shareholder(s)
----------------------------------
Signature of Shareholder(s)
</TABLE>
