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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(b) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD N/A TO N/A
COMMISSION FILE NUMBER 333-16951
MID-STATE BANCSHARES
(Exact name of registrant as specified in its charter)
California 77-0442667
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1026 Grand Ave.
Arroyo Grande, CA 93420
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code : (805) 473-7700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(no par value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or shorter period that the Registrant
was required to file such reports) Yes [X] No [ ], and (2) has been subject
to such filing requirements for the past 90 days. Yes[X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 23, 1999 was $263,168,960.
The number of shares of common stock of the registrant outstanding as of
March 23, 1999 was 10,088,282.
The following documents are incorporated by reference herein: Part III, Items
10 through 13 are incorporated from Registrant's definitive proxy statement
for the 1999 Annual Meeting of Shareholders.
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TABLE OF CONTENTS
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. PROPERTIES 18
ITEM 3. LEGAL PROCEEDINGS 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY 20
AND RELATED SHAREHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 24
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT 44
MARKET RISK
ITEM 7B. DISCLOSURE ABOUT RISKS ASSOCIATED WITH YEAR 2000 ISSUES 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 47
ON ACCOUNTING AND FINANCIAL DISCLOSURE
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 47
ITEM 11. EXECUTIVE COMPENSATION 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 47
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 47
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND 47
REPORTS ON FORM 8-K
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
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MID-STATE BANCSHARES AND MID-STATE BANK
Mid-State Bancshares (The "Company") is the parent company to Mid-State Bank,
its 100% owned principal subsidiary. Mid-State Bancshares (formerly BSM
Bancorp) was formed on July 10, 1998, the effective date of the merger of
Bank of Santa Maria with and into Mid-State Bank. The Company is registered
as a bank holding company under the Bank Holding Company Act of 1956, as
amended ("BHC Act") and is subject to the supervision and regulation of the
Board of Governors of the Federal Reserve System ("Federal Reserve Board").
Mid-State Bank (the "Bank") was incorporated under the laws of the State of
California and commenced operations on June 12, 1961 as a California state
chartered bank. The Bank's accounts are insured by the Federal Deposit
Insurance Corporation ("FDIC"), but it is not a member of the Federal Reserve
System. At December 31, 1998 the Company had total assets of $1.2 billion,
total deposits of $1.08 billion and total shareholders' equity of $133.7
million.
The Bank operates 28 full service retail banking offices along the central
coast of California throughout Santa Barbara and San Luis Obispo counties.
The Bank's headquarters is located in Arroyo Grande and it also serves the
communities of Paso Robles, Cambria, Templeton, Atascadero, Cayucos, Morro
Bay, Los Osos, San Luis Obispo, Pismo Beach, Grover Beach, Guadalupe, Nipomo,
Santa Maria, Orcutt, Lompoc, Vandenberg Village, Buellton, Santa Ynez,
Solvang, Goleta and Santa Barbara. The headquarters' mailing address is 1026
Grand Ave., Arroyo Grande, CA 93420, Telephone: (805) 473-7700. The Bank can
also be reached through its internet address at www.midstatebank.com.
The Bank is a full-service community bank offering a broad range of banking
products and services, including accepting time and demand deposits,
originating commercial loans, consumer loans and real estate loans, providing
escrow services, and making other investments. The Bank originates several
types of loans, including secured and unsecured commercial and consumer
loans, commercial and residential real estate mortgage loans, and commercial
and residential construction loans. The Bank's loans are primarily short-term
and adjustable rate. Special services and requests beyond the lending limits
of the Banks are arranged through correspondent banks.
The Company, through the Bank, derives its income primarily from interest
received on real estate loans, commercial loans and consumer loans and, to a
lesser extent, from interest on investment securities, fees received in
connection with loans and other services offered, including loan servicing
and escrow and deposit services. The Company's major operating expenses are
the interest it pays on deposits and on borrowings and general operating
expenses. The Bank relies on a foundation of locally generated deposits, and
management believes it has a relatively low cost of funds due to a high
percentage of low cost and non-interest bearing deposits. The Company's
operations, like those of other financial institutions operating in
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California, are significantly influenced by economic conditions in
California, including the strength of the real estate market, and the fiscal
and regulatory policies of the federal government and of the regulatory
authorities that govern financial institutions. See "Supervision and
Regulation."
When the Company uses or incorporates by reference in this Annual Report on
Form 10-K (the "Annual Report") the words "anticipate," "estimate," "expect,"
"project," "intend," "commit," "believe" and similar expressions, the Company
intends to identify forward-looking statements. Such statements are subject
to certain risks, uncertainties and assumptions, including those described in
this Annual Report. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, expected, projected,
intended, committed or believed.
BANK SUBSIDIARIES
The Bank operates two wholly owned subsidiaries - Mid Coast Land Company and
MSB Properties. Mid Coast Land Company was founded in 1984 pursuant to
section 751.3 of the California Bank Law. Section 751.3 provided that State
chartered banks were authorized to invest in a corporation that engaged in
real estate activities. The Federal Deposit Insurance Corporation (FDIC)
Improvement Act (FDICIA) became law in December 1991. Under FDICIA the Bank,
through Mid Coast Land Company, would have been required to substantially
eliminate its real estate development activities. The Bank received an
extension of that deadline to December 31, 2000 for good cause. The Bank is
in the process of completing the divestiture of the assets held by Mid Coast
Land Company which were approximately $6.8 million on the Bank's consolidated
investments in real estate (reflecting $7.0 million in gross holdings netted
against a $262 thousand reserve). The holdings and results of operations of
Mid Coast Land are included within the consolidated financial statements of
the Bank. For further information concerning Mid Coast Land Company, see the
subsidiaries activity section of the Management's Discussion and Analysis
section and Footnote number 7 to the Financial Statements included in Item 8
of this Report.
MSB Properties was incorporated under the laws of the State of California in
May of 1968 allowing for the ownership of property which may be reasonably
necessary for the expansion of the Bank's business, or which is otherwise
reasonably related to the conduct of the Bank's business, pursuant to Section
752 of the Financial Code of the State of California.
The holdings and results of operations of MSB Properties are included within
the consolidated financial statements of the Bank. MSB Properties had
earnings of $1.4 million, $1.6 million, and $1.3 million in 1998, 1997 and
1996, respectively. For further information concerning MSB Properties, see
the "Subsidiary Activity" portions of the Management's Discussion and
Analysis section of the Financial Condition and Results of Operations which
is included in Item 7 of this Report.
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ACQUISITION OF BANK OF SANTA MARIA
On January 29, 1998, the Bank entered into an Agreement to Merge and Plan of
Reorganization (the "Agreement") with BSM Bancorp ("Bancorp") and its wholly
owned subsidiary Bank of Santa Maria, Santa Maria, California ("Santa
Maria"). The merger was completed after obtaining all requisite approvals on
July 10, 1998.
The transaction was structured as a so-called "reverse triangular merger."
Pursuant to the transaction, among other things, (1) Bank of Santa Maria was
merged with and into Mid-State Bank, (2) BSM Bancorp became the bank holding
company for Mid-State Bank and changed its name to Mid-State Bancshares and
(3) the outstanding shares of BSM Bancorp at the effective date of the
transaction remained outstanding and the shareholders of Mid-State Bank
became shareholders of BSM Bancorp in accordance with the exchange ratio set
forth in the Agreement. For purposes of the exchange ratio, a share of BSM
Bancorp stock was valued at $29.37. Each share of Mid-State Bank stock
outstanding at the effective time of the transaction was exchanged for the
number of shares of Bancorp stock equal to the reciprocal of the number
determined by dividing $29.37 by the "Average Closing Price." The Average
Closing Price meant the average of the daily closing prices of a share of the
Bank's stock during the 20 consecutive trading days that the Bank's stock
trades ending on the third trading day immediately before the effective day
of the transaction. That average price was $29.01 resulting in an exchange
ration of 1.0123. Total shares issued in connection with the merger equaled
83,813. When completed, of the 10,053,452 shares outstanding effective with
the merger, 6,991,613 were former Mid-State Bank shareholders (69.54%) and
3,061,839 were former BSM Bancorp shareholders (30.46%).
The merger was accounted for as a pooling of interests. As a result, prior
periods are combined and restated as if the two organizations were
historically one unit.
SERVICES
The Bank offers a full range of commercial banking services including the
acceptance of checking accounts, NOW accounts, Savings accounts, Money Market
accounts, and various types of time certificates of deposit (including
various maturities and individual retirement accounts). The Bank makes a
variety of construction and land development loans, real estate related
loans, home equity credit lines, installment loans, agricultural and
commercial loans, SBA loans, and credit card lines. Other services offered by
the Bank include, but are not limited to, safe deposit boxes, travelers
cheques, notary public, merchant depository services for VISA and Mastercard,
cash management, home banking, telephone voice response system and ATM's.
The Bank's organization and structure is designed to serve the banking needs
of individuals and small to medium sized businesses in Santa Barbara and San
Luis Obispo counties.
DEPOSIT AND LIABILITY MANAGEMENT
Deposits represent the Bank's primary source of funds. As of December 31,
1998 the Bank had approximately 28,815 non interest bearing demand deposit
accounts representing $224.5 million, or $7,800 per account. The Bank also
had over 102,045 NOW, Money Market and Savings
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accounts amounting to $539.4 million on deposit, or about $5,300 per account.
There were over 16,060 time certificates of deposit outstanding at December
31, 1998 representing $324.8 million on deposit with an average deposit
balance of approximately $20,200. Of the total time certificates of deposit,
only $88.7 million represented holders who carried an amount on deposit of
$100,000 or more - about 27% of the total.
The Bank is not dependent on a single or a few customers for its deposits,
most of which are obtained from individuals and small to medium sized
businesses. This results in the relatively small average balances noted above
and allows the Bank to be less subject to the adverse effects of the loss of
a large depositor. As of December 31, 1998, no individual, corporate, or
public depositor accounted for more than 1% of the Bank's total deposits.
Liquidity is the Bank's ability to meet fluctuations in deposit levels and to
provide for the credit needs of its customers. The objective in liquidity
management is to maintain a balance between the sources and uses of funds.
Principal sources of liquidity include interest and principal payments on
loans and investments, proceeds from the maturity of investments and growth
in deposits. The Bank holds overnight Fed Funds Sold as a cushion for
temporary liquidity needs. For 1998, Fed Funds Sold averaged $49.4 million
representing 4.1% of average assets. In addition, the Bank maintains Federal
Funds lines of $30 million with major correspondents, subject to customary
terms for such arrangements.
The Bank's internally calculated liquidity ratio, which measures the
percentage of total liabilities (excluding equity) which are used to fund
cash, cash equivalents and non-pledged marketable securities, was 57.0% -
well above the Bank's policy minimum of 15%.
LOANS
The Bank's Loan to Deposit ratio stood at approximately 50.7% at year-end
1998. This is below other Banks on the Central Coast which average about 63%.
It is the Bank's goal to increase its Loan to Deposit ratio by growing its
Loan Portfolio without sacrificing credit quality.
The Bank maintains an allowance for loan losses which is netted against loans
on the balance sheet. Additions to the allowance are made by charges to
operating expenses. All loans deemed to be uncollectible are charged to the
allowance; subsequent recoveries are credited to the allowance. The amount in
the loan loss allowance is an estimate of the losses inherent in the loan
portfolio as determined by a variety of factors considered by Management.
Factors include, but are not limited to, the current economic climate, type
and quality of loans in the portfolio, trends in delinquencies, trends in
losses, trends in non-accrual totals, diversification of the portfolio,
exposure of the Bank's loan clients to losses from year 2000 issues, value of
available collateral and the cost of collateral liquidation.
As of December 31, 1998, the Bank's allowance for loan losses stood at $12.9
million or 2.3% of gross loans. It also represents 205% of non performing
loans (non-accrual loans plus loans 90 days or more past due). Outside
factors, not within the Bank's control, such as adverse changes in the
economy, can effect the adequacy of the allowance and there can be no
assurance that, in any given period, the Bank might not suffer losses which
are substantial in relation to the size of
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the allowance. During the year 1998, the Bank experienced charge-offs, net of
recoveries, of $764 thousand, or 0.14% of average loans.
UNDERWRITING AND CREDIT ADMINISTRATION
The lending activities of Mid-State Bank are guided by the lending policies
established by the Bank's Board of Directors. The credit policy is managed
through periodic reviews and approved annually by the Board.
Each loan must meet minimum underwriting criteria established in the Bank's
lending policy. Lending authority is granted to officers of the Bank on a
limited basis, dependent upon individual knowledge and experience. Loan
requests exceeding individual officer approval limits are approved by the
Administrative Loan Committee. Loan requests exceeding these limits are
submitted to the Executive Loan Committee, which consists of the President
and Chief Executive Officer and three outside directors. Each of these
committees meets on a regular basis in order to provide timely responses to
the Bank's clients.
Mid-State Bank's credit administration function includes an internal review
and the regular use of an outside loan review firm. In addition, the Special
Assets Committee, composed of senior officers meet once a month and review
delinquencies, non-performing assets, classified assets and other pertinent
information about the loan portfolio. The information reviewed by this
committee is submitted to the Board of Directors on a monthly basis.
LOAN PORTFOLIO
At December 31, 1998, Mid-State Bank's gross loan portfolio totaled $553.8
million. By portfolio segment, this is distributed as follows:
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Construction and Land Development 12.6%
Real Estate - Farmland 3.1%
Real Estate - Residential 18.3%
Real Estate - Non Farm, Non Residential 23.4%
Home Equity Credit Lines 9.9%
Credit Card and Related 1.7%
Installment 5.5%
Agricultural Production 6.4%
Commercial, Other 19.1%
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The interest rates charged for the loans made by the Bank vary with the
degree of risk, size and maturity of the loans. Rates are generally affected
by competition, associated factors stemming from the client's deposit
relationship with the Bank along with the cost of funds.
COMMERCIAL LOANS. The Bank provides personal financial services to diverse
commercial and professional businesses in the marketplace. Commercial loans
consist primarily of short term loans (normally with a maturity of under one
year) for working capital and business expansion.
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Commercial loans typically include revolving lines of credit collateralized
by inventory, accounts receivable and equipment. Emphasis is placed on the
borrower's earnings history, capitalization, secondary sources of repayment,
and in some instances, third-party guarantees or highly liquid collateral
(such as time deposits and investment securities). Commercial loan pricing is
generally at a rate tied to the prime rate (as quoted in the WALL STREET
JOURNAL) or the Bank's reference rates.
The Bank participates in a Small Business Administration (SBA) loan guarantee
program. Those programs used include both the 504 program, which is focused
toward longer-term financing of buildings and other long-term assets, and the
7A program, which is primarily used for financing of the equipment, inventory
and working capital needs of eligible businesses, generally over a
three-to-seven year term. The Bank's collateral position in the SBA loans is
enhanced by the SBA guarantee in the case of 7A loans, and by lower
loan-to-value ratios under the 504 program.
REAL ESTATE CONSTRUCTION AND DEVELOPMENT LOANS. The Bank's real estate
construction loan activity has focused on providing short-term (less than one
year maturity)loans to individuals and developers with whom the Bank has
established relationships for the construction primarily of single family
residences in the Bank's market area.
Residential real estate construction loans are typically secured by first
deeds of trust and require guarantees of the borrower. The economic viability
of the project and the borrower's credit-worthiness are primary
considerations in the loan underwriting decision. The Bank utilizes approved
independent local appraisers as well as in-house staff, and loan-to-value
ratios which generally do not exceed 70% to 80% of the appraised value of the
property. The Bank monitors projects during the construction phase through
regular construction inspections and a disbursement program tied to the
percentage of completion of each project.
The Bank also occasionally makes land loans to individuals who intend to
construct a single-family residence on the lot, generally within 24 months.
In addition, the Bank has occasionally in the past, and may to a greater
extent in the future, make commercial real estate construction loans to
high-net-worth clients with adequate liquidity for construction of office and
warehouse properties. Such loans are typically secured by first deeds of
trust and require guarantees of borrowers.
COMMERCIAL REAL ESTATE TERM LOANS. The Bank provides medium-term commercial
real estate loans secured by commercial or industrial buildings where the
properties are either used by the owner for business purposes (owner-used
properties) or have income derived from tenants (investment properties). The
Bank's loan policies require the principal balance of the loan to be no more
than 70% of the stabilized appraised value of the underlying real estate
collateral. The loans, which are typically secured by first deeds of trust
only, generally have terms of no more than ten years and are amortized over
25 years. Most of these loans have rates tied to the prime rate, with many
adjusting whenever the prime rate changes; the remaining loans adjust every
five years depending upon the term of the loan.
CONSUMER AND OTHER LOANS. The Bank's consumer and other loan portfolio is
divided between installment loans secured by automobiles and other consumer
purposes. Installment loans tend
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to be fixed rate and longer-term (one-to-five-year maturity). The Bank also
has a minimal portfolio of credit card and related loans, issued as an
additional service to its clients.
INVESTMENT SECURITIES
The Bank maintains a portfolio of investment securities to provide income and
to serve as a secondary source of liquidity for its operations in conjunction
with Federal Funds Sold (see liquidity management above). The Bank's
investment policy provides for the purchase of United States Treasury
Securities, United States Government Agency Securities, Mortgage Backed
Securities, Obligations of State and Political Subdivisions, and Other
Securities as permitted by Federal and State regulation. As of December 31,
1998, the aggregate carrying value of the Investment Portfolio was $516.7
million. Of this total, $174.8 million was invested in U.S. Treasury
Securities, $135.5 million in U.S. Government Agencies, $13.2 million in
Mortgage Backed Securities, $190.4 million in Obligations of State and
Political Subdivisions and $2.9 million in Other Securities. The types of
securities held are influenced by several factors, among which are: rate of
return, maturity, and risk. Generally, the Bank endeavors to stagger the
maturities of its securities so that it has regular maturities for liquidity
purposes.
Acceptable securities may be pledged to secure public deposits from State and
Public Agencies. As of December 31, 1998, the Bank had public funds totaling
approximately $7.7 million. The Bank has made available $43.3 million of
securities to securitize these funds. Excess collateral can be released as
needed.
ECONOMIC CLIMATE
The economy in the Bank's trade area is based upon agriculture, oil, tourism,
light industry, the aerospace industries and retail trade. Services
supporting those involved in these industries have also developed in the
areas of medical, financial and educational services. Population in the two
county area totals about 635,000 people with about 62% of them in Santa
Barbara County and the balance in San Luis Obispo County. Certain economic
activities are unique to the area such as the space launching facilities at
Vandenberg Air Force Base (which is now also being used by private commercial
enterprises) and the production of seeds for various flowers grown worldwide.
While major oil companies have elected to do business elsewhere (due to the
very stringent county business regulations), smaller production companies
have moved in to continue the oil industry in the area. The moderate climate
allows a year round growing season for numerous vegetables and fruits.
Vineyards and cattle ranches make large contributions to the local economy.
Access to numerous recreational activities, including both mountains and
beaches, provide a fairly stable tourist industry from larger metropolitan
areas such as the Los Angeles/Orange County basin and the San Francisco Bay
area. With the diversity of the various types of industries in the Bank's
service area, the Central Coast, while not immune from economic fluctuations,
does tend to enjoy a more stable level of economic activity than many other
areas of California.
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COMPETITION
The banking business in California generally, and in the Bank's primary
service areas specifically, is highly competitive with respect to both loans
and deposits and is dominated by a relatively small number of major banks
with many offices and operations over a wide geographic area. Among the
advantages such major banks have over the Bank are their ability to finance
wide-ranging advertising campaigns and to allocate their investment assets to
regions of higher yield and demand. Such banks offer certain services such as
trust services and international banking which are not offered directly by
the Bank; but which can be offered indirectly by the Bank through
correspondent institutions. In addition, by virtue of their greater total
capitalization, such banks have substantially higher lending limits than the
Bank. (Legal lending limits to an individual customer are based upon a
percentage of a bank's total capital accounts.) The Bank's unsecured and
secured lending limits were approximately $21,993,000 and $36,656,000,
respectively, at December 31, 1998.
Although within the Bank's trade area, there are few companies who would
require more funds than the Bank can legally lend. Other entities, both
governmental and in private industry, seeking to raise capital through the
issuance and sale of debt or equity securities also provide competition for
the Bank in the acquisition of deposits. Banks also compete with money market
funds and other money market instruments which are not subject to interest
rate ceilings.
In order to compete with other competitors in their primary service areas,
the Bank attempts to use, to the fullest extent, the flexibility which its
independent status permits. This includes an emphasis on specialized
services, local promotional activity, and personal contacts by its officers,
directors and employees. In particular, the Bank offers highly personalized
banking services.
EMPLOYEES
At December 31, 1998, the Bank had a total of 703 employees. A number of
these employees are part-time however. On a full-time equivalent basis, these
employees represent 622 positions. The Bank believes that its employee
relations are satisfactory.
EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the Bank on loans extended
to its customers and securities held in the Bank's portfolio comprise the
major portion of the Bank's earnings. These rates are highly sensitive to
many factors that are beyond the control of the Bank. Accordingly the
earnings and growth of the Bank are subject to the influence of local,
domestic and foreign economic conditions, including recession, unemployment
and inflation.
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
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implements national monetary policies (with objectives such as curbing
inflation and combating recession) by its open-market operations in United
States Government securities, by adjusting the required level of reserves for
financial 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
bank loans, investments and deposits and also affect interest rates charged
on loans and paid on deposits. The nature and impact of any future changes in
monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
intermediaries. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
intermediaries are frequently made in Congress, in the California legislature
and before various bank regulatory and other professional agencies. For
example, legislation has been introduced in Congress that would repeal the
current statutory restrictions on affiliations between commercial banks and
securities firms. See "Financial Modernization Legislation."
SUPERVISION AND REGULATION
The Bank is extensively regulated under both federal and state law. Set forth
below, is a summary description of certain laws which relate to the
regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to the applicable
laws and regulations.
THE COMPANY
The Company is a bank holding company within the meaning of the BHC Act and
is registered as such with, and subject to the supervision of, the Federal
Reserve Board. The Company is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the Bank Holding Company Act. The
Federal Reserve Board may conduct examinations of bank holding companies and
their subsidiaries.
The Company is required to obtain the approval of the Federal Reserve Board
before it may acquire all or substantially all of the assets of any bank, or
ownership or control of the voting shares of any bank if, after giving effect
to such acquisition of shares, the Company would own or control more than 5%
of the voting shares of such bank. Prior approval of the Federal Reserve
Board is also required for the merger or consolidation of the Company and
another bank holding company.
The Company is prohibited by the Bank Holding Company Act, except in certain
statutorily prescribed instances, from acquiring direct or indirect ownership
or control of more than 5% of the outstanding voting shares of any company
that is not a bank or bank holding company and from engaging , directly or
indirectly, in activities other than those of banking, managing or
controlling banks or furnishing services to its subsidiaries. However, the
Company may, subject to the prior approval of the Federal Reserve Board,
engage in any, or acquire shares of
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companies engaged in, activities that are deemed by the Federal Reserve Board
to be so closely related to banking or managing or controlling banks as to be
a proper incident thereto.
The Federal Reserve Board may require that the Company terminate an activity
or terminate control of or liquidate or divest subsidiaries or affiliates
when the Federal Reserve Board determines that the activity or the control or
the subsidiary or affiliates constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The
Federal Reserve Board also has the authority to regulate provisions of
certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances,
the Company must file written notice and obtain approval from the Federal
Reserve Board prior to purchasing or redeeming its equity securities.
Under the Federal Reserve Board's regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe and unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving
as a source of strength to its subsidiary banks, a bank holding company
should stand ready to use available resources to provide adequate capital
funds to its subsidiary banks during periods of financial stress or adversity
and should maintain the financial flexibility and capital-raising capacity to
obtain additional resources for assisting its subsidiary banks. A bank
holding company's failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the Federal
Reserve Board to be an unsafe and unsound banking practice or a violation of
the Federal Reserve Board's regulations or both.
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, and filed reports and proxy
statements pursuant to such Act with the Securities and Exchange Commission
("SEC").
THE BANK
The Bank is chartered under the laws of the State of California and its
deposits are insured by the FDIC to the extent provided by law. The Bank is
subject to the supervision of, and is regularly examined by, the DFI and the
FDIC. Such supervision and regulation include comprehensive reviews of all
major aspects of the Bank's business and condition.
Various requirements and restrictions under the laws of the United States and
the State of California affect the operations of the Bank. Federal and
California statutes relate to many aspects of the Banks operations, including
reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends and locations of
branch offices. Further, the Bank is required to maintain certain levels of
capital.
CAPITAL STANDARDS
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking
12
<PAGE>
organization's operations for both transactions reported on the balance sheet
as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high
credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators
measure risk-adjusted assets, which includes off balance sheet items, against
both total qualifying capital (the sum of Tier 1 capital and limited amounts
of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of
common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and
minority interests in certain subsidiaries, less most intangible assets. Tier
2 capital may consist of a limited amount of the allowance for possible loan
and lease losses, cumulative preferred stock, long term preferred stock,
eligible term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital is
subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1
capital to risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators
to rate banking organizations, the minimum leverage ratio of Tier 1 capital
to total assets is 3%. For all banking organizations not rated in the highest
category, the minimum leverage ratio must be at least 100 to 200 basis points
above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios.
Future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends. The following table
presents the amounts of regulatory capital and the capital ratios for the
Company, compared to its minimum regulatory capital requirements as of
December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
Minimum
Capital Well
Actual Requirement Capitalized
------ ----------- -----------
<S> <C> <C> <C>
Leverage ratio 10.5% 4.0% 5.0%
Tier 1 risk-based ratio 16.7% 4.0% 6.0%
Total risk-based ratio 17.9% 8.0% 10.0%
</TABLE>
13
<PAGE>
Under applicable regulatory guidelines, the Bank was also considered "Well
Capitalized" at December 31, 1998.
On January 1, 1998 new legislation became effective which, among other
things, gave the power to the DFI to take possession of the business and
properties of a bank in the event that the tangible shareholders' equity of
the bank is less than the greater of (i) 3% of the banks total assets or (ii)
$1,000,000.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including
but not limited to those that fall below one or more prescribed minimum
capital ratios. The law required each federal banking agency to promulgate
regulations defining the following five categories in which an insured
depository institution will be placed, based on the level of its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
An insured depository institution generally will be classified in the
following categories based on capital measures indicated below:
<TABLE>
<CAPTION>
"Well capitalized" "Adequately capitalized"
------------------ ------------------------
<S> <C>
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
------------------ --------------------------------
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
-----------------------------
Tangible equity to total assets less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment. The law prohibits insured
depository institutions from paying management fees to any controlling
persons or, with certain limited exceptions, making capital distributions if
after such transaction the institution would be undercapitalized. If an
insured depository institution is undercapitalized, it will be closely
monitored by the appropriate federal banking agency, subject to asset growth
restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot
accept a capital plan
14
<PAGE>
unless, among other things, it determines that the plan (i) specifies the
steps the institution will take to become adequately capitalized, (ii) is
based on realistic assumptions and (iii) is likely to succeed in restoring
the depository institution's capital. In addition, each company controlling
an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each
of four consecutive calendar quarters and must otherwise provide adequate
assurances of performance. The aggregate liability of such guarantee is
limited to the lesser of (a) an amount equal to 5% of the depository
institution's total assets at the time the institution became
undercapitalized or (b) the amount which is necessary to bring the
institution into compliance with all capital standards applicable to such
institution as of the time the institution fails to comply with its capital
restoration plan. Finally, the appropriate federal banking agency may impose
any of the additional restrictions or sanctions that it may impose on
significantly undercapitalized institutions if it determines that such action
will further the purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced
sale of voting shares to raise capital or, if grounds exist for appointment
of a receiver or conservator, a forced merger; (ii) restrictions on
transactions with affiliates; (iii) further limitations on interest rates
paid on deposits; (iv) further restrictions on growth or required shrinkage;
(v) modification or termination of specified activities; (vi) replacement of
directors or senior executive officers; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency. Although the
appropriate federal banking agency has discretion to determine which of the
foregoing restrictions or sanctions it will seek to impose, it is required to
force a sale of voting shares or merger, impose restrictions on affiliate
transactions and impose restrictions on rates paid on deposits unless it
determines that such actions would not further the purpose of the prompt
corrective action provisions. In addition, without the prior written approval
of the appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average
rate of base compensation during the 12 calendar months preceding the month
in which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated
debt beginning 60 days after becoming critically undercapitalized. Most
importantly, however, except under limited circumstances, the appropriate
federal banking agency, not later than 90 days after an insured depository
institution becomes critically undercapitalized, is required to appoint a
conservator or receiver for the institution. The board of directors of an
insured depository institution would not be liable to the institution's
shareholders or creditors for consenting in good faith to the appointment of
a receiver or conservator or to an acquisition or merger as required by the
regulator.
15
<PAGE>
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with
the agency. Enforcement actions may include the imposition of a conservator
or receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money penalties, the
issuance of directives to increase capital, the issuance of formal and
informal agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that
the agency would be harmed if such equitable relief was not granted.
PREMIUMS FOR DEPOSIT INSURANCE
All deposits of the Bank are insured by the FDIC through the Bank Insurance
Fund ("BIF") which are subject to FDIC insurance assessment. The amount of
FDIC assessment paid by individual insured depository institutions is based
upon their relative risk as measured by regulatory capital ratios and certain
other factors. During 1995, the FDIC significantly reduced premium rates
assessed on deposits insured by the BIF. As a result of its "Well
Capitalized" status, the Bank paid the minimum required premium in 1998.
FINANCIAL MODERNIZATION LEGISLATION
Various proposals to adopt comprehensive financial modernization legislation
have been introduced in Congress which include, among other things,
elimination of the federal thrift charter, creation of a uniform financial
institutions charter, expansion of bank powers, and integration of banking,
commerce, securities activities and insurance. In May 1998, the House passed
legislation that would have overhauled the financial services industry and
would have, among other things, allowed mergers among banking, securities and
insurance firms. Congress adjourned for 1998 without the passage of similar
legislation by the Senate. Similar legislation has already been introduced in
both houses of Congress in the current session. It is currently impossible to
predict whether and in what form financial reform legislation will be passed
in 1999 or in the future or what the impact of such legislation might be on
the Company, its financial condition and business as well as its results of
operations.
COMMUNITY REINVESTMENT ACT
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate
income neighborhoods. In addition to substantial penalties and corrective
measures that may be required for a violation of certain fair lending laws,
the federal banking agencies may take compliance with such laws and CRA into
account when regulating and supervising other activities.
In connection with its assessment of CRA performance, the appropriate bank
regulatory agency assigns a rating of "outstanding," "satisfactory," "needs
to improve" or "substantial
16
<PAGE>
noncompliance." At its last examination by the FDIC, the Bank received a CRA
rating of "Satisfactory."
ACCOUNTING CHANGES
From time to time the Financial Accounting Standards Board ("FASB") issues
pronouncements which govern the accounting treatment for the Company's
financial statements. For a description of the recent pronouncements
applicable to the Company (see the Notes to the Financial Statements included
in Item 7 of this Report). The FASB recently agreed to solicit comments by
means of an Invitation to Comment as part of its business combinations
project. While the Board has not yet deliberated the issues or conclusions
from the Invitation to Comment, it is possible that certain changes to
methods of accounting for business combinations may result. Specifically, the
"pooling method" of accounting could be changed or possibly even eliminated.
Financial institutions often prefer to account for mergers using this method
and many of the mergers in the financial institutions industry in the last
several years have been accounted for using the pooling method. The impact of
such accounting change, if adopted, on mergers and acquisitions involving
financial institutions and upon the Company and the value of its Common Stock
cannot presently be predicted.
POTENTIAL ENFORCEMENT ACTIONS
Commercial banking organizations, such as the company and the Bank, may be
subject to potential enforcement actions by the FDIC and the DFI for unsafe
or unsound practices in conducting their businesses or for violations of any
law, rule, regulation or any condition imposed in writing by the agency or
any written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of
deposits (in the case of a depository institution), the imposition of civil
money penalties, the issuance of directives to increase capital, the issuance
of formal and informal agreements, the issuance of removal and prohibition
orders against institution-affiliated parties and the imposition of
restrictions and sanctions under the prompt corrective action provisions of
the FDIC Improvement Act.
17
<PAGE>
ITEM 2. PROPERTIES
----------
The Company's principal office is located at 1026 Grand Avenue, Arroyo
Grande, California. In total as of December 31, 1998, the Bank owned 21 of
its offices and leased 7 other locations. Information regarding offices of
Bank of Santa Maria consolidated and discontinued is set forth below.
<TABLE>
<CAPTION>
OWNED BY BANK OR SUBSIDIARY: LOCATION OF OFFICES ENCUMBRANCE
<S> <C> <C>
Arroyo Grande* 991 Bennett Avenue NONE
Arroyo Grande 1026 Grand Avenue NONE
Arroyo Grande* 550 Camino Mercado NONE
Arroyo Grande* 398 Sunrise Terrace NONE
Atascadero 6950 El Camino Real $189,403.32
Buellton West Highway 246 & Central NONE
Cambria 1070 Main Street NONE
Goleta Valley 5956 Calle Real NONE
Grover Beach 899 Grand Avenue NONE
Grover Beach* 140 North Second Street NONE
Guadalupe 905 Guadalupe Street NONE
Lompoc 828 North "H" Street NONE
Los Osos 1001 Los Osos Valley Road NONE
Morro Bay 251 Harbor Street NONE
Nipomo 615 West Tefft Street NONE
Paso Robles 845 Spring Street NONE
Pismo Beach 801 Price Street NONE
San Luis Obispo 75 Santa Rosa NONE
San Luis Obispo 2276 Broad Street NONE
Santa Maria 720 North Broadway NONE
Santa Maria 2739 Santa Maria Way NONE
Santa Maria 1554 South Broadway NONE
Santa Maria 519 E. Main Street NONE
Templeton 1025 Las Tablas Road NONE
Vandenberg Village 3745 Constellation Road NONE
</TABLE>
18
<PAGE>
FORMER BANK OF SANTA MARIA OFFICES WHICH HAVE BEEN CONSOLIDATED AND ARE BEING
SOLD:
<TABLE>
<CAPTION>
OWNED BY BANK OR SUBSIDIARY: LOCATION OF OFFICES ENCUMBRANCE
<S> <C> <C>
Paso Robles 840 Spring Street NONE
Orcutt Oak Knolls 1070 East Clark NONE
Grover Beach 1580 Grand Avenue NONE
Santa Maria 528 South Broadway NONE
</TABLE>
LEASED BY BANK OR SUBSIDIARY
<TABLE>
<S> <C> <C>
Cayucos 107 North Ocean Avenue $1,423.50 per month
Expires November, 2002
Paso Robles 705 Golden Hill Road $9,463.00 per month
Expires, August, 2000
Oak Knolls - Orcutt 1110 East Clark, Santa Maria $8,959.00 per month
Expires October, 2000
Oak Park - Pismo Beach 865 Oak Park Boulevard $9,837.00 per month
Expires March, 2008
Santa Barbara 921 Carpinteria Street $9,396.58 per month
Expires May, 2017
Santa Maria* 2801 - B Santa Maria Way $1,296.99 per month
Expires April, 2000
Santa Ynez 3600 Sagunto Street $2,000.00 per month
Expires May, 2002
Solvang 1600 Copenhagen Drive $9,688.69 per month
Expires April, 2003
</TABLE>
FORMER BANK OF SANTA MARIA OFFICES LEASED BY BANK -
WHICH WILL BE SUB-LEASED OR EXPIRE
<TABLE>
<S> <C> <C>
Lompoc 1325 North H. Street $5,783.00 per month
Expires October, 1999
Nipomo 630 W. Tefft Street $3,394.61 per month
Expires Feb. 2015
</TABLE>
*ALL OFFICES LISTED ABOVE (EXCLUDING THOSE FORMER BANK OF SANTA MARIA OFFICES
BEING SOLD OR SUB-LEASED) ARE FULL-SERVICE OFFICES, EXCEPT THOSE WITH
ASTERISKS NOTED ABOVE. ASTERISKS REPRESENT NON-BANKING SUPPORT OFFICES (E.G.,
ADMINISTRATION, DATA PROCESSING, SUPPLIES WAREHOUSE, CREDIT SERVICES,
TRAINING FACILITIES, ET. AL.).
19
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is, from time to time, subject to various pending and threatened
legal actions which arise out of the normal course of its business. The
Company is not a party to any pending legal or administrative proceedings
(other than ordinary routine litigation incidental to the Company's business)
and no such proceedings are known to be contemplated.
There are no material proceedings adverse to the Company to which any
director, officer, affiliate of the Company or 5% shareholder of the Company,
or any associate of any such director, officer, affiliate or 5% shareholder
of the Company is a party, and none of the above persons has a material
interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
- -------------------------------------------------------------------------------
PART II
- -------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
---------------------------------------------------------------------
MARKET INFORMATION
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "MDST."
Prior to July 10, 1998, trading of the Company's Common Stock occurred solely
"over the counter," and was limited. Consequently, the prices listed before
that date represent quotations by dealers making a market in the Company's
Common Stock and reflect inter-dealer prices, without adjustments for
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions. On July 10, 1998, the Company's Common Stock was designated for
quotation on the Nasdaq National Market. The prices listed below for periods
subsequent to July 10, 1998 are as reported by the Nasdaq National Market.
The following table summarizes those trades of the Company's Common Stock of
which Management is aware, setting forth the approximate high and low trade
prices for each quarterly period ended since January 1, 1997.
<TABLE>
<CAPTION>
QUARTER ENDED SALES PRICES
------------- ------------------------------------------------
1997 LOW HIGH
---- --- ----
<S> <C> <C>
March 31 $15.00 $21.00
June 30 $16.38 $22.00
September 30 $19.75 $23.75
December 31 $22.75 $30.85
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED SALES PRICES
------------- ------------------------------------------------
1997 LOW HIGH
---- --- ----
<S> <C> <C>
March 31 $25.63 $29.25
June 30 $28.75 $32.00
September 30 $24.00 $31.25
December 31 $22.88 $28.88
</TABLE>
HOLDERS
As of December 31, 1998, there were approximately 3,500 holders of the
Company's Common Stock. There are no other classes of common equity
outstanding.
DIVIDENDS
The Company is a legal entity separate and distinct from the Bank. The
Company's shareholders are entitled to receive dividends when and as declared
by its Board of Directors, out of funds legally available therefor, subject
to the restrictions set forth in the California General Corporation Law (the
"Corporation Law"). The Corporation Law provides that a corporation may make
a distribution to its shareholders if the corporation's retained earnings
equal at least the amount of the proposed distribution. The Corporation Law
also provides that, in the event that sufficient retained earnings are not
available for the proposed distribution, a corporation may nevertheless make
a distribution to its shareholders if it meets two conditions, which
generally stated are as follows: (i) the corporation's assets equal at least
1-1/4 times its liabilities, and (ii) the corporation's current assets equal
at least its current liabilities or, if the average of the corporation's
earnings before taxes on income and before interest expenses for the two
preceding fiscal years was less than the average of the corporation's
interest expenses for such fiscal years, then the corporation's current
assets must equal at least 1-1/4 times its current liabilities.
The ability of the Company to pay a cash dividend depends largely on the
Bank's ability to pay a cash dividend to the Company. The payment of cash
dividends by the Bank is subject to restrictions set forth in the California
Financial Code (the "Financial Code"). The Financial Code provides that a
bank may not make a cash distribution to its shareholders in excess of the
lesser of (a) the bank's retained earnings; or (b) 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. However, a bank may, with the approval of the
DFI, make a distribution to its shareholders in an amount not exceeding the
greater of (x) its retained earnings; (y) its net income for its last fiscal
year; or (z) its net income for its current fiscal year. In the event that
the DFI determines that the shareholders' equity of a bank is inadequate or
that the making of a distribution by the bank would be unsafe or unsound, the
DFI may order the bank to refrain from making a proposed distribution. The
FDIC may also restrict the payment of dividends if such payment would be
deemed unsafe or unsound or if after the payment of such dividends, the Bank
would be included in one of the "undercapitalized" categories for capital
adequacy purposes pursuant to federal law. (See, "Item 1 - Description of
Business - Prompt Corrective Action and Other Enforcement Mechanisms.")
21
<PAGE>
Additionally, while the Federal Reserve Board has no general restriction with
respect to the payment of cash dividends by an adequately capitalized bank to
its parent holding company, the Federal Reserve Board might, under certain
circumstances, place restrictions on the ability of a particular bank to pay
dividends based upon peer group averages and the performance and maturity of
the particular bank, or object to management fees to be paid by a subsidiary
bank to its holding company on the basis that such fees cannot be supported
by the value of the services rendered or are not the result of an arm's
length transaction.
The following table sets forth the per share amount and month of payment for
all cash dividends paid since January 1, 1997.
<TABLE>
<CAPTION>
PAYABLE DATE DIVIDEND
<S> <C>
Jan. 27, 1997 - Mid-State Bank 5% - Stock
July 25, 1997 - Mid-State Bank $0.12 per share - Cash
Jan. 23, 1998 - Mid-State Bank 5% - Stock
June 26, 1998 - Mid-State Bank $0.15 per share - Cash
Jan. 22, 1999 - Mid-State Bancshares $0.12 per share - Cash
</TABLE>
Whether or not stock dividends or any cash dividends will be paid in the
future will be determined by the Board of Directors after consideration of
various factors. The Company's profitability and regulatory capital ratios in
addition to other financial conditions will be key factors considered by the
Board of Directors in making such determinations regarding the payment of
dividends by the Company.
TRANSFER AGENT
ChaseMellon Shareholder Services serves as the Company's transfer agent.
Shareholder inquiries regarding holdings of Mid-State Bancshares Common Stock
can be directed to:
Sharon Knepper
ChaseMellon Shareholder Services
400 S. Hope Street
Los Angeles, California 90071
Alternatively, ChaseMellon can be contacted via the Internet at
www.chasemellon.com.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL DATA - MID-STATE BANCSHARES
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31:
Interest Income (not taxable equivalent) $ 86,960 $ 82,276 $ 75,416 $ 74,041 $ 68,533
Interest Expense 25,992 25,560 24,150 23,685 19,716
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 60,968 56,716 51,266 50,356 48,817
Provision for Loan Losses 300 30 227 875 2,790
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income after provision for loan losses 60,668 56,686 51,039 49,481 46,027
Non-interest income 22,881 16,460 15,819 14,720 13,338
Non-interest expense 55,529 50,888 53,842 60,142 66,024
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 28,020 22,258 13,016 4,059 (6,659)
Provision for income taxes 9,000 4,616 5,138 210 1,475
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 19,020 $ 17,642 $ 7,878 $ 3,849 $ (8,134)
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE:
Net Income - basic $ 1.90 $ 1.77 $ 0.79 $ 0.39 $ (0.83)
Net Income - diluted $ 1.88 $ 1.76 $ 0.79 $ 0.39 $ (0.83)
Weighted avg. shares for Basic E.P.S. calculation 10,031 9,965 9,948 9,900 9,779
Cash dividends 0.31 0.18 0.10 0.03 0.09
Book value at year-end 13.07 11.43 9.76 9.20 7.79
Ending Shares (adj. for stock dividends & merger) 10,078 9,980 9,962 9,938 9,867
AT DECEMBER 31,
Cash and due $ 66,761 $ 92,180 $ 91,036 $ 87,631 $ 91,758
Investments and Fed Funds Sold 568,535 499,542 450,636 394,092 317,816
Loans, net of deferred fees, before allowance 551,780 540,878 509,020 480,362 515,135
Allowance for Loan & Lease Losses (12,901) (13,366) (13,141) (14,144) (15,629)
Other assets 60,781 67,111 76,277 95,061 115,861
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $1,234,956 $1,186,345 $1,113,828 $1,043,002 $1,024,941
- ------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing deposits $ 224,516 $ 212,077 $ 189,578 $ 169,938 $ 164,780
Interest bearing deposits 864,159 851,269 811,425 767,940 767,523
Other borrowings 3,049 4,494 7,424 5,589 8,992
Accrued interest payable and
other liabilities 9,508 4,476 8,205 8,057 6,762
Capital Accounts 133,724 114,029 97,196 91,478 76,884
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' equity $1,234,956 $1,186,345 $1,113,828 $1,043,002 $1,024,941
- ------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY
Non-accrual loans $ 1,899 $ 3,467 $ 4,619 $ 14,114 $ 26,089
Loans past due 90 days or more 4,399 663 2,801 2,048 5,531
Other real estate owned 259 3,480 7,838 11,814 15,123
- ------------------------------------------------------------------------------------------------------------------------------
Total non performing assets $ 6,557 $ 7,610 $ 15,258 $ 27,976 $ 46,743
FINANCIAL RATIOS
For the year:
Return on assets 1.59% 1.57% 0.74% 0.38% -0.78%
Return on equity 15.35% 16.67% 8.35% 4.53% -9.19%
Net interest margin (not taxable equivalent) 5.69% 5.72% 5.62% 5.94% 5.66%
Net loan losses (recoveries) to avg. loans 0.14% -0.04% 0.30% 0.48% 1.84%
Efficiency ratio 66.2% 69.5% 80.3% 92.4% 106.2%
At December 31:
Equity to average assets (leverage ratio) 10.5% 9.5% 8.6% 8.6% 8.3%
Tier One capital to risk-adjusted assets 16.7% 14.9% 13.7% 13.1% 12.3%
Total capital to risk-adjusted assets 17.9% 16.0% 15.0% 14.3% 13.5%
Loan loss allowance to loans, gross 2.3% 2.5% 2.6% 2.9% 3.0%
Non-accrual loans to total loans, gross 0.3% 0.6% 0.9% 2.9% 5.1%
Non performing assets to total assets 0.5% 0.6% 1.4% 2.7% 4.6%
Allowance for loan losses to non performing loans 205% 324% 177% 88% 49%
</TABLE>
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION AND BUSINESS OF THE COMPANY
The Company has as its single, wholly owned subsidiary, Mid-State Bank (the
"Bank"). The Bank itself has two wholly owned subisidiaries - MSB Properties
and Mid Coast Land Company (discussed above in Part I of this report and
later in this Management's Discussion and Analysis). The Bank was founded in
1961 and operates a full service commercial banking business serving its
customers on the Central Coast of California. Headquartered in Arroyo Grande,
it 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 is the second largest Bank in terms of total assets and is one of
12 independent commercial banks operating in the two county area (the
"Central Coast banks"). Of the 300 banks in the State of California, only 23
of them were chartered prior to the Bank.
An Agreement to Merge and Plan of Reorganization by and among Mid-State Bank,
BSM Bancorp, and Bank of Santa Maria was effected in 1998. Effective with the
completion of the merger on July 10, 1998, BSM Bancorp changed its name to
Mid-State Bancshares and remained the parent company to the merged bank,
which retained the Mid-State Bank name. The merger was accounted for on a
pooling of interests basis and as a result, prior periods are combined and
re-stated as if the banks were historically one entity.
The following discussion and analysis will provide insight and supplementary
information into the accompanying consolidated financial statements of the
Bank. It also provides Management's assessment of the operating trends over
the past few years and certain of their expectations for 1999.
Reference is made to the accompanying consolidated financial statements and
notes to those statements. Comparable data from peer banks in the Bank's
trade area are based on results from those institutions' Call Reports which
were supplied to their regulatory agencies as of September 30, 1998. These
data are the latest available as of the time of this writing.
The Management's Discussion and Analysis (MD&A) includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act. All of
the statements contained in the MD&A, other than statements of historical
fact, should be considered forward-looking statements, including, but not
limited to, those concerning (i) the Company's strategies, objectives and
plans for expansion of its operations, products and services, and growth of
its portfolio of loans, investments and deposits, (ii) the Company's beliefs
and expectations regarding actions that may be taken by regulatory
authorities having oversight of the operation, and (iii) the Company's
beliefs as to the adequacy of its existing and anticipated allowances for
loan and real estate losses. Although the Company believes the expectations
reflected in those forward-looking statements are reasonable, it can give no
assurance that those expectations will prove to have been correct. All
subsequent written and oral forward-looking statements by or attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by this qualification. Investors are cautioned not to place undue
reliance on these
24
<PAGE>
forward-looking statements, which speak only as of the date hereof and are
not intended to give any assurance as to future results. The Company
undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
1998 RESULTS AND ACCOMPLISHMENTS
FINANCIAL
For 1998, the Company on a consolidated basis reported Net Income of $19.0
million compared to $17.6 million in 1997 and $7.9 million in 1996. The
diluted Earnings Per Share was $1.88 compared to $1.76 in 1997 and $0.79 in
1996. Consolidated total assets at December 31, 1998 were $1.235 billion
compared to $1.186 billion at December 31, 1997, up approximately 4.1%. Total
deposits also increased from $1.063 billion as of December 31, 1997 to $1.089
billion at year-end 1998. Shareholders' common equity stood at $133.7 million
at period-end up from its $114.0 million level a year earlier, owing
primarily to net income of $19.0 million for 1998. Also impacting
shareholders' equity were the unrealized gain on securities available for
sale of $4.3 million which is up from $1.8 million one year earlier, as well
as, cash dividends paid during 1998 of $3.1 million.
The table below illustrates net income by subsidiary unit. Significant items
affecting the income statement in 1998 include: 1) non-recurring merger
charges of $5.4 million after-tax, 2) after-tax gains of $3.2 million
associated with the disposition of real estate development assets by the
company's wholly owned subsidiary, Mid Coast Land Company, and 3) increased
realization of deferred tax assets benefiting the income statement ($3.7
million in 1998 compared to $5.4 million in 1997 and $(1.5) million in 1996).
All of these items are discussed more fully below in the analysis of income
and expense.
<TABLE>
<CAPTION>
Income (Loss) by subsidiary (000's) 1998 1997 1996
----------------------------------- ---- ---- ----
<S> <C> <C> <C>
Bank only, pre-tax $ 20,769 $ 23,120 $ 17,560
MSB Properties, pre-tax 2,165 2,203 2,024
Mid Coast Land Co., pre-tax 5,410 (2,891) (6,568)
Parent only, pre-tax (324) (174) -
Tax expense 9,000 4,616 5,138
---------------------------------------------------------------------------------
Consolidated Mid-State Bancshares $ 19,020 $ 17,642 $ 7,878
</TABLE>
OTHER ACCOMPLISHMENTS IN 1998
The most significant accomplishment during the year, was the successful
completion of the merger of Bank of Santa Maria with the Bank. Prior to the
announcement of the merger at the end of January 1998, Mid-State Bank had
$842 million in assets, 23 office locations and 502 full time equivalent
employees. BSM Bancorp and its wholly owned subisidiary, Bank of Santa Maria,
which operated entirely within Mid-State Bank's geographical territory,
maintained $344 million in assets, 13 branch locations and 199 full time
equivalent employees.
The integration of these two entities is complex and involved significant
management effort. The goal of this in-market merger was to attain the
synergy's available to benefit the stockholders of both organizations, while
minimizing the disruption to customers and employees
25
<PAGE>
alike. Large strides have been taken towards reaching this end. Full time
equivalent employees now total 622, down from the 701 in the pro forma
combined organization of one year ago. This will result in on-going staff
expense savings over the months ahead. Similarly, because 8 Bank of Santa
Maria offices were geographically near Mid-State Bank offices (6 were
actually across the street from one another), these offices were consolidated
and combined into existing Mid-State Bank branches. Two of these eight
locations were sold prior to the end of 1998. Of the remaining six, one has
been sub-leased under favorable terms beginning in March 1999. One location
was leased, under an agreement that expires in October 1999, and the
remaining four locations will be sold as soon as possible. All other
locations continue to operate as Mid-State Bank branches, thus expanding to
28 the number of branch locations serving the customer.
In the geographical area known as the Santa Maria Valley, where the majority
of Bank of Santa Maria's deposits were domiciled, deposits declined just 3.5%
below pre-merger levels. This easily exceeded Management's expectations and
post merger industry averages of 20%. Management considers this to be
exceptionally good, especially in light of the expanded banking presence of
other institutions in the area. In addition to the major banks already
present in the Santa Maria Valley, Hacienda Bank, the other local bank in
Santa Maria, in response to the merger added two branches in that market to
complement its headquarters. Similarly, Heritage Oaks Bank, a Paso Robles
based institution, also established a branch in early 1999. Santa Barbara
Bank and Trust, which already had one branch in Santa Maria, opened its
second location during 1998 as well. Coast National Bank, headquartered in
San Luis Obispo, has announced that it too will establish a branch in this
highly competitive market during 1999. This expanded competition will require
the Bank to pay close attention to customer service and retention.
The Bank determined to adopt full service Saturday banking throughout its
territory. This service was previously limited to drive-up banking for
Mid-State Bank customers, but was available at the Bank of Santa Maria.
Similarly, the Bank endeavored to utilize the most attractive features of the
two banks' products when considering the surviving deposit product of the
combined organization.
In addition, during 1998, the Company converted to a new computer system and
internal network. The new system installed in July, 1998, was a
software/hardware configuration offered by Information Technology Inc. on
Unisys equipment. Bank of Santa Maria had operated on this configuration, so
their expertise became available to assist in both the conversion of the
former Mid-State Bank and Bank of Santa Maria to the new platform. Mid-State
Bank had operated on a different system since 1991 that was known to be non
Year 2000 compliant. Having served the Bank for 7 years, and given the
proximity to the new millennium, this was an appropriate opportunity to
convert to the new ITI/Unisys configuration which is widely thought to be
year 2000 compliant. That conversion was completed with only modest
disruption to the Bank's customers.
In October, the two bank's databases were combined on the new system. The
Bank has utilized the old Bank of Santa Maria system to conduct much of its
Year 2000 testing. This testing of not only mission critical functions, but
also ancillary application systems, continues today.
The total cost of the hardware installed to replace the former system was
$3.3 million. The software purchased totaled $2.7 million. New ATM's which
also had to be purchased to be compliant were an additional $1.1 million. The
total cost of this equipment and software was
26
<PAGE>
$7.2 million. These charges are being depreciated over their expected useful
lives ranging from 5 to 7 years. The total depreciation expense amounts to
$119,000 per month and is included in occupancy expense on the consolidated
statements of income. Additionally, through several maintenance contracts,
maintenance expense amounts to $50,000 per month.
ENVIRONMENTAL FACTORS IMPACTING THE BANK
ECONOMIC CONDITIONS
The most comprehensive review of local economic conditions known to
Management comes from the UCSB Economic Forecast Project which provides both
annual forecast information and periodic updates of economic conditions in
the Company's trade area. The economy continues a steady improvement, as
measured by a variety of data. Perhaps the most important economic criteria
is projected job growth for the area's residents. In San Luis Obispo County,
job growth increased by 3.6% in 1998 compared to 4.2% in 1997. The
unemployment rate in San Luis Obispo County was at 3.6% in November of 1998
compared to 4.5% one year earlier. According to UCSB estimates, if the
unemployment rate drops much further, the existing labor force will not be
able to accommodate new job demand, thus placing pressure for additional
population growth pursuing employment opportunities. Santa Barbara County is
seeing a similar situation with employment having increased by less than 1.0%
over the 12 months ended in June - at least in part because of an
exceptionally low unemployment rate over this period below 4.0%. Principal
sectors creating this growth were the transportation, communications and
utilities sector, the education sector, and construction. The unemployment
rate in Santa Barbara County was 3.6% at mid year.
Tourism in both counties remained solid in 1998. Hotel/motel occupancy rates
have seen steady improvement with hotel/motel room sales up 3.9% during 1998
in San Luis Obispo County over 1997. This is particularly impressive in light
of the heavy El Nino rains early in 1998. UCSB estimates that absent that
aberration, the growth rate would have been closer to 5.6%. Visitor spending
has been estimated for 1998 to be up 7.3% to $439 million. Similarly, in
Santa Barbara County on the south coast, hotel/motel room sales are up
indicating positive tourism trends there as well. This important sector to
the Company's trade area appears to be healthy and improving. Looks could be
somewhat deceiving, however. Because of the turmoil in many of the world's
financial markets, especially in Asian economies which are an important
source of tourism to the central coast, 1999 may see declines in this sector
in the months ahead. Much will depend on the length of the difficulties
abroad and how much domestic tourism offsets some of the decline from abroad.
Solid retail sales figures were noted throughout the Company's trade area,
especially in the larger cities of Paso Robles, San Luis Obispo City, Santa
Maria, and Santa Barbara. Retail sales in San Luis Obispo County jumped a
healthy 6.9% in 1997 followed by an estimated 7% in 1998. Rates in Santa
Barbara County were in the 8% range. Management would expect retail sales
growth, adjusted for inflation, to continue to grow in 1999, albeit at a
somewhat reduced pace from the levels of 1997 and 1998. Growth in the 4% to
5% range would seem more likely given the prospects for a more modest rate of
growth in 1999.
Residential real estate sales were strong in 1998 throughout the Company's
trade area. Home sales are estimated to be up some 49% in San Luis Obispo
County and 7% in Santa Barbara
27
<PAGE>
County (for the first half of 1998). The median price of homes sold in San
Luis Obispo increased 2% (third quarter compared to third quarter) and 5% in
Santa Barbara County (based on first half of 1998). The UCSB Economic
Forecast Project is projecting an increase in selling prices for 1999 owing
to a lack of housing inventory going into the new year.
Interest rates are not expected to change dramatically during 1999. In last
year's Annual Report the Bank was anticipating "...expectations for 1998
would again be for relatively stable interest rates for much, if not all, of
the year." This was indeed the case for the first nine months of the year.
The Prime Rate began the year at 8.50% and remained at that level until the
end of the third quarter. Three 25 basis point drops on September 30th,
October 19th and November 18th saw the Prime Rate finish the year at 7.75%.
On average for the full year 1998, Prime was 8.36% compared to 8.44% in 1997.
Other key interest rates followed similar patterns. The closely watched Fed
Funds Rate began the year at 5.50% and fell to 4.75% by December 31st.
Similarly, the thirty year Treasury Bond which had started the year at just
under 6% was 5.12% by the end of 1998. Much of the downward move in rates
right at the end of 1998 was related to Federal Reserve concerns over the
difficulties being felt abroad and the desire to avoid the resulting credit
crunch which could be experienced domestically.
Management's expectations for 1999 are for continued modest growth at
somewhat lower levels than those seen in 1998 and 1997. Management does not
see an appreciable slowdown during the year. Projections would again argue
for relatively stable interest rates for much, if not all, of the year.
Factors arguing against any upward movement in rates include; 1) the stable
inflation statistics which continue to be released, and 2) the uncertain
conditions in foreign markets which are negatively impacting the earnings of
corporations in the United States. Factors arguing against any further drop
in interest rates include; 1) a tight labor market, and 2) both lofty, and
fairly volatile, stock market levels. Against this back-drop, it seems that a
more stable, middle of the road course on the part of the Federal Reserve is
most likely. These interest rate conditions, coupled with the steady momentum
developed in the local economy over the past few years, would appear to
indicate another favorable year for the local Central Coast economy.
COMPETITIVE FACTORS
Competitive pressures from other financial institutions continue to be
intense both in the Company's trade area and throughout the Nation. Many
banks are suffering from a lack of loan demand, which is translating into
more aggressive pricing on the good credits available. As noted earlier,
local independent banks in the Company's trade area have become extremely
aggressive in pursuing business in the Santa Maria Valley following the
merger with Bank of Santa Maria. Various mortgage bankers are blanketing the
central coast communities with sales promotions and are extremely competitive
with their rate programs. Brokerage houses are indeed a factor through their
marketing of mutual funds and numerous banks are now offering these products.
The Company continues to be reluctant to offer these products because of 1)
the resultant capital outflows from San Luis Obispo and Santa Barbara
Counties which negatively impact the local economy, 2) the very real
potential for market losses to customers who would purchase these products
(who have not previously experienced losses on their FDIC insured savings and
checking accounts) and 3) the front-end fees charged by some firms which
offer these products. While there are positive arguments for offering
alternative investments, the Bank continues to carefully analyze the
feasibility of offering these deposit alternatives to its customers.
28
<PAGE>
It should also be noted that the trend toward consolidation of banking assets
exhibited over the past few years in California continued in 1998. Statewide,
27 banks were merged out of existence during the year. Locally, in addition
to Mid-State Bank's merger with Bank of Santa Maria, Santa Barbara Bancorp
announced a major merger with Pacific Capital Bancorp of Salinas. In that
merger, the holding company will keep the Pacific Capital Bancorp name and
operate the First National Bank and South Valley Bank in Monterey County and
the Santa Barbara Bank and Trust in Santa Barbara and Ventura counties. While
no new banks were started in Mid-State Bank's trade area during 1998, 17 were
established throughout the State during the year. Two new banks began
operating locally in 1997 and a savings bank began operation in San Luis
Obispo during early 1999.
As mentioned in last year's Annual Report, the other trend in banking in
Mid-State's trade area mirrors what has happened throughout the State of
California. The larger institutions, most notably Bank of America and Wells
Fargo Bank, have closed a number of their traditional brick and mortar
branches in favor of an expanded "kiosk" type presence in local supermarket
chains. Moreover, they have continued to promote their electronic delivery
capabilities to their customer base. It is unclear over the long term how
this strategy will fair, however.
LEGAL MATTERS
The Bank is involved in litigation of a routine nature which is being handled
and defended in the ordinary course of the Bank's business. In the opinion of
Management, based on the advice of legal counsel, the resolution of pending
litigation will have no material impact on the Bank's income or financial
position.
ANALYSIS OF STATEMENT OF FINANCIAL POSITION
LOANS
The Bank experienced an increase in its net loan portfolio from $527.5
million at the end of 1997 to $538.9 million at the end of 1998. This
represents continued growth of the loan portfolio of $11.4 million following
the $31.6 million increase in 1997. Loans now represent approximately 44% of
the Bank's assets which is below the level at which Management would prefer
to operate. Experiences at the independent banks in the Bank's trade area are
similar. In 1989, loans were 66% of total bank assets among the 17
independent banks. On September 30, 1998 this figure had declined to 55% of
the remaining 12 independent bank assets. The Investment Portfolio has grown
in absolute dollars, as well as a percentage of assets, over this period of
time as funds are being allocated to this portion of the balance sheet. The
section immediately following provides a more extensive discussion of the
Investment Portfolio.
29
<PAGE>
The composition of the loan portfolio is changing as well. The graph below
displays the trend over the past five years in the various components of the
loan portfolio.
[DATA POINTS NEED FOR GRAPH]
Construction loans have risen from their level three years earlier - $41.4
million at December 31, 1995 compared to $69.8 million at year-end 1998. Real
Estate loans generally trended up from $209.3 million at the end of 1995 to
nearly $253.0 million at December 31, 1997, and $248.3 million at the end of
1998. Home Equity Credit Lines have steadily declined from $84.1 million at
the end of 1995 to $54.9 million at the end of 1998. Consumer loans
(installment, credit cards and credit reserve) have generally exhibited
declines over the last 3 years reaching $40.1 million at year-end 1998
compared to $46.3 million at the end of 1995. Commercial loans have grown in
recent years having reached $105.6 million at December 31, 1998. Agricultural
production loans have also grown from $19.6 million at the end of 1995 to
$35.1 million at the end of 1998. The Bank expects to continue to emphasize
other types of lending activity in order to diversify the risk in those
categories relative to term real estate loans. Economic recovery in the
Central Coast will determine the types of credit the Bank will be able to
extend and hence its ability to achieve this objective.
The Bank's allowance for loan losses stands at $12.9 million, or 2.3% of
gross loans, representing losses inherent in the Loan Portfolio but not yet
realized. This amount is down from the $13.4 million at December 31, 1997.
The year-end 1998 balance now represents 205% of non-performing loans down
from 324% at the end of 1997. A five year review of activitiy in the
allowance for loan losses and an allocation by loan type of the allowance is
shown in the two tables below.
30
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN 000'S)
ALLOWANCE FOR LOAN LOSSES 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 13,366 $ 13,141 $ 14,144 $ 15,629 $ 22,950
Provision charged to operating expense 300 30 227 875 2,790
Other Adjustments - Merger -- -- 228 -- --
Loans charged off:
Construction and development loans -- -- (73) (1,156) (7,299)
Real estate loans (151) (265) (785) (1,273) (1,954)
Home equity credit lines (94) (15) (293) (278) (358)
Installment loans (405) (467) (355) (389) (489)
Commercial loans (539) (462) (1,422) (1,427) (1,206)
Credit cards and related loans (339) (367) (324) (308) (268)
Recoveries of loans previously charged off:
Construction and development loans 32 44 908 1,616 794
Real estate loans 188 84 96 161 22
Home equity credit lines 17 20 23 49 12
Installment loans 121 111 95 97 265
Commercial loans 338 1,448 618 488 340
Credit cards and related loans 67 64 54 60 30
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 12,901 $ 13,366 $ 13,141 $ 14,144 $ 15,629
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Ratio of Net Loan Losses (Recoveries)
to Average Loans Outstanding 0.14% -0.04% 0.30% 0.48% 1.84%
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31, IS AS FOLLOWS:
<TABLE>
<CAPTION>
(dollars in 000's) Percent Percent Percent Percent Percent
of of of of of
Balance applicable to: 1998 Loans 1997 Loans 1996 Loans 1995 Loans 1994 Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Construction and Land Dev. $ 685 12.6% $ 529 7.6% $ 910 8.5% $ 2,301 8.6% $ 3,289 11.0%
Real Estate 3,310 44.8% 3,352 46.6% 5,825 43.3% 5,717 43.5% 5,100 43.3%
H.E.C.L 721 9.9% 858 13.1% 1,070 15.5% 1,433 17.5% 2,113 18.3%
Installment 884 5.5% 538 6.0% 419 6.9% 760 7.8% 1,090 6.7%
Credit Card and Related 1,138 1.7% 687 2.9% 455 2.9% 533 1.8% 227 1.6%
Commercial, Other 4,454 25.5% 2,495 23.8% 2,166 22.9% 2,919 20.8% 3,743 19.1%
Y2K Related Losses 502 N/A -- N/A -- N/A -- N/A -- N/A
Unallocated 1,207 N/A 4,907 N/A 2,196 N/A 481 N/A 67 N/A
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $12,901 100.0% $13,366 100.0% $13,141 100.0% $14,144 100.0% $15,629 100.0%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Non-Accrual loans within the Bank's portfolio stood at $1.9 million as of
December 31, 1998, an improvement from the $3.5 million at the end of 1997.
Loans 90 days or more past due stood at $4.4 million at December 31, 1998,
which is up from the $663 thousand at the end of 1997. The increase in loans
90 days past due primarily reflects an increase in the number of renewals
which have not been completed as of year-end. The vast majority of the loans
on non-accrual ($1.8 million) are secured by real estate. There is potential
for this collateral to be liquidated to
31
<PAGE>
recover principal and unpaid interest. To the extent this is insufficient, a
charge-off to the allowance may result. $2.9 million of 90 days or more past
due loans are secured by real estate. Recoveries in 1998 of loans previously
charged-off totaled $763 thousand compared to charge-offs of $1.5 million
taken during the year resulting in NET CHARGE-OFFS of $764 thousand. This
compares to net recoveries received during 1997 of $195 thousand and net
charge-offs of $1.5 million in 1996. The Bank anticipates that charge-offs
(actual losses) will continue during 1999. It is unlikely however that
recoveries would again exceed charge-offs in the coming year.
With the combination of the collateral securing the problem loans and the
size of the allowance for loan losses, Management feels that the allowance is
sufficient to cover inherent losses. Management reviews the adequacy of the
allowance and adjusts it as necessary on a regular basis. The allowance is
also examined annually by one or more of the Bank's regulatory bodies
including the FDIC and The State Of California Department of Financial
Institutions.
The allowance for loan losses as a percentage of total loans has gradually
decreased from 3.0% in 1994 to 2.3% in 1998, refelecting an improvement in
asset quality during this period. This is evident in the reduction of
non-performing assets from $46.7 million in 1994 to $6.6 million by the end
of 1998. The adequacy of the allowance is determined by considering the type
and quality of loans in the loan portfolio, trends in non-accrual loans,
trends in delinquencies, trends in actual losses, geographical distribution
of loans, level of preparedness for Year 2000, management expertise, economic
outlook, diversification of the loan portfolio, value of available
collateral, and the costs of collateral liquidation. In establishing the
allowance at December 31, 1998, Management acknowledged the combined high
concentration of real estate loans, increases in certain higher risk
activities such as construction lending, concern with respect to the Year
2000 readiness of borrowers, and higher levels of individually large
corporate loans. These factors directly offset the beneficial trends in
non-performing loans.
The allowance for loan losses consists of an amount allocated to loans which
are impaired, a statistically allocated portion, a specifically allocated
portion, and the remaining unallocated portion. The total of these components
is considered adequate to provide for losses which can be reasonably
anticipated. However, since these amounts are based on estimates, ultimate
losses relating to these loans may vary.
A summary of maturities and sensitivities of loans to changes in interest
rates at December 31, is shown in the table below. A more complete discussion
of the Bank's exposure to changes in interest rates can be found in the MD&A
under the section titled "Net Interest Income and Interest Rate Risk".
<TABLE>
<CAPTION>
(dollars in 000's) Over Due after Due after
3 Months one year three years
1998 3 Months through to three to five Due after
---- or less 12 Months years years five years Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans $ 9,462 $34,028 $50,578 $40,154 $127,147 $261,369
Floating rate loans 287,163 3,376 -- -- -- 290,539
- ---------------------------------------------------------------------------------------------------------------------------
Sub-total 296,625 37,404 50,578 40,154 127,147 551,908
Non accrual loans 1,899
---------
Total Loans, gross $553,807
---------
---------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
(dollars in 000's) Over Due after Due after
3 Months one year three years
1997 3 Months through to three to five Due after
---- or less 12 Months years years five years Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans $ 7,463 $40,880 $60,737 $46,973 $83,596 $239,649
Floating rate loans 297,822 1,589 -- -- -- 299,411
- ---------------------------------------------------------------------------------------------------------------------------
Sub-total 305,285 42,469 60,737 46,973 83,596 539,060
Non accrual loans 3,467
---------
Total Loans, gross $542,527
---------
---------
</TABLE>
INVESTMENT PORTFOLIO
The Bank's Investment Portfolio primarily consists of US Treasury Notes and
Bills, Federal Agency Notes, Mortgage Backed Securities and Municipal Bonds.
See footnote No. 4 to the consolidated financial statements for a detailed
composition of the Investment Portfolio. Most of the growth in the portfolio
was centered in the Municipal Portfolio as it increased from $138.8 million
at the end of 1997 to $190.9 million at the end of 1998. The Bank has focused
on this segment of the portfolio because it generates better returns and
there is already ample liquidity with the Treasury and Agency portion of the
portfolio ($310.4 million at year-end 1998). The U.S. Treasury portion of the
portfolio increased by $12.1 million while Federal Agencies and Mortgage
Backed Securities decreased by $27.5 million.
The Bank may segregate its portfolio into three categories - a "Trading
Portfolio" (which is carried at market value, with changes reflected in the
income statement), a "Held to Maturity" portfolio (which is carried at
historical amortized cost) and an "Available for Sale" portfolio (which is
carried at market value, with changes reflected in comprehensive income, but
provides for the same income statement treatment as the Held-to-Maturity
portfolio.) The Bank holds no securities that should be classified as Trading
securities. The Bank has determined that since its securities may be sold
prior to maturity because of interest rate changes, to meet liquidity needs,
or to better match the repricing characteristics of funding sources, the
majority of the portfolio ($474.8 million) should be classified as Available
for Sale. The remaining $42.7 million in the held-to-maturity portion of the
portfolio will likely be allowed to mature with the funds re-invested either
in the loan portfolio or the Available for Sale portion of the Investment
Portfolio.
The mark to market adjustment on the Available for Sale portfolio resulted in
positive increases in capital accounts of $4.3 million and $1.8 million at
the December 31, 1998 and 1997, respectively. Purchases exceeded
maturities/sales over the full year and the total investment portfolio thus
grew by $34.6 million from the end of 1997 to the end of 1998.
Shown below is a summary maturity distribution of the investment portfolio by
type and weighted taxable equivalent yield as of December 31, 1998. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations
33
<PAGE>
with or without call or prepayment penalties. Maturity information for
Mortgage Backed securities shown below is based on contractual maturities.
AVAILABLE FOR SALE (AT MARKET VALUE):
<TABLE>
<CAPTION>
After One After Five
One Year Year to Years to After
(dollars in 000's) or Less Five Years Ten Years Ten Years Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maturity Distribution:
U.S. Treasury Securities $ 70,821 $ 103,940 $ -- $ -- $ 174,761
U.S. Government Agencies 60,779 65,956 -- -- 126,735
Mortgage Backed Securities 1,329 5,604 1,112 4,449 12,494
Municipals, Other Securities 29,821 102,331 28,576 36 160,764
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Total $ 162,750 $ 277,831 $ 29,688 $ 4,485 $ 474,754
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
After One After Five
One Year Year to Years to After
or Less Five Years Ten Years Ten Years Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted Average Yield:
U.S. Treasury Securities 6.05% 5.96% -- -- 6.00%
U.S. Government Agencies 5.56% 6.14% -- -- 5.86%
Mortgage Backed Securities 6.63% 6.73% 5.93% 7.02% 6.75%
Municipals, Other Securities 6.17% 6.24% 6.04% -- 6.19%
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Total 5.89% 6.12% 6.04% 7.02% 6.05%
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
HELD TO MATURITY (AT AMORTIZED COST):
<TABLE>
<CAPTION>
After One After Five
One Year Year to Years to After
(dollars in 000's) or Less Five Years Ten Years Ten Years Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maturity Distribution:
U.S. Government Agencies $ 4,253 $ 4,501 $ -- $ -- $ 8,754
Mortgage Backed Securities -- 706 -- -- 706
Municipals, Other Securities 5,784 15,653 11,019 -- 32,456
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Total $ 10,037 $20,860 $ 11,019 $ -- $ 41,916
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
After One After Five
One Year Year to Years to After
or Less Five Years Ten Years Ten Years Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted Average Yield:
U.S. Government Agencies 5.94% 6.37% -- -- 6.16%
Mortgage Backed Securities -- 6.44% -- -- 6.44%
Municipals, Other Securities 6.32% 6.50% 6.73% -- 6.55%
- -------------------------------------------------------------------------------------------------------
Total 6.16% 6.47% 6.73% -- 6.46%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
OTHER REAL ESTATE OWNED ("OREO")
As noted in the financial statements, net OREO on the Company's books stood
at $259 thousand at December 31, 1998 compared to $3.5 million at the end of
1997. All of the OREO on the
34
<PAGE>
Company's books at the end of 1998 represented residential lots. OREO is held
at the lower of cost or market, less estimated selling costs, on the
Company's consolidated statements of financial position.
During 1998, the Bank received net proceeds from sale of OREO properties of
$3.9 million. Only $566 thousand of additions were generated during 1998,
including some minor capitalized advances needed to complete the
marketability of some holdings. Future OREO activity will depend, among other
things, on the strength of the real estate market and general economic
activity. In general however, Management does not anticipate substantial
additions to its OREO holdings.
DEPOSITS
While the Bank is competitive with major banks in terms of its structure of
interest rates on deposit products offered, Management was not overtly
aggressive during 1998 in terms of paying higher rates to attract additional
deposits, a decision which reflects the Bank's excess liquidity at the
present time. As a result, some of the more interest sensitive accounts, in
particular passbook savings, have actually declined in recent years. Much of
the decline in passbook has migrated to time deposits, however, the
combination of an improving economy and "non-aggressive" pricing on deposits
has resulted in a growth rate over the last few years of about 4% per year.
As discussed in the Income Statement Analysis, interest rates were little
changed during most of 1998, having only modestly declined toward the end of
the year. This is readily seen in a comparison of the rates paid on the
Bank's deposit products at year-end 1998 compared to year-end 1997.
<TABLE>
<CAPTION>
SELECTED QUOTED INTEREST RATES 1998 1997 * Change
- ------------------------------ -------------------------------------------
<S> <C> <C> <C>
Demand Deposits 0% 0% --
NOW Account
(50 & Better - over $10,000) 0.75% 1.00% -0.25%
Money Market Deposits
(over $2,500) 2.00% 2.40% -0.40%
Passbook Savings Account 2.00% 2.25% -0.25%
Individual Retirement
Account (2 Year term) 4.15% 5.30% -1.15%
Time Deposit
($100,000 - 6 month term) 4.40% 5.25% -0.85%
Wall Street Journal Prime Rate 7.75% 8.50% -0.75%
</TABLE>
*Rates shown for 1997 are Mid-State Bank rates. Rates for Bank of
Santa Maria were not appreciably different.
Average deposits have grown steadily over the last few years. The rates paid
on these deposits have provided a relatively stable cost of funds to the Bank
with a modest drop occurring during 1998. Shown below is a summary of the
average deposits outstanding and the average rate paid by category over the
last three years.
35
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
(dollars in 000's) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Bearing Demand $368,309 $ 5,324 1.45% $ 347,790 $ 5,592 1.61% $344,399 $ 5,517 1.60%
Savings Accounts 156,718 3,380 2.16% 150,043 3,344 2.23% 153,863 3,595 2.34%
Time Deposits 331,471 16,955 5.12% 314,518 16,425 5.22% 285,562 14,861 5.20%
---------------------------------------------------------------------------------------
Total Interest Bearing
Deposits 856,498 25,659 3.00% 812,351 25,361 3.12% 783,824 23,973 3.06%
Non Interest Bearing Demand 212,087 -- -- 189,766 -- -- 171,184 -- --
---------------------------------------------------------------------------------------
Total Deposits $1,068,585 $25,659 2.40% $1,002,117 $25,361 2.53% $955,008 $23,973 2.51%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
The majority of the Bank's time deposits (approximately 73%) have balances
which are under $100,000 in size. While all time deposits are somewhat more
rate sensitive than the Bank's other deposit categories, the smaller balance
time deposits do tend to be more stable and less sensitive to absolute rate
levels than do time deposits of $100,000 or more. Approximately 88% of the
Bank's time deposits mature within one year and would be subject to a change
in rate at that time. The following table as of December 31, 1998, displays
summary size and maturity information on the Bank's time deposits.
<TABLE>
<CAPTION>
(dollars in 000's) Three After Three After Six
Months or Months to Months to After
Balance by Size Less Six Months One Year One Year Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Under $100,000 $ 84,513 $ 80,040 $ 39,423 $ 32,046 $236,022
$100,000 or More 42,409 27,146 13,370 5,818 88,743
----------------------------------------------------------------------------------
Total Time Deposits $126,922 $107,186 $ 52,793 $ 37,864 $324,765
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
OTHER BORROWINGS
While not a significant component of the Bank's structure, other borrowings
decreased from $4.5 million at the end of 1997 to $3.0 million at the end of
1998. These consist primarily of borrowings under the US Treasury Tax and
Loan note account, securities sold under agreements to repurchase and
mortgages payable. The Bank had outstanding borrowings of $1.6 million and
$2.5 million at December 31, 1998 and 1997, respectively, under the US
Treasury Tax and Loan note account program. Securities sold under agreement
to repurchase were $1.2 million and $1.75 million at December 31, 1998 and
1997, respectively. Mortgages payable were $189 thousand and $213 thousand at
year-end 1998 and 1997, respectively.
36
<PAGE>
CAPITAL
Capital ratios for commercial banks and their holding companies in the United
States are generally calculated using 3 different formulas. These
calculations are referred to as the "Leverage Ratio" and two "risk based"
calculations known as "Tier One Risk Based Capital Ratio" and the "Total Risk
Based Capital Ratio." The Company and the Bank are subject to certain
standards concerning these ratios. These standards were developed through the
joint efforts of banking authorities from 12 different countries around the
world. The standards essentially take into account the fact that different
types of assets have different levels of risk associated with them. Further,
they take into account the off-balance sheet exposures of banks when
assessing capital adequacy.
The Leverage Ratio calculation simply divides common stockholders' equity
(reduced by any goodwill a bank may have) by the total assets of the bank. In
the Tier One Risk Based Capital Ratio, the numerator is the same as the
leverage ratio, but the denominator is the total "risk-weighted assets" of
the bank. Risk weighted assets are determined by segregating all the assets
and off-balance sheet exposures into different risk categories and weighting
them by a percentage ranging from 0% (lowest risk) to 100% (highest risk).
The Total Risk Based Capital Ratio again uses "risk-weighted assets" in the
denominator, but expands the numerator to include other capital items besides
equity such as a limited amount of the allowance for loan losses, long-term
capital debt, preferred stock and other instruments. Summarized below are the
capital ratios at December 31, 1998 and 1997, for both Mid-State Bancshares
and Mid-State Bank. Additionally, the standards for a well capitalized
institution, as defined by the federal banking agencies, are displayed.
<TABLE>
<CAPTION>
Minimum Well-Capitalized
Regulatory Regulatory Mid-State Bancshares Mid-State Bank
Standard Standard 1998 1997 1998 1997
-------- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Leverage Ratio 4.0% 5.0% 10.5% 9.5% 10.4% 9.5%
Tier One
Risk Based
Capital Ratio 4.0% 6.0% 16.7% 14.9% 16.5% 14.8%
Total Risk
Based
Capital Ratio 8.0% 10.0% 17.9% 16.0% 17.8% 16.0%
</TABLE>
It is the intent of Management to continue to maintain strong capital ratios.
This has meant that the Company's dividend payout ratio is relatively modest
and the ratio of average equity to average assets is high as displayed in the
following table for the years ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<C> <C> <C> <C>
Dividend Payout Ratio 16.5% 10.4% 12.2%
Average Common Equity to Average Assets 10.3% 9.4% 8.9%
</TABLE>
LIQUIDITY
The focus of the Bank's liquidity management is to ensure its ability to meet
cash requirements. Sources of liquidity include Cash, Due From Bank Balances
(net of Federal Reserve requirements to maintain reserves against deposit
liabilities), Fed Funds Sold, Investment Securities (net of pledging
requirements), loan repayments, deposits and Fed Funds Borrowing
37
<PAGE>
lines. Typical demands on liquidity are deposit run-off from demand deposits
and savings accounts, maturing time deposits which are not renewed, and
anticipated funding under credit commitments to customers.
The Bank has substantial liquidity at the present time. As a comparison, its
loan to deposit ratio at year-end was 50.7% versus about 63% across all
Central Coast Banks. This means that the Bank has less of its deposits
invested in the loan portfolio which tends to be a less liquid asset than a
typical investment security. The Bank normally strives for a loan to deposit
ratio in the 65% to 75% range. The Bank's internally calculated liquidity
ratio stands at 57.0% at December 31, 1998, which is above its normal desired
range of between 15% and 30% and is at about the same level as one year
earlier.
The Bank strives to make high quality loans to optimize earnings while still
maintaining adequate liquidity. Recent economic conditions have dictated that
the Bank operate with excess liquidity as it has been unable to build its
loan portfolio to the desired range. Management believes that its ability to
do so in the future will at least partly be dependent on the strength of the
local economy.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME AND INTEREST RATE RISK
Net Interest Income is the difference between interest and fees earned on all
earning assets and interest paid on interest bearing liabilities. Net
Interest Income for 1998 was $61.0 million, up from $56.7 million recorded in
1997 and $51.3 million in 1996. The components of net interest income change
in response to both changes in rate, average balance and mix of both earning
assets and liabilities. The following tables present an analysis of
yields/rates, interest income and expense, and average balances for 1998,
1997, and 1996.
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
1998 Compared to 1997
(dollars in 000's) 1998 1997 Composition of Change
- -------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average Change Due To:
Average Income / Yield Average Income / Yield -------------------- Total
Balance Expense Rate Balance Expense Rate Volume Rate Change
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans $ 533,074 $55,064 10.33% $510,689 $ 53,383 10.45% $ 2,326 $ (645) $ 1,681
Investment Securities 493,160 29,332 5.95% 445,988 27,035 6.06% 2,833 (536) 2,297
Fed Funds, Other 49,483 2,564 5.18% 35,799 1,858 5.19% 710 (4) 706
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS $1,075,717 $86,960 8.08% $992,476 $ 82,276 8.29% $ 5,869 $(1,185) $ 4,684
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING
LIABILITIES:
NOW, Savings, and
Money Market Accounts $ 525,027 $ 8,704 1.66% $497,833 $ 8,936 1.79% $ 469 $ (701) $ (232)
Time Deposits 331,471 16,955 5.12% 314,518 16,425 5.22% 876 (346) 530
- -------------------------------------------------------------------------------------------------------------------------------
Interest Bearing Deposits 856,498 25,659 3.00% 812,351 25,361 3.12% 1,345 (1,047) 298
Other Borrowings 6,095 333 5.46% 3,282 199 6.06% 162 (28) 134
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING
LIABILITIES 862,593 25,992 3.01% 815,633 25,560 3.13% 1,507 (1,075) 432
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $1,075,717 $ 60,968 5.67% $ 992,476 $ 56,716 5.71% $ 4,362 $ (110) $ 4,252
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
1997 Compared to 1996
(dollars in 000's) 1997 1996 Composition of Change
- -------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average Change Due To:
Average Income / Yield Average Income / Yield -------------------- Total
Balance Expense Rate Balance Expense Rate Volume Rate Change
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans $ 510,689 $ 53,383 10.45% $480,823 $ 49,789 10.35% $ 3,107 $ 487 $3,594
Investment Securities 445,988 27,035 6.06% 392,722 23,691 6.03% 3,221 123 3,344
Fed Funds, Other 35,799 1,858 5.19% 37,925 1,936 5.10% (109) 31 (78)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS $ 992,476 $82,276 8.29% $ 911,470 $ 75,416 8.27% $ 6,219 $ 641 $6,860
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING
LIABILITIES:
NOW, Savings, and
Money Market Accounts $ 497,833 $ 8,936 1.79% $ 498,262 $ 9,112 1.83% $ (8) $ (168) $ (176)
Time Deposits 314,518 16,425 5.22% 285,562 14,861 5.20% 1,510 54 1,564
- -------------------------------------------------------------------------------------------------------------------------------
Interest Bearing Deposits 812,351 25,361 3.12% 783,824 23,973 3.06% 1,502 (114) 1,388
Other Borrowings 3,282 199 6.06% 3,217 177 5.50% 4 18 22
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING
LIABILITIES 815,633 25,560 3.13% 787,041 24,150 3.07% 1,506 (96) 1,410
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 992,476 $56,716 5.71% $911,470 $51,266 5.62% $ 4,713 $ 737 $5,450
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1998, there was a $4.7 million increase in interest income along with
a smaller $432 thousand increase in interest expense compared to 1997. The
resulting $4.3 million increase in net interest income for 1998 is a result
of a number of dynamics affecting both average balance and interest rate
considerations. First, the Company experienced an increase in its average
earning assets outstanding in all categories (loans, investments and fed
funds) of $83.2 million. Secondly, the prime rate on which many of Company's
loans are tied was lower in 1998 (8.36%) compared to 1997 (8.44%). Third, the
Company's interest bearing liabilities increased by just $47.0 million
compared to the $83.2 million increase in average earning assets. Fourth,
while interest rates were slightly lower in 1998 than 1997, they had a
similar impact on interest income to that on the Company's cost of funds.
The $5.4 million increase in net interest income for 1997 compared to 1996
was the result of similar, yet slightly different dynamics. First, the
Company experienced an increase in its average earning assets outstanding in
most categories (loans and investments). Secondly, the prime rate on which
many of the Company's loans are tied was somewhat higher in 1997 (8.44%)
compared to 1996 (8.27%). Third, the volume of average earning assets was
higher on average in 1997 than in 1996 by some $81.0 million, while the
Company's interest bearing liabilities increased by just $28.6 million.
Fourth, while interest rates were slightly higher in 1997 than 1996, they had
a positive impact on interest income and a neutral impact on the Company's
cost of funds.
The Company's risk exposure to changes in interest rates is minimal and is
centered in the Bank. A recent review of the potential changes in the Bank's
net interest income over the next 12 month time horizon indicated possible
fluctuations under very extreme alternative rate scenarios from between +3.9%
and -5.0% of the base case (Prime rate unchanged at 7.75%) of $61.4 million.
The Bank's policy is to maintain a structure of assets and liabilities which
are such that net interest income will not vary more than plus or minus 15%
of the base forecast over the next 12 months. Management feels that its
exposure to interest rate risk is manageable and it will continue to strive
for an optimal trade-off between risk and earnings.
39
<PAGE>
The following table presents a summary of the Bank's net interest income
forecasted for the coming 12 months under alternative interest rate scenarios.
<TABLE>
<CAPTION>
Change
From Base
---------
<S> <C>
Rates Down Very Significant -5.0%
(Prime down incrementally to 3.75% by Oct. 1999)
Rates Down Significant -2.5%
(Prime down incrementally to 5.25% by Oct. 1999)
Rates Down Modestly -0.7%
(Prime down incrementally to 6.75% by Oct. 1999)
Base Case - Rates Unchanged --
(Prime unchanged at 7.75% over 12 months)
Rates Up Modestly +3.3%
(Prime up incrementally to 8.75% by Oct. 1999)
Rates Up Aggressive +3.9%
(Prime up incrementally to 10.25% by Oct. 1999)
Rates Up Very Aggressive +2.8%
(Prime up incrementally to 11.75% by Oct. 1999)
</TABLE>
Net interest income under the above scenarios is influenced by the
characteristics of the Bank's assets and liabilities. In the case of NOW,
savings and money market deposits (total $539.4 million) interest is based on
rates set at the discretion of Management ranging from 0.75% to 2.00%. This
characteristic is the major reason why it is assumed that a 4% decline in
Prime decreases net interest income by 5.0% while a 4% increase in Prime only
improves net interest income by 2.8%. In a downward rate environment, there
is a limit to how far these deposit instruments can be re-priced and this
behavior is similar to that of fixed rate instruments. In an upward rate
environment, the magnitude and timing of changes in rates on these deposits
is assumed to be more reflective of variable rate instruments.
It is important to note that the above table is a summary of several
forecasts and actual results may vary. The forecasts are based on estimates
and assumptions of Management that may turn out to be different and may
change over time. Factors affecting these estimates and assumptions include,
but are not limited to, competitors' behavior, economic conditions both
locally and nationally, actions taken by the Federal Reserve Bank, customer
behavior, and Management's responses. Historically, the Bank has been able to
manage its Net Interest Income in a fairly narrow range reflecting the Bank's
relative insensitivity to interest rate changes. The impact of prepayment
behavior on mortgages, real estate loans, mortgage backed securities,
securities with call features, etc. is not considered material to the
sensitivity analysis. As noted in the Financial Summary at the beginning of
the Management's Discussion and Analysis, over the last 5 years, the
Company's net interest margin (which is net interest income divided by
average earning assets of the Company) has ranged from a low of 5.62% to a
high of 5.94% (not taxable equivalent). Based on the scenarios above, the net
interest margin under the alternative scenarios ranges from 5.00% to 5.46%.
Management feels this range of scenarios is conservative, but no assurances
can be given that actual experience will fall within this range.
The Company has no exposure with respect to interest rate derivatives,
exchange rate fluctuations, and/or commodity price movements. The Company
does not own any instruments within these markets.
40
<PAGE>
PROVISION FOR LOAN LOSSES
The Company made contributions to the allowance for loan losses of $300
thousand, $30 thousand and $227 thousand in 1998, 1997 and 1996,
respectively. This reflects management's assessment of the level of inherent
losses identified in the portfolio which has been supplemented by higher than
expected recoveries of loans previously charged off, amounting to $763
thousand, $1.8 million and $1.8 million, in 1998, 1997, and 1996,
respectively. The need for additional provision for loan losses in 1999 will
be dependent upon Management's on-going analysis of the adequacy of the
allowance for loan losses. While Management believes it to be adequate at the
present time, the appropriate value can fluctuate over time in response to
economic conditions and the subjective decisions which must be made in
response to those conditions.
NON-INTEREST INCOME
Non-Interest Income for 1998 totaled $22.9 million compared to $16.5 million
in 1997 and $15.8 million in 1996. The major reason for the increase in 1998
was the reversal into income of $5.3 million of the reserve for losses on
investments in real estate which Management felt was no longer required at
Mid Coast Land Company. This decision came about because of the improved real
estate market and the higher than anticipated sales prices being received on
certain of the subsidiary's real estate development projects - most notably
San Luis Bay Estates. A more detailed description of this activity follows in
the section below about subsidiary activity. Service charges on deposit
accounts were down somewhat to $6.5 million in 1998 over 1997 after having
increased by $343 thousand in 1997 compared to 1996. The decline in 1998 was
related to certain waivers of accounts during the computer conversion and the
merger of Bank of Santa Maria and Mid-State Bank. Commissions, fees and other
service charges increased by $1.1 million in 1998 over 1997 after a $566
thousand increase in 1997. Earnings from investments in real estate at Mid
Coast Land Company were up $420 thousand in 1998 after a $442 thousand
decline in 1997. Income in 1998 would have actually declined again in light
of the Bank's phase-out of this business, but gains of $200 thousand on a
settlement for potential damages and $353 thousand from the sale of a project
created the increase. Securities gains, net of losses, were immaterial
throughout the three years ended in 1998 and other categories of non-
interest income remained static throughout this period at $2.7 million.
NON-INTEREST EXPENSE
Total non-interest expense for 1998 was $55.5 million, which was up from
$50.9 million in 1997 and $53.8 million in 1996. The most dramatic impact in
this category which caused the increase in 1998 was the charge of $7.4
million of non-recurring, merger related costs. This amount was comprised of
$1.9 million in severance charges for displaced personnel, $1.8 million of an
accrual for the expected loss on the eight consolidated branches (including
furniture and equipment) of Bank of Santa Maria, $0.7 million of the expected
loss on the surplus computer equipment of Bank of Santa Maria, $1.9 million
of investment bank fees, and $1.1 million of various charges for legal fees,
accounting fees, filings and other miscellaneous charges incurred.
Salaries and employee benefits decreased by $600 thousand in 1998 over 1997
after having increased by $1.9 million in 1997 over 1996. The decrease in
1998 represented certain savings generated in the latter part of the year
through synergies and the reduced staffing requirements of the merged Bank.
The increase in 1997 over 1996 related to increases in profit sharing,
deferred
41
<PAGE>
compensation for executive officers and increases in bonuses paid - all of
which were related to the improved performance of the Company.
Occupancy expense has remained virtually unchanged throughout the last 3
years at just over $7.6 million in 1998 and $7.9 and $7.7 million in 1997 and
1996, respectively. Major capital expenditures for computer equipment and
ATM's were completed in 1998. This equipment came on stream in the middle of
the year and occupancy expense increased as these items are depreciated over
useful lives of between 5 and 7 years. These items cost approximately $7.2
million and are being depreciated at a total rate of $119 thousand per month.
In 1999, it is likely that occupancy will actually decline owing to the
consolidation of the eight former offices of the Bank of Santa Maria. No
other major expenditures are planned for 1999.
Expenses from write-downs and provisions for losses on investments in real
estate were nil in 1998 after incurring $2.0 million in 1997, down from $5.5
million in 1996. These amounts were determined by reviewing appraisals,
updated annually, for each material investment in real estate. The Bank
continues to work towards divestiture of these activities by its current
deadline of December 31, 2000 to conform to the requirements of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Management
believes that the allowance for losses on investments in real estate, which
stood at $300 thousand at December 31, 1998, is sufficient to cover any
remaining potential losses as the divestiture winds down.
OREO expense decreased from $1.2 million in 1996 to $0.4 million in 1997 and
$177 thousand in 1998. The reduction in OREO expense reflects lower
foreclosures and an improved real estate market. While the anticipated level
of OREO expense for 1999 is unknown at this time, it is expected that some
costs, albeit minor, will continue based on the level of additional
foreclosures from 1998. Management is hopeful however that the positive trend
seen in 1997 and 1998 will continue in 1999. The economic recovery continues
to be encouraging from this perspective.
Other operating expense remained relatively unchanged in 1998 at $14.2
million compared to $13.9 million in 1997 and $14.6 million in 1996.
Management expects that this category should decline in 1999 as the synergies
from the merger begin to benefit the income statement. The Company has
already begun to note savings at the end of the year in the areas of
advertising, auditing charges, insurance premiums, printing, supplies,
professional fees, dues & memberships, telephone, travel, and others.
TAXES
As described in Footnote No. 9 to the financial statements, the Company has
deferred tax assets primarily related to the timing difference associated
with write-downs and provisions for losses on certain real estate assets and
loans. The amount generated for book purposes compared to the actual loss
experience recorded for tax purposes has been significantly different.
Because of regulatory restrictions on the amount of deferred tax assets which
can be recognized for financial reporting purposes, the Company had
historically established a valuation allowance for taxes on the Consolidated
Statement of Financial Position. This was no longer considered necessary at
the end of 1998 resulting in a reversal of the $3.7 million in valuation
allowance that existed at December 31, 1997. Specifically, the limitation on
the amount of the deferred tax assets was based on a number of factors,
including the level of projected future taxable income. The elimination of
the valuation allowance results primarily from an expectation of increased
future taxable income. The reduction in the valuation allowance during 1998
directly benefited the tax
42
<PAGE>
expense recognized for the year, compared to normal statutory tax rates. The
valuation allowance decreased in 1997 compared to 1996 by $5.4 million and
thus 1997 tax expense recognized for the year was also lower compared to the
normal statutory tax rates.
SUBSIDIARY ACTIVITY
MID COAST LAND COMPANY
Investments in real estate shown on the Consolidated Statement of Financial
Position principally represent the assets of the Bank's real estate
development subsidiary, Mid Coast Land Company. Footnote No. 7 to the
accompanying financial statements provides additional information about this
wholly owned subsidiary. Mid Coast Land Company recorded earnings during 1998
of $3.1 million compared to a loss during 1997 of $2.9 million and a $6.6
million loss in 1996. The profit in the current year was principally because
of the reversal of $5.3 million of its reserve for losses on investments in
real estate. The sale at a better than expected price for one phase of a
development in December of 1998 and the placement in escrow of another phase
(for settlement in early 1999) of a development led to this decision. The
remaining $262 thousand in the reserve is sufficient to cover any losses on
the remaining projects and parcels to be sold.
Because of the progress made to liquidate the real estate development assets,
the FDIC granted an extension of the original required divestiture date in
July 1996 until December 1998. The regional director of the FDIC, recently
extended the deadline to December 31, 2000.
MSB PROPERTIES, INC.
This wholly owned subsidiary was formed to engage in the specific business of
acquiring, owning, and improving real property and tangible personal property
which may be necessary or convenient for the operation or housing of the
administrative departments and branch offices of the Bank. Incorporated under
the laws of the State of California in May of 1968, it also allows for the
ownership of property which may be reasonably necessary for future expansion
of the Bank's business, or which is otherwise reasonably related to the
conduct of the Bank's business, pursuant to Section 752 of the Financial Code
of the State of California.
Earnings for this subsidiary consist primarily of rental income from the
Bank's offices and administrative center coupled with a minor amount of
rental income from non-bank tenants and interest earnings on its cash assets.
Expenses are principally interest on mortgages, depreciation of leasehold
improvements, general maintenance and utilities expense. The affairs of the
subsidiary are managed by Bank employees and as such this subsidiary has no
paid staff members.
Earnings for MSB Properties have increased over the years with net earnings
after-tax of $1.4 million, $1.6 million, and $1.3 million, in 1998, 1997 and
1996, respectively. The largest contributing factor for the increase in
earnings in 1997 was a one-time gain of $143 thousand on the sale of excess
property in San Luis Obispo. Leases are written with market terms and at
market rates.
43
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Certain information concerning market risk is contained in the notes to the
financial statements which are included in Item 8 of this Report and in
Management Discussion and Analysis of Financial Condition and Results of
Operations which is included in Item 7 of this Report.
ITEM 7B. DISCLOSURE ABOUT RISKS ASSOCIATED WITH YEAR 2000 ISSUES
"YEAR 2000 READINESS DISCLOSURE"
STATE OF READINESS. The Company began implementation of its Year 2000 Plan in
1997. It has complied with all time-frames associated with that Plan and is
on schedule to meet all remaining deadlines. The most significant component
of that plan was the replacement of the Bank's mainframe computer and
software system with a Year 2000 compliant system. That task was completed in
July 1998 with the installation of the Information Technology Incorporated
software on new Unisys equipment. This system is believed to be Year 2000
compliant and other banking organizations have completed Year 2000 testing
with favorable results. The Company is completing its own testing as well.
The system is installed nationwide at some 1,500 data processing sites for
over 3,000 banks. Other systems are also being assessed including in-house
applications, outside vendor applications, environmental systems and parties
with whom the Company exchanges information. This process has been actively
underway for some time, and while no assurance can be given that all systems
will be addressed, the Management feels that it has addressed all "Mission
Critical" processs in a timely matter. Testing of "Mission Critical" systems
and implementations of compliant systems was substantially complete by early
1999.
Additionally, the Bank has been mailing, and received a number of positive
responses to, its Request for Compliance Assessment Letters to certain of its
credit customers. The Company has also issued Compliance Acknowledgement
Questionaires to new credit customers. While no assurance can be given that
the Year 2000 problem could not negatively effect certain of the Bank's
credit customers and hence negatively affect the Bank, Management feels that
it has proactively addressed the Year 2000 issue as it may affect its
customers and potential customers. 336 credit relationships meet the Bank's
criteria for an assessment and questionaire. These relationships represent
approximately 70% of the total loan portfolio. To date, just four
relationships totaling about $2 million have been identified as being a high
Year 2000 related risk. As previously noted, the Bank has established
reserves within the loan loss allowance to provide for Year 2000 related
losses.
The Company has been designing and distributing printed materials through
mailings and statement stuffers, holding informational seminars for the
Bank's business customers, and engaged a speaker at its October 1997 Annual
Economic Symposium who addressed this issue. Year 2000 seminars are planned
for March 1999 in Santa Maria and San Luis Obispo. Moreover, the Bank has
proactively participated in numerous community meetings dealing with this
topic. Examples of this participation include working with the San Luis
Obispo Y2K Action Alliance, an exhibit at the Y2K expo held February 7, 1999
in San Luis Obispo, a television interview and tour for a local television
station showcasing the Bank's level of Y2K readiness,
44
<PAGE>
participating in local radio panel discussions on the topic, and
presentations to local community groups on Year 2000 readiness and the
specific accomplishments of the Bank.
COSTS TO ADDRESS YEAR 2000 ISSUES. It is important to note that the Company's
current computer system had been fully depreciated after serving the Bank for
over 7 years. It was due for replacement irrespective of the Year 2000 issue.
The total capital cost of the new mainframe, software, terminals and ATM's
associated with the Bank's conversion to date have totaled approximately $7.2
million, all of which has been capitalized and will be amortized over their
expected useful lives. It is expected that additional purchases of certain
equipment will be necessary, but the Company does not expect that the total
cost will exceed $7.5 million. Amortizing these capitalized costs over their
expected useful lives, Management would expect monthly depreciation expense
at approximately $125 thousand. A majority of this expected amount did begin
impacting the income statement in August. The costs associated with the
mailings, questionnaires, seminars and other activities noted above is not
expected to have a material effect on the financial position or results of
operations of the Company.
RISKS FOR THE COMPANY FROM YEAR 2000 ISSUES. 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 the Company. Management believes that its Year 2000 plan,
especially as it relates to its recent computer hardware and software
conversion noted above, fully mitigates this direct risk from the Year 2000
problem. While the Company 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.
Credit risks associated with the difficulties incurred by the Bank's
customers which have problems resulting from Year 2000 issues are considered
low to moderate. Factors considered include, but are not limited to, 1) the
review of the Request for Compliance Assessment Letters and Compliance
Acknowledgment Questionaires received to date, 2) the understanding of each
customer's business which the Bank has, 3) underlying secondary sources of
collateral available to the Bank in the event of default by the customer, 4)
the Bank's allowance for loan losses, 5) the potential effects of general
economic disruptions (e.g. -transportation, communications, electrical) on
the customer and 6) the "ripple effects" from problems elsewhere in the
economy which end up effecting the customer.
Risks associated with the Year 2000 readiness status of the Company's vendors
have also been reviewed. A due diligence process has been initially completed
with the 313 identified vendors serving the Bank. Responses from these
vendors have been reviewed and assessed. Alternate arrangements will be made
where appropriate, but no major concerns exist at this point.
THE COMPANY'S CONTINGENCY PLAN. The Company had set a goal to complete its
Contingency Plans for all Mission Critical processes in early 1999. The
Company has completed these plans and has established an independent panel to
review and approve them by mid 1999. Should additional contingency planning
be needed, or revisions to developed plans be appropriate, Management
believes it will still have time to make adjustments prior to the end of
1999. The independent panel reports that as of early March 1999, it had
reviewed and approved approximately 50% of the Bank Mission Critical
Contingency Plans.
45
<PAGE>
CURRENT TARGET DATES. All projects associated with prior target dates
included in the Company's Year 2000 Plan have been completed. While there can
be no guarantee that the Company will be able to continue to meet all future
target dates associated with its Year 2000 Plan, there are no outstanding
exceptions to either its previous or future target dates. Significant target
dates in the future include, by March 31, 1999, the completion of all
organizational planning guidelines and business impact analysis. By June 30,
1999, business resumption contingency plans will be complete, the method of
validating those business resumption contingency plans will be complete, and
the testing of all mission critical systems and implementation of compliant
systems should be substantially complete.
It should be noted that the Company will be progressively heightening its
customer awareness efforts in the communities it serves between now and
year-end 1999. The Company is taking these steps to provide realistic
information to the public in contrast to more pessimistic views being
promulgated by certain interests.
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
- -------------------------------------------------------------------------------
PART III
- -------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K is incorporated by reference
from the information contained in the Bank's Proxy Statement for the 1999
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference
from the information contained in the Bank's Proxy Statement for the 1999
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by reference
from the information contained in the Bank's Proxy Statement for the 1999
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by reference
from the information contained in the Bank's Proxy Statement for the 1999
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS:
2.1 Agreement to Merge and Plan of Reorganization, dated as of January
29, 1998, filed as an exhibit to the Form 8-K filed February 2, 1998
3.1 Articles of Incorporation, as amended to date
47
<PAGE>
3.2 Bylaws of Registrant*
4.1 Specimen Certificate evidencing shares of Mid-State Bancshares
Common Stock**
10.1 Mid-State Bancshares 1996 Stock Option Plan, form of Stock Option
Agreement and form of Substitute Stock Option Agreement**
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
16 Letter regarding change in certifying accountants***
21 Subsidiary of Mid-State Bancshares - Mid-State Bank is the only
subsidiary**
27 Financial Data Schedule
* Filed as an exhibit to Registrant's Registration Statement (File No.
333-16952) filed on November 27, 1996.
** Filed as part of Registrant's Initial Registration Statement on Form S-4
(File No. 333-48181) filed on March 18, 1998.
*** Filed on August 25, 1998, as part of the Company's Form 8-K, disclosing
change certifying accountants.
48
<PAGE>
(b) SCHEDULES:
Not Applicable
(c) REPORTS ON FORM 8-K
During the fourth quarter of 1998, the Bank did not file any Reports.
Notice of Annual Meeting and Proxy Statement for the Bank's 1999 Annual
Meeting will be mailed to shareholders subsequent to the date of filing
of this Report. Copies of said materials will be furnished to the FDIC in
accordance with applicable rules and regulations.
49
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Bank has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MID-STATE BANK
By: /s/ CARROL R. PRUETT
-----------------------------------
CARROL R. PRUETT
President and Chief Executive Officer
Dated: March 23, 1999
By /s/ JAMES G. STATHOS
-----------------------------------
JAMES G. STATHOS
Executive Vice President
and Chief Financial Officer
Dated: March 23, 1999
50
<PAGE>
SIGNATURES
----------
In accordance with the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the Bank and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Dated:
<S> <C> <C>
/s/ CARROL R. PRUETT President and Chairman March 23, 1999
- -------------------- of the Board
CARROL R. PRUETT
/s/ GRACIA B. BELLO Director March 23, 1999
- --------------------
GRACIA B. BELLO
/s/ CLIFFORD H. CLARK Director March 23, 1999
- --------------------
CLIFFORD H. CLARK
/s/ A. J. DIANI Director March 23, 1999
- --------------------
A. J. DIANI
/s/ DARYL L. FLOOD Director March 23, 1999
- --------------------
DARYL L. FLOOD
/s/ WILLIAM A. HARES Director March 23, 1999
- --------------------
WILLIAM A. HARES
/s/ RAYMOND E. JONES Director March 23, 1999
- --------------------
RAYMOND E. JONES
/s/ STEPHEN P. MAGUIRE Director March 23, 1999
- --------------------
STEPHEN P. MAGUIRE
/s/ GREGORY R. MORRIS Director March 23, 1999
- --------------------
GREGORY R. MORRIS
/s/ WILLIAM L. SNELLING Director March 23, 1999
- --------------------
WILLIAM L. SNELLING
</TABLE>
51
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
- ------- ----------- -----------
<S> <C> <C>
3.1 Articles of Incorporation, 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
27 Financial Data Schedule
</TABLE>
52
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Report of Independent Public Accountants F-2
Report of Independent Public Accountants F-3
Consolidated Statements of Financial Position F-4
Consolidated Statements of Income and Comprehensive Income F-5
Consolidated Statements of Changes in Capital Accounts F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
Management Statement F-30
Report of Independent Public Accountants F-31
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF MID-STATE BANCSHARES:
We have audited the accompanying consolidated statements of financial
position of Mid-State Bancshares and Subsidiary (The Company) as of December
31, 1998 and 1997, and the related consolidated statements of income and
comprehensive income, changes in capital accounts and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. The consolidated financial statements give retroactive effect
to the merger of Mid-State Bank and BSM Bancorp on July 10, 1998, in a
transaction accounted for as a pooling of interests, as discussed in Note 2.
We did not audit the consolidated financial statements of BSM Bancorp as of
December 31, 1997, and the related consolidated statements of income, changes
in capital accounts and cash flows for each of the two years in the period
ended December 31, 1997. Such statements are included in the accompanying
consolidated statements of financial position of Mid-State Bancshares and
Subsidiary and reflect total assets, net interest income and net income of
29.0%, 29.2% and 23.8%, respectively, of the related consolidated totals for
1997, and net interest income and net income of 30.0% and 44.0%,
respectively, of the related consolidated totals for 1996. These statements
were audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to amounts included for BSM Bancorp, is based
solely upon the report of the other auditors.
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, and the report
of other auditors, provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Mid-State Bancshares and Subsidiary as of
December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
January 21, 1999
F-2
<PAGE>
Report of Independent Public Accountants
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF BSM BANCORP AND SUBSIDIARY:
We have audited the consolidated balance sheet of BSM Bancorp and Subsidiary
as of December 31, 1997 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the two years in
the period ended December 31, 1997. These financial statements, which are not
presented separately herein, are the responsibility of the Company'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 BSM Bancorp and Subsidiary
as of December 31, 1997, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ Vavrinek, Trine, Day & Co., LLP
-----------------------------------
VAVRINEK, TRINE, DAY & CO., LLP
Laguna Hills, California
January 8, 1998
F-3
<PAGE>
Consolidated Statements of Financial Position
(dollars in 000's except share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH AND DUE FROM BANKS $ 66,761 $ 92,180
FEDERAL FUNDS SOLD 51,865 17,461
SECURITIES, net:
Securities available for sale 474,754 419,314
Securities held to maturity (market value of $42,704
and $63,074, respectively) 41,916 62,767
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES 516,670 482,081
- ------------------------------------------------------------------------------------------------------------------------
LOANS, net 538,879 527,512
BANK PREMISES AND EQUIPMENT, net 29,736 33,172
ACCRUED INTEREST RECEIVABLE 10,869 10,503
INVESTMENTS IN REAL ESTATE, net 6,769 8,768
OTHER REAL ESTATE OWNED, net 259 3,480
OTHER ASSETS 13,148 11,188
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,234,956 $ 1,186,345
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Demand deposits $ 224,516 $ 212,077
Savings, money market and NOW accounts 539,394 523,577
Time deposits--$100,000 or more 88,743 87,301
Time deposits--Under $100,000 236,022 240,391
- ------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,088,675 1,063,346
- ------------------------------------------------------------------------------------------------------------------------
OTHER BORROWINGS 3,049 4,495
ACCRUED INTEREST PAYABLE & OTHER LIABILITIES 9,508 4,476
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 1,101,232 $ 1,072,317
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 15)
CAPITAL ACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------
Capital stock, no par value:
Authorized--50,000,000 shares
Outstanding--10,078,416 shares in 1998 and
9,961,721 in 1997 $ 42,894 $ 41,576
Undivided profits 86,548 70,667
Accumulated other comprehensive income, net of tax 4,282 1,785
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL ACCOUNTS 133,724 114,028
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & CAPITAL ACCOUNTS $ 1,234,956 $ 1,186,345
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
F-4
<PAGE>
Consolidated Statements of Income and Comprehensive Income
(dollars in 000's except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases $ 55,064 $ 53,383 $ 49,789
Interest on securities:
U.S. Treasury securities 10,673 11,662 11,570
U.S. Government agencies and corporations 8,967 9,505 8,593
Obligations of states and political subdivisions, other 9,692 5,868 3,528
Interest on funds sold 2,564 1,858 1,936
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 86,960 82,276 75,416
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 25,659 25,361 23,973
Interest on mortgages payable, other 333 199 177
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 25,992 25,560 24,150
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 60,968 56,716 51,266
Provision for loan losses 300 30 227
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 60,668 56,686 51,039
- ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts 6,454 6,813 6,470
Commissions, fees and other service charges 7,372 6,291 5,725
Investments in real estate 927 507 949
Reversal of reserve for losses on investments in real estate 5,300 -- --
Securities gains, net of (losses) 33 90 (4)
Other income 2,795 2,759 2,679
- ------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 22,881 16,460 15,819
- ------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries & Employee benefits 26,098 26,698 24,768
Occupancy expenses 7,643 7,871 7,738
Provision for losses and expenses on real estate 177 2,387 6,696
Merger related charges 7,440 -- --
Other operating expenses 14,171 13,932 14,640
- ------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 55,529 50,888 53,842
- ------------------------------------------------------------------------------------------------------------------------
Income before taxes 28,020 22,258 13,016
Tax expense 9,000 4,616 5,138
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 19,020 $ 17,642 $ 7,878
- ------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME BEFORE TAXES:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during year $ 4,196 $ 1,558 $ (2,365)
Less: reclassification adjustment for gains (losses)
included in net income 33 90 (4)
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, before tax 4,163 1,468 (2,361)
Income tax expense (benefit) related to items in
comprehensive income 1,666 585 (967)
- ------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME,
NET OF TAXES 2,497 883 (1,394)
- ------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 21,517 $ 18,525 $ 6,484
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
-- Basic $ 1.90 $ 1.77 $ 0.79
-- Diluted $ 1.88 $ 1.76 $ 0.79
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
F-5
<PAGE>
Consolidated Statements of
Changes in Capital Accounts
(dollars in 000's except share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Number of Capital Undivided Comprehensive
Shares Stock Profits Income (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 9,938,321 $27,001 $62,181 $ 2,296 $ 91,478
Stock dividend -- 4,684 (4,699) -- (15)
Cash dividend -- -- (964) -- (964)
Over accrual of 1995 cash dividend on
partial shares related to stock dividend -- -- 2 -- 2
Exercise of stock options 23,400 210 -- -- 210
Net Income -- -- 7,878 -- 7,878
Change in unrealized (loss)
on available for sale securities -- -- -- (1,394) (1,394)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 9,961,721 $31,895 $64,398 $ 902 $ 97,195
Stock dividend -- 9,497 (9,537) -- (40)
Cash dividend -- -- (1,831) -- (1,831)
Under accrual of 1996 cash dividend on
partial shares related to stock dividend -- -- (5) -- (5)
Exercise of stock options 18,131 184 -- -- 184
Net Income -- -- 17,642 -- 17,642
Change in unrealized gain
on available for sale securities -- -- -- 883 883
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 9,979,852 $41,576 $70,667 $ 1,785 $ 114,028
Cash dividend -- -- (3,147) -- (3,147)
Over accrual of 1997 cash dividend on
partial shares related to stock dividend -- -- 8 -- 8
Exercise of stock options 98,564 1,318 -- -- 1,318
Net Income -- -- 19,020 -- 19,020
Change in unrealized gain
on available for sale securities -- -- -- 2,497 2,497
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 10,078,416 $42,894 $86,548 $ 4,282 $ 133,724
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
F-6
<PAGE>
Consolidated Statements of Cash Flows
(dollars in 000's)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 19,020 $ 17,642 $ 7,878
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and amortization 3,624 3,880 3,783
Amortization of investment security premiums, net 1,238 787 1,075
Merger related losses on sale of bank premises and equipment 2,500 -- --
Provision for OREO valuation allowance -- -- 350
Provision for losses on investments in real estate (5,300) 1,997 5,500
Provision for credit losses 300 30 227
Net gain on sales of other real estate owned (1,334) (1,032) (1,722)
Deferred tax charge (benefit) 1,633 (3,755) 872
(Increase) decrease in accrued interest and other assets (2,326) 863 (2,203)
Increase (decrease) in accrued interest payable
and other liabilities 5,032 (3,730) 147
Other changes, net (2,721) (1,591) (1,188)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,666 15,091 14,719
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities 162,781 162,116 137,449
Purchases of securities (195,787) (206,898) (211,824)
Proceeds from sales of other real estate owned 3,910 7,368 10,483
Net increase in loans (11,280) (29,662) (15,078)
Receipts from real estate investments, net of advances 8,142 4,105 13,522
Purchases of premises and equipment (8,553) (6,991) (4,680)
Proceeds from sales of premises and equipment 6,052 1,790 974
Net cash received - bank acquisition -- -- 8,067
- ------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (34,735) (68,172) (61,087)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in demand deposits, savings
and money market accounts 28,256 36,045 5,106
Net (decrease) increase in time deposits (2,927) 26,298 28,702
Net (decrease) increase in other borrowings (1,446) (2,930) 1,835
Cash dividend paid (3,147) (1,831) (964)
Proceeds from exercise of stock options 1,318 184 210
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 22,054 57,766 34,889
- ------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 8,985 4,685 (11,479)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 109,641 104,956 116,435
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 118,626 $ 109,641 $ 104,956
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized) $ 25,464 $ 26,276 $ 25,426
Taxes on income, net 6,500 6,796 3,635
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
F-7
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1998
- -------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
- -------------------------------------------------------------------------------
The accounting and reporting policies of Mid-State Bancshares and Subsidiary
(the "Company") conform with generally accepted accounting principles (GAAP)
and general practice within the banking industry. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and dislosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The following are descriptions of the more significant accounting
policies of the Company.
CONSOLIDATION: The consolidated financial statements include the accounts of
Mid-State Bancshares and its wholly owned Subsidiary, Mid-State Bank, which
includes the Bank's wholly owned subsidiaries, Mid Coast Land Company and MSB
Properties. Significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
STATEMENT OF CASH FLOWS: The Company presents its cash flows using the
indirect method and reports certain cash receipts and payments arising from
customer loans and deposits and deposits placed with other financial
institutions on a net basis. Cash and cash equivalents include short-term,
highly liquid investments that generally have an original maturity of three
months or less.
SECURITIES: Securities for which the Company has the positive intent and
ability to hold until maturity are classified as held-to-maturity securities.
Securities which are purchased principally for the purpose of selling them in
the near term for a gain are classified as trading securities. Securities not
classified as held-to-maturity or trading are classified as available for
sale. The Company holds no securities that should be classified as trading
securities. Securities classified as available for sale are reported on the
consolidated statements of financial position as of December 31, 1998 and
1997, at their market value. The net unrealized gains or losses for these
securities are reported, net of related taxes, in the statements of income and
comprehensive income and as a separate component of the capital accounts for
the years ended December 31, 1998, 1997 and 1996. Securities classified as
held-to-maturity are reported on the consolidated statements of financial
position as of December 31, 1998 and 1997 at their amortized cost basis.
Interest income from the securities portfolio is accrued as earned including
the accretion of discounts and the amortization of premiums based on the
original cost of each security owned.
LOANS: Loans are stated at face amount, less payments collected and deferred
loan fees. The allowance for loan losses, which is based on estimates, is
maintained at a level considered adequate to provide for losses that are
considered to be inherent in the portfolio. Ultimate losses may vary from the
current estimates. Management reviews these estimates periodically,
considering the borrower's financial status, current economic conditions,
historical loan loss experience and other factors. As adjustments become
necessary, they are reported in earnings in the periods in which they become
known. The allowance is increased by provisions charged to operating expense
and reduced by net charge-offs.
In determining income recognition on loans, generally no interest is
recognized with respect to loans on which a default of interest or principal
has occurred for a period of 90 days or more. Loans are placed on non-accrual
status when management believes that the borrower's financial condition,
after giving consideration to economic and business conditions and collection
efforts, is such that the presumption of collectibility of interest no longer
is prudent. When a loan is placed on non-accrual status, previously accrued
and uncollected interest is reversed from income.
F-8
<PAGE>
OTHER REAL ESTATE OWNED: Other real estate owned (OREO), comprised of real
estate acquired through foreclosure, is carried at the lower of cost or
estimated fair value.
INVESTMENTS IN REAL ESTATE: Real estate acquired for sale or development is
stated at cost or market value, whichever is less. Real estate operations
from investments acquired for development are conducted and profits are
shared pursuant to agreements with outside joint venture investors and are
accounted for under the equity method. Gains on sales of such real estate are
recognized when certain criteria relating to the buyer's initial and
continuing investment in the property are met. Under certain circumstances,
the gain, or a portion thereof, may be deferred until the criteria are met.
The Company capitalizes interest on funds disbursed during the active
development phases of real estate development projects and the construction
of Bank premises.
The Bank's real estate development subsidiary, Mid Coast Land Company, has
established a reserve for losses on real estate investment activities. This
amount is netted against investments in real estate in the Consolidated
Statements of Financial Position.
BANK PREMISES AND EQUIPMENT: Bank premises and equipment are carried at cost,
less accumulated depreciation and amortization. Depreciation and amortization
are computed principally on the straight-line method over the lesser of the
estimated useful life of each type of asset or the lease term.
COMPREHENSIVE INCOME: The Company has retroactively adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "REPORTING COMPREHENSIVE
INCOME", which requires that an enterprise report and display, by major
components and as a single total, the change in its net assets during the
period from non-owner sources. The adoption of this statement resulted in a
change in the financial statement presentation, but did not have an impact on
the Company's consolidated financial position or results of operations.
ACCOUNTING FOR INCOME TAXES: Deferred income tax assets or liabilities are
computed based on the difference between the financial statement and income
tax basis of assets and liabilities using the enacted marginal tax rate.
Deferred income tax expenses or benefits are based on the changes in the
deferred asset or liability from period to period.
NEW ACCOUNTING PRONOUNCEMENTS: The Financial Accounting Standards Board
(FASB) recently issued SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION" and SFAS No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES."
SFAS No. 131 establishes interim and annual reporting standards for public
entities regarding an enterprise's operating segments and related disclosures
about its products, services, geographic areas and major customers. The
statement is effective for the year-end 1998 financial statements and is
retroactive for all years presented. The adoption of this statement did not
have a material impact on the consolidated financial position or results of
operations.
SFAS No. 133 establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded on the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Such hedge transactions
require that a company must formally document, designate, and assess the
effectiveness of transactions. The Company plans to adopt this statement on
January 1, 2000. The Company currently has no derivative or hedged
instruments and therefore the implementation of this statement is not
expected to have a material impact on the Company's financial position or
results of operations.
F-9
<PAGE>
RECLASSIFICATIONS: Certain items in the consolidated financial statements for
1997, and 1996 were reclassified to conform to the 1998 presentation.
- -------------------------------------------------------------------------------
2. Merger of Mid-State Bank, Bank of Santa Maria and BSM Bancorp
- -------------------------------------------------------------------------------
The Company entered into an "Agreement to Merge and Plan of Reorganization"
dated January 29, 1998 and amended on March 27, 1998 by and among Mid-State
Bank, BSM Bancorp and Bank of Santa Maria. This matter was submitted to a
vote of the shareholders of Mid-State Bank at its Annual Meeting on June 17,
1998. The matter was also submitted to a vote of the shareholders of BSM
Bancorp, the parent company of Bank of Santa Maria, on June 18, 1998. The
shareholders of both organizations approved the merger. Co-terminus with the
completion of the merger on July 10, 1998, BSM Bancorp changed its name to
Mid-State Bancshares and remained the parent company to the merged bank,
which retained the Mid-State Bank name. The merger was accounted for on a
pooling of interests basis and as a result, prior periods are combined and
restated as if the two banks were historically one unit.
The following summarizes the separate revenue and net income of BSM Bancorp
and Mid-State Bank that have been reported in the restated financial
statements of Mid-State Bancshares for the years ending December 31:
<TABLE>
<CAPTION>
(dollars in 000's) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and non-interest income:
BSM Bancorp * $ 14,721 $28,481 $26,470
Mid-State Bank: Pre-merger * 37,243 70,255 64,765
Mid-State Bancshares: Post-merger 57,877 -- --
-------- ------- -------
Total $109,841 $98,736 $91,235
-------- ------- -------
-------- ------- -------
Net Income:
BSM Bancorp * $ 2,306 $ 4,205 $ 3,468
Mid-State Bank: Pre-merger * 7,123 13,437 4,410
Mid-State Bancshares: Post-merger 9,591 -- --
-------- ------- -------
Total $ 19,020 $17,642 $ 7,878
-------- ------- -------
-------- ------- -------
</TABLE>
* For the year ended December 31, 1998, results for BSM Bancorp and Mid-State
Bank (pre-merger), reflect the six month period ended June 30, 1998. Results
from July 1, 1998 through July 10, 1998, the date of the merger, have not
been seperately identified and were not considered material to the financial
statements.
F-10
<PAGE>
The shares outstanding for Mid-State Bancshares at December 31, 1998, result
from the following activity in 1998:
<TABLE>
<CAPTION>
BSM Mid-State Mid-State
Bancorp Bank Bancshares
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares Outstanding December 31, 1997: 2,990,939 6,905,100
Stock Options Exercised Prior to Merger 71,400 2,700
Additional Shares Issued in Connection with
the Exchange for Mid-State Bancshares stock -- 83,813
---------- ----------
3,062,339 6,991,613 10,053,952
---------- ---------
---------- ---------
Stock Options Exercised After the Merger 24,464
----------
Shares Outstanding December 31, 1998: 10,078,416
----------
----------
</TABLE>
- -------------------------------------------------------------------------------
3. Cash Reserves
- -------------------------------------------------------------------------------
The average reserve balances required to be maintained by the Federal Reserve
Bank were approximately $19,947,000 and $13,162,000 at December 31, 1998 and
1997, respectively.
- -------------------------------------------------------------------------------
4. Securities
- -------------------------------------------------------------------------------
A summary of investment securities owned as of December 31, 1998 and 1997 is
as follows.
<TABLE>
<CAPTION>
1998
Gross Gross
(dollars in 000's) Amortized Unrealized Unrealized Market
SECURITIES AVAILABLE FOR SALE Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 172,110 $ 2,651 $ -- $ 174,761
Securities of U.S. government
agencies and corporations 125,492 1,248 5 126,735
Mortgage backed securities 12,505 20 31 12,494
Obligations of states and
political subdivisions 156,173 3,307 59 159,421
Other investments 1,336 8 1 1,343
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
TOTAL $ 467,616 $ 7,234 $ 96 $ 474,754
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
SECURITIES HELD TO MATURITY Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities of U.S. government
agencies and corporations $ 8,754 $ 107 $ -- $ 8,861
Mortgage backed securities 706 9 -- 715
Obligations of states and
political subdivisions 30,852 673 -- 31,525
Other investments 1,604 2 3 1,603
=====================================================================================================================
TOTAL $ 41,916 $ 791 $ 3 $ 42,704
=====================================================================================================================
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
SECURITIES AVAILABLE FOR SALE Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 160,279 $ 1,506 $ 79 $ 161,706
Securities of U.S. government
agencies and corporations 130,253 628 154 130,727
Mortgage backed securities 16,749 24 63 16,710
Obligations of states and
political subdivisions 107,158 1,167 95 108,230
Other investments 1,900 41 -- 1,941
====================================================================================================================
TOTAL $ 416,339 $ 3,366 $ 391 $ 419,314
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
SECURITIES HELD TO MATURITY Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 1,000 $ -- $ -- $ 1,000
Securities of U.S. government
agencies and corporations 27,712 71 86 27,697
Mortgage backed securities 1,202 0 1 1,201
Obligations of states and
political subdivisions 30,238 333 1 30,570
Other investments 2,615 7 16 2,606
====================================================================================================================
TOTAL $ 62,767 $ 411 $ 104 $ 63,074
====================================================================================================================
</TABLE>
Securities having an amortized cost of $43,319,000 and $49,311,000 at
December 31, 1998 and 1997, respectively, were pledged to secure public
deposits and for other purposes as required by law.
Proceeds from calls, partial paydowns and/or sales of securities during 1998
were $38,045,044. Gross gains of $42,992 and gross losses of $9,585 were
realized on that activity.
The amortized cost and market value of securities at December 31, 1998 and
1997, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available For Sale Held-to-Maturity
------------------ ----------------
Amortized Market Amortized Market
1998 (dollars in 000's) Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $161,788 $162,750 $ 10,037 $ 10,075
Due after one year to three years 204,073 207,976 12,956 13,195
Due after three years to five years 67,967 69,855 7,904 8,080
Due after five years to ten years 29,323 29,687 11,019 11,354
Due after ten years 4,465 4,486 -- --
- ---------------------------------------------------------------------------------------------------------
TOTAL $467,616 $474,754 $ 41,916 $ 42,704
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
Available For Sale Held-to-Maturity
------------------ ----------------
Amortized Market Amortized Market
1998 (dollars in 000's) Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 93,002 $ 93,126 $ 15,754 $15,757
Due after one year to three years 178,446 179,671 17,287 17,349
Due after three years to five years 112,153 113,462 19,044 19,124
Due after five years to ten years 25,563 25,868 9,343 9,490
Due after ten years 7,175 7,187 1,339 1,354
- ---------------------------------------------------------------------------------------------------------
TOTAL $416,339 $419,314 $ 62,767 $63,074
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
- -------------------------------------------------------------------------------
5. Loans and Allowance for Loan Losses
- -------------------------------------------------------------------------------
THE LOAN PORTFOLIO CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in 000's) 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Construction and development loans $ 69,770 $ 41,094
Real estate loans 248,326 252,969
Home equity credit lines 54,865 70,933
Installment loans 30,587 32,440
Credit cards & related 9,542 15,520
Agricultural Production 35,128 34,993
Commercial, other 105,589 94,578
- ------------------------------------------------------------------------------------------------------------------
553,807 542,527
- ------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses (12,901) (13,366)
Less deferred loan fees (2,027) (1,649)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL LOAN PORTFOLIO $ 538,879 $ 527,512
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, $372,961,000 of the Bank's portfolio was collateralized
by various forms of real estate. The Bank attempts to reduce its
concentration of credit risk by making loans which are diversified by project
type and geographic locations throughout the Central Coast of California.
While management of the Bank believes that the collateral presently securing
this portfolio is adequate, there can be no assurances that a deterioration
in the California real estate market would not expose the Bank to
significantly greater credit risk.
Loans on non-accrual status totaled $1,899,000 and $3,468,000 at December 31,
1998 and 1997, respectively. If interest income on non-accrual loans had been
recorded as originally scheduled, approximately $157,000, $1,503,000, and
$1,590,000 of additional interest income would have been recorded for the
years ended December 31, 1998, 1997 and 1996. Additionally, interest income
which was recognized for loans on non accrual totaled $88,000, $336,000, and
$348,000, for 1998, 1997, and 1996, respectively.
A loan is identified as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the
loan agreement. Because this definition is very similar to that used by bank
regulators to determine on which loans interest should not be accrued, the
Bank expects that most impaired loans will be on non-accrual status.
Therefore, in general, the accrual of interest on impaired loans is
discontinued, and any uncollected interest is written off against interest
from other loans in the current period. No further income is recognized until
all recorded amounts of principal are recovered in full or until
circumstances have changed such that the loan is no longer regarded as
impaired. Certain impaired loans are both fully secured by collateral and are
current in their interest and principal payments. These impaired loans are
not classified as nonaccrual and $302,000, $304,000 and $329,000 in interest
was recognized from these loans during 1998, 1997 and 1996, respectively.
The amount of the valuation allowance for impaired loans is determined by
comparing the recorded investment in each loan with its value measured by one
of three methods: (1) the expected future cash flows discounted at the
effective interest rate; (2) the loan's observable market price, if available
from a secondary market; or (3) by valuing the underlying collateral. A
valuation allowance is computed as any amount by which the recorded
investment exceeds the value of the impaired loan. If the value of the loan,
as determined by one of the above methods, exceeds the recorded
F-14
<PAGE>
investment in the loan, a valuation allowance for the loan is not
established. The following table discloses information about impaired loans
and their related allowance.
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in 000's) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Loans identified as impaired at year end $ 3,985 $ 5,756
Impaired loans for which a valuation
allowance has been determined 2,573 4,077
Impaired loans for which no valuation
allowance was determined necessary 1,412 1,679
Amount of valuation allowance $ 892 $ 1,055
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
The average amount of the recorded investment in impaired loans during the
year ended December 31, 1998 and 1997, was approximately $3,978,000 and
$7,739,000, respectively.
The valuation allowance reported above is determined on a loan-by-loan basis
or by aggregating loans with similar risk characteristics. Because the loans
currently identified as impaired have unique risk characteristics, the
valuation allowance was determined on a loan-by-loan basis.
The Bank also provides an allowance for losses for (1) loans that while not
individually identified as being currently impaired, are internally evaluated
as having a relatively higher level of credit risk and (2) losses inherent in
the balance of the loan portfolio which have not been specifically identified
as of the year-end. The allowance is based on review of individual loans,
historical trends, current economic conditions, and other factors. The
allowance for loan losses consists of an amount allocated to loans which are
impaired, a statistically allocated portion, a specifically allocated
portion, and the remaining unallocated portion. The total of these components
is considered adequate to provide for losses which can be reasonably
anticipated.
The allowance for loan losses is netted against loans on the statement of
financial position for December 31, 1998 and 1997. A summary of the changes
in the allowance account is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in 000's) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 13,366 $ 13,140 $ 14,145
Additions to the allowance charged to expense 300 30 227
Allowance acquired from merger -- -- 228
Loans charged off (1,528) (1,576) (3,260)
Recoveries of loans previously
charged off 763 1,772 1,800
- ---------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 12,901 $ 13,366 $ 13,140
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
AN ANALYSIS OF LOANS TO DIRECTORS AND OFFICERS IS AS FOLLOWS:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in 000's) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, at beginning of year $ 7,080 $ 9,139
Additional loans made 1,000 3,026
Payments received (1,884) (5,085)
- ---------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 6,196 $ 7,080
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
These loans were made in the ordinary course of the Bank's business and, in
management's opinion, were made at prevailing rates and terms.
F-15
<PAGE>
- -------------------------------------------------------------------------------
6. Bank Premises and Equipment
- -------------------------------------------------------------------------------
BANK PREMISES AND EQUIPMENT CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in 000's) 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 9,524 $ 10,069
Buildings 19,182 20,077
Furniture and equipment 21,716 24,979
Construction in progress 211 434
- -------------------------------------------------------------------------------------------------
50,633 55,559
Less--Accumulated depreciation and amortization (20,897) (22,387)
- -------------------------------------------------------------------------------------------------
TOTAL PREMISES AND EQUIPMENT $ 29,736 $ 33,172
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization included in occupancy expenses was $3,624,000,
$3,880,000, and $3,783,000 in 1998, 1997 and 1996, respectively, based on the
following estimated useful lives:
Buildings 0-40 years
Furniture and equipment 3-20 years
Total rental expense for banking premises was $882,000, $770,000, and
$837,000, in 1998, 1997 and 1996, respectively. As of December 31, 1998 the
approximate minimum future lease rentals payable under non-cancellable lease
contracts for bank premises were as follows:
<TABLE>
<CAPTION>
Year (dollars in 000's)
- ---------------------------------------------------------------------
<S> <C>
1999 $ 778
2000 594
2001 429
2002 413
2003 310
Thereafter 2,370
- ---------------------------------------------------------------------
TOTAL LEASE COMMITMENTS $ 4,894
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
- -------------------------------------------------------------------------------
7. Investments in Real Estate
- -------------------------------------------------------------------------------
REAL ESTATE HELD FOR SALE OR DEVELOPMENT INCLUDES THE FOLLOWING:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in 000's) 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Advances to and investments in real estate joint ventures $ 699 $ 820
Direct investments in real estate development 6,292 13,808
Interest capitalized on investments in real estate 40 184
Allowance for losses on investments in real estate (262) (6,044)
- ------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN REAL ESTATE, NET $ 6,769 $ 8,768
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The Federal Deposit Insurance Corporation (FDIC) Improvement Act (FDICIA)
became law in December 1991. Under FDICIA the Bank was originally required to
substantially eliminate its real estate development activities by December
19, 1996. In July 1996, the Bank received an extension of the deadline for
two years to Decemer 31, 1998. On December 15, 1998, the Regional Director of
the FDIC extended the deadline to December 31, 2000.
The Bank's real estate operations are significant to the local real estate
market. Based on current estimates of the fair value of the Bank's real
estate operations, management believes that the properties are carried at the
lower of cost or market. However, there can be no assurances that a
deterioration in the local real estate markets would not expose the Bank to
the risk of significant additional losses. Management continues with its
liquidation plans for its various development projects. If adjustments become
necessary, they will be reported in earnings in the period in which they
become known.
- -------------------------------------------------------------------------------
8. Disclosures about Fair Value of Financial Instruments
- -------------------------------------------------------------------------------
Where applicable, the Bank is required by GAAP to disclose the fair value of
financial instruments and the methods and significant assumptions used to
estimate those fair values. In the case of financial instruments for which it
is not practicable to estimate the fair value, the Bank is required to
disclose information pertinent to estimating the fair value such as interest
rates and maturity, and also state the reasons why it is not practicable to
estimate fair value.
"Fair values of financial instruments depict the market's assessment of the
present value of net future cash flows directly or indirectly embodied in
them, discounted to reflect both current interest rates and the market's
assessment of the risk that the cash flows will not occur." The information
about fair value is said to better enable "investors, creditors, and other
users to assess the consequences of an entity's investment and financing
strategies, that is, to assess its performance."
Nonetheless, there are several factors which users of these financial
statements should consider. First, there are uncertainties inherent in
the process of estimating the fair value of financial instruments. Secondly,
the statement covers financial instruments only, not other assets like
premises and equipment, the fair value of which might differ significantly
from the amounts at which they are carried in an entity's financial
statements. Thirdly, the Bank must exclude from its estimate of the fair
value of deposit liabilities any consideration of its ongoing customer
relationships which provide stable sources of investable funds. Lastly, these
disclosures do not address means of evaluating an entity's performance in
areas other than the management of financial instruments; for example, the
ability to generate non-interest income and the control of non-interest
expense. For these reasons, users are advised not to regard the disclosure of
the fair market value of financial instruments as in any way equivalent to a
valuation of the Bank as a whole.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments
F-17
<PAGE>
for which it is practicable to estimate that value:
CASH AND DUE FROM BANKS AND FED FUNDS SOLD
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
INVESTMENT SECURITIES
For securities held as investments, fair value equals quoted market
price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
LOAN RECEIVABLES
For certain homogeneous categories of loans, such as some residential
mortgages, credit card receivables, and other consumer loans, fair
value is estimated using the quoted market prices for securities backed
by similar loans, adjusted for differences in loan characteristics.
The fair value of other types of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same
remaining maturities.
DEPOSIT LIABILITIES
The fair value of demand deposits is the amount payable on demand. The
fair value of fixed-maturity certificates of deposit, savings accounts
and money market deposits is estimated using the rates currently
offered for deposits of similar remaining maturities.
OTHER BORROWINGS
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
Commitments to extend credit and letters of credit are written at
current market rates. The Bank does not anticipate any interest rate or
credit factors that would affect the fair value of commitments or
letters of credit outstanding at December 31, 1998.
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
(dollars in 000's) 1998 1997
- --------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 66,761 $ 66,761 $ 92,180 $ 92,180
Fed funds sold 51,865 51,865 17,461 17,461
Investment securities 516,670 517,458 482,081 482,388
Loans, net 538,879 547,292 527,512 528,588
Financial liabilities:
Deposits 1,088,675 1,082,455 1,063,346 1,057,325
Other borrowings 3,049 3,049 4,495 4,495
</TABLE>
F-18
<PAGE>
- -------------------------------------------------------------------------------
9. Income Taxes
- -------------------------------------------------------------------------------
The current and deferred amounts of the provision for taxes in the years ended
December 31, were:
<TABLE>
<CAPTION>
(dollars in 000's) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 5,308 $ 6,345 $ 2,623
Deferred 1,844 (3,468) 549
- ----------------------------------------------------------------------------------------------------
TOTAL FEDERAL TAXES $ 7,152 2,877 3,172
- ----------------------------------------------------------------------------------------------------
State:
Current 2,059 2,026 1,643
Deferred (211) (287) 323
- ----------------------------------------------------------------------------------------------------
TOTAL STATE TAXES 1,848 1,739 1,966
- ----------------------------------------------------------------------------------------------------
TOTAL FEDERAL AND STATE TAX EXPENSE $ 9,000 $ 4,616 $ 5,138
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The provision for taxes on income differed from the amounts computed using
the federal statutory rate of 35 percent as follows:
<TABLE>
<CAPTION>
(dollars in 000's) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at federal statutory tax rate $ 9,807 $ 7,790 $ 4,556
Alternative minimum tax (credit) -- -- (472)
State income tax expense 2,170 1,543 793
Tax savings from exempt investment and loan income (502) (273) (197)
Merger related expenses 921 -- --
Other, net 272 999 (1,008)
- ----------------------------------------------------------------------------------------------------
Total before change in valuation allowance $ 12,668 $ 10,059 $ 3,672
Change in valuation allowance (3,668) (5,443) 1,466
- ----------------------------------------------------------------------------------------------------
TOTAL TAX EXPENSE $ 9,000 $ 4,616 $ 5,138
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE PRINCIPAL ITEMS GIVING RISE TO DEFERRED TAXES WERE:
<TABLE>
<CAPTION>
(dollars in 000's) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses $ (32) $ 66 $ 724
Gain on loan workouts (25) (581) (913)
Real estate joint ventures 5,852 1,047 (290)
Deferred compensation (139) (66) 90
Merger related expenses (1,016) -- --
State income taxes 86 (34) (315)
Provisions for OREO Properties 991 857 204
Depreciation (226) (300) (81)
Securities - discount accretion (286) 114 123
Change in valuation allowance (3,668) (5,443) 1,466
Other, net 96 585 (136)
- -----------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAXES $ 1,633 $ (3,755) $ 872
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
- -------------------------------------------------------------------------------
AS OF DECEMBER 31, THE DEFERRED TAX ASSETS AND LIABILITIES ARE AS FOLLOWS:
<TABLE>
<CAPTION>
(dollars in 000's) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Allowance for loan losses $ 4,736 $ 4,704 $ 4,770
Gain on loan workouts 1,519 1,494 913
Real estate joint ventures 1,293 7,145 8,192
Deferred compensation 1,153 1,014 948
Merger related expenses 1,016 -- --
State income taxes 544 630 596
Provisions for OREO properties 292 1,283 2,140
All other, net 162 258 843
- ----------------------------------------------------------------------------------------------
Total Assets 10,715 16,528 18,402
- ----------------------------------------------------------------------------------------------
Liabilities:
Depreciation and amortization (448) (674) (974)
Securities-- discount accretion (70) (356) (242)
- ----------------------------------------------------------------------------------------------
Total Liabilities (518) (1,030) (1,216)
- ----------------------------------------------------------------------------------------------
Valuation Allowance -- (3,668) (9,111)
- ----------------------------------------------------------------------------------------------
Net deferred tax asset before tax effect of
unrealized gain on securities available for sale $ 10,197 $ 11,830 $ 8,075
Tax effect of unrealized
gain on securities available for sale (2,856) (1,190) (605)
- ----------------------------------------------------------------------------------------------
DEFERRED TAX ASSET, NET $ 7,341 $ 10,640 $ 7,470
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
The valuation allowance provides for deferred taxes that are not anticipated
to be offset by taxable income projected for the next 12 months. The
valuation allowance is based on estimates by management which could change in
the near term. Management does not currently believe that a valuation
allowance is required.
As of December 31, 1998, the Bank has no operating loss and tax credit
carryforwards for financial reporting purposes. There are also no alternative
minimum tax credit carryforwards for tax purposes.
- -------------------------------------------------------------------------------
10. Other Borrowings
- -------------------------------------------------------------------------------
Mid-State Bank's wholly owned subsidiaries have obtained first trust deed
mortgage financing for several of the properties and investments that they
own. Mortgages payable totaled $189,000 and $213,000 at December 31, 1998 and
1997, respectively. Other borrowings also include borrowings under the
Treasury Tax and Loan note account of $1,659,000 and $2,532,000 at December
31, 1998 and 1997, respectively. Securities sold under agreement to
repurchase are also included in other borrowings of $1,200,000 and $1,750,000
at December 31, 1998 and 1997, respectively.
F-20
<PAGE>
- -------------------------------------------------------------------------------
11. Commitments and Contingencies
- -------------------------------------------------------------------------------
At December 31, 1998 and 1997, the Bank was contingently liable for letter of
credit accommodations made to its customers totaling $18,997,000 and
$29,776,000, respectively. At December 31, 1998 and 1997, the Bank also had
undisbursed loan commitments in the amount of $225,104,000 and $243,992,000,
respectively.
Many of the commitments are expected to expire without being drawn upon.
Accordingly, the total outstanding commitment amount does not necessarily
represent future cash requirements. The Bank does not anticipate any
significant losses as a result of these transactions. Provision has been made
for losses which may be sustained in the fulfillment of, or from an inability
to fulfill, any commitments.
The Bank is involved in litigation of a routine nature which is being handled
and defended in the ordinary course of the Bank's business. In the opinion of
management, based on the advice of legal counsel, the resolution of this
litigation will have no material impact on the Bank's financial condition or
results of operations.
F-21
<PAGE>
- -------------------------------------------------------------------------------
12. Earnings Per Share
- -------------------------------------------------------------------------------
Earnings per share (EPS) have been computed in 1998, 1997 and 1996, based on
the weighted average number of shares outstanding each year of 10,031,000,
9,965,000, and 9,948,000, respectively, the weighted average number of shares
outstanding each year. Average outstanding shares in prior years have been
restated to reflect stock dividends paid to former shareholders of Mid-State
Bank, as well as, additional shares issued in connection with the merger
The following is a reconciliation of the numerators and denominators used in
the calculation of basic EPS and diluted EPS for the years ended December 31.
<TABLE>
<CAPTION>
(dollars in 000's except per share data)
1998 Earnings Shares EPS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net Income available to Common Stockholders $ 19,020 10,031 $1.90
Effect of Dilutive Securities:
Stock Options 67
Diluted Earnings Per Share:
Net Income available to Common Stockholders and
assumed conversions $ 19,020 10,098 $1.88
1997
- ------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Net Income available to Common Stockholders $ 17,642 9,965 $1.77
Effect of Dilutive Securities:
Stock Options 84
Diluted Earnings Per Share:
Net Income available to Common Stockholders and
assumed conversions $ 17,642 10,049 $1.76
1996
- ------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Net Income available to Common Stockholders $ 7,878 9,948 $0.79
Effect of Dilutive Securities:
Stock Options 41
Diluted Earnings Per Share:
Net Income available to Common Stockholders and
assumed conversions $ 7,878 9,989 $0.79
</TABLE>
F-22
<PAGE>
- -------------------------------------------------------------------------------
13. Capital Accounts
- -------------------------------------------------------------------------------
The California Financial Code provides that a bank may not make a cash
distribution to its shareholders in excess of (1) the company's undivided
profits or (2) the company's net income for its last three fiscal years less
the amount of any distributions made by the company to shareholders during
such period. Under these restrictions, the Bank can make cash dividends
totaling $38,577,000 at December 31, 1998. The Company declared cash
dividends during 1998 of $3,146,000.
- -------------------------------------------------------------------------------
14. Stock Options
- -------------------------------------------------------------------------------
The Bank adopted a new stock option plan, the "Plan", in 1998. The Plan
replaced earlier plans granted by the former BSM Bancorp and the former
Mid-State Bank. Options are granted at a price not less than the fair market
value of the stock at the grant date. Options are exercisable and expire as
determined by the Board of Directors. However, options expire no later than
ten years from the date of grant. The 1998 plan provides for issuance of up
to 669,065 shares of common stock and is subject to termination as determined
by the Board of Directors. After the merger, under the new 1998 Plan, the
Company granted options representing 134,677 shares as substitutes for prior
outstanding options (at previous exercise prices, as adjusted for the merger)
and new options representing 410,000 shares at current market prices. As of
December 31, 1998, 511,122 shares are currently under option. The shares are
exercisable at prices ranging from $10.75 to $31.00. During 1997, 18,273
shares were exercised and 98,564 shares were exercised in 1998.
The Bank applies Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES," and related Interpretations in accounting for its
Stock Plan. Accordingly, no compensation expense has been recognized for
grants under the Stock Plan.
Consistent with the methods of SFAS No. 123, proforma compensation expense
for the Bank stock option plan had been determined based on the fair value at
the grant date. Fair values were estimated using the Black-Scholes option
- -pricing model with the following weighted average assumptions used at
October 14, 1998, the date of the last options granted: 25% dividend yield
(dividend per share divided by earnings per share), expected volatility of
50%, risk-free interest rate of 4.5% and expected lives of five years. The
Bank's net income and earnings per share for the years ended December 31,
1998, 1997 and 1996 would have been reduced to pro forma amounts indicated
below:
<TABLE>
<CAPTION>
(dollars in 000's except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income to common shareholders:
As reported $19,020 $17,642 $7,878
Pro forma $17,128 $17,620 $7,822
Net income per common and common share equivalent:
Basic earnings per share:
As reported $ 1.90 $ 1.77 $ 0.79
Pro forma $ 1.71 $ 1.77 $ 0.78
Diluted earnings per share:
As reported $ 1.88 $ 1.76 $ 0.79
Pro forma $ 1.70 $ 1.75 $ 0.78
</TABLE>
F-23
<PAGE>
A SUMMARY OF THE BANK'S STOCK OPTIONS AS OF DECEMBER 31, 1998, 1997 AND 1996,
AND CHANGES DURING THE PERIODS THEN ENDED, IS PRESENTED BELOW:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 215,077 $ 12.57 236,794 $ 12.27 202,118 $ 12.33
Granted 410,000 30.05 4,000 16.00 85,875 13.18
Exercised/Forfeited (113,955) 13.84 (25,717) 10.28 (51,199) 14.02
- -----------------------------------------------------------------------------------------------------------------
Outstanding at
end of period 511,122 $ 26.31 215,077 $ 12.57 236,794 $ 12.27
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
15. Employee Benefits
- ------------------------------------------------------------------------------
The Company offers a combination qualified profit sharing plan (the Profit
Sharing Plan) and a savings and retirement plan designed to comply with
Internal Revenue Service Code Section 401(k) (the 401(k) Plan) to
substantially all employees. The Company's contributions to the Profit
Sharing and 401(k) Plans for the years ended December 31, 1998, 1997, and
1996 were $1,643,000, $1,599,000, and $979,000, respectively.
A deferred compensation plan is also in effect to provide performance
oriented deferred compensation for the Company's senior management.
Allocations to the participants accounts are made at the discretion of the
Board of Directors. The amount of contributions is determined by the Board of
Directors as a function of net profits and prior year return on equity. No
contribution was made in 1996. In 1997, $403,000 was contributed to
participants with $571,000 contributed for 1998.
Prior to the merger, Mid-State Bank began a bonus incentive system in 1996
(the Incentive Reward System) for many of the Bank's employees. A bonus is
paid to selected employees who exceed certain goals under formulas
established at the start of the year. Included in employee benefits expense
for 1998, 1997 and 1996 was a charge of $504,000, $667,850 and $190,750,
respectively, which was accrued during those years and paid in the following
year under the Incentive Reward System. Approximately 479 employees received
bonuses under this program in 1998 ranging from 1.0% of their salary to as
much as 12.5% of their salary.
Also prior to the merger, BSM Bancorp through its wholly owned subsidiary,
Bank of Santa Maria paid bonuses to employees amounting to $285,000,
$570,000, and $480,000 for the years 1998, 1997, and 1996, respectively.
F-24
<PAGE>
- -------------------------------------------------------------------------------
16. Regulatory Matters
- -------------------------------------------------------------------------------
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's
capital amounts and classifications are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations), and
of Tier I capital to average assets (as defined). Management believes, as of
December 31, 1998, that Mid-State Bancshares and Mid-State Bank meet all
capital adequacy requirements to which they are subject.
<TABLE>
<CAPTION>
To be Considered
Well Capitalized
For Capital For Capital
(dollars in 000's) Actual Adequacy Purposes Adequacy Purposes
Amount Ratio Amount Ratio Amount Ratio
----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
MID-STATE BANCSHARES - CONSOLIDATED:
As of December 31, 1998:
- ------------------------
Total Capital
(to Risk Weighted Assets) $ 137,460 17.9% $ 61,339 8.0% $ 76,674 10.0%
Tier One Capital
(to Risk Weighted Assets) $ 127,835 16.7% $ 30,670 4.0% $ 46,004 6.0%
Tier One Capital
(to Average Assets) $ 127,835 10.5% $ 48,882 4.0% $ 61,102 5.0%
As of December 31, 1997:
- ------------------------
Total Capital
(To Risk Weighted Assests) $ 119,074 16.0% $ 59,372 8.0% $ 74,215 10.0%
Tier One Capital
(to Risk Weighted Assets) $ 110,517 14.9% $ 29,686 4.0% $ 44,529 6.0%
Tier One Capital
(to Average Assets) $ 110,517 9.5% $ 46,517 4.0% $ 58,146 5.0%
MID-STATE BANK - ONLY:
As of December 31, 1998:
- ------------------------
Total Capital
(to Risk Weighted Assets) $ 136,186 17.8% $ 61,307 8.0% $ 76,634 10.0%
Tier One Capital
(to Risk Weighted Assets) $ 126,566 16.5% $ 30,654 4.0% $ 45,980 6.0%
Tier One Capital
(to Average Assets) $ 126,566 10.4% $ 48,866 4.0% $ 61,083 5.0%
As of December 31, 1997:
- ------------------------
Total Capital
(To Risk Weighted Assests) $ 118,749 16.0% $ 59,367 8.0% $ 74,209 10.0%
Tier One Capital
(to Risk Weighted Assets) $ 110,192 14.8% $ 29,684 4.0% $ 44,526 6.0%
Tier One Capital
(to Average Assets) $ 110,192 9.5% $ 46,514 4.0% $ 58,143 5.0%
</TABLE>
F-25
<PAGE>
- -------------------------------------------------------------------------------
17. Reportable Business Segments
- -------------------------------------------------------------------------------
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," introduces a new model for segment reporting, referred to as
the "management approach." The management approach is intended to present
reportable segments consistent with how the chief operating decision maker
organizes segments within a company for making operating decisions and
assessing performance. Presently, the Company is segregated into Community
Banking, Mid Coast Land Company, and "All Other".
The Community Banking business segment consists of commercial and retail
banking. This segment is managed as a single strategic unit which derives its
revenues from a wide range of banking services, including lending and
investing activities, acceptance of demand, savings, and time deposits, and
mortgage servicing. As previously noted, Mid-Coast Land Company engages in
real estate investment activities. There is no major customer and the Company
operates within a single geographic area.
Non reportable operating segments of the Company's operations which do not
have similar characteristics to any other banking operations and do not meet
the quantitative thresholds requiring disclosure, are included in the "All
Other" category. "All Other" includes the activities of the Parent Company
(excluding equity in earnings of subsidiaries) and certain non-recurring
items such as merger related expenses of $7.4 million in 1998 and the
reversal of the reserve for losses on investments in real estate of $5.3
million in 1998. These items are not considered attributable to the
assessment of performance of the business segments to which they relate.
Below is a summary statement of income and certain selected financial data for
the three years ended December 31, 1998. The accounting policies used in the
disclosure of business segments are the same as those described in the
summary of significant accounting policies. Certain assumptions are made
concerning the allocations of costs between segments which may influence
relative results, most notably, allocations of various types of overhead and
administrative costs. Management believes that the allocations utilized below
are reasonable and consistent with the way it manages the business.
<TABLE>
<CAPTION>
All
Community Banking Mid Coast Land Company Other Mid State Bancshares
(dollars in 000's) 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
- -------------------------------------------------- --------------------------- ------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $86,861 $82,183 $75,353 $ 99 $ 93 $ 63 $ - $ - $ - $86,960 $82,276 $75,416
Interest Expense 25,992 25,560 24,150 - - - - - - 25,992 25,560 24,150
---------------------------- --------------------------- ------------------------ --------------------------
Net Interest Income 60,869 56,623 51,203 99 93 63 - - - 60,968 56,716 51,266
Provision
300 30 227 - - - - - - 300 30 227
Non Interest Income 16,654 15,953 14,870 727 507 949 5,500 - - 22,881 16,460 15,819
Non Interest Expense 46,849 47,223 46,261 916 3,491 7,580 7,764 174 1 55,529 50,888 53,842
---------------------------- --------------------------- ------------------------ --------------------------
Pre-Tax Income $30,374 $25,323 $19,585 $ (90) $(2,891) $(6,568) $(2,264) $(174) $ (1) $28,020 $22,258 $13,016
---------------------------- --------------------------- ------------------------ --------------------------
---------------------------- --------------------------- ------------------------ --------------------------
Average Assets
(in millions) $ 1,188 $ 1,107 $ 1,030 $ 8 $ 18 $ 29 $ 1 $ - $ - $ 1,197 $ 1,125 $ 1,059
</TABLE>
F-26
<PAGE>
- -------------------------------------------------------------------------------
18. Parent Company Financial Information
- -------------------------------------------------------------------------------
Condensed financial information of Mid-State Bancshares (parent only)
follows: (dollars in 000's)
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
- -----------------------
DECEMBER 31,
ASSETS 1998 1997
--------- ---------
<S> <C> <C>
Cash $ 2,112 $ 185
Investment in Mid-State Bank 132,455 113,706
Other Assets 394 151
--------- ---------
Total Assets $ 134,961 $ 114,042
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Dividend Payable $ 1,209 $ --
Accrued Liabilities 28 14
--------- ---------
Total Liabilities 1,237 14
Shareholders' Equity 133,724 114,028
--------- ---------
Total Liabilities and Shareholders' Equity $ 134,961 $ 114,042
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED INCOME STATEMENTS
- ---------------------------
DECEMBER 31,
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Equity in earnings of subsidiaries:
Undistributed $ 17,246 $ 16,899 $ (1)
Dividends 2,000 850 --
Operating Expenses (324) (174) --
Income Tax Benefit 98 67 --
--------- --------- ---------
Net Income (Loss) $ 19,020 $ 17,642 $ (1)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------
DECEMBER 31,
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Cash flows from operation activities:
Net Income (loss) $ 19,020 $ 17,642 $ (1)
Adjustments to reconcile net income to net cash
Provided by operating activities:
Net earnings of Bank (17,246) (16,899) 1
Amortization of organizational expenses 15 15 --
Other (243) (129) (23)
-------- --------- ---------
Net cash provided by (used in)
operating activities 1,546 628 (23)
-------- --------- ---------
Net Cash Flow from Investing Activities -- -- (1)
-------- --------- ---------
Net Cash Flows from Financing Activities:
Net change in short term note payable -- (40) 40
(Redemption) issuance of organizational stock -- (1) 1
Proceeds from stock options 1,282 177 --
Dividends paid by parent (901) (596) --
-------- --------- ---------
Net cash provided by (used in)
financing activities 381 (460) 41
-------- --------- ---------
Net Increase in Cash 1,927 168 17
Cash, beginning of year 185 17 --
-------- --------- ---------
Cash, at end of year $ 2,112 $ 185 $ 17
-------- --------- ---------
-------- --------- ---------
</TABLE>
F-28
<PAGE>
Management Statement
MID-STATE BANK IS RESPONSIBLE FOR THE PREPARATION, INTEGRITY, AND FAIR
PRESENTATION OF ITS PUBLISHED CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1998 AND THE YEAR THEN ENDED. THE CONSOLIDATED FINANCIAL
STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES AND, AS SUCH, INCLUDE AMOUNTS, SOME OF WHICH ARE BASED
ON JUDGMENTS AND ESTIMATES OF MANAGEMENT.
INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting. The system contains
monitoring mechanisms, and actions are taken to correct deficiencies
identified.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control system may vary over time.
Management assessed its internal control structure over financial reporting
as of December 31, 1998. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal
Control--Integrated Framework" issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission. Based upon this assessment,
management believes that Mid-State Bank maintained an effective internal
control structure over financial reporting as of December 31, 1998.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for compliance with the federal and state laws
and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders designated by the FDIC as safety and
soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management
believes that Mid-State Bank complied, in all significant aspects, with the
designated laws and regulations relating to safety and soundness for the year
ended December 31, 1998.
/s/ James G. Stathos /s/ Carrol R. Pruett
-------------------- --------------------
James G. Stathos Carrol R. Pruett
Executive Vice President President
Chief Financial Officer Chief Executive Officer
F-29
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Mid-State Bank:
We have examined management's assertions that Mid-State Bancshares maintained
an effective internal control structure over financial reporting as of
December 31, 1998 included in the accompanying Management Statement.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing, and evaluating the design and operating effectiveness of
the internal control structure and such other procedures as we considered
necessary in the circumstances. We believe that our examination provides a
reasonable basis for our opinion.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to
future periods are subject to the risk that the internal control structure
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, management's assertion that Mid-State Bancshares maintained
an effective internal control structure over financial reporting as of
December 31, 1998, is fairly stated, in all material respects, based on
criteria established in the INTERNAL CONTROL-INTEGRATED FRAMEwork issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Arthur Andersen LLP
---------------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
January 21, 1999
F-30
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
BSM BANCORP
The undersigned incorporator for the purpose of forming a corporation under
the General Corporation Law of the State of California hereby certifies:
ARTICLE I - NAME
The name of this corporation is BSM BANCORP.
ARTICLE II - PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III - AGENT FOR SERVICE OF PROCESS
The name and address in the State of California of this Corporation's
initial agent for service of process is:
Loren P. Hansen, Esquire
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, California 92660
ARTICLE IV - AUTHORIZED STOCK
(a) The Corporation is authorized to issue two classes of shares designated
"Preferred Stock" and "Common Stock", respectively. The number of shares of
Preferred Stock authorized to be issued is 25,000,000 and the number of shares
of Common Stock authorized to be issued is 50,000,000.
(b) The Preferred Stock may be divided into such number of series as the
board of directors may determine. The board of directors is authorized to
determine and alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock, and
to fix the number of shares of any series of Preferred Stock and the
designation of any such series of Preferred Stock. The board of directors,
within the limits and restrictions stated in any resolution or resolutions of
the board of directors originally fixing the number of shares constituting
any series, may increase or decrease (but not below the number of shares of
such
-1-
<PAGE>
series then outstanding) the number of shares of such series subsequent to
the issue of shares of that series.
ARTICLE V - DIRECTOR LIABILITY
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
ARTICLE VI - INDEMNIFICATION
The Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the Corporations Code) for breach of duty to the
corporation and its stockholders through bylaw provisions or through agreements
with agents, or both, in excess of the indemnification otherwise permitted by
Section 317 of the Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the Corporations Code.
ARTICLE VII -
MEETINGS OF STOCKHOLDERS
Meetings of stockholders may be held at such place as the Bylaws may
provide.
ARTICLE VIII -
DIRECTORS
A. NUMBER; VACANCIES. The number of directors of the Corporation shall
be such number, as shall be provided from time to time in the Bylaws; provided,
however, that no decrease in the number of directors shall have the effect of
shortening the term of any incumbent director, and provided further, that no
action shall be taken to decrease or increase the number of directors within the
range stated in the Bylaws unless at least two-thirds of the directors then in
office shall concur in said action. Vacancies in the board of directors of the
Corporation, however caused, and newly created directorships shall be filled by
a vote of two-thirds of the directors then in office, whether or not a quorum,
and any director so chosen shall hold office for a term expiring at the annual
meeting of stockholders at which the term of the class to which the director has
been chosen expires and when the director's successor is elected and qualified.
IX -
APPROVAL OF CERTAIN BUSINESS COMBINATIONS
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<PAGE>
The stockholder vote required to approve Business Combinations (as
hereinafter defined) shall be as set forth in this section.
A.1. Except as otherwise expressly provided in this Article IX, the
affirmative vote of the holders of (i) at least 66 2/3% of the outstanding
shares entitled to vote thereon (and, if any class or series of shares is
entitled to vote thereon separately, the affirmative vote of the holders of at
least 66 2/3% of the outstanding shares of each such class or series), and (ii)
at least a majority of the outstanding shares entitled to vote thereon, not
including shares deemed beneficially owned by a Related Person (as hereinafter
defined), shall be required in order to authorize any of the following:
(a) any merger or consolidation of the Corporation with or into a
Related Person (as hereinafter defined);
(b) any sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage, or any other security device, of all
or any Substantial Part (as hereinafter defined) of the assets of the
Corporation (including without limitation any voting securities of a subsidiary)
or of a subsidiary, to a Related Person;
(c) any merger or consolidation of a Related Person with or into the
Corporation or a subsidiary of the Corporation;
(d) any sale, lease, exchange, transfer or other disposition of all or
any Substantial Part of the assets of a Related Person to the Corporation or a
subsidiary of the Corporation;
(e) the issuance of any securities of the Corporation or a subsidiary
of the Corporation to a Related Person;
(f) the acquisition by the Corporation or a subsidiary of the
Corporation of any securities of a Related Person;
(g) any reclassification of the common stock of the Corporation, or
any recapitalization involving the common stock of the Corporation; and
(h) any agreement, contract or other arrangement providing for any of
the transactions described in this Article.
2. Such affirmative vote shall be required notwithstanding any other
provision of these Articles, any provision of law, or any agreement with any
regulatory agency or national securities exchange which might otherwise permit a
lesser vote or no vote.
3. The term "Business Combination" as used in this Article IX shall mean
any transaction which is referred to in any one or more of subparagraphs A(1)(a)
through (h) above.
-3-
<PAGE>
B. The provisions of paragraph A shall not be applicable to any particular
Business Combination, and such Business Combination shall require only such
affirmative vote as is required by any other provision of these Articles, any
provision of law, or any agreement with any regulatory agency or national
securities exchange, if the Business Combination shall have been approved by a
majority vote of the Continuing Directors (as hereinafter defined); provided,
however, that such approval shall only be effective if obtained at a meeting at
which a Continuing Director Quorum (as hereinafter defined) is present.
C. For the purposes of this Article IX the following definitions apply:
1. The term "Related Person" shall mean and include (a) any
individual, corporation, partnership or other person or entity which together
with its "affiliates" (as that term is defined in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as amended),
"beneficially owns" (as that term is defined in Rule 13d-3 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended) in the
aggregate 10% or more of the outstanding shares of the common stock of the
Corporation; and (b) any "affiliate" (as that term is defined in Rule 12b-2
under the Securities Exchange Act of 1934, as amended) of any such individual,
corporation, partnership or other person or entity. Without limitation, any
shares of the common stock of the Corporation which any Related Person has the
right to acquire pursuant to any agreement, or upon exercise or conversion
rights, warrants or options, or otherwise, shall be deemed "beneficially owned"
by such Related Person.
2. The term "Substantial Part" shall mean more than 25% of the total
assets of the Corporation, as of the end of its most recent fiscal year ending
prior to the time the determination is made.
3. The term "Continuing Director" shall mean any member of the Board
of Directors of the Corporation who is unaffiliated with the Related Person and
was a member of the board prior to the time that the Related Person became a
Related Person, and any successor of a Continuing Director who is unaffiliated
with the Related Person and is recommended to succeed a Continuing Director by a
majority of Continuing Directors then on the board.
4. The term "Continuing Director Quorum" shall mean a majority of
the Continuing Directors capable of exercising the powers conferred on them.
4 of 3
<PAGE>
X -
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make,
repeal, alter, amend and rescind the Bylaws of the Corporation by a majority
vote of the board. Notwithstanding any other provision of these Articles (and
notwithstanding the fact that some lesser percentage may be specified by law),
the Bylaws shall not be adopted, repealed, altered, amended or rescinded by the
stockholders of the Corporation except by the vote of the holders of not less
than 66 2/3% of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as one class) cast at a meeting of the stockholders called for that
purpose (provided that notice of such proposed adoption, repeal, alteration,
amendment or rescission is included in the notice of such meeting), or, as set
forth above, by the Board of Directors.
XI -
AMENDMENT OF ARTICLES OF INCORPORATION
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in these Articles in the manner now or hereafter prescribed
by law, and all rights conferred on stockholders herein are granted subject to
this reservation. Notwithstanding the foregoing, the provisions set forth in
Articles VII, VIII, IX, X, and this Article XI may not be repealed, altered,
amended or rescinded in any respect unless the same is approved by the
affirmative vote of the holders of not less than 66 2/3% of the outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (considered for this purpose as a single class) cast at a
meeting of the stockholders called for that purpose (provided that notice of
such proposed adoption, repeal, alteration, amendment or rescission is included
in the notice of such meeting).
Dated: November 11, 1996
/s/ Loren P. Hansen
------------------------------
Loren P. Hansen
Incorporator
5 of 3
<PAGE>
I hereby declare that I am the person who executed the foregoing Articles
of Incorporation, which execution is my act and deed.
/s/ Loren P. Hansen
------------------------------
Loren P. Hansen
Incorporator
6 of 3
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
BSM BANCORP
William A. Hares and William L. Snelling certify that:
1. They are the President and Secretary, respectively, of BSM Bancorp, a
California corporation.
2. Paragraphs B., C. and D. are added to Article VIII of the Articles of
Incorporation of this Corporation, to read as follows:
"B. The remaining provisions of this article shall become effective
only when the Corporation becomes a listed corporation within the meaning of
Section 301.5 of the Corporations Code, which provision refers to a corporation
whose shares are traded on the New York Stock Exchange, American Stock Exchange,
or National Market System-NASDAQ.
C. CLASSIFIED BOARD. If the authorized number of directors is nine
or more, then the board of directors shall be classified into three classes, the
members of each class to serve for a term of three years. Notwithstanding the
foregoing, the director whose term shall expire at any annual meeting shall
continue to serve until such time as his successor shall have been duly elected
and shall have qualified unless his position on the board of directors shall
have been abolished by action taken to reduce the size of the board of directors
prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as nearly as equal as possible.
The Board of Directors shall designate, by the name of the incumbent(s), the
position(s) to be abolished. Notwithstanding the foregoing, no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as nearly as equal
as possible.
At the first annual meeting of shareholders held after the corporation
qualifies as a listed corporation within the meaning of Section 301.5 of the
7 of 3
<PAGE>
Corporations Code, one-third of the directors shall be elected for a term of
three years, one-third of the directors shall be elected for a term of two
years, and one-third of the directors shall be elected for a term of one year.
If the number of directors is not divisible by three, the first extra director
shall be elected for a term of three years and a second extra director, if any,
shall be elected for a term of two years.
At subsequent annual meetings of shareholders, a number of directors
shall be elected equal to the number of directors with terms expiring at that
annual meeting. Directors elected at each such annual meeting shall be elected
for a term expiring with the annual meeting of shareholders three years
thereafter.
D. CUMULATIVE VOTING. The election of directors shall not be by
cumulative voting. At each election of directors, each shareholder entitled to
vote may vote all the shares held by that shareholder for each of several
nominees for director up to the number of directors to be elected. The
shareholder may not cast more votes for any single nominee than the number of
shares held by that shareholder."
3. The foregoing amendments to the Articles of Incorporation have been
duly approved by the Board of Directors.
4. The foregoing amendments to the Articles of Incorporation have been
duly approved by the required vote of shareholders of Common Stock in accordance
with Section 902 of the Corporations Code. The corporation has 150 shares of
Common Stock issued and outstanding and no shares of Series A Preferred Stock
issued and outstanding. The number of shares of Common Stock entitled to vote
and voting in favor of each of the foregoing Amendments equaled or exceeded the
vote required. The percentage vote of Common Stock required for the approval of
the Amendments was more than 50% of the outstanding shares.
8 of 3
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: November 22, 1996
/s/ William A. Hares
------------------------------
William A. Hares
/s/ William L. Snelling
------------------------------
William L. Snelling
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<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
BSM BANCORP
William A. Hares and William L. Snelling certify that:
1. They are the President and Secretary, respectively, of BSM Bancorp, a
California corporation.
2. Paragraph A.1. of Section IX - APPROVAL OF CERTAIN BUSINESS
COMBINATIONS is hereby amended as follows:
"A.1. Except as otherwise expressly provided in this Article IX, the
affirmative vote of the holders of at least 66 2/3% of the outstanding shares
entitled to vote thereon (and, if any class or series of shares is entitled to
vote thereon separately, the affirmative vote of the holders of at least 66 2/3%
of the outstanding shares of each such class or series) shall be required in
order to authorize any of the following:
(a) any merger or consolidation of the Corporation with or into a
Related Person (as hereinafter defined);
(b) any sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage, or any other security device, of all
or any Substantial Part (as hereinafter defined) of the assets of the
Corporation (including without limitation any voting securities of a subsidiary)
or of a subsidiary, to a Related Person;
(c) any merger or consolidation of a Related Person with or into the
Corporation or a subsidiary of the Corporation;
(d) any sale, lease, exchange, transfer or other disposition of all or
any Substantial Part of the assets of a Related Person to the Corporation or a
subsidiary of the Corporation;
(e) the issuance of any securities of the Corporation or a subsidiary
of the Corporation to a Related Person;
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<PAGE>
(f) the acquisition by the Corporation or a subsidiary of the
Corporation of any securities of a Related Person;
(g) any reclassification of the common stock of the Corporation, or
any recapitalization involving the common stock of the Corporation; and
(h) any agreement, contract or other arrangement providing for any of
the transactions described in this Article."
3. The foregoing amendments to the Articles of Incorporation have been
duly approved by the Board of Directors.
4. The foregoing amendments to the Articles of Incorporation have been
duly approved by the required vote of shareholders of Common Stock in accordance
with Section 902 of the Corporations Code. The corporation has 150 shares of
Common Stock issued and outstanding and no shares of Series A Preferred Stock
issued and outstanding. The number of shares of Common Stock entitled to vote
and voting in favor of each of the foregoing Amendments equaled or exceeded the
vote required. The percentage vote of Common Stock required for the approval of
the Amendments was more than 66 2/3% of the outstanding shares.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: December 31, 1996
/s/ William A. Hares
------------------------------
William A. Hares
/s/ William L. Snelling
------------------------------
William L. Snelling
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<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
BSM BANCORP
William A. Hares and William L. Snelling certify that:
1. They are the President and Secretary, respectively, of BSM BANCORP, a
California corporation.
2. Article I of the Articles of Incorporation of this Corporation is
amended to read as follows:
"ARTICLE I - NAME
The name of this corporation is MID-STATE BANCSHARES."
3. The foregoing amendment to the Articles of Incorporation has been duly
approved by the Board of Directors.
4. The foregoing amendment to the Articles of Incorporation has been duly
approved by the required vote of shareholders of Common Stock in accordance with
Section 902 of the Corporations Code. The corporation has 3,062,339 shares of
Common Stock issued and outstanding and no shares of Series A Preferred Stock
issued and outstanding. The number of shares of Common Stock entitled to vote
and voting in favor of each of the foregoing Amendments equaled or exceeded the
vote required. The percentage vote of Common Stock required for the approval of
the Amendments was more than 50% of the outstanding shares.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: July 10, 1998
/s/ William A. Hares
------------------------------
William A. Hares
/s/ William L. Snelling
------------------------------
William L. Snelling
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<PAGE>
EXHIBIT 10.2
MID-STATE BANK
DEFERRED COMPENSATION PLAN
AMENDED AND RESTATED JULY 1, 1996
WHEREAS, MID-STATE BANK (the "Bank"), by resolution of the Board of
Directors, has previously adopted this Deferred Compensation Plan (the "Plan")
for the purpose of providing performance-oriented deferred compensation for
personnel of the Bank; and
WHEREAS, it is believed that the continuation of this Plan providing for
deferred compensation will be in the best interests of the Bank; and
WHEREAS, it is believed that by providing more distribution options the
Bank would enhance the Plan, and consequently the performance of participating
executives.
NOW, THEREFORE, it is hereby declared as follows:
ARTICLE 1
DEFINITIONS
1.1 TITLE. This Plan shall be known as the Mid-State Bank Deferred
Compensation Plan.
1.2 DEFINITIONS.
(a) "Account" shall mean the account maintained by the Committee
for each Participant under this Plan for each Plan Year.
(b) "Affiliate" shall mean:
(1) any corporation while it is a member of the same controlled
group of corporations (within the meaning of Code Section 414(b)) as the Bank;
(2) any organization while it is under "common control" with the
Bank (within the meaning of Code Section 414(c));
(3) any organization while it is an "affiliated service group"
together with the Bank (within the meaning of Code Section 414(m)); or
<PAGE>
(4) any other entity while it is required to be aggregated with
the Bank under Code Section 414(o);
provided, however, that the phrase "more than 50 percent" shall be substituted
for the phrase "at least 80 percent" each place the latter appears in Code
Section 1563 and in the regulations under Code Section 414(c).
(c) "Bank" shall mean Mid-State Bank, a California banking
corporation, and any successor thereto.
(d) "Beneficiary" shall mean the person last designated in writing by
the Participant to the Committee as the Participant's beneficiary under this
Plan, or, if there is no designated beneficiary or the designated beneficiary
does not survive the Participant, the Participant's estate.
(e) "Board of Directors" shall mean the Board of Directors of
the Bank.
(f) "Break in Service" shall mean any Plan Year during which a
Participant completes less than 1,000 hours of employment with the Bank and the
Affiliates.
(g) "Committee" shall mean the committee appointed by the Board of
Directors pursuant to the provisions of this Plan.
(h) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, all successor laws thereto, and any regulations or
guidance promulgated thereunder. Where the Plan refers to a particular
section of the Code, the reference shall also apply to any successor to that
section.
(i) "Deferral Election" shall mean an election made under Section
7.1 or 7.2.
(j) "Disability" shall mean any mental or physical condition,
illness, or injury which renders a Participant unable to perform his or her
employment duties in a normal and regular manner, and which is expected to
result in death or has lasted or is expected to last for a continuous period of
not less than six (6) months. Disability shall be determined by a physician
acceptable to both the Committee and the Participant.
(k) "Employer" shall mean the Bank and any Affiliates authorized
by the Board of Directors to adopt this Plan, and which, by direction of the
Affiliate's board of directors, or appropriate executive authority if a
partnership or proprietorship, adopts this Plan.
2
<PAGE>
(l) "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time, all successor laws thereto, and any
regulations or guidance promulgated thereunder. Where the Plan refers to a
particular section of ERISA, the reference shall also apply to any successor
to that section.
(m) "Full Year of Service" shall mean any calendar year in which
an individual completes at least 1,000 hours of employment with the Bank or
the Affiliates.
(n) "Net Profits" shall mean net income (during the Plan Year for
which an allocation is made) on the Bank's audited financial statements net
of all expenses including reserves for loan losses, provision for income
taxes, and extraordinary items, all as determined according to generally
accepted accounting principles.
(o) "Participant" shall mean each employee of the Bank or any
other Employer who is designated by the Committee as eligible to participate
hereunder.
(p) "Plan" shall mean this Deferred Compensation Plan, as set
forth herein.
(q) "Plan Year" shall mean any calendar year during which the Plan
is in effect beginning January 1, 1983.
(r) "Return on Equity" shall mean, for purposes of Section 4.1,
the return on stockholder's equity, as determined according to generally
accepted accounting principles, during the Plan Year for which an allocation
is made.
ARTICLE 2
PARTICIPATION
2.1 ELIGIBILITY. Carrol Pruett, Raymond Jones, Daryl Flood, James G.
Stathos, Thomas E. Reese, John Fowler, and such other persons constituting
senior management of the Bank, its successors, or Affiliates as the Committee
may from time to time designate, shall be eligible to participate in the Plan.
2.2 GENERAL RESTRICTION. Notwithstanding Section 2.1, participation
shall be limited to a "select group of management or highly compensated
employees" within the meaning of ERISA Section 201(2).
2.3 CONTINUANCE AS PARTICIPANT. Every person who becomes a Participant
shall continue to be a Participant until the date he or she:
3
<PAGE>
(a) Resigns or is dismissed as an employee of the Bank or its
Affiliates;
(b) Retires on or after attaining his or her normal retirement
date (as set forth in the Bank's Policy Manual); or
(c) Dies or suffers a Disability.
2.4 BREAK IN SERVICE. Any person who after becoming a Participant has a
Break in Service shall cease to be a Participant in this Plan until, after
returning to work, he or she has completed one thousand (1,000) hours in the
employment of the Bank or the Affiliates.
ARTICLE 3
ADMINISTRATION OF PLAN
3.1 MEMBERS. The Committee hereunder shall consist of five (5) members
appointed by the Board of Directors. Notwithstanding anything to the contrary
set forth herein, no Participant under the Plan shall be eligible to serve as a
member of the Committee.
3.2 COMMITTEE ACTION. The Committee shall, for the purpose of
administering the Plan, choose a secretary and an assistant secretary (either
of whom is hereafter referred to as "Secretary") who shall keep minutes of
the Committee's proceedings and all records and documents pertaining to the
Committee's administration of the Plan. The Secretary may execute any
certificates or other written direction on behalf of the Committee. Three
(3) members of the Committee shall constitute a quorum.
3.3 RIGHTS AND DUTIES. The Committee, on behalf of the Participants,
shall be charged with the general administration of the Plan and shall have
all powers necessary to accomplish those purposes, including, but not by way
of limitation, the following:
(a) To construe, interpret, and administer the Plan;
(b) To make allocation and determinations required by the Plan;
(c) To compute and certify the amount and kind of benefits payable
to Participants;
(d) To authorize all disbursements by the Bank or the Affiliates
pursuant to the Plan;
4
<PAGE>
(e) To maintain all the necessary records for the administration
of the Plan; and
(f) To make and publish such rules for the regulation of the Plan
as are not inconsistent with the terms hereof.
Decisions and determinations by the Committee shall be final and binding upon
all parties and shall be given the maximum deference allowed by law.
3.4 INFORMATION. To enable the Committee to perform its functions,
the Bank and the Affiliates shall supply full and timely information to the
Committee on all matters relating to the compensation of the Participants, their
employment, their death or Disability, and any other pertinent facts as the
Committee may require.
3.5 COMPENSATION, INDEMNITY, AND LIABILITY. The members of the
Committee shall serve without bond and without compensation for their
services hereunder. All expenses of the Committee shall be paid by the Bank
and the other Employers. The Bank and the other Employers shall furnish the
Committee with such clerical and other assistance as is necessary in the
performance of its duties. No member of the Committee shall be liable for
the act or omission of any other member of the Committee nor for any act or
omission on his or her own part, excepting only his or her own willful
misconduct or gross negligence. The Bank shall indemnify and hold harmless
each member of the Committee against any and all expenses and liabilities
arising out of his or her membership on the Committee, excepting only
expenses and liabilities arising out of his or her own willful misconduct or
gross negligence.
3.6 TAXES. If the whole or any part of a Participant's Accounts shall
become liable for the payment of any estate, inheritance, income, or other
tax which an Employer shall be required to pay, the Employer shall have the
power and authority to pay such tax and reduce the book account of the person
whose interests hereunder are so liable. Prior to making any payment, the
Employer may require such releases or other documents from any lawful taxing
authority as it shall deem necessary.
3.7 EMPLOYMENT OF COUNSEL. The Committee may consult with legal
counsel (who may be counsel for the Bank) and shall be fully protected with
respect to any action taken or permitted by good faith pursuant to the advice
of such counsel.
ARTICLE 4
DEFERRED COMPENSATION POOL
5
<PAGE>
4.1 DEFERRED COMPENSATION POOL. The Board of Directors shall, within
sixty (60) days following the end of each Plan Year, cause the Bank (and, to the
extent applicable, any other Employer) to determine an amount as follows:
6
<PAGE>
<TABLE>
<CAPTION>
RETURN ON EQUITY AMOUNT OF "ALLOCATION"
---------------- ----------------------
<S> <C>
Less than 10% -0-
10% but less than 15% 2% of Net Profits
15% but less than 20% 3% of Net Profits
20% or more 4% of Net Profits
</TABLE>
4.2 FORFEITURE; REDUCTION OF ALLOCATIONS. Any "forfeitures," as that
term is defined in Section 5.3, occurring in a Plan Year shall be credited as
part of and used to reduce the amount of allocation under this Plan from the
Bank or any other Employer for that Plan Year.
ARTICLE 5
ALLOCATIONS
5.1 SEPARATE ACCOUNTS. The Committee shall establish and maintain on
all books and accounts of the Plan, by Plan Year, a separate Account for each
Participant.
5.2 ALLOCATIONS. Within sixty (60) days after the close of the Plan
Year, the Committee shall allocate the amount allocable under this Plan for
such Plan Year by the Bank or any other Employer pursuant to Section 4.1
among the Accounts of those persons who were Participants on the last day of
the Plan Year. This amount shall be allocated among such Accounts in such
proportions as the Committee shall determine from time to time.
5.3 ALLOCATION OF FORFEITURES. The term "forfeitures" as used in this
Plan means the unvested portion of an Account established pursuant to Section
5.1 for a person whose status as a Participant has been terminated.
Notwithstanding the foregoing, in the case of an individual whose status as a
Participant is terminated as a result of the termination of his or her
employment with the Bank or the Affiliates for cause, the term "forfeitures"
means the vested and unvested portion of an Account established pursuant to
Section 5.1. Whether a Participant's termination of employment is "for
cause" shall be determined by the Committee in its sole and absolute
discretion. All forfeitures occurring in a Plan Year shall be used to reduce
the amount that must be allocated for such Plan Year by the Bank or any other
Employer pursuant to Section 4.1 and shall be allocated accordingly.
5.4 RATE OF RETURN. The full amount of the funds credited to the
Accounts of each Participant shall accrue an annual rate of return equal to
ninety percent (90%) of the Bank's prime rate (as that rate may be determined
from time to time by the Board of Directors). Funds remaining in the
Accounts, after any installment payment described in Article 7 hereof, shall
continue to accrue a rate of return as set forth in this Section 5.4. This
return shall be adjusted and credited to each Account quarterly.
7
<PAGE>
ARTICLE 6
VESTING
6.1 FULLY VESTED INTEREST. Subject to Section 5.3, the full amount
credited to the Accounts established for each Participant pursuant to Section
5.1, including any interest credited thereto, shall be fully vested in the
Participant for whom the Accounts are established after such Participant has
completed ten (10) Full Years of Service. For purposes of this Plan, the
Accounts of Messrs. Pruett, Jones, Flood, and Reese shall be considered fully
vested.
6.2 PARTIAL VESTING. Subject to Sections 5.3 and 6.1, the amount
credited to the Accounts established for a Participant pursuant to Section 5.1,
including any interest credited thereto, shall become vested in the Participant
for whom the Accounts were established in accordance with the following
schedule:
<TABLE>
<CAPTION>
FULL YEARS PERCENTAGE OF
OF SERVICE ACCOUNT VESTED
---------- --------------
<S> <C>
1 10%
2 20%
3 30%
4 40%
5 50%
6 60%
7 70%
8 80%
9 90%
10 100%
</TABLE>
6.3 BREAKS IN SERVICE. Should a Participant have a Break in Service,
the Full Years of Service rendered by the Participant after the Break in
Service shall be taken into account for purposes of determining the
percentage, if any, of the amount in his or her Accounts derived from
allocations made before the Break in Service that is vested in the
Participant.
6.4 FORFEITURE OF UNVESTED AMOUNT. Except as provided in Section 5.3,
on termination of a Participant's status as a Participant, that portion of
the amount in the Account established for the Participant pursuant to Section
5.1 that is not vested as provided in this Article shall be forfeited by the
Participant. This amount shall be credited, in the manner prescribed by
Articles 4 and 5, to reduce the amount allocable under this Plan from the
Employer for the then current Plan Year. Notwithstanding the foregoing,
where a Participant's employment with the Bank or the Affiliates is
terminated for cause, all funds in the Account established for the
Participant pursuant to Section 5.1, whether vested or not vested, shall be
immediately forfeited by the
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<PAGE>
Participant and credited, in the manner prescribed by Articles 4 and 5, to
reduce the allocable amount under this Plan by the Employer for the then
current Plan Year.
ARTICLE 7
PAYMENT OF DEFERRED COMPENSATION
7.1 ANNUAL ELECTION. On or before the December 31 preceding a Plan
Year, a Participant may elect in writing to receive the vested portion which may
be credited to his or her Account for said Plan Year, either:
(a) Upon retirement, either:
(1) In a single amount not later than sixty (60) days after the
close of the Plan Year in which his or her retirement occurred; or
(2) In equal monthly, quarterly, or annual installments over
a specified number of years, which shall be not more than ten (10) years,
commencing not later than sixty (60) days after the close of the Plan Year in
which his or her retirement occurred.
(b) In the fifth Plan Year after the Plan Year for which the
Deferral Election was made, either:
(1) In a single amount not later than sixty (60) days after
the close of the fifth Plan Year after the Plan Year for which such Deferral
Election was made; or
(2) In equal monthly, quarterly, or annual installments over
a specified number of years, which shall be not more than ten (10) years,
commencing not later than sixty (60) days after the close of the fifth Plan
Year after the Plan Year for which such Deferral Election was made.
"Retirement" shall mean early, normal, or deferred retirement as set forth in
the Bank's Policy Manual.
Notwithstanding the foregoing, in no event shall benefit payments commence later
than the year following the year in which the Participant terminates employment
with the Bank or the Affiliates.
7.2 RULES REGARDING DELAY OF PAYMENTS. A Participant may elect to
delay the time at which the Account balance is to be paid under Section 7.1(b),
or subsequently under this Section 7.2, until:
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<PAGE>
(a) As soon as possible after January 1 of the fourth Plan year
following the year the election to delay payment is made; or
(b) Termination of employment, if earlier.
Such election to delay payments must be received by the Board before the January
1 of the year preceding the date the amounts would otherwise first become
payable under Section 7.1(b) or this Section 7.2. The election to delay
payments shall also specify the form of payment, whether in one lump sum in cash
or in installments over a period not exceeding ten (10) years.
Any change in the elected time or form of payment shall not be valid unless the
Participant shall have remained employed with the Bank or the Affiliates for a
period of at least one year after the date on which such election is made.
Notwithstanding the foregoing, in no event shall benefit payments commence later
than the year following the year in which the participant terminates employment
with the Bank or the Affiliates.
7.3 DEATH OR DISABILITY. Notwithstanding anything to the contrary
herein, should a Participant die or suffer a Disability prior to termination
of employment with the Bank or the Affiliates, the full value of his or her
vested interest (as of the date of death or Disability) in the Accounts
established for him or her under Section 5.1 shall be paid to the
Participant's Beneficiary or to the Participant, as the case may be, in equal
monthly installments over a ten (10) year period commencing not later than
sixty (60) days after the close of the Plan Year in which the death or
Disability occurred.
On the death of a Participant following retirement, payments shall be made to
the Participant's Beneficiary or estate in the manner prescribed by Section 7.1
or 7.4, as appropriate.
7.4 RETIREMENT. Upon the retirement of a Participant, the full value
of his or her vested interest (as of the date of retirement) in the Accounts
established for him or her under Section 5.1 shall be paid in the form
elected under Section 7.1 or 7.2.
7.5 HARDSHIP. A Participant may at any time apply to the Board of
Directors in writing for the withdrawal of all or part of such Participant's
Accounts for a financial emergency. The Board of Directors shall approve
such withdrawal only for an unanticipated emergency that is caused by an
event beyond the control of the Participant and that would result in severe
financial hardship if early withdrawal were not permitted. If the Board of
Directors approves such a withdrawal, such amount shall be deducted from such
Participant's Accounts and paid to such Participant in cash. No payment
shall be made under this Section if the Committee determines that such
10
<PAGE>
payment would lead any other amounts deferred hereunder to be deemed
constructively received under the Code.
7.6 TERMINATION. Notwithstanding any provision to the contrary herein,
upon a Participant's termination of employment with the Bank or the
Affiliates, other than by reason of retirement (as defined in Section 5.1),
death, Disability, or termination of employment for cause, the full value of
his or her vested interest in the Participant's Accounts shall be paid in a
lump sum payment within sixty (60) days following the date of termination.
7.7 COMMITTEE DISCRETION. Notwithstanding the foregoing, the Committee
may, in its sole and absolute discretion, change the form and the timing of
payments under the Plan.
7.8 TAX WITHHOLDING. The Bank may withhold from any payment made under
this Plan (and transmit to the proper taxing authority) such amounts as it
may be required to withhold under any Federal, state, or other law.
ARTICLE 8
AMENDMENT AND TERMINATION
8.1 AMENDMENTS. The Bank shall have the right to amend the Plan in
whole or in part from time to time by resolutions of the Board of Directors, and
to amend or cancel any amendments; provided, however, that no action under this
Section shall cancel or affect in any way amounts previously credited to any
Participant's Account. Such amendments shall be stated in an instrument in
writing, executed by the Bank in the same manner as the Plan, and the Plan shall
be amended in the manner and at the time therein set forth, and all Participants
shall be bound thereby.
8.2 DISCONTINUANCE OF PLAN. It is the expectation of the Bank that
the Plan will be continued indefinitely, but continuance of the Plan is not
assumed as a contractual obligation of the Bank or any Employer, and the right
is reserved at any time to discontinue and to terminate the Plan. If the Bank
decides to discontinue and to terminate the Plan, it shall notify the Committee
of its action in an instrument in writing, executed by the Bank in the same
manner as the Plan, and the Plan shall be terminated at the time therein set
forth, and all Participants shall be bound thereby; provided, however, that no
action under this Section shall cancel or affect in any way amounts previously
credited to any Participant's Accounts.
8.3 MERGER. In the event of a dissolution or a liquidation of the Bank
or a reorganization, merger, or consolidation of the Bank with one or more
corporations as a result of which the Bank will not be the surviving
corporation, or a sale of substantially all of the assets and property of the
Bank to another person, or in the event of any other
11
<PAGE>
single transaction involving the Bank where there is a change in ownership of
at least twenty-five percent (25%), except as may result from a transfer of
shares of another corporation in exchange for at least eighty percent (80%)
control of that corporation, notwithstanding any provision of this Plan to
the contrary, the full value of each Participant's vested interest in his or
her Accounts shall be paid in a single amount not later than sixty (60) days
following receipt of notice of such intended dissolution, liquidation,
merger, reorganization, or consolidation.
ARTICLE 9
MISCELLANEOUS
9.1 LIMITATION ON PARTICIPANT'S RIGHTS. Participation in the Plan
shall not give any Participant the right to be retained in the employ of the
Bank or any Affiliate or any right or interest in the Plan other than as herein
provided. The Bank and the Affiliates reserve the right to dismiss any
Participant without any liability for any claim against them, except to the
extent provided herein. The Plan shall create only a contractual obligation on
the part of the Bank and shall not be construed as creating a trust. The
payments to a Participant or his or her designated Beneficiary or other
beneficiary hereunder shall be made from assets which shall continue, for all
purposes, to be a part of the general assets of the Bank or the Affiliates, and
no person, other than the Bank or the Affiliates, shall have, by virtue of the
provisions of the Plan, any interest in such assets. To the extent that any
person acquires a right to receive payments from the Bank or any other Employer
under the provisions hereof, such right shall be no greater than the right of
any unsecured general creditor of the Bank or the relevant Employer.
9.2 OTHER PLANS. The Plan shall not affect the right of any employee
or Participant to participate in and to receive benefits under and in accordance
with the provisions of any other Bank or Affiliate plans which are now or
hereafter in existence.
9.3 RECEIPT OF RELEASE. Any payment to any Participant in accordance
with the provisions of the Plan shall, to the extent thereof, be in full
satisfaction of all claims against the Committee, the Bank, and any other
Employer; the Committee may require such Participant, as a condition precedent
to such payment, to execute a receipt and release to such effect.
9.4 CALIFORNIA LAW. To the extent not preempted by Federal Law, the
Plan shall be construed, administered, and governed in all respects under and by
laws of the State of California, without regard to any conflict of laws
provisions. If any provisions of this instrument shall be held by a court of
competent jurisdiction to be invalid or unenforceable, the remaining provisions
hereof shall continue to be fully effective.
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<PAGE>
9.5 HEADINGS. Headings and subheadings in this Plan are inserted for
convenience or reference only and are not to be considered in the construction
of the provisions hereof.
9.6 SUCCESSORS AND ASSIGNS. The Plan shall inure to the benefit of,
and be binding upon, the parties hereto and their successors and assigns;
provided, however, that the amounts credited to the Accounts of a Participant
shall not be assignable or transferable, and any purported transfer, assignment,
encumbrance, or attachment shall be void.
9.7 INTENT. The Plan is to be construed as a plan maintained to
provide deferred compensation to a "select group of management or highly
compensated employees" within the meaning of Section 201(2) of ERISA. The
Plan is intended to be exempt from the participation, vesting, funding, and
fiduciary requirements of Title I of ERISA, to the fullest extent permitted
under the law. The Plan shall at all times be "unfunded" within the meaning
of ERISA and the Code.
9.8 GENDER AND NUMBER. Where the context permits, words in any
gender shall include any other gender, words in the singular shall include the
plural, and the plural shall include the singular.
IN WITNESS WHEREOF, the Bank has caused these presents to be executed by
its duly authorized officers this 10th day of July, 1996.
MID-STATE BANK
By /s/ Carrol R. Pruett
---------------------------------
Carrol R. Pruett, President
By /s/ James G. Stathos
---------------------------------
James G. Stathos
Executive Vice President
13
<PAGE>
EXHIBIT 10.3
MID-STATE BANK
PROFIT SHARING AND
SALARY DEFERRAL 401(K) PLAN
SUMMARY PLAN DESCRIPTION
<PAGE>
<TABLE>
<S> <C>
IX
STATEMENT OF ERISA RIGHTS
1. Explanation of Your ERISA Rights . . . . . . . . . . . . . . . . 22
X
AMENDMENT AND TERMINATION OF YOUR PLAN
1. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . 23
XI
GENERAL INFORMATION ABOUT YOUR PLAN
1. General Plan Information. . . . . . . . . . . . . . . . . . . . 24
2. Employer Information. . . . . . . . . . . . . . . . . . . . . . 24
3. Plan Administrator Information. . . . . . . . . . . . . . . . . 25
4. Plan Trustee Information. . . . . . . . . . . . . . . . . . . . 25
5. Service of Legal Process. . . . . . . . . . . . . . . . . . . . 25
</TABLE>
2
<PAGE>
MID-STATE BANK
PROFIT SHARING AND
SALARY DEFERRAL 401(K) PLAN
SUMMARY PLAN DESCRIPTION
I
INTRODUCTION TO YOUR PLAN
Mid-State Bank has amended your Profit Sharing Plan as of January 1, 1995.
Mid-State Bank continues to recognize the efforts you have made to its success.
This amended Profit Sharing Plan is for the exclusive benefit of eligible
employees and their beneficiaries.
Your Plan is a "salary reduction plan." It is also called a "401(K) Plan."
Under this type of plan, you may choose to reduce your compensation and have
these amounts contributed to this Plan on your behalf.
The purpose of this Plan is to reward eligible employees for long and loyal
service by providing them with retirement benefits.
Between now and your retirement, your Employer intends to make
contributions for you and other eligible employees. When you retire, you will
be eligible to receive the value of the amounts which have accumulated in your
account.
Your Employer has the right to submit this Plan to the Internal Revenue
Service for approval. The Internal Revenue Service for approval. The Internal
Revenue Service will issue a "determination letter" to your Employer approving
this Plan as a "qualified" retirement plan, if this Plan meets specific legal
requirements.
Other participating Employers have adopted the provisions of this Plan.
(See the Section in this Summary entitled "Employer Information.")
This Summary Plan Description is a brief description of your Plan and your
rights, obligations, and benefits under that Plan. Some of the statements made
in this Summary Plan Description are dependent upon this Plan being "qualified"
under the provisions of the Internal Revenue Code. This Summary Plan
Description is not meant to interpret, extend, or change the provisions of your
Plan in any way. The provisions of your Plan may only be determined accurately
by reading the actual Plan document.
A copy of your Plan is on file at your Employer's office and may be read by
you, your beneficiaries, or your legal representatives at any reasonable time.
If you have any questions regarding either your Plan or this Summary Plan
Description and the actual provisions of the Plan, the Plan will govern.
3
<PAGE>
II
PARTICIPATION IN YOUR PLAN
Before you become a member or a "participant" in the Plan, there are
certain eligibility and participation rules which you must meet. These rules
are explained in this section.
1. ELIGIBILITY REQUIREMENTS
You will be eligible to participate in the Plan if you have completed six
(6) months of service.
You will have completed six (6) months of service if you are in the employ
of your Employer six (6) months after your employment commencement date.
2. PARTICIPATION REQUIREMENTS
Once you have satisfied your Plan's eligibility requirements, your next
step will be to actually become a member or a "participant" in the Plan. You
will become a participant on a specified day of the Plan Year. This day is
called the Effective Date of Participation.
You will become a participant on the earlier of the January 1st, April 1st,
July 1st or October 1st coinciding with or next following the date you satisfy
your Plan's eligibility requirements.
3. EXCLUDED EMPLOYEES
There are certain employees of Mid-State Bank who will not be eligible to
participate in your Plan. Those employees are:
(a) employees whose employment is governed by a collective bargaining
agreement under which retirement benefits were the subject of good faith
bargaining, unless such agreement expressly provides for participation in this
Plan.
III
CONTRIBUTIONS TO YOUR PLAN
1. EMPLOYER CONTRIBUTIONS TO THE PLAN
Each year, your Employer will contribute to your Plan the following
amounts:
(a) The total amount of the salary reduction you elected to defer.
(See the Section in this Article entitled "Participant Salary Reduction
Election.")
4
<PAGE>
(b) A discretionary matching contribution equal to a percentage of
the amount of the salary reduction you elected to defer, which percentage will
be determined each year by the Employer.
In applying this matching percentage, however, only salary reductions up to
6% of your compensation will be considered.
You must be actively employed on the last day of the Plan Year in order to
share in the matching contribution for the year.
(c) On behalf of each non-highly compensation participant, a special
discretionary contribution equal to a percentage of your compensation, which
percentage will be determined each year by the Employer.
You must be actively employed on the last day of the Plan Year to share in
this special contribution for the year.
(d) A discretionary amount in addition to the special contribution,
which amount will be determined each year by your Employer.
You must be actively employed on the last day of the Plan Year in order to
share in the contribution.
In determining your eligibility to share in contributions for the year,
there are special rules which apply if your employment terminates due to your
Retirement (Normal or Late), Total and Permanent Disability or death.
In such cases, you will be eligible to share in the contributions made by
your Employer in accordance with the following:
If the reason your employment terminated is due to your retirement (Normal
or Late), total and permanent disability or death, then you will be eligible to
share in the contribution for the year without regard to whether you satisfied
the requirements explained above.
2. PARTICIPANT SALARY REDUCTION ELECTION
As a participant, you may elect to defer up to 10% of your compensation
each year instead of receiving that amount in cash. However, your total
deferrals in any taxable year may not exceed a dollar limit which is set by law.
The limit for 1995 is $9,240. This limit will be increased in future years for
cost of living changes.
The amount you elect to defer will be deducted from your pay in accordance
with a procedure established by your Employer and Administrator. The procedure
will require that you enter into a written salary reduction agreement after you
satisfy the Plan's eligibility requirements. You will be permitted to modify
your election during the Plan Year. You are also permitted to revoke your
election any time during the Plan Year.
5
<PAGE>
The amount you elect to defer, and any earnings on that amount, will not be
subject to income tax until it is actually distributed to you. This money will,
however, be subject to Social Security taxes at all times.
You should also be aware that the annual dollar limit is an aggregate limit
which applies to all deferrals you may make under this plan or other cash or
deferred arrangements (including tax-sheltered 403(b) annuity contracts,
simplified employee pensions or other 401(k) plans in which you may be
participating). Generally, if your total deferrals under all cash or deferred
arrangements for a calendar year exceed the annual dollar limit, the excess must
be included in your income for the year. For this reason, it is desirable to
request in writing that these excess deferrals be returned to you. If you fail
to request such a return, you may be taxed a second time when the excess
deferral is ultimately distributed from the Plan.
You must decide which plan or arrangement you would like to have return the
excess. If you decide that the excess should be distributed from this Plan, you
should communicate this in writing to the Administrator no later than the March
1st following the close of the calendar year in which such excess deferrals were
made. If the entire dollar limit is exceeded in this Plan or any other plan
maintained by the Employer, you will be deemed to have notified the
Administrator of the excess. The Administrator will then return the excess
deferral and any earnings to you by April 15th.
In the event you receive a hardship distribution from your deferrals to any
other plan maintained by your Employer, you will not be allowed to make
additional salary reductions for a period of twelve (12) months after you
receive the distribution. Furthermore, the dollar limitation set by law with
respect to your taxable year following the year in which you received the
distribution, will be reduced by your salary reductions, if any, for the taxable
year of the distribution.
You will always be 100% vested in the amount you deferred. This means that
you will always be entitled to all of the deferred amount. This money will,
however, be affected by any investment gains or losses. If the Trustee invested
this money and there was a gain, the balance in your account would increase. Of
course, if there was a loss, the balance in your account would decrease. Your
interest in this account cannot be forfeited for any reason.
Distributions from your deferred account are not permitted EXCEPT in the
event of:
(a) death;
(b) disability; or
(c) termination of employment.
In addition, if you are a highly compensated employee (generally owners,
officers or individuals receiving wages in excess of certain amounts established
by law), a distribution from your deferred account of certain excess
contributions may be required to comply with the law. The Administrator will
notify you when a distribution is required.
6
<PAGE>
3. YOUR SHARE OF EMPLOYER CONTRIBUTIONS
Your Employer will allocate the amount you elect to defer to an account
maintained by the Trustee on your behalf.
If you are eligible, your Employer will also allocate the matching
contribution and the special contribution made to the Plan on your behalf. (See
the Section in this Article entitled "Employer Contributions to the Plan.")
7
<PAGE>
SUMMARY OF MATERIAL MODIFICATION
MID-STATE BANK PROFIT SHARING AND
SALARY DEFERRAL 401(k) PLAN
Mid-State Bank EIN: 95-2135438
1026 Grand Avenue Plan Number: 001
Arroyo Grande, CA 93421-0580
The following changes have been made to the Mid-State Bank Profit Sharing and
Salary Deferral 401(k) Plan Summary Plan Description:
ARTICLE III, SECTION 2, FIRST PARAGRAPH, FIRST SENTENCE HAS BEEN CHANGED
From: "As a Participant, you may elect to defer up to 10% of your
compensation each year instead of receiving that amount in cash."
To: "As a Participant, you may elect to defer up to 15% of your
compensation each year instead of receiving that amount in cash."
THIS SUMMARY OF MATERIAL MODIFICATION IS EFFECTIVE AS OF JULY 1, 1998.
8
<PAGE>
Your Employer's discretionary contribution will be "allocated" or
divided among participants eligible to share in the contribution for the Plan
Year. Your share of the contribution will depend upon how much compensation
you received during the year and the compensation received by other eligible
participants.
Your share of your Employer's discretionary contribution is determined
by the following fraction:
Employer's Your Compensation
Discretionary Contribution X -----------------------
Total Compensation of
All Participants Eligible
to Share
For example: Suppose the Employer's Discretionary Contribution for the
Plan Year is $20,000. Employee A's compensation for the Plan Year is $25,000.
The total compensation of all participants eligible to share, including Employee
A, is $250,000. Employee A's share will be:
$25,000
$20,000 X __________ or $2,000
$250,000
In addition to the Employer's contributions made to your account, your
account will be credited daily with a share of the investment earnings or losses
of the trust fund.
You should also be aware that the law imposes certain limits on how much
money may be allocated to your account for a year. These limits are extremely
complex but generally no more than the lesser of $30,000 or 25% of your
compensation may be allocated to you (excluding earnings or losses) in any year.
The Administrator will inform you if these limits have affected you.
4. COMPENSATION
For the purposes of your Plan, compensation has a special meaning.
Compensation is defined as your total compensation during a Plan Year that is
subject to income tax and is reflected on your W-2 Form, but
-- including your salary reduction contributions to any plan or
arrangement maintained by your Employer.
Your compensation will be recognized for benefit purposes from your date of
entry into the Plan.
9
<PAGE>
For Plan Years beginning in 1994, the Plan, by law, cannot recognize
compensation in excess of $150,000. This amount will be adjusted in future
years for cost of living increases. It will also be applied to certain highly
compensated employees and their family members as if they were a single
participant. If you or a member of your family may be affected by this rule,
ask your Administrator for further details. For any short Plan Year, the
adjusted $150,000 limit will be prorated based upon the number of full months in
the short Plan Year.
5. FORFEITURES
Forfeitures are created when participants terminate employment before
becoming entitled to their full benefits under the Plan. Your account may grow
from the forfeitures of other participants. Forfeitures will be "allocated" or
divided among participants eligible to share for a Plan Year. However, a
portion of forfeited amounts will be used to reduce your Employer's
contributions to the Plan.
6. YOUR VOLUNTARY CONTRIBUTIONS TO THE PLAN
Previously under the Plan, you were permitted to make after-tax voluntary
contributions to the Plan. However, the Plan has been amended, and you are no
longer permitted to make such contributions to your Plan. Your previously
established account will still be maintained under the Plan.
You will always be "100% vested" in your voluntary contributions. This
means that you will always be entitled to all of your voluntary contributions.
Your voluntary contributions will, however, be affected by any investment gains
or losses. If the Trustee invested this money and there was a gain, the balance
in your account would increase. Of course, if there were a loss from an
investment, the balance in your account would decrease.
Your voluntary contributions may be invested by the Trustee in segregated,
interest-bearing accounts or as part of the general trust fund.
You may withdraw the balance of your voluntary contributions and any gains
from your voluntary contribution account. You will only be taxed on investment
income and gains when you withdraw them from your account.
When you retire or otherwise become eligible for Plan benefits, the value
of your voluntary contribution account will be used to provide additional
benefits for you or your beneficiaries.
7. YOUR QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS ("QVECS")
Prior to the enactment of the Tax Reform Act of 1986, you were permitted to
make qualified voluntary employee contributions (or "QVECs") to your Plan.
These contributions were made on a tax-deductible basis. However, for taxable
years beginning after December 31, 1986, these QVEC contributions are no longer
permitted. Your Plan will continue to maintain a QVEC account in your name
representing contributions attributable to tax years before January 1, 1987.
QVECs held by your Plan will be subject to the rules outlined in this section.
10
<PAGE>
Your "QVEC" contributions may be invested by the Trustee in segregated,
interest bearing accounts or as part of the general trust fund.
You will always be 100% vested in your "QVEC" account. This means that you
will always be entitled to all of your "QVEC" contributions. Qualified
voluntary employee contributions will, however, be affected by any investment
gains or losses. If the Trustee invested this money and there was a gain, the
balance in your account would increase. Of course, if there were a loss from an
investment, the balance in your account would decrease.
Upon written request to the Administrator, you may make withdrawals of your
qualified voluntary employee contributions and any gains from your "QVEC"
account. If you make any withdrawals before you reach age 59 1/2, you will be
charged a penalty tax of 10% on the amount withdrawn in addition to the income
tax you would ordinarily pay. There would be no penalty tax, however, if you
made this withdrawal because of your disability, as that term is defined under
your Plan.
When you retire or otherwise become eligible for Plan benefits, the
value of your "QVEC" account will be used to provide additional benefits for
you or your beneficiaries.
8. TRANSFERS FROM QUALIFIED PLANS (ROLLOVERS)
At the discretion of the Administrator, you may be permitted to deposit
into your Plan Distributions you have received from other plans. Such a
deposit is called a "rollover" and may result in tax savings to you. You
should consult qualified counsel to determine if a rollover is in your best
interest.
Your rollover will be placed in a separate account called a "participant's
rollover account." The Administrator may establish rules for investment.
You will always be 100% vested in your "rollover account." This means that
you will always be entitled to all of your rollover contributions. Rollover
contributions will be affected by any investment gains or losses. If the
Trustee invested this money and there was a gain, the balance in your account
would increase. Of course, if there were a loss from an investment, the balance
in your account would decrease.
9. DIRECTED INVESTMENTS
The Administrator may establish rules for investment of your account balance.
If the Administrator approves, you may direct the Trustee as to the investment
of your account balance.
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<PAGE>
IV
BENEFITS UNDER YOUR PLAN
1. DISTRIBUTION OF BENEFITS UPON NORMAL RETIREMENT
Your Normal Retirement Date is the Birthdate coinciding with your Normal
Retirement Age.
You will attain your Normal Retirement Age when you reach your 65th
birthday.
At your Normal Retirement Age, you will be entitled to 100% of your account
balance. Payment of your benefits will, at your election, begin as soon as
practicable following your actual retirement but not prior to your Normal
Retirement Date.
2. DISTRIBUTION OF BENEFITS UPON LATE RETIREMENT
You may remain employed past your Plan's Normal Retirement Date and retire
instead on your Late Retirement Date. Your Late Retirement Date is the
Anniversary Date coinciding with or next following the date you choose to
retire, after first having reached your Normal Retirement Date. On your Late
Retirement Date, you will be entitled to 100% of your Account. Actual benefit
payments will begin as soon as practicable following your Late Retirement Date.
3. DISTRIBUTION OF BENEFITS UPON DEATH
Your beneficiary will be entitled to 100% of your account balance upon your
death.
If you are married at the time of your death, your spouse will be the
beneficiary of the death benefit, unless you otherwise elect in writing on a
form to be furnished to you by the Administrator. IF YOU WISH TO DESIGNATE A
BENEFICIARY OTHER THAN YOUR SPOUSE, HOWEVER, YOUR SPOUSE MUST IRREVOCABLY
CONSENT TO WAIVE ANY RIGHT TO THE DEATH BENEFIT. YOUR SPOUSE'S CONSENT MUST BE
IN WRITING, BE WITNESSED BY A NOTARY OR A PLAN REPRESENTATIVE AND ACKNOWLEDGE
THE SPECIFIC NONSPOUSE BENEFICIARY.
If, however,
(a) your spouse has validly waived any right to the death benefit in
the manner outlined above,
(b) your spouse cannot be located; or
(c) you are not married at the time of your death,
then your death benefit will be paid to the beneficiary of your own choosing in
installments or as a single lump sum, as you or your beneficiary may elect. You
may designate the beneficiary on
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<PAGE>
a form to be supplied to you by the Administrator. If you change your
designation, your spouse must again consent to the change.
Regardless of the method of distribution selected, your entire death
benefit must generally be paid to your beneficiaries within five years after
your death (the "5-year rule"). However, if your designated beneficiary is a
person (instead of your estate or most trusts), then you or your beneficiary may
elect to have minimum distributions begin within one year of your death and it
may be paid over the designated beneficiary's life expectancy (the "1-year
rule"). If your spouse is the beneficiary, then under the "1-year rule", the
start of payments may be delayed until the year in which you would have attained
age 70 1/2. The election to have death benefits distributed under the "1-year
rule" instead of the "5-year rule' must be made no later than the time at which
minimum distributions must commence under the "1-year rule" (or, in the case of
a surviving spouse, the "5-year rule," if earlier).
Since your spouse has certain rights in the death benefit, you should
immediately report any change in your marital status to the Administrator.
4. DISTRIBUTION OF BENEFITS UPON DISABILITY
Under your Plan, disability is defined as a physical or mental condition
resulting from bodily injury, disease, or mental disorder which renders you
incapable of continuing any gainful occupation with your Employer. This
condition must constitute total disability under the federal Social Security
Acts.
If you become disabled while a participant, you will be entitled to 100% of
your account balance. Payment of your disability benefits will be made to you
as if you had retired. (See the Section in this Article entitled "Benefit
Payment Options.")
5. DISTRIBUTION OF BENEFITS UPON TERMINATION OF EMPLOYMENT
Your Plan is designed to encourage you to stay with your Employer until
retirement. Payment of your account balance under your Plan is only available
upon your death, disability or retirement.
If your employment terminates for reasons other than those listed above,
you will be entitled to receive only your "vested percentage" of your account
balance and the remainder of your account will be forfeited. Only contributions
made by your Employer are subject to forfeiture. (See the Section in this
Article entitled "Vesting in Your Plan.")
If you so elect, the Administrator will direct the Trustee to distribute
your vested benefit to you before the date it would normally be distributed
(upon your death, disability or retirement). If your vested benefit under the
plan at the time of any prior distribution exceeded $3, 500 or currently exceeds
$3, 500, you must give written consent before the distribution may be made.
Amounts of $3,500 or less will be distributed without the need for consent.
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<PAGE>
6. VESTING IN YOUR PLAN
Your "vested percentage" in your account is determined under the
following schedule and is based on vesting Years of Service. You will
always, however, be 100% vested upon your Normal Retirement Age. (See the
Section in this Article entitled "Distribution of Benefits Upon Normal
Retirement.")
VESTING SCHEDULE
<TABLE>
<CAPTION>
Years of Service Percentage
<S> <C>
Less than 3 0%
3 20%
4 40%
5 60%
6 80%
7 100%
</TABLE>
Regardless of this vesting schedule, you are always 100% vested in your
salary reduction amounts contributed to the Plan.
Additionally, you are 100% vested in your Employer's special contributions
made to the Plan. However, matching contributions attributable to salary
reduction amounts which are returned to you for any reason will be forfeited.
Your vested percentage will not be less than your vested percentage under
the Plan before this amendment and restatement.
Your vested benefit will normally be distributed to you or your beneficiary
upon your death, disability or retirement. If you terminate employment before
any of these events, however, your unpaid vested benefit may be segregated in a
special account.
7. BENEFIT PAYMENT OPTIONS
The Administrator, in accordance with your election, will direct the
Trustee to pay your benefits to you under one or more of the following
options:
(a) a single lump-sum payment in cash;
(b) equal installments over a period of not more than your assumed life
expectancy (or your assumed life expectancy (or your and your beneficiary's
assumed life expectancies) determined at the time of distribution.
GENERALLY, WHENEVER A DISTRIBUTION IS TO BE MADE TO YOU ON OR AS OF AN
ANNIVERSARY DATE, IT MAY BE MADE ON SUCH DATE OR AS SOON
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<PAGE>
THEREAFTER AS IS PRACTICABLE. HOWEVER, UNLESS YOU ELECT IN WRITING TO DEFER
THE RECEIPT OF BENEFITS, NO DISTRIBUTION MAY BEGIN LATER THAN THE 60TH DAY
AFTER THE CLOSE OF THE PLAN YEAR IN WHICH THE LATEST OF THE FOLLOWING EVENTS
OCCURS:
(a) the date on which you reach the age of 65 or your Normal Retirement
Age;
(b) the 10th anniversary of the year in which you became a participant
in the Plan;
(c) the date you terminated employment with your Employer.
Regardless of whether you elect to delay the receipt of benefits,
there are other rules which generally require minimum payments to
begin no later than the April 1st following the year in which you
reach age 70 1/2. You should see the Administrator if you feel you
may be affected by this rule.
8. PRE-RETIREMENT DISTRIBUTION OF BENEFITS
You are entitled to receive pre-retirement distributions from your
Voluntary Contribution and Rollover Accounts. However, any distributions
will reduce the value of the benefits you will receive at normal retirement.
These distributions are made at your election.
Also, the law restricts any pre-retirement distribution from certain
accounts which are maintained for you under the Plan. These accounts are
generally the ones set up to receive your salary reduction contributions and
other Employer contributions which are used to satisfy special rules for 401(K)
plans. Ask your Administrator if you need more details.
9. TREATMENT OF DISTRIBUTIONS FROM YOUR PLAN
Whenever you receive a distribution from your Plan, it will normally be
subject to income taxes. You may, however, reduce, or defer entirely, the tax
due on your distribution through use of one of the following methods:
(a) The rollover of all or a portion of the distribution to an
Individual Retirement (IRA) or another qualified employer plan. This
will result in no tax being due until you begin withdrawing funds from
the IRA or other qualified employer plan. The rollover of the
distribution, however, MUST be made within strict time frames (normally,
within 60 days after you receive your distribution). Under certain
circumstances all or a portion of a distribution may not qualify for
this rollover treatment. In addition, most distributions will be
subject to mandatory federal income tax withholding at a rate of 20%.
This will reduce the amount you actually receive. For this reason, if
you wish to rollover all or a portion of your distribution amount, the
direct transfer option described in paragraph (b) below would be the
better choice.
(b) You may request for most distributions that a direct transfer of
all or a portion of your distribution amount be made to either an
Individual Retirement Account (IRA) or
15
<PAGE>
another qualified employer plan willing to accept the transfer. A
direct transfer will result in no tax being due until you withdraw funds
from the IRA or other qualified employer plan. Like the rollover, under
certain circumstances all or a portion of the amount to be distributed
may not qualify for this direct transfer. If you elect to actually
receive the distribution rather than request a direct transfer, then in
most cases 20% of the distribution amount will be withheld for federal
income tax purposes.
(c) The election of favorable income tax treatment under "10-year
forward averaging," "5-year forward averaging" or, if you qualify,
"capital gains" method of taxation.
WHENEVER YOU RECEIVE A DISTRIBUTION, THE ADMINISTRATOR WILL DELIVER TO
YOU A MORE DETAILED EXPLANATION OF THESE OPTIONS. HOWEVER THE RULES WHICH
DETERMINE WHETHER YOU QUALIFY FOR FAVORABLE TAX TREATMENT ARE VERY COMPLEX.
YOU SHOULD CONSULT WITH QUALIFIED TAX COUNSEL BEFORE MAKING A CHOICE.
10. DOMESTIC RELATIONS ORDER
As a general rule, your interest in your account, including your "vested
interest," may not be alienated. This means that your interest may not be
sold, used as collateral for a loan, given away or otherwise transferred. In
addition, your creditors may not attach, garnish or otherwise interfere with
your account.
There is an exception, however, to this general rule. The Administrator
may be required by law to recognize obligations you incur as a result of court
ordered child support or alimony payments. The Administrator must honor a
"qualified domestic relations order." A "qualified domestic relations order" is
defined as a decree or order issued by a court that obligates you to pay child
support or alimony, or otherwise allocates a portion of your assets in the Plan
to your spouse, former spouse, child or other dependent. If a qualified
domestic relations order is received by the Administrator, all or a portion of
your benefits may be used to satisfy the obligation. The Administrator will
determine the validity of any domestic relations order received.
11. PENSION BENEFIT GUARANTY CORPORATION
Benefits provided by your Plan are NOT insured by the Pension Benefit
Guaranty Corporation (PBGC) under the Title IV of the Employee Retirement Income
Security Act of 1974 because the insurance provisions under ERISA are not
applicable to your Plan.
16
<PAGE>
V
YEAR OF SERVICE RULES
1. YEAR OF SERVICE AND HOUR OF SERVICE
You will have completed a Year of Service for vesting purposes if you are
credited with 12 consecutive Months of Service during a Plan Year, even if you
were not employed on the first or last day of the Plan Year.
An "Hour" of Service" has a special meaning for Plan purposes. You will be
credited with an Hour of Service for:
(a) each hour for which you are directly or indirectly compensated by
your Employer for the performance of duties during the Plan Year;
(b) each hour for which you are directly or indirectly compensated by
your Employer for reasons other than performance of duties (such as
vacation, holidays, sickness, disability, lay-off, military duty, jury
duty or leave of absence during the Plan Year); and
(c) each hour for back pay awarded or agreed to by your Employer
You will not be credited for the same Hours of Service both under (a)
or (b), as the case may be and under (c).
2. 1-YEAR BREAK IN SERVICE
A 1-Year Break in Service shall occur on the first day of the month
following a period of 12 consecutive months during which you are not credited
with an Hour of Service. (See the Article and Section in this Summary
entitled "BENEFITS UNDER YOUR PLAN: Vesting in Your Plan.")
A 1-Year Break in Service does NOT occur, however, in the computation
period in which you enter or leave the Plan for reasons of:
(a) an authorized leave of absence;
(b) certain maternity or paternity absences.
The Administrator will be required to credit you with Hours of Service
for a maternity or paternity absence. These are absences taken on account of
pregnancy, birth, or adoption of your child. These Hours of Service shall be
credited solely to avoid your incurring a 1-Year Break in Service. The
Administrator may require you to furnish proof that your absence qualifies as
a maternity or paternity absence.
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<PAGE>
VI
YOUR PLAN'S "TOP HEAVY RULES"
1. EXPLANATION OF "TOP HEAVY RULES"
A 401(K) Profit Sharing Plan that primarily benefits "key employees" is
called a "top heavy plan." Key employees are certain owners or officers of
your Employer. A Plan is a "top heavy plan" when more than 60% of the
contributions or benefits have been allocated to the key employees.
Each year, the Administrator is responsible for determining whether your
plan is a "top heavy plan."
If your Plan becomes top heavy in any Plan Year, then non-key employees
will be entitled to certain "top heavy minimum benefits," and other special
rules will apply. Among these top heavy rules are the following:
(a) Your Employer may be required to make a contribution equal to 35
of your compensation to your account;
(b) Instead of the vesting schedule outlined in the Article and Section
in this Summary entitled "BENEFITS UNDER YOUR PLAN": Vesting in Your Plan,"
your nonforfeitable right to benefits or contributions derived from Employer
contributions will be determined according to the following schedule:
VESTING SCHEDULE
<TABLE>
<CAPTION>
Years of Service Percentage
<S> <C>
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 100%
</TABLE>
(c) If you are a participant in more than one Plan, you may not be
entitled to minimum benefits under both Plans.
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<PAGE>
VII
LOANS
You may apply to the Administrator for a loan from the Plan. Your
application must be in writing on forms which the Administrator will provide to
you. The Administrator may also request that you provide additional
information, such as financial statements, tax returns and credit reports.
After considering your application, the Administrator may, in its discretion,
determine that you qualify for the loan. The Administrator will inform the
Trustee that you qualify. The Trustee may then review the Administrator's
determination and make a loan to you if it is a prudent investment for the Plan.
LOAN REQUIREMENTS
There are various rules and requirements that apply for any loan. These
rules are outlined in this section. In addition, your Employer has
established a written loan program which explains these requirements in more
detail. You can request a copy of the loan program from the Administrator.
Generally, the rules for loans include the following:
(a) Loans must be made available to all participants and their
beneficiaries on a uniform and non-discriminatory basis.
(b) All loans must be adequately secured. You may use up to one-half
(1/2) of your vested account balance under the Plan as security for
the loan. If more security is required, your principal residence may
be used, if permitted by State law. The Plan may also require that
repayments on the loan obligation be by payroll deduction.
(c) All loans must bear a reasonable rate of interest. The interest
rate must be one a bank or other professional lender would charge for
making a loan in a similar circumstance.
(d) All loans must have a definite repayment period which provides for
payments to be made not less frequently than quarterly, and for the
loan to be amortized on a level basis over a reasonable period time,
not to exceed five (5) years. However, if you use the loan to acquire
your principal residence, you may repay the loan over a reasonable
period of time that may be longer than five (5) years.
(e) All loans will be considered a directed investment from your
account under the Plan. All payments of principal and interest by
you on a loan shall be credited to your account.
(f) The amount of the Plan may loan to you is limited by rules under
the Internal Revenue Code. All loans, when added to the outstanding
balance of all other loans from the Plan, will be limited to the
lesser of:
19
<PAGE>
(1) $50,000 reduced by the excess, if any, of your highest outstanding
balance of loans from the Plan during the one-year period prior to the
date of the loan over your current outstanding balance of loans; or
(2) 1/2 of your vested account balance.
The $50,000 limit stated in (1) above will not be reduced for loans
made on or before DECEMBER 31, 1986.
Also, no loan will be made if two prior loans are currently
outstanding.
(g) If you fail to make payments when they are due under the loan, you
will be considered to be "in default." The trustee would then have
authority to take all reasonable actions to collect the balance owing
on the loan. This could include filing a lawsuit or foreclosing on
the security for the loan. Under certain circumstances, a loan that
is in default may be considered a distribution from the Plan, and
could result in taxable income to you. In any event, your failure to
repay a loan will reduce the benefit you would otherwise be entitled
to from the Plan.
VIII
CLAIMS BY PARTICIPANTS AND BENEFICIARIES
Benefits will be paid to participants and their beneficiaries without
the necessity of formal claims. You or your beneficiaries, however, may make
a request for any Plan benefits to which you may be entitled. Any such
request must be made in writing, and it should be made to the Administrator.
(See the Article in this Summary entitled "GENERAL INFORMATION ABOUT YOUR
PLAN.")
Your request for Plan benefits shall be considered a claim for Plan
benefits, and it will be subject to a full and fair review. If your claim is
wholly or partially denied, the Administrator will furnish you with a written
notice of this denial. This written notice must be provided to you within a
reasonable period of time (generally 90 days) after the receipt of your claim
by the Administrator. The written notice must contain the following
information:
(a) the specific reason or reasons for the denial;
(b) specific reference to those Plan provisions on which the denial is
based;
(c) a description of any additional information or material necessary
to correct your claim and an explanation of why such material or
information is necessary; and
(d) appropriate information as to the steps to be taken if you or your
beneficiary wishes to submit your claim for review.
20
<PAGE>
If notice of the denial of a claim is not furnished to you in accordance
with the above within a reasonable period of time, your claim will be deemed
denied. You will then be permitted to proceed to the review stage described
in the following paragraphs.
If your claim has been denied, and you wish to submit your claim for
review, you must follow the Claims Review Procedure.
1. THE CLAIMS REVIEW PROCEDURE
(a) Upon the denial of your claim for benefits, you may file your
claim for review, in writing, with the Administrator.
(b) YOU MUST FILE THE CLAIM FOR REVIEW NO LATER THAN 60 DAYS AFTER
YOU HAVE RECEIVED WRITTEN NOTIFICATION OF THE DENIAL OF YOUR CLAIM FOR
BENEFITS, OR IF NO WRITTEN DENIAL OF YOUR CLAIM WAS PROVIDED, NO LATER
THAN 60 DAYS AFTER THE DEEMED DENIAL OF YOUR CLAIM.
(c) You may review all pertinent document relating to the denial of
your claim and submit any issues and comments, in writing, to the
Administrator.
(d) Your claim for review must be given a full and fair review. If
your claim is denied, the Administrator must provide you with written
notice of this denial within 60 days after the Administrator's receipt of
your written claim for review. There may be times when this 60 day period
may be extended. This extension may only be made, however, where there
are special circumstances which are communicated to you in writing within
the 60 day period. If there is an extension, a decision shall be made as
soon as possible, but not later than 120 days after receipt by the
Administrator of your claim for review.
(e) The Administrator's decision on your claim for review will be
communicated to you in writing and will include specific references to the
pertinent Plan provisions on which the decision was based.
(f) If the Administrator's decision on review is not furnished to you
within the time limitations described above, your claim will be deemed
denied on review.
(g) If benefits are provided or administered by an insurance company,
insurance service, or other similar organization which is subject to
regulation under the insurance laws, the claims procedure relating to these
benefits may provide for review. If so, that company, service, or
organization will be the entity to which claims are addressed. If you have
any questions regarding the proper person or entity to address claims, you
should ask the Administrator.
21
<PAGE>
IX
STATEMENT OF RIGHTS
1. EXPLANATION OF YOUR ERISA RIGHTS
As a participant in this Plan you are entitle to certain rights and
protections under the Employee Retirement Income Security Act of 1974,
also called ERISA. ERISA provides that all Plan participants are entitled
to:
(a) examine, without charge, all Plan documents, including:
(1) insurance contracts;
(2) collective bargaining agreements, and
(3) copies of all documents filed by the Plan with the U.S.
Department of Labor, such as detailed annual reports and Plan
descriptions.
This examination may take place at the Administrator's Office and at other
specified employment locations of the Employer. (See the Article in this
Summary entitled "GENERAL INFORMATION ABOUT YOUR PLAN");
(b) obtain copies of all Plan documents and other Plan information
upon written request to the Plan Administrator. The Administrator
may make a reasonable charge for the copies;
(c) receive a summary of the Plan's annual financial report. The
Administrator is required by law to furnish each participant with a
copy of this summary annual report;
(d) obtain a statement telling you whether you have a right to
receive a retirement benefit at Normal Retirement Age and, if so,
what your benefits would be at Normal Retirement Age if you stop
working under the Plan now. If you do not have a right to a
retirement benefit, the statement will tell you how many years you
have to work to get a right to a retirement benefit. THIS STATEMENT
MUST BE REQUESTED IN WRITING AND IS NOT REQUIRED TO BE GIVEN MORE
THAN ONCE A YEAR. The Plan must provide the statement free of charge.
In addition to creating rights for Plan participants, ERISA imposes duties
upon the people who are responsible for the operation of the Plan. The people
who operate your Plan, called "fiduciaries" of the Plan, have a duty to do so
prudently and in the interest of you and other Plan participants and
beneficiaries. No one, including your employer or any other person, may fire
you or otherwise discriminate against you in any way to prevent you from
obtaining a pension benefit or exercising your rights under ERISA.
22
<PAGE>
If your claim for a retirement benefit is denied in whole or in part, you
must receive a written explanation of the reason for the denial. you have the
right to have the Administrator review and reconsider your claim. (See the
Article in this Summary entitled "CLAIMS BY PARTICIPANTS AND BENEFICIARIES.")
Under ERISA, there are steps you can take to enforce the above rights. For
instance, if you request materials from the Plan and do not receive them within
30 days, you may file suit in a federal court. In such a case, the court may
require the Administrator to provide the materials and pay you up to $100.00 a
day until you receive the materials, unless the materials were not sent because
of reasons beyond the control of the Administrator.
If you have a claim for benefits which is denied or ignored, in whole or in
part, you may file suit in a state or federal court.
If the Plan's fiduciaries misuse the Plan's money, or if you are
discriminated against for asserting your rights, you may seek assistance from
the U.S. Department of Labor, or you may file suit in a federal court. The
court will decide who should pay court costs and legal fees. If you are
successful, the court may order the person you have sued to pay these costs and
fees. If you lose, the court may order you to pay these costs and fees if, for
example, it finds your claim is frivolous.
If you have any questions about this statement, or about your rights under
ERISA, you should contact the nearest Area Office of the U.S. Labor-Management
Services Administration, Department of Labor.
X
AMENDMENT AND TERMINATION OF YOUR LOAN
1. AMENDMENT
Your Employer has the right to amend your Plan at any time. Any such
amendment shall be adopted by formal action of the Employer's board of
directors and executed by an officer authorized to act on behalf of the
Employer. In no event, however, will any amendment:
(a) authorize or permit any part of the Plan assets to be used for
purposes other than the exclusive benefit of participants or their
beneficiaries; or
(b) cause any reduction in the amount credited to your account.
2. TERMINATION
Your Employer has the right terminate the Plan at any time. Upon
termination, all amounts credited to your accounts will become 100% vested.
A complete discontinuance of contributions by your Employer will constitute a
termination.
23
<PAGE>
XI
GENERAL INFORMATION ABOUT YOUR PLAN
There is certain general information which you may need to know about your
Plan. This information has been summarized for you in this section.
1. GENERAL PLAN INFORMATION
Mid-State Bank Profit Sharing and Salary Deferral 401(K) Plan is the name
of your Plan.
California Bankers Association Profit Sharing and Salary Deferral 401(K)
Plan was the original Plan name.
Your Employer has assigned Plan Number 001 to your Plan.
The amended and restated provisions of your plan become effective on
January 1, 1995
Your Plan's records are maintained on a twelve-month period of time. This
is known as the Plan Year. The Plan Year begins on January 1st and ends on
December 31st.
Certain valuations and distributions are made on the Anniversary Date of
your Plan. This date is December 31.
The contributions made to your Plan will be held and invested by the
Trustee of your Plan.
Your Plan will be governed by the laws of the State of California.
2. EMPLOYER INFORMATION
Your Employer's name, address and identification number are:
Mid-State Bank
1026 Grand Avenue
Arroyo Grande, California 93421-0580
(95-2135438)
Your Plan allows other employers to adopt its provisions. You or your
beneficiaries may examine or obtain a complete list of employers, if any, who
have adopted your Plan by making a written request to the Administrator.
Another Employer who has adopted the provisions of the Plan is:
Mid-Coast Land Company
1026 Grand Avenue
Arroyo Grande, California 03421-0580
24
<PAGE>
3. PLAN ADMINISTRATOR INFORMATION
The name, address and business telephone number of your Plan's
Administrator are:
Mid-State Bank
1026 Grand Avenue
Arroyo Grande, California 93421-0580
(805) 473-7700
Your Plan's Administrator keeps the records for the Plan and is responsible
for the administration of the Plan. The Administrator has discretionary
authority to construe the terms of the Plan and make determinations on questions
which may affect your eligibility for benefits. Your Plan's Administrator will
also answer any questions you may have about your Plan.
4. PLAN TRUSTEE INFORMATION
The name of your Plan's Trustee is:
Franklin Templeton Trust Company
The principal place of business of your Plan's Trustee is:
777 Mariners Island Blvd.
San Mateo, California 94403-7777
Your Plan's Trustee has been designated to hold and invest Plan assets
for the benefit of you and other Plan participants. The trust fund
established by the Plan's Trustee will be the funding medium used for the
accumulation of assets from which benefits will be distributed.
5. SERVICE OF LEGAL PROCESS
The name and address of your Plan's agent for service of legal process are:
Mid-State Bank
1026 Grand Avenue
Arroyo Grande, California 93421-0580
Service of legal process may also be made upon the Trustee or
Administrator.
25
<PAGE>
EXHIBIT 10.4
CHANGE IN CONTROL AGREEMENT
November 12, 1997
Dear Carrol R. Pruett:
Mid-State Bank, a California corporation (the "Company"), considers
the establishment and maintenance of a sound and vital management to be
essential to protecting and enhancing the best interests of the Company and
its shareholders. In this connection, the Company recognizes that, as is the
case with many publicly held corporations, the possibility of a change in
control may arise and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of management personnel to the detriment of the Company and its
shareholders. Accordingly, the Board of Directors of the Company (the
"Board") has determined that appropriate steps should be taken to reinforce
and encourage the continued attention and dedication of members of the
Company's management to their assigned duties without distraction in
circumstances arising from the possibility of a change in control of the
Company. In particular, the Board believes it important, should the Company
or its shareholders receive a proposal for transfer of control of the
Company, that you be able to assess and advise the Board whether such
proposal would be in the best interests of the Company and its shareholders
and to take such other action regarding such proposal as the Board might
determine to be appropriate, without being influenced by the uncertainties of
your own situation.
In order to induce you to remain in the employ of the Company, this
letter agreement, which has been approved by the Board, sets forth the
severance benefits which the Company agrees will be provided to you in the
event your employment with the Company is terminated subsequent to a "change
in control" of the Company under the circumstances described below.
1. AGREEMENT TO PROVIDE SERVICES; RIGHT TO TERMINATE.
(i) Except as otherwise provided in paragraph (ii) below, the
Company or you may terminate your employment at any time, subject to the
Company's providing the benefits hereinafter specified in accordance with the
terms hereof.
(ii) In the event a tender offer or exchange offer is made by a
Person (as hereinafter defined) for more than 25% of the combined voting
power of the Company's outstanding securities ordinarily having the right to
vote at elections of directors ("Voting Securities"), including shares of the
Common Stock, no par value, of the Company (the "Company Shares"), you agree
that you will not leave the employ of the Company (other than as a result of
Disability or upon Retirement, as such terms are hereinafter defined) and
will render the services
<PAGE>
contemplated in the recitals to this Agreement until such tender offer or
exchange offer has been abandoned or terminated or a change in control of the
Company, as defined in Section 3 hereof, has occurred. For purposes of this
Agreement, the term "Person" shall mean and include any individual,
corporation, partnership, group, association or other "person", as such term
is used in Section 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), other than the Company, a wholly owned subsidiary of the
Company or any employee benefit plan(s) sponsored by the Company or a
subsidiary of the Company.
2. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until December 31, 1999; provided,
however, that commencing on January 1, 2000, and each January 1 thereafter,
the term of this Agreement shall automatically be extended for one additional
year unless at least 90 days prior to such January 1st date, the Company or
you shall have given notice that this Agreement shall not be extended; and
provided, further, that this Agreement shall continue in effect for a period
of twenty-four (24) months beyond the term provided herein if a change in
control of the Company, as defined in Section 3 hereof, shall have occurred
during such term. Notwithstanding anything in this Section 2 to the contrary,
this Agreement shall terminate if you or the Company terminate your
employment prior to a change in control of the Company.
3. CHANGE IN CONTROL. Change in Control means a change, after
January 1, 1999, in Control of the Bank of a nature that would be required to
be the subject of prior approval by the Federal Reserve Board pursuant to the
Bank Holding Company Act of 1956, as amended as of the date hereof, the
Federal Deposit Insurance Corporation ("FDIC") under the Change in Bank
Control Act, pursuant to the California Financial Code as in effect on this
date; provided that, without limitation, and without consideration of
regulatory exemptions from prior approval, such a Change in Control will be
deemed to have occurred if and when any of the following occur: (i) there is
a transfer, voluntarily or by hostile takeover or proxy contest, operation of
law, or otherwise, of Control of the Bank, (ii) the individuals who were
members of the Board of Directors of the Bank immediately prior to a meeting
of the shareholders of the Bank which meeting involves a contest for the
election of directors, do not constitute a majority of the Board of Directors
of the Bank following such meeting or election, (iii) an acquisition,
directly or indirectly, of more than 25% of the outstanding shares of any
class of voting securities of the Bank by any Person, (iv) a merger,
consolidation or sale of all or substantially all of the assets of the Bank,
or (v) there is a change, during any period of two consecutive years of a
majority of the Board of Directors of the Bank as constituted as of the
beginning of such period, unless the election of each director who is not a
director at the beginning of such period was approved by a vote of at least
two-thirds of the directors then in office who were directors at the
beginning of such period.
4. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the events
described in Section 3 hereof constituting a change in control of the Company
shall have occurred, you shall be entitled to the benefits provided in Section 5
hereof upon the termination of your employment with the Company within
twenty-four (24) months after such event, unless such termination is (a) because
of your death or Retirement, (b) by the Company for Cause or Disability or (c)
by you other than for Good Reason (as all such capitalized terms are hereinafter
defined).
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(i) DISABILITY. Termination by the Company of your employment
based on "Disability" shall mean termination because of your absence from
your duties with the Company on a full time basis for one hundred eighty
(180) consecutive days as a result of your incapacity due to physical or
mental illness, unless within thirty (30) days after Notice of Termination
(as hereinafter defined) is given to you following such absence you shall
have returned to the full time performance of your duties.
(ii) RETIREMENT. Termination by you of your employment based on
"Retirement" shall mean the voluntary termination of active employment with
the Company or a subsidiary on or about 65 years of age or at such later age
as such employee desires to discontinue his active employment with the
Company or a subsidiary.
(iii) CAUSE. Termination by the Company of your employment for
"Cause" shall mean termination upon (a) the willful and continued failure by
you to perform substantially your duties with the Company (other than any
such failure resulting from your incapacity due to physical or mental
illness) after a demand for substantial performance is delivered to you by
the Chairman of the Board or the Vice Chairman of the Board or the President
of the Company which specifically identifies the manner in which such
executive believes that you have not substantially performed your duties, or
(b) the willful engaging by you in illegal conduct which is materially and
demonstrably injurious to the Company. For purposes of this paragraph (iii),
no act, or failure to act, on your part shall be considered "willful" unless
done, or omitted to be done, by you in bad faith and without reasonable
belief that your action or omission was in, or not opposed to, the best
interests of the Company. Any act, or failure to act, based upon authority
given pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be done,
or omitted to be done, by you in good faith and in the best interests of the
Company. It is also expressly understood that your attention to matters not
directly related to the business of the Company shall not provide a basis for
termination for Cause so long as the Board has approved your engagement in
such activities. Notwithstanding the foregoing, you shall not be deemed to
have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote
of not less than three quarters of the entire membership of the Board at a
meeting of the Board called and held for the purpose (after reasonable notice
to you and an opportunity for you, together with your counsel, to be heard
before the Board), finding that in the good faith opinion of the Board you
were guilty of the conduct set forth above in (a) or (b) of this paragraph
(iii) and specifying the particulars thereof in detail.
(iv) GOOD REASON. Termination by you of your employment for "Good
Reason" shall mean termination based on:
(A) an adverse change in your status or position(s) as an executive
officer of the Company as in effect immediately prior to the change in
control, including, without limitation, any adverse change in your status
or position as a result of a material diminution in your duties or
responsibilities (other than, if applicable, any such change directly
attributable to the fact that the Company is no longer publicly owned) or
the
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assignment to you of any duties or responsibilities which, in your
reasonable judgment, are inconsistent with such status or position(s), or
any removal of you from or any failure to reappoint or reelect you to such
position(s) (except in connection with the termination of your employment
for Cause, Disability or Retirement or as a result of your death or by you
other than for Good Reason);
(B) a reduction by the Company in your base salary as in effect
immediately prior to the change in control;
(C) the failure by the Company to continue in effect any Plan (as
hereinafter defined) in which you are participating at the time of the
change in control of the Company (or Plans providing you with at least
substantially similar benefits) other than as a result of the normal
expiration of any such Plan in accordance with its terms as in effect at
the time of the change in control, or the taking of any action, or the
failure to act, by the Company which would adversely affect your continued
participation in any of such Plans on at least as favorable a basis to you
as is the case on the date of the change in control or which would
materially reduce your benefits in the future under any of such Plans or
deprive you of any material benefit under any Plan enjoyed by you at the
time of the change in control.
(D) the failure by the Company to provide and credit you with the
number of paid vacation days to which you are then entitled in accordance
with the Company's normal vacation policy as in effect immediately prior to
the change in control;
(E) the Company's requiring you to be based at an office that is
greater than 25 miles from where your office is located immediately prior
to the change in control except for required travel on the Company's
business to an extent substantially consistent with the business travel
obligations which you undertook on behalf of the Company prior to the
change in control;
(F) the failure by the Company to obtain from any Successor (as
hereinafter defined) the assent to this Agreement contemplated by Section 6
hereof; or
(G) any purported termination by the Company of your employment which
is not effected pursuant to a Notice of Termination satisfying the
requirements of paragraph (v) below (and, if applicable, paragraph (iii)
above); and for purposes of this Agreement, no such purported termination
shall be effective.
For purposes of this Agreement, "Plan" shall mean any compensation plan such as
an incentive, stock option or restricted stock plan or any employee benefit plan
such as a thrift, pension, profit sharing, medical, disability, accident, life
insurance plan or a relocation plan or policy or any other plan, program or
policy of the Company intended to benefit employees.
(v) NOTICE OF TERMINATION. Any purported termination by the
Company or by you following a change in control shall be communicated by
written Notice of Termination to the
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other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon.
(vi) DATE OF TERMINATION. "Date of Termination" following a
change in control shall mean (a) if your employment is to be terminated for
Disability, thirty (30) days after Notice of Termination is given (provided
that you shall not have returned to the performance of your duties on a
full-time basis during such thirty (30) day period), (b) if your employment
is to be terminated by the Company for Cause or by you pursuant to Sections
4(iv) (F) and 6 hereof or for any other Good Reason, the date specified in
the Notice of Termination, or (c) if your employment is to be terminated by
the Company for any reason other than Cause, the date specified in the Notice
of Termination, which in no event shall be a date earlier than ninety (90)
days after the date on which a Notice of Termination is given, unless an
earlier date has been expressly agreed to by you in writing either in advance
of, or after, receiving such Notice of Termination. In the case of
termination by the Company of your employment for Cause, if you have not
previously expressly agreed in writing to the termination, then within thirty
(30) days after receipt by you of the Notice of Termination with respect
thereto, you may notify the Company that a dispute exists concerning the
termination, in which event the Date of Termination shall be the date set
either by mutual written agreement of the parties or by the arbitrators in a
proceeding as provided in Section 13 hereof. During the pendency of any such
dispute, the Company will continue to pay you your full compensation in
effect just prior to the time the Notice of Termination is given and until
the dispute is resolved in accordance with Section 13.
5. COMPENSATION UPON TERMINATION OR DURING DISABILITY; OTHER
AGREEMENTS.
(i) During any period following a change in control of the Company
that you fail to perform your duties as a result of incapacity due to
physical or mental illness, you shall continue to receive your salary at the
rate then in effect and any benefits or awards under any Plans shall continue
to accrue during such period, to the extent not inconsistent with such Plans,
until your employment is terminated pursuant to and in accordance with
paragraphs 4(i) and 4(vi) hereof. Thereafter, your benefits shall be
determined in accordance with the Plans then in effect.
(ii) If your employment shall be terminated for Cause following a
change in control of the Company, the Company shall pay you your salary
through the Date of Termination is given plus any benefits or awards
(including both the cash and stock components) which pursuant to the terms of
any Plan have been earned or become payable, but which have not yet been paid
to you. Thereupon the Company shall have no further obligations to you under
this Agreement.
(iii) Subject to Section 8 hereof, if, within twenty-four (24) months
after a change in control of the Company, as defined in Section 3 above, shall
have occurred, your employment by the Company shall be terminated (a) by the
Company other than for Cause, Disability or Retirement or (b) by you for Good
Reason, then the Company shall pay to you, no later than the fifth day following
the Date of Termination, without regard to any contrary provisions of any Plan,
the following:
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(A) your salary through the Date of Termination at the rate in
effect just prior to the time a Notice of Termination is given plus any
benefits or awards (including both the cash and stock components) which
pursuant to the terms of any Plans have been earned or become payable,
but which have not yet been paid to you (including amounts which
previously had been deferred at your request); and
(B) as severance pay and in lieu of any further salary for periods
subsequent to the Date of Termination, an amount in cash equal to one and
one-half (1-1/2) times your annual salary and bonus, such salary to be at
the rate of salary in effect immediately prior to the Date of Termination
(or, if greater, immediately prior to the change in control of the Company)
and such bonus to be equal to the total bonus paid to you during the
twelve-month period immediately preceding the Date of Termination (or, if
greater, during the twelve-month period immediately preceding the change in
control of the Company); provided, however, that in no event shall such
amount exceed 2.99 times your "annualized includible compensation for the
base period" (as defined in Section 280G(d) (1) of the Internal Revenue
Code of 1986 (the "Code").
(iv) If, within twenty-four (24) months after a change in control
of the Company, as defined in Section 3 above, shall have occurred, your
employment by the Company shall be terminated (a) by the Company other than
for Cause, Disability or Retirement or (b) by you for Good Reason, then the
Company shall maintain in full force and effect, for the continued benefit of
you and your dependents for a period terminating on the earliest of (a) three
years after the Date of Termination, (b) the commencement date of equivalent
benefits from a new employer or (c) your normal retirement date under the
terms of any retirement plan, all insured and self-insured employee welfare
benefit Plans in which you were entitled to participate immediately prior to
the Date of Termination, provided that your continued participation is
possible under the general terms and provisions of such Plans (and any
applicable funding media) and you continue to pay an amount equal to your
regular contribution under such plans for such participation. If, at the end
of three years after the Termination Date, you have not reached your normal
retirement date and you have not previously received or are not then
receiving equivalent benefits from a new employer, the Company shall arrange,
at its sole cost and expense, to enable you to convert your and your
dependents' coverage under such Plans to individual policies or programs upon
the same terms as employees of the Company may apply for such conversions.
In the event that your participation in any such Plan is barred, the Company,
at its sole cost and expense, shall arrange to have issued for the benefit of
you and your dependents individual policies of insurance providing benefits
substantially similar (on an after-tax basis) to those which you otherwise
would have been entitled to receive under such Plans pursuant to this
paragraph (iv) or, if such insurance is not available at a reasonable cost to
the Company, the Company shall otherwise provide you and your dependents with
equivalent benefits (on an after-tax basis). You shall not be required to
pay any premiums or other charges in an amount greater than that which you
would have paid in order to participate in such Plans.
(v) Except as specifically provided in paragraph (iv) above, the
amount of any payment provided for in this Section 5 shall not be reduced,
offset or subject to recovery by the
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Company by reason of any compensation earned by you as the result of
employment by another employer after the Date of Termination, or otherwise.
6. SUCCESSORS; BINDING AGREEMENT.
(i) The Company will seek, by written request at least five (5)
business days prior to the time a Person becomes a Successor (as hereinafter
defined), to have such Person by agreement in form and substance satisfactory
to you, assent to the fulfillment of the Company's obligations under this
Agreement. Failure of such Person to furnish such assent by the later of (A)
three (3) business days prior to the time such Person becomes a Successor or
(B) two (2) business days after such Person receives a written request to so
assent shall constitute Good Reason for termination by you of your employment
if a change in control of the Company occurs or has occurred. For purposes
of this Agreement, "Successor" shall mean any Person that succeeds to, or has
the practical ability to control (either immediately or with the passage of
time), the Company's business directly, by merger or consolidation, or
indirectly, by purchase of the Company's Voting Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you should die while any amount would still be payable to you hereunder if
you had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to your
estate.
(iii) For purposes of this Agreement, the "Company" shall include any
corporation or other entity which is the surviving or continuing entity in
respect of any merger, consolidation or form of business combination in which
the Company ceases to exist.
7. FEES AND EXPENSES; MITIGATION.
(i) The Company shall pay all reasonable legal fees and related
expenses incurred by you in connection with the Agreement following a change
in control of the Company, including, without limitation, (a) all such fees
and expenses, if any, incurred in contesting or disputing any termination of
your employment or incurred by you in seeking advice with respect to the
matters set forth in Section 8 hereof or (b) your seeking to obtain or
enforce any right or benefit provided by this Agreement; provided, however,
you shall be required to repay any such amounts to the Company to the extent
that a court issues a final and non-appealable order setting forth the
determination that the position taken by you was frivolous or advanced by you
in bad faith.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection with this
Agreement, by seeking other employment or otherwise.
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8. TAXES.
(i) All payments to be made to you under this Agreement will be
subject to required withholding of federal, state and local income and
employment taxes.
(ii) Notwithstanding anything in the foregoing to the contrary, if
any of the payments provided for in this Agreement, together with any other
payments which you have the right to receive from the Company or any
corporation which is a member of an "affiliated group" (as defined in Section
1504(a) of the Code without regard to Section 1504(b) of the Code) of which
the Company is a member, would constitute a "parachute payment" (as defined
in Section 280G(b) (2) of the Code), the payments pursuant to this Agreement
shall be reduced (reducing first the payments under Section 5(iii) (B)) to
the largest amount as will result in no portion of such payments being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that the determination as to whether any reduction in the payments
under this Agreement pursuant to this proviso is necessary shall be made by
you in good faith, and such determination shall be conclusive and binding on
the Company with respect to its treatment of the payment for tax reporting
purposes.
9. SURVIVAL. The respective obligations of, and benefits
afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 13
and 14 of this Agreement shall survive termination of this Agreement.
10. NOTICE. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid and
addressed, in the case of the Company, to the address set forth on the first
page of this Agreement or, in the case of the undersigned employee, to the
address set forth below his signature, provided that all notices to the
Company shall be directed to the attention of the Chairman of the Board or
President of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
11. MISCELLANEOUS. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge
is agreed to in a writing signed by you and approved by the Board of
Directors of the Company. No waiver by either party hereto at any time of
any breach by the other party hereto of, or of compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of California.
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12. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
13. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Luis Obispo County, California, by three (3) arbitrators in accordance
with the rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction; provided, however, that you shall be entitled to seek specific
performance of your right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with
this Agreement. The Company shall bear all costs and expenses arising in
connection with any arbitration proceeding pursuant to this Section 13.
14. EMPLOYEE'S COMMITMENT. You agree that subsequent to your
period of employment with the Company, you will not at any time communicate
or disclose to any unauthorized person, without the written consent of the
Company, any proprietary processes of the Company or any subsidiary or other
confidential information concerning their business, affairs, products,
suppliers or customers which, if disclosed, would have a material adverse
effect upon the business or operations of the Company and its subsidiaries,
taken as a whole; it being understood, however, that the obligations of this
Section 14 shall not apply to the extent that the aforesaid matters (a) are
disclosed in circumstances where you are legally required to do so or (b)
become generally known to and available for use by the public otherwise than
by your wrongful act or omission.
15. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of
this letter which will then constitute our agreement on this subject.
Sincerely,
Mid-State Bank
By: /s/ James G. Stathos
-----------------------------------
James G. Stathos
Executive Vice President
Agreed to this 12th day
of November, 1997.
/s/ Carrol R. Pruett
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EXHIBIT 10.5
CHANGE IN CONTROL AGREEMENT
November 12, 1997
Dear T. E. Reese:
Mid-State Bank, a California corporation (the "Company"), considers
the establishment and maintenance of a sound and vital management to be
essential to protecting and enhancing the best interests of the Company and
its shareholders. In this connection, the Company recognizes that, as is the
case with many publicly held corporations, the possibility of a change in
control may arise and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of management personnel to the detriment of the Company and its
shareholders. Accordingly, the Board of Directors of the Company (the
"Board") has determined that appropriate steps should be taken to reinforce
and encourage the continued attention and dedication of members of the
Company's management to their assigned duties without distraction in
circumstances arising from the possibility of a change in control of the
Company. In particular, the Board believes it important, should the Company
or its shareholders receive a proposal for transfer of control of the
Company, that you be able to assess and advise the Board whether such
proposal would be in the best interests of the Company and its shareholders
and to take such other action regarding such proposal as the Board might
determine to be appropriate, without being influenced by the uncertainties of
your own situation.
In order to induce you to remain in the employ of the Company, this
letter agreement, which has been approved by the Board, sets forth the
severance benefits which the Company agrees will be provided to you in the
event your employment with the Company is terminated subsequent to a "change
in control" of the Company under the circumstances described below.
1. AGREEMENT TO PROVIDE SERVICES; RIGHT TO TERMINATE.
(i) Except as otherwise provided in paragraph (ii) below, the
Company or you may terminate your employment at any time, subject to the
Company's providing the benefits hereinafter specified in accordance with the
terms hereof.
(ii) In the event a tender offer or exchange offer is made by a
Person (as hereinafter defined) for more than 25% of the combined voting
power of the Company's outstanding securities ordinarily having the right to
vote at elections of directors ("Voting Securities"), including shares of the
Common Stock, no par value, of the Company (the "Company Shares"), you agree
that you will not leave the employ of the Company (other than as a result of
Disability or upon Retirement, as such terms are hereinafter defined) and
will render the services
<PAGE>
contemplated in the recitals to this Agreement until such tender offer or
exchange offer has been abandoned or terminated or a change in control of the
Company, as defined in Section 3 hereof, has occurred. For purposes of this
Agreement, the term "Person" shall mean and include any individual,
corporation, partnership, group, association or other "person", as such term
is used in Section 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), other than the Company, a wholly owned subsidiary of the
Company or any employee benefit plan(s) sponsored by the Company or a
subsidiary of the Company.
2. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until December 31, 1999; provided,
however, that commencing on January 1, 2000, and each January 1 thereafter,
the term of this Agreement shall automatically be extended for one additional
year unless at least 90 days prior to such January 1st date, the Company or
you shall have given notice that this Agreement shall not be extended; and
provided, further, that this Agreement shall continue in effect for a period
of twenty-four (24) months beyond the term provided herein if a change in
control of the Company, as defined in Section 3 hereof, shall have occurred
during such term. Notwithstanding anything in this Section 2 to the contrary,
this Agreement shall terminate if you or the Company terminate your
employment prior to a change in control of the Company.
3. CHANGE IN CONTROL. Change in Control means a change, after
January 1, 1999, in Control of the Bank of a nature that would be required to
be the subject of prior approval by the Federal Reserve Board pursuant to the
Bank Holding Company Act of 1956, as amended as of the date hereof, the
Federal Deposit Insurance Corporation ("FDIC") under the Change in Bank
Control Act, pursuant to the California Financial Code as in effect on this
date; provided that, without limitation, and without consideration of
regulatory exemptions from prior approval, such a Change in Control will be
deemed to have occurred if and when any of the following occur: (i) there is
a transfer, voluntarily or by hostile takeover or proxy contest, operation of
law, or otherwise, of Control of the Bank, (ii) the individuals who were
members of the Board of Directors of the Bank immediately prior to a meeting
of the shareholders of the Bank which meeting involves a contest for the
election of directors, do not constitute a majority of the Board of Directors
of the Bank following such meeting or election, (iii) an acquisition,
directly or indirectly, of more than 25% of the outstanding shares of any
class of voting securities of the Bank by any Person, (iv) a merger,
consolidation or sale of all or substantially all of the assets of the Bank,
or (v) there is a change, during any period of two consecutive years of a
majority of the Board of Directors of the Bank as constituted as of the
beginning of such period, unless the election of each director who is not a
director at the beginning of such period was approved by a vote of at least
two-thirds of the directors then in office who were directors at the
beginning of such period.
4. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the
events described in Section 3 hereof constituting a change in control of the
Company shall have occurred, you shall be entitled to the benefits provided
in Section 5 hereof upon the termination of your employment with the Company
within twenty-four (24) months after such event, unless such termination is
(a) because of your death or Retirement, (b) by the Company for Cause or
Disability or (c) by you other than for Good Reason (as all such capitalized
terms are hereinafter defined).
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(i) DISABILITY. Termination by the Company of your employment
based on "Disability" shall mean termination because of your absence from
your duties with the Company on a full time basis for one hundred eighty
(180) consecutive days as a result of your incapacity due to physical or
mental illness, unless within thirty (30) days after Notice of Termination
(as hereinafter defined) is given to you following such absence you shall
have returned to the full time performance of your duties.
(ii) RETIREMENT. Termination by you of your employment based on
"Retirement" shall mean the voluntary termination of active employment with the
Company or a subsidiary on or about 65 years of age or at such later age as such
employee desires to discontinue his active employment with the Company or a
subsidiary.
(iii) CAUSE. Termination by the Company of your employment for
"Cause" shall mean termination upon (a) the willful and continued failure by
you to perform substantially your duties with the Company (other than any
such failure resulting from your incapacity due to physical or mental
illness) after a demand for substantial performance is delivered to you by
the Chairman of the Board or the Vice Chairman of the Board or the President
of the Company which specifically identifies the manner in which such
executive believes that you have not substantially performed your duties, or
(b) the willful engaging by you in illegal conduct which is materially and
demonstrably injurious to the Company. For purposes of this paragraph (iii),
no act, or failure to act, on your part shall be considered "willful" unless
done, or omitted to be done, by you in bad faith and without reasonable
belief that your action or omission was in, or not opposed to, the best
interests of the Company. Any act, or failure to act, based upon authority
given pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be done,
or omitted to be done, by you in good faith and in the best interests of the
Company. It is also expressly understood that your attention to matters not
directly related to the business of the Company shall not provide a basis for
termination for Cause so long as the Board has approved your engagement in
such activities. Notwithstanding the foregoing, you shall not be deemed to
have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote
of not less than three quarters of the entire membership of the Board at a
meeting of the Board called and held for the purpose (after reasonable notice
to you and an opportunity for you, together with your counsel, to be heard
before the Board), finding that in the good faith opinion of the Board you
were guilty of the conduct set forth above in (a) or (b) of this paragraph
(iii) and specifying the particulars thereof in detail.
(iv) GOOD REASON. Termination by you of your employment for "Good
Reason" shall mean termination based on:
(A) an adverse change in your status or position(s) as an executive
officer of the Company as in effect immediately prior to the change in
control, including, without limitation, any adverse change in your status
or position as a result of a material diminution in your duties or
responsibilities (other than, if applicable, any such change directly
attributable to the fact that the Company is no longer publicly owned) or
the
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assignment to you of any duties or responsibilities which, in your
reasonable judgment, are inconsistent with such status or position(s), or
any removal of you from or any failure to reappoint or reelect you to such
position(s) (except in connection with the termination of your employment
for Cause, Disability or Retirement or as a result of your death or by you
other than for Good Reason);
(B) a reduction by the Company in your base salary as in effect
immediately prior to the change in control;
(C) the failure by the Company to continue in effect any Plan (as
hereinafter defined) in which you are participating at the time of the
change in control of the Company (or Plans providing you with at least
substantially similar benefits) other than as a result of the normal
expiration of any such Plan in accordance with its terms as in effect at
the time of the change in control, or the taking of any action, or the
failure to act, by the Company which would adversely affect your continued
participation in any of such Plans on at least as favorable a basis to you
as is the case on the date of the change in control or which would
materially reduce your benefits in the future under any of such Plans or
deprive you of any material benefit under any Plan enjoyed by you at the
time of the change in control.
(D) the failure by the Company to provide and credit you with the
number of paid vacation days to which you are then entitled in accordance
with the Company's normal vacation policy as in effect immediately prior to
the change in control;
(E) the Company's requiring you to be based at an office that is
greater than 25 miles from where your office is located immediately prior
to the change in control except for required travel on the Company's
business to an extent substantially consistent with the business travel
obligations which you undertook on behalf of the Company prior to the
change in control;
(F) the failure by the Company to obtain from any Successor (as
hereinafter defined) the assent to this Agreement contemplated by Section 6
hereof; or
(G) any purported termination by the Company of your employment
which is not effected pursuant to a Notice of Termination satisfying the
requirements of paragraph (v) below (and, if applicable, paragraph (iii)
above); and for purposes of this Agreement, no such purported termination
shall be effective.
For purposes of this Agreement, "Plan" shall mean any compensation plan such as
an incentive, stock option or restricted stock plan or any employee benefit plan
such as a thrift, pension, profit sharing, medical, disability, accident, life
insurance plan or a relocation plan or policy or any other plan, program or
policy of the Company intended to benefit employees.
(v) NOTICE OF TERMINATION. Any purported termination by the
Company or by you following a change in control shall be communicated by
written Notice of Termination to the
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other party hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon.
(vi) DATE OF TERMINATION. "Date of Termination" following a
change in control shall mean (a) if your employment is to be terminated for
Disability, thirty (30) days after Notice of Termination is given (provided
that you shall not have returned to the performance of your duties on a
full-time basis during such thirty (30) day period), (b) if your employment
is to be terminated by the Company for Cause or by you pursuant to Sections
4(iv) (F) and 6 hereof or for any other Good Reason, the date specified in
the Notice of Termination, or (c) if your employment is to be terminated by
the Company for any reason other than Cause, the date specified in the Notice
of Termination, which in no event shall be a date earlier than ninety (90)
days after the date on which a Notice of Termination is given, unless an
earlier date has been expressly agreed to by you in writing either in advance
of, or after, receiving such Notice of Termination. In the case of
termination by the Company of your employment for Cause, if you have not
previously expressly agreed in writing to the termination, then within thirty
(30) days after receipt by you of the Notice of Termination with respect
thereto, you may notify the Company that a dispute exists concerning the
termination, in which event the Date of Termination shall be the date set
either by mutual written agreement of the parties or by the arbitrators in a
proceeding as provided in Section 13 hereof. During the pendency of any such
dispute, the Company will continue to pay you your full compensation in
effect just prior to the time the Notice of Termination is given and until
the dispute is resolved in accordance with Section 13.
5. COMPENSATION UPON TERMINATION OR DURING DISABILITY; OTHER
AGREEMENTS.
(i) During any period following a change in control of the
Company that you fail to perform your duties as a result of incapacity due to
physical or mental illness, you shall continue to receive your salary at the
rate then in effect and any benefits or awards under any Plans shall continue
to accrue during such period, to the extent not inconsistent with such Plans,
until your employment is terminated pursuant to and in accordance with
paragraphs 4(i) and 4(vi) hereof. Thereafter, your benefits shall be
determined in accordance with the Plans then in effect.
(ii) If your employment shall be terminated for Cause following a
change in control of the Company, the Company shall pay you your salary
through the Date of Termination is given plus any benefits or awards
(including both the cash and stock components) which pursuant to the terms of
any Plan have been earned or become payable, but which have not yet been paid
to you. Thereupon the Company shall have no further obligations to you under
this Agreement.
(iii) Subject to Section 8 hereof, if, within twenty-four (24) months
after a change in control of the Company, as defined in Section 3 above, shall
have occurred, your employment by the Company shall be terminated (a) by the
Company other than for Cause, Disability or Retirement or (b) by you for Good
Reason, then the Company shall pay to you, no later than the fifth day following
the Date of Termination, without regard to any contrary provisions of any Plan,
the following:
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(A) your salary through the Date of Termination at the rate in effect
just prior to the time a Notice of Termination is given plus any benefits
or awards (including both the cash and stock components) which pursuant to
the terms of any Plans have been earned or become payable, but which have
not yet been paid to you (including amounts which previously had been
deferred at your request); and
(B) as severance pay and in lieu of any further salary for periods
subsequent to the Date of Termination, an amount in cash equal to one and
one-half (1-1/2) times your annual salary and bonus, such salary to be at
the rate of salary in effect immediately prior to the Date of Termination
(or, if greater, immediately prior to the change in control of the Company)
and such bonus to be equal to the total bonus paid to you during the
twelve-month period immediately preceding the Date of Termination (or, if
greater, during the twelve-month period immediately preceding the change in
control of the Company); provided, however, that in no event shall such
amount exceed 2.99 times your "annualized includible compensation for the
base period" (as defined in Section 280G(d) (1) of the Internal Revenue
Code of 1986 (the "Code").
(iv) If, within twenty-four (24) months after a change in control
of the Company, as defined in Section 3 above, shall have occurred, your
employment by the Company shall be terminated (a) by the Company other than
for Cause, Disability or Retirement or (b) by you for Good Reason, then the
Company shall maintain in full force and effect, for the continued benefit of
you and your dependents for a period terminating on the earliest of (a) three
years after the Date of Termination, (b) the commencement date of equivalent
benefits from a new employer or (c) your normal retirement date under the
terms of any retirement plan, all insured and self-insured employee welfare
benefit Plans in which you were entitled to participate immediately prior to
the Date of Termination, provided that your continued participation is
possible under the general terms and provisions of such Plans (and any
applicable funding media) and you continue to pay an amount equal to your
regular contribution under such plans for such participation. If, at the end
of three years after the Termination Date, you have not reached your normal
retirement date and you have not previously received or are not then
receiving equivalent benefits from a new employer, the Company shall arrange,
at its sole cost and expense, to enable you to convert your and your
dependents' coverage under such Plans to individual policies or programs upon
the same terms as employees of the Company may apply for such conversions.
In the event that your participation in any such Plan is barred, the Company,
at its sole cost and expense, shall arrange to have issued for the benefit of
you and your dependents individual policies of insurance providing benefits
substantially similar (on an after-tax basis) to those which you otherwise
would have been entitled to receive under such Plans pursuant to this
paragraph (iv) or, if such insurance is not available at a reasonable cost to
the Company, the Company shall otherwise provide you and your dependents with
equivalent benefits (on an after-tax basis). You shall not be required to
pay any premiums or other charges in an amount greater than that which you
would have paid in order to participate in such Plans.
(v) Except as specifically provided in paragraph (iv) above, the
amount of any payment provided for in this Section 5 shall not be reduced,
offset or subject to recovery by the
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Company by reason of any compensation earned by you as the result of
employment by another employer after the Date of Termination, or otherwise.
6. SUCCESSORS; BINDING AGREEMENT.
(i) The Company will seek, by written request at least five (5)
business days prior to the time a Person becomes a Successor (as hereinafter
defined), to have such Person by agreement in form and substance satisfactory
to you, assent to the fulfillment of the Company's obligations under this
Agreement. Failure of such Person to furnish such assent by the later of (A)
three (3) business days prior to the time such Person becomes a Successor or
(B) two (2) business days after such Person receives a written request to so
assent shall constitute Good Reason for termination by you of your employment
if a change in control of the Company occurs or has occurred. For purposes
of this Agreement, "Successor" shall mean any Person that succeeds to, or has
the practical ability to control (either immediately or with the passage of
time), the Company's business directly, by merger or consolidation, or
indirectly, by purchase of the Company's Voting Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you should die while any amount would still be payable to you hereunder if
you had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to your
estate.
(iii) For purposes of this Agreement, the "Company" shall include any
corporation or other entity which is the surviving or continuing entity in
respect of any merger, consolidation or form of business combination in which
the Company ceases to exist.
7. FEES AND EXPENSES; MITIGATION.
(i) The Company shall pay all reasonable legal fees and related
expenses incurred by you in connection with the Agreement following a change
in control of the Company, including, without limitation, (a) all such fees
and expenses, if any, incurred in contesting or disputing any termination of
your employment or incurred by you in seeking advice with respect to the
matters set forth in Section 8 hereof or (b) your seeking to obtain or
enforce any right or benefit provided by this Agreement; provided, however,
you shall be required to repay any such amounts to the Company to the extent
that a court issues a final and non-appealable order setting forth the
determination that the position taken by you was frivolous or advanced by you
in bad faith.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection with this
Agreement, by seeking other employment or otherwise.
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8. TAXES.
(i) All payments to be made to you under this Agreement will be
subject to required withholding of federal, state and local income and
employment taxes.
(ii) Notwithstanding anything in the foregoing to the contrary, if
any of the payments provided for in this Agreement, together with any other
payments which you have the right to receive from the Company or any
corporation which is a member of an "affiliated group" (as defined in Section
1504(a) of the Code without regard to Section 1504(b) of the Code) of which
the Company is a member, would constitute a "parachute payment" (as defined
in Section 280G(b) (2) of the Code), the payments pursuant to this Agreement
shall be reduced (reducing first the payments under Section 5(iii) (B)) to
the largest amount as will result in no portion of such payments being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that the determination as to whether any reduction in the payments
under this Agreement pursuant to this proviso is necessary shall be made by
you in good faith, and such determination shall be conclusive and binding on
the Company with respect to its treatment of the payment for tax reporting
purposes.
9. SURVIVAL. The respective obligations of, and benefits
afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 13
and 14 of this Agreement shall survive termination of this Agreement.
10. NOTICE. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid and
addressed, in the case of the Company, to the address set forth on the first
page of this Agreement or, in the case of the undersigned employee, to the
address set forth below his signature, provided that all notices to the
Company shall be directed to the attention of the Chairman of the Board or
President of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
11. MISCELLANEOUS. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge
is agreed to in a writing signed by you and approved by the Board of
Directors of the Company. No waiver by either party hereto at any time of
any breach by the other party hereto of, or of compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of California.
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12. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
13. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Luis Obispo County, California, by three (3) arbitrators in accordance
with the rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction; provided, however, that you shall be entitled to seek specific
performance of your right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with
this Agreement. The Company shall bear all costs and expenses arising in
connection with any arbitration proceeding pursuant to this Section 13.
14. EMPLOYEE'S COMMITMENT. You agree that subsequent to your
period of employment with the Company, you will not at any time communicate
or disclose to any unauthorized person, without the written consent of the
Company, any proprietary processes of the Company or any subsidiary or other
confidential information concerning their business, affairs, products,
suppliers or customers which, if disclosed, would have a material adverse
effect upon the business or operations of the Company and its subsidiaries,
taken as a whole; it being understood, however, that the obligations of this
Section 14 shall not apply to the extent that the aforesaid matters (a) are
disclosed in circumstances where you are legally required to do so or (b)
become generally known to and available for use by the public otherwise than
by your wrongful act or omission.
15. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of
this letter which will then constitute our agreement on this subject.
Sincerely,
Mid-State Bank
By: /s/ Carrol R. Pruett
----------------------------------
Carrol R. Pruett, President
Agreed to this 12th day
of November, 1997.
/s/ T. E. Reese
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EXHIBIT 10.6
CHANGE IN CONTROL AGREEMENT
November 12, 1997
Dear James G. Stathos:
Mid-State Bank, a California corporation (the "Company"), considers
the establishment and maintenance of a sound and vital management to be
essential to protecting and enhancing the best interests of the Company and
its shareholders. In this connection, the Company recognizes that, as is the
case with many publicly held corporations, the possibility of a change in
control may arise and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of management personnel to the detriment of the Company and its
shareholders. Accordingly, the Board of Directors of the Company (the
"Board") has determined that appropriate steps should be taken to reinforce
and encourage the continued attention and dedication of members of the
Company's management to their assigned duties without distraction in
circumstances arising from the possibility of a change in control of the
Company. In particular, the Board believes it important, should the Company
or its shareholders receive a proposal for transfer of control of the
Company, that you be able to assess and advise the Board whether such
proposal would be in the best interests of the Company and its shareholders
and to take such other action regarding such proposal as the Board might
determine to be appropriate, without being influenced by the uncertainties of
your own situation.
In order to induce you to remain in the employ of the Company, this
letter agreement, which has been approved by the Board, sets forth the
severance benefits which the Company agrees will be provided to you in the
event your employment with the Company is terminated subsequent to a "change
in control" of the Company under the circumstances described below.
1. AGREEMENT TO PROVIDE SERVICES; RIGHT TO TERMINATE.
(i) Except as otherwise provided in paragraph (ii) below, the
Company or you may terminate your employment at any time, subject to the
Company's providing the benefits hereinafter specified in accordance with the
terms hereof.
(ii) In the event a tender offer or exchange offer is made by a
Person (as hereinafter defined) for more than 25% of the combined voting
power of the Company's outstanding securities ordinarily having the right to
vote at elections of directors ("Voting Securities"), including shares of the
Common Stock, no par value, of the Company (the "Company Shares"), you agree
that you will not leave the employ of the Company (other than as a result of
Disability or upon Retirement, as such terms are hereinafter defined) and
will render the services
<PAGE>
contemplated in the recitals to this Agreement until such tender offer or
exchange offer has been abandoned or terminated or a change in control of the
Company, as defined in Section 3 hereof, has occurred. For purposes of this
Agreement, the term "Person" shall mean and include any individual,
corporation, partnership, group, association or other "person", as such term
is used in Section 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), other than the Company, a wholly owned subsidiary of the
Company or any employee benefit plan(s) sponsored by the Company or a
subsidiary of the Company.
2. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until December 31, 1999; provided,
however, that commencing on January 1, 2000, and each January 1 thereafter,
the term of this Agreement shall automatically be extended for one additional
year unless at least 90 days prior to such January 1st date, the Company or
you shall have given notice that this Agreement shall not be extended; and
provided, further, that this Agreement shall continue in effect for a period
of twenty-four (24) months beyond the term provided herein if a change in
control of the Company, as defined in Section 3 hereof, shall have occurred
during such term. Notwithstanding anything in this Section 2 to the contrary,
this Agreement shall terminate if you or the Company terminate your
employment prior to a change in control of the Company.
3. CHANGE IN CONTROL. Change in Control means a change, after
January 1, 1999, in Control of the Bank of a nature that would be required to
be the subject of prior approval by the Federal Reserve Board pursuant to the
Bank Holding Company Act of 1956, as amended as of the date hereof, the
Federal Deposit Insurance Corporation ("FDIC") under the Change in Bank
Control Act, pursuant to the California Financial Code as in effect on this
date; provided that, without limitation, and without consideration of
regulatory exemptions from prior approval, such a Change in Control will be
deemed to have occurred if and when any of the following occur: (i) there is
a transfer, voluntarily or by hostile takeover or proxy contest, operation of
law, or otherwise, of Control of the Bank, (ii) the individuals who were
members of the Board of Directors of the Bank immediately prior to a meeting
of the shareholders of the Bank which meeting involves a contest for the
election of directors, do not constitute a majority of the Board of Directors
of the Bank following such meeting or election, (iii) an acquisition,
directly or indirectly, of more than 25% of the outstanding shares of any
class of voting securities of the Bank by any Person, (iv) a merger,
consolidation or sale of all or substantially all of the assets of the Bank,
or (v) there is a change, during any period of two consecutive years of a
majority of the Board of Directors of the Bank as constituted as of the
beginning of such period, unless the election of each director who is not a
director at the beginning of such period was approved by a vote of at least
two-thirds of the directors then in office who were directors at the
beginning of such period.
4. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the events
described in Section 3 hereof constituting a change in control of the Company
shall have occurred, you shall be entitled to the benefits provided in Section 5
hereof upon the termination of your employment with the Company within
twenty-four (24) months after such event, unless such termination is (a) because
of your death or Retirement, (b) by the Company for Cause or Disability or (c)
by you other than for Good Reason (as all such capitalized terms are hereinafter
defined).
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(i) DISABILITY. Termination by the Company of your employment
based on "Disability" shall mean termination because of your absence from
your duties with the Company on a full time basis for one hundred eighty
(180) consecutive days as a result of your incapacity due to physical or
mental illness, unless within thirty (30) days after Notice of Termination
(as hereinafter defined) is given to you following such absence you shall
have returned to the full time performance of your duties.
(ii) RETIREMENT. Termination by you of your employment based on
"Retirement" shall mean the voluntary termination of active employment with the
Company or a subsidiary on or about 65 years of age or at such later age as such
employee desires to discontinue his active employment with the Company or a
subsidiary.
(iii) CAUSE. Termination by the Company of your employment for
"Cause" shall mean termination upon (a) the willful and continued failure by
you to perform substantially your duties with the Company (other than any
such failure resulting from your incapacity due to physical or mental
illness) after a demand for substantial performance is delivered to you by
the Chairman of the Board or the Vice Chairman of the Board or the President
of the Company which specifically identifies the manner in which such
executive believes that you have not substantially performed your duties, or
(b) the willful engaging by you in illegal conduct which is materially and
demonstrably injurious to the Company. For purposes of this paragraph (iii),
no act, or failure to act, on your part shall be considered "willful" unless
done, or omitted to be done, by you in bad faith and without reasonable
belief that your action or omission was in, or not opposed to, the best
interests of the Company. Any act, or failure to act, based upon authority
given pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be done,
or omitted to be done, by you in good faith and in the best interests of the
Company. It is also expressly understood that your attention to matters not
directly related to the business of the Company shall not provide a basis for
termination for Cause so long as the Board has approved your engagement in
such activities. Notwithstanding the foregoing, you shall not be deemed to
have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote
of not less than three quarters of the entire membership of the Board at a
meeting of the Board called and held for the purpose (after reasonable notice
to you and an opportunity for you, together with your counsel, to be heard
before the Board), finding that in the good faith opinion of the Board you
were guilty of the conduct set forth above in (a) or (b) of this paragraph
(iii) and specifying the particulars thereof in detail.
(iv) GOOD REASON. Termination by you of your employment for "Good
Reason" shall mean termination based on:
(A) an adverse change in your status or position(s) as an executive
officer of the Company as in effect immediately prior to the change in
control, including, without limitation, any adverse change in your status
or position as a result of a material diminution in your duties or
responsibilities (other than, if applicable, any such change directly
attributable to the fact that the Company is no longer publicly owned) or
the
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assignment to you of any duties or responsibilities which, in your
reasonable judgment, are inconsistent with such status or position(s), or
any removal of you from or any failure to reappoint or reelect you to such
position(s) (except in connection with the termination of your employment
for Cause, Disability or Retirement or as a result of your death or by you
other than for Good Reason);
(B) a reduction by the Company in your base salary as in effect
immediately prior to the change in control;
(C) the failure by the Company to continue in effect any Plan (as
hereinafter defined) in which you are participating at the time of the
change in control of the Company (or Plans providing you with at least
substantially similar benefits) other than as a result of the normal
expiration of any such Plan in accordance with its terms as in effect at
the time of the change in control, or the taking of any action, or the
failure to act, by the Company which would adversely affect your continued
participation in any of such Plans on at least as favorable a basis to you
as is the case on the date of the change in control or which would
materially reduce your benefits in the future under any of such Plans or
deprive you of any material benefit under any Plan enjoyed by you at the
time of the change in control.
(D) the failure by the Company to provide and credit you with the
number of paid vacation days to which you are then entitled in accordance
with the Company's normal vacation policy as in effect immediately prior to
the change in control;
(E) the Company's requiring you to be based at an office that is
greater than 25 miles from where your office is located immediately prior
to the change in control except for required travel on the Company's
business to an extent substantially consistent with the business travel
obligations which you undertook on behalf of the Company prior to the
change in control;
(F) the failure by the Company to obtain from any Successor (as
hereinafter defined) the assent to this Agreement contemplated by Section 6
hereof; or
(G) any purported termination by the Company of your employment which
is not effected pursuant to a Notice of Termination satisfying the
requirements of paragraph (v) below (and, if applicable, paragraph (iii)
above); and for purposes of this Agreement, no such purported termination
shall be effective.
For purposes of this Agreement, "Plan" shall mean any compensation plan such as
an incentive, stock option or restricted stock plan or any employee benefit plan
such as a thrift, pension, profit sharing, medical, disability, accident, life
insurance plan or a relocation plan or policy or any other plan, program or
policy of the Company intended to benefit employees.
(v) NOTICE OF TERMINATION. Any purported termination by the
Company or by you following a change in control shall be communicated by
written Notice of Termination to the
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other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon.
(vi) DATE OF TERMINATION. "Date of Termination" following a
change in control shall mean (a) if your employment is to be terminated for
Disability, thirty (30) days after Notice of Termination is given (provided
that you shall not have returned to the performance of your duties on a
full-time basis during such thirty (30) day period), (b) if your employment
is to be terminated by the Company for Cause or by you pursuant to Sections
4(iv) (F) and 6 hereof or for any other Good Reason, the date specified in
the Notice of Termination, or (c) if your employment is to be terminated by
the Company for any reason other than Cause, the date specified in the Notice
of Termination, which in no event shall be a date earlier than ninety (90)
days after the date on which a Notice of Termination is given, unless an
earlier date has been expressly agreed to by you in writing either in advance
of, or after, receiving such Notice of Termination. In the case of
termination by the Company of your employment for Cause, if you have not
previously expressly agreed in writing to the termination, then within thirty
(30) days after receipt by you of the Notice of Termination with respect
thereto, you may notify the Company that a dispute exists concerning the
termination, in which event the Date of Termination shall be the date set
either by mutual written agreement of the parties or by the arbitrators in a
proceeding as provided in Section 13 hereof. During the pendency of any such
dispute, the Company will continue to pay you your full compensation in
effect just prior to the time the Notice of Termination is given and until
the dispute is resolved in accordance with Section 13.
5. COMPENSATION UPON TERMINATION OR DURING DISABILITY; OTHER
AGREEMENTS.
(i) During any period following a change in control of the
Company that you fail to perform your duties as a result of incapacity due to
physical or mental illness, you shall continue to receive your salary at the
rate then in effect and any benefits or awards under any Plans shall continue
to accrue during such period, to the extent not inconsistent with such Plans,
until your employment is terminated pursuant to and in accordance with
paragraphs 4(i) and 4(vi) hereof. Thereafter, your benefits shall be
determined in accordance with the Plans then in effect.
(ii) If your employment shall be terminated for Cause following a
change in control of the Company, the Company shall pay you your salary
through the Date of Termination is given plus any benefits or awards
(including both the cash and stock components) which pursuant to the terms of
any Plan have been earned or become payable, but which have not yet been paid
to you. Thereupon the Company shall have no further obligations to you under
this Agreement.
(iii) Subject to Section 8 hereof, if, within twenty-four (24) months
after a change in control of the Company, as defined in Section 3 above, shall
have occurred, your employment by the Company shall be terminated (a) by the
Company other than for Cause, Disability or Retirement or (b) by you for Good
Reason, then the Company shall pay to you, no later than the fifth day following
the Date of Termination, without regard to any contrary provisions of any Plan,
the following:
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(A) your salary through the Date of Termination at the rate in effect
just prior to the time a Notice of Termination is given plus any benefits
or awards (including both the cash and stock components) which pursuant to
the terms of any Plans have been earned or become payable, but which have
not yet been paid to you (including amounts which previously had been
deferred at your request); and
(B) as severance pay and in lieu of any further salary for periods
subsequent to the Date of Termination, an amount in cash equal to one and
one-half (1-1/2) times your annual salary and bonus, such salary to be at
the rate of salary in effect immediately prior to the Date of Termination
(or, if greater, immediately prior to the change in control of the Company)
and such bonus to be equal to the total bonus paid to you during the
twelve-month period immediately preceding the Date of Termination (or, if
greater, during the twelve-month period immediately preceding the change in
control of the Company); provided, however, that in no event shall such
amount exceed 2.99 times your "annualized includible compensation for the
base period" (as defined in Section 280G(d) (1) of the Internal Revenue
Code of 1986 (the "Code").
(iv) If, within twenty-four (24) months after a change in control
of the Company, as defined in Section 3 above, shall have occurred, your
employment by the Company shall be terminated (a) by the Company other than
for Cause, Disability or Retirement or (b) by you for Good Reason, then the
Company shall maintain in full force and effect, for the continued benefit of
you and your dependents for a period terminating on the earliest of (a) three
years after the Date of Termination, (b) the commencement date of equivalent
benefits from a new employer or (c) your normal retirement date under the
terms of any retirement plan, all insured and self-insured employee welfare
benefit Plans in which you were entitled to participate immediately prior to
the Date of Termination, provided that your continued participation is
possible under the general terms and provisions of such Plans (and any
applicable funding media) and you continue to pay an amount equal to your
regular contribution under such plans for such participation. If, at the end
of three years after the Termination Date, you have not reached your normal
retirement date and you have not previously received or are not then
receiving equivalent benefits from a new employer, the Company shall arrange,
at its sole cost and expense, to enable you to convert your and your
dependents' coverage under such Plans to individual policies or programs upon
the same terms as employees of the Company may apply for such conversions.
In the event that your participation in any such Plan is barred, the Company,
at its sole cost and expense, shall arrange to have issued for the benefit of
you and your dependents individual policies of insurance providing benefits
substantially similar (on an after-tax basis) to those which you otherwise
would have been entitled to receive under such Plans pursuant to this
paragraph (iv) or, if such insurance is not available at a reasonable cost to
the Company, the Company shall otherwise provide you and your dependents with
equivalent benefits (on an after-tax basis). You shall not be required to
pay any premiums or other charges in an amount greater than that which you
would have paid in order to participate in such Plans.
(v) Except as specifically provided in paragraph (iv) above, the
amount of any payment provided for in this Section 5 shall not be reduced,
offset or subject to recovery by the
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Company by reason of any compensation earned by you as the result of
employment by another employer after the Date of Termination, or otherwise.
6. SUCCESSORS; BINDING AGREEMENT.
(i) The Company will seek, by written request at least five (5)
business days prior to the time a Person becomes a Successor (as hereinafter
defined), to have such Person by agreement in form and substance satisfactory
to you, assent to the fulfillment of the Company's obligations under this
Agreement. Failure of such Person to furnish such assent by the later of (A)
three (3) business days prior to the time such Person becomes a Successor or
(B) two (2) business days after such Person receives a written request to so
assent shall constitute Good Reason for termination by you of your employment
if a change in control of the Company occurs or has occurred. For purposes
of this Agreement, "Successor" shall mean any Person that succeeds to, or has
the practical ability to control (either immediately or with the passage of
time), the Company's business directly, by merger or consolidation, or
indirectly, by purchase of the Company's Voting Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you should die while any amount would still be payable to you hereunder if
you had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to your
estate.
(iii) For purposes of this Agreement, the "Company" shall include
any corporation or other entity which is the surviving or continuing entity
in respect of any merger, consolidation or form of business combination in
which the Company ceases to exist.
7. FEES AND EXPENSES; MITIGATION.
(i) The Company shall pay all reasonable legal fees and related
expenses incurred by you in connection with the Agreement following a change
in control of the Company, including, without limitation, (a) all such fees
and expenses, if any, incurred in contesting or disputing any termination of
your employment or incurred by you in seeking advice with respect to the
matters set forth in Section 8 hereof or (b) your seeking to obtain or
enforce any right or benefit provided by this Agreement; provided, however,
you shall be required to repay any such amounts to the Company to the extent
that a court issues a final and non-appealable order setting forth the
determination that the position taken by you was frivolous or advanced by you
in bad faith.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection with this
Agreement, by seeking other employment or otherwise.
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8. TAXES.
(i) All payments to be made to you under this Agreement will be
subject to required withholding of federal, state and local income and
employment taxes.
(ii) Notwithstanding anything in the foregoing to the contrary, if
any of the payments provided for in this Agreement, together with any other
payments which you have the right to receive from the Company or any
corporation which is a member of an "affiliated group" (as defined in Section
1504(a) of the Code without regard to Section 1504(b) of the Code) of which
the Company is a member, would constitute a "parachute payment" (as defined
in Section 280G(b) (2) of the Code), the payments pursuant to this Agreement
shall be reduced (reducing first the payments under Section 5(iii) (B)) to
the largest amount as will result in no portion of such payments being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that the determination as to whether any reduction in the payments
under this Agreement pursuant to this proviso is necessary shall be made by
you in good faith, and such determination shall be conclusive and binding on
the Company with respect to its treatment of the payment for tax reporting
purposes.
9. SURVIVAL. The respective obligations of, and benefits
afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 13
and 14 of this Agreement shall survive termination of this Agreement.
10. NOTICE. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid and
addressed, in the case of the Company, to the address set forth on the first
page of this Agreement or, in the case of the undersigned employee, to the
address set forth below his signature, provided that all notices to the
Company shall be directed to the attention of the Chairman of the Board or
President of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
11. MISCELLANEOUS. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge
is agreed to in a writing signed by you and approved by the Board of
Directors of the Company. No waiver by either party hereto at any time of
any breach by the other party hereto of, or of compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of California.
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12. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
13. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Luis Obispo County, California, by three (3) arbitrators in accordance
with the rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction; provided, however, that you shall be entitled to seek specific
performance of your right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with
this Agreement. The Company shall bear all costs and expenses arising in
connection with any arbitration proceeding pursuant to this Section 13.
14. EMPLOYEE'S COMMITMENT. You agree that subsequent to your
period of employment with the Company, you will not at any time communicate
or disclose to any unauthorized person, without the written consent of the
Company, any proprietary processes of the Company or any subsidiary or other
confidential information concerning their business, affairs, products,
suppliers or customers which, if disclosed, would have a material adverse
effect upon the business or operations of the Company and its subsidiaries,
taken as a whole; it being understood, however, that the obligations of this
Section 14 shall not apply to the extent that the aforesaid matters (a) are
disclosed in circumstances where you are legally required to do so or (b)
become generally known to and available for use by the public otherwise than
by your wrongful act or omission.
15. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of
this letter which will then constitute our agreement on this subject.
Sincerely,
Mid-State Bank
By: /s/ Carrol R. Pruett
-----------------------------------
Carrol R. Pruett, President
Agreed to this 12th day
of November, 1997.
/s/ James G. Stathos
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EXHIBIT 10.7
CHANGE IN CONTROL AGREEMENT
November 11, 1998
Dear Steven Harding:
Mid-State Bank, a California corporation (the "Company"), considers
the establishment and maintenance of a sound and vital management to be
essential to protecting and enhancing the best interests of the Company and
its shareholders. In this connection, the Company recognizes that, as is the
case with many publicly held corporations, the possibility of a change in
control may arise and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of management personnel to the detriment of the Company and its
shareholders. Accordingly, the Board of Directors of the Company (the
"Board") has determined that appropriate steps should be taken to reinforce
and encourage the continued attention and dedication of members of the
Company's management to their assigned duties without distraction in
circumstances arising from the possibility of a change in control of the
Company. In particular, the Board believes it important, should the Company
or its shareholders receive a proposal for transfer of control of the
Company, that you be able to assess and advise the Board whether such
proposal would be in the best interests of the Company and its shareholders
and to take such other action regarding such proposal as the Board might
determine to be appropriate, without being influenced by the uncertainties of
your own situation.
In order to induce you to remain in the employ of the Company, this
letter agreement, which has been approved by the Board, sets forth the
severance benefits which the Company agrees will be provided to you in the
event your employment with the Company is terminated subsequent to a "change
in control" of the Company under the circumstances described below.
1. AGREEMENT TO PROVIDE SERVICES; RIGHT TO TERMINATE.
(i) Except as otherwise provided in paragraph (ii) below, the
Company or you may terminate your employment at any time, subject to the
Company's providing the benefits hereinafter specified in accordance with the
terms hereof.
(ii) In the event a tender offer or exchange offer is made by a
Person (as hereinafter defined) for more than 25% of the combined voting
power of the Company's outstanding securities ordinarily having the right to
vote at elections of directors ("Voting Securities"), including shares of the
Common Stock, no par value, of the Company (the "Company Shares"), you agree
that you will not leave the employ of the Company (other than as a result of
Disability or upon Retirement, as such terms are hereinafter defined) and
will render the services
<PAGE>
contemplated in the recitals to this Agreement until such tender offer or
exchange offer has been abandoned or terminated or a change in control of the
Company, as defined in Section 3 hereof, has occurred. For purposes of this
Agreement, the term "Person" shall mean and include any individual,
corporation, partnership, group, association or other "person", as such term
is used in Section 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), other than the Company, a wholly owned subsidiary of the
Company or any employee benefit plan(s) sponsored by the Company or a
subsidiary of the Company.
2. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until December 31, 1999; provided,
however, that commencing on January 1, 2000, and each January 1 thereafter,
the term of this Agreement shall automatically be extended for one additional
year unless at least 90 days prior to such January 1st date, the Company or
you shall have given notice that this Agreement shall not be extended; and
provided, further, that this Agreement shall continue in effect for a period
of eighteen (18) months beyond the term provided herein if a change in
control of the Company, as defined in Section 3 hereof, shall have occurred
during such term. Notwithstanding anything in this Section 2 to the contrary,
this Agreement shall terminate if you or the Company terminate your
employment prior to a change in control of the Company.
3. CHANGE IN CONTROL. Change in Control means a change, after
January 1, 1999, in Control of the Bank of a nature that would be required to
be the subject of prior approval by the Federal Reserve Board pursuant to the
Bank Holding Company Act of 1956, as amended as of the date hereof, the
Federal Deposit Insurance Corporation ("FDIC") under the Change in Bank
Control Act, pursuant to the California Financial Code as in effect on this
date; provided that, without limitation, and without consideration of
regulatory exemptions from prior approval, such a Change in Control will be
deemed to have occurred if and when any of the following occur: (i) there is
a transfer, voluntarily or by hostile takeover or proxy contest, operation of
law, or otherwise, of Control of the Bank, (ii) the individuals who were
members of the Board of Directors of the Bank immediately prior to a meeting
of the shareholders of the Bank which meeting involves a contest for the
election of directors, do not constitute a majority of the Board of Directors
of the Bank following such meeting or election, (iii) an acquisition,
directly or indirectly, of more than 25% of the outstanding shares of any
class of voting securities of the Bank by any Person, (iv) a merger,
consolidation or sale of all or substantially all of the assets of the Bank,
or (v) there is a change, during any period of two consecutive years of a
majority of the Board of Directors of the Bank as constituted as of the
beginning of such period, unless the election of each director who is not a
director at the beginning of such period was approved by a vote of at least
two-thirds of the directors then in office who were directors at the
beginning of such period.
4. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the
events described in Section 3 hereof constituting a change in control of the
Company shall have occurred, you shall be entitled to the benefits provided
in Section 5 hereof upon the termination of your employment with the Company
within eighteen (18) months after such event, unless such termination is (a)
because of your death or Retirement, (b) by the Company for Cause or
Disability or (c) by you other than for Good Reason (as all such capitalized
terms are hereinafter defined).
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(i) DISABILITY. Termination by the Company of your employment
based on "Disability" shall mean termination because of your absence from
your duties with the Company on a full time basis for one hundred eighty
(180) consecutive days as a result of your incapacity due to physical or
mental illness, unless within thirty (30) days after Notice of Termination
(as hereinafter defined) is given to you following such absence you shall
have returned to the full time performance of your duties.
(ii) RETIREMENT. Termination by you of your employment based on
"Retirement" shall mean the voluntary termination of active employment with the
Company or a subsidiary on or about 65 years of age or at such later age as such
employee desires to discontinue his active employment with the Company or a
subsidiary.
(iii) CAUSE. Termination by the Company of your employment for
"Cause" shall mean termination upon (a) the willful and continued failure by
you to perform substantially your duties with the Company (other than any
such failure resulting from your incapacity due to physical or mental
illness) after a demand for substantial performance is delivered to you by
the Chairman of the Board or the Vice Chairman of the Board or the President
of the Company which specifically identifies the manner in which such
executive believes that you have not substantially performed your duties, or
(b) the willful engaging by you in illegal conduct which is materially and
demonstrably injurious to the Company. For purposes of this paragraph (iii),
no act, or failure to act, on your part shall be considered "willful" unless
done, or omitted to be done, by you in bad faith and without reasonable
belief that your action or omission was in, or not opposed to, the best
interests of the Company. Any act, or failure to act, based upon authority
given pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be done,
or omitted to be done, by you in good faith and in the best interests of the
Company. It is also expressly understood that your attention to matters not
directly related to the business of the Company shall not provide a basis for
termination for Cause so long as the Board has approved your engagement in
such activities. Notwithstanding the foregoing, you shall not be deemed to
have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote
of not less than three quarters of the entire membership of the Board at a
meeting of the Board called and held for the purpose (after reasonable notice
to you and an opportunity for you, together with your counsel, to be heard
before the Board), finding that in the good faith opinion of the Board you
were guilty of the conduct set forth above in (a) or (b) of this paragraph
(iii) and specifying the particulars thereof in detail.
(iv) GOOD REASON. Termination by you of your employment for "Good
Reason" shall mean termination based on:
(A) an adverse change in your status or position(s) as an executive
officer of the Company as in effect immediately prior to the change in
control, including, without limitation, any adverse change in your status
or position as a result of a material diminution in your duties or
responsibilities (other than, if applicable, any such change directly
attributable to the fact that the Company is no longer publicly owned) or
the
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assignment to you of any duties or responsibilities which, in your
reasonable judgment, are inconsistent with such status or position(s), or
any removal of you from or any failure to reappoint or reelect you to such
position(s) (except in connection with the termination of your employment
for Cause, Disability or Retirement or as a result of your death or by you
other than for Good Reason);
(B) a reduction by the Company in your base salary as in effect
immediately prior to the change in control;
(C) the failure by the Company to continue in effect any Plan (as
hereinafter defined) in which you are participating at the time of the
change in control of the Company (or Plans providing you with at least
substantially similar benefits) other than as a result of the normal
expiration of any such Plan in accordance with its terms as in effect at
the time of the change in control, or the taking of any action, or the
failure to act, by the Company which would adversely affect your continued
participation in any of such Plans on at least as favorable a basis to you
as is the case on the date of the change in control or which would
materially reduce your benefits in the future under any of such Plans or
deprive you of any material benefit under any Plan enjoyed by you at the
time of the change in control.
(D) the failure by the Company to provide and credit you with the
number of paid vacation days to which you are then entitled in accordance
with the Company's normal vacation policy as in effect immediately prior to
the change in control;
(E) the Company's requiring you to be based at an office that is
greater than 25 miles from where your office is located immediately prior
to the change in control except for required travel on the Company's
business to an extent substantially consistent with the business travel
obligations which you undertook on behalf of the Company prior to the
change in control;
(F) the failure by the Company to obtain from any Successor (as
hereinafter defined) the assent to this Agreement contemplated by Section 6
hereof; or
(G) any purported termination by the Company of your employment which
is not effected pursuant to a Notice of Termination satisfying the
requirements of paragraph (v) below (and, if applicable, paragraph (iii)
above); and for purposes of this Agreement, no such purported termination
shall be effective.
For purposes of this Agreement, "Plan" shall mean any compensation plan such as
an incentive, stock option or restricted stock plan or any employee benefit plan
such as a thrift, pension, profit sharing, medical, disability, accident, life
insurance plan or a relocation plan or policy or any other plan, program or
policy of the Company intended to benefit employees.
(v) NOTICE OF TERMINATION. Any purported termination by the
Company or by you following a change in control shall be communicated by
written Notice of Termination to the
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other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon.
(vi) DATE OF TERMINATION. "Date of Termination" following a
change in control shall mean (a) if your employment is to be terminated for
Disability, thirty (30) days after Notice of Termination is given (provided
that you shall not have returned to the performance of your duties on a
full-time basis during such thirty (30) day period), (b) if your employment
is to be terminated by the Company for Cause or by you pursuant to Sections
4(iv) (F) and 6 hereof or for any other Good Reason, the date specified in
the Notice of Termination, or (c) if your employment is to be terminated by
the Company for any reason other than Cause, the date specified in the Notice
of Termination, which in no event shall be a date earlier than ninety (90)
days after the date on which a Notice of Termination is given, unless an
earlier date has been expressly agreed to by you in writing either in advance
of, or after, receiving such Notice of Termination. In the case of
termination by the Company of your employment for Cause, if you have not
previously expressly agreed in writing to the termination, then within thirty
(30) days after receipt by you of the Notice of Termination with respect
thereto, you may notify the Company that a dispute exists concerning the
termination, in which event the Date of Termination shall be the date set
either by mutual written agreement of the parties or by the arbitrators in a
proceeding as provided in Section 13 hereof. During the pendency of any such
dispute, the Company will continue to pay you your full compensation in
effect just prior to the time the Notice of Termination is given and until
the dispute is resolved in accordance with Section 13.
5. COMPENSATION UPON TERMINATION OR DURING DISABILITY; OTHER
AGREEMENTS.
(i) During any period following a change in control of the
Company that you fail to perform your duties as a result of incapacity due to
physical or mental illness, you shall continue to receive your salary at the
rate then in effect and any benefits or awards under any Plans shall continue
to accrue during such period, to the extent not inconsistent with such Plans,
until your employment is terminated pursuant to and in accordance with
paragraphs 4(i) and 4(vi) hereof. Thereafter, your benefits shall be
determined in accordance with the Plans then in effect.
(ii) If your employment shall be terminated for Cause following a
change in control of the Company, the Company shall pay you your salary
through the Date of Termination is given plus any benefits or awards
(including both the cash and stock components) which pursuant to the terms of
any Plan have been earned or become payable, but which have not yet been paid
to you. Thereupon the Company shall have no further obligations to you under
this Agreement.
(iii) Subject to Section 8 hereof, if, within eighteen (18) months
after a change in control of the Company, as defined in Section 3 above, shall
have occurred, your employment by the Company shall be terminated (a) by the
Company other than for Cause, Disability or Retirement or (b) by you for Good
Reason, then the Company shall pay to you, no later than the fifth day following
the Date of Termination, without regard to any contrary provisions of any Plan,
the following:
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(A) your salary through the Date of Termination at the rate in effect
just prior to the time a Notice of Termination is given plus any benefits
or awards (including both the cash and stock components) which pursuant to
the terms of any Plans have been earned or become payable, but which have
not yet been paid to you (including amounts which previously had been
deferred at your request); and
(B) as severance pay and in lieu of any further salary for periods
subsequent to the Date of Termination, an amount in cash equal to one and
one-half (1-1/2) times your annual salary and bonus, such salary to be at
the rate of salary in effect immediately prior to the Date of Termination
(or, if greater, immediately prior to the change in control of the Company)
and such bonus to be equal to the total bonus paid to you during the
twelve-month period immediately preceding the Date of Termination (or, if
greater, during the twelve-month period immediately preceding the change in
control of the Company); provided, however, that in no event shall such
amount exceed 2.99 times your "annualized includible compensation for the
base period" (as defined in Section 280G(d) (1) of the Internal Revenue
Code of 1986 (the "Code").
(iv) If, within eighteen (18) months after a change in control of the
Company, as defined in Section 3 above, shall have occurred, your employment by
the Company shall be terminated (a) by the Company other than for Cause,
Disability or Retirement or (b) by you for Good Reason, then the Company shall
maintain in full force and effect, for the continued benefit of you and your
dependents for a period terminating on the earliest of (a) three years after the
Date of Termination, (b) the commencement date of equivalent benefits from a new
employer or (c) your normal retirement date under the terms of any retirement
plan, all insured and self-insured employee welfare benefit Plans in which you
were entitled to participate immediately prior to the Date of Termination,
provided that your continued participation is possible under the general terms
and provisions of such Plans (and any applicable funding media) and you continue
to pay an amount equal to your regular contribution under such plans for such
participation. If, at the end of three years after the Termination Date, you
have not reached your normal retirement date and you have not previously
received or are not then receiving equivalent benefits from a new employer, the
Company shall arrange, at its sole cost and expense, to enable you to convert
your and your dependents' coverage under such Plans to individual policies or
programs upon the same terms as employees of the Company may apply for such
conversions. In the event that your participation in any such Plan is barred,
the Company, at its sole cost and expense, shall arrange to have issued for the
benefit of you and your dependents individual policies of insurance providing
benefits substantially similar (on an after-tax basis) to those which you
otherwise would have been entitled to receive under such Plans pursuant to this
paragraph (iv) or, if such insurance is not available at a reasonable cost to
the Company, the Company shall otherwise provide you and your dependents with
equivalent benefits (on an after-tax basis). You shall not be required to pay
any premiums or other charges in an amount greater than that which you would
have paid in order to participate in such Plans.
(v) Except as specifically provided in paragraph (iv) above, the
amount of any payment provided for in this Section 5 shall not be reduced,
offset or subject to recovery by the
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Company by reason of any compensation earned by you as the result of
employment by another employer after the Date of Termination, or otherwise.
6. SUCCESSORS; BINDING AGREEMENT.
(i) The Company will seek, by written request at least five (5)
business days prior to the time a Person becomes a Successor (as hereinafter
defined), to have such Person by agreement in form and substance satisfactory
to you, assent to the fulfillment of the Company's obligations under this
Agreement. Failure of such Person to furnish such assent by the later of (A)
three (3) business days prior to the time such Person becomes a Successor or
(B) two (2) business days after such Person receives a written request to so
assent shall constitute Good Reason for termination by you of your employment
if a change in control of the Company occurs or has occurred. For purposes
of this Agreement, "Successor" shall mean any Person that succeeds to, or has
the practical ability to control (either immediately or with the passage of
time), the Company's business directly, by merger or consolidation, or
indirectly, by purchase of the Company's Voting Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you should die while any amount would still be payable to you hereunder if
you had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to your
estate.
(iii) For purposes of this Agreement, the "Company" shall include any
corporation or other entity which is the surviving or continuing entity in
respect of any merger, consolidation or form of business combination in which
the Company ceases to exist.
7. FEES AND EXPENSES; MITIGATION.
(i) The Company shall pay all reasonable legal fees and related
expenses incurred by you in connection with the Agreement following a change
in control of the Company, including, without limitation, (a) all such fees
and expenses, if any, incurred in contesting or disputing any termination of
your employment or incurred by you in seeking advice with respect to the
matters set forth in Section 8 hereof or (b) your seeking to obtain or
enforce any right or benefit provided by this Agreement; provided, however,
you shall be required to repay any such amounts to the Company to the extent
that a court issues a final and non-appealable order setting forth the
determination that the position taken by you was frivolous or advanced by you
in bad faith.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection with this
Agreement, by seeking other employment or otherwise.
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8. TAXES.
(i) All payments to be made to you under this Agreement will be
subject to required withholding of federal, state and local income and
employment taxes.
(ii) Notwithstanding anything in the foregoing to the contrary, if
any of the payments provided for in this Agreement, together with any other
payments which you have the right to receive from the Company or any
corporation which is a member of an "affiliated group" (as defined in Section
1504(a) of the Code without regard to Section 1504(b) of the Code) of which
the Company is a member, would constitute a "parachute payment" (as defined
in Section 280G(b) (2) of the Code), the payments pursuant to this Agreement
shall be reduced (reducing first the payments under Section 5(iii) (B)) to
the largest amount as will result in no portion of such payments being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that the determination as to whether any reduction in the payments
under this Agreement pursuant to this proviso is necessary shall be made by
you in good faith, and such determination shall be conclusive and binding on
the Company with respect to its treatment of the payment for tax reporting
purposes.
9. SURVIVAL. The respective obligations of, and benefits
afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 13
and 14 of this Agreement shall survive termination of this Agreement.
10. NOTICE. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid and
addressed, in the case of the Company, to the address set forth on the first
page of this Agreement or, in the case of the undersigned employee, to the
address set forth below his signature, provided that all notices to the
Company shall be directed to the attention of the Chairman of the Board or
President of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
11. MISCELLANEOUS. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge
is agreed to in a writing signed by you and approved by the Board of
Directors of the Company. No waiver by either party hereto at any time of
any breach by the other party hereto of, or of compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of California.
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12. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
13. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Luis Obispo County, California, by three (3) arbitrators in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrators' award in any court having jurisdiction; provided,
however, that you shall be entitled to seek specific performance of your right
to be paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement. The Company
shall bear all costs and expenses arising in connection with any arbitration
proceeding pursuant to this Section 13.
14. EMPLOYEE'S COMMITMENT. You agree that subsequent to your
period of employment with the Company, you will not at any time communicate
or disclose to any unauthorized person, without the written consent of the
Company, any proprietary processes of the Company or any subsidiary or other
confidential information concerning their business, affairs, products,
suppliers or customers which, if disclosed, would have a material adverse
effect upon the business or operations of the Company and its subsidiaries,
taken as a whole; it being understood, however, that the obligations of this
Section 14 shall not apply to the extent that the aforesaid matters (a) are
disclosed in circumstances where you are legally required to do so or (b)
become generally known to and available for use by the public otherwise than
by your wrongful act or omission.
15. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of
this letter which will then constitute our agreement on this subject.
Sincerely,
Mid-State Bank
By: /s/ Carrol R. Pruett
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Carrol R. Pruett, President
Agreed to this 11th day
of November, 1998.
/s/ Steven Harding
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EXHIBIT 10.8
CHANGE IN CONTROL AGREEMENT
November 11, 1998
Dear Michael Gibson:
Mid-State Bank, a California corporation (the "Company"), considers
the establishment and maintenance of a sound and vital management to be
essential to protecting and enhancing the best interests of the Company and
its shareholders. In this connection, the Company recognizes that, as is the
case with many publicly held corporations, the possibility of a change in
control may arise and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of management personnel to the detriment of the Company and its
shareholders. Accordingly, the Board of Directors of the Company (the
"Board") has determined that appropriate steps should be taken to reinforce
and encourage the continued attention and dedication of members of the
Company's management to their assigned duties without distraction in
circumstances arising from the possibility of a change in control of the
Company. In particular, the Board believes it important, should the Company
or its shareholders receive a proposal for transfer of control of the
Company, that you be able to assess and advise the Board whether such
proposal would be in the best interests of the Company and its shareholders
and to take such other action regarding such proposal as the Board might
determine to be appropriate, without being influenced by the uncertainties of
your own situation.
In order to induce you to remain in the employ of the Company, this
letter agreement, which has been approved by the Board, sets forth the
severance benefits which the Company agrees will be provided to you in the
event your employment with the Company is terminated subsequent to a "change
in control" of the Company under the circumstances described below.
1. AGREEMENT TO PROVIDE SERVICES; RIGHT TO TERMINATE.
(i) Except as otherwise provided in paragraph (ii) below, the
Company or you may terminate your employment at any time, subject to the
Company's providing the benefits hereinafter specified in accordance with the
terms hereof.
(ii) In the event a tender offer or exchange offer is made by a
Person (as hereinafter defined) for more than 25% of the combined voting
power of the Company's outstanding securities ordinarily having the right to
vote at elections of directors ("Voting Securities"), including shares of the
Common Stock, no par value, of the Company (the "Company Shares"), you agree
that you will not leave the employ of the Company (other than as a result of
Disability or upon Retirement, as such terms are hereinafter defined) and
will render the services
<PAGE>
contemplated in the recitals to this Agreement until such tender offer or
exchange offer has been abandoned or terminated or a change in control of the
Company, as defined in Section 3 hereof, has occurred. For purposes of this
Agreement, the term "Person" shall mean and include any individual,
corporation, partnership, group, association or other "person", as such term
is used in Section 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), other than the Company, a wholly owned subsidiary of the
Company or any employee benefit plan(s) sponsored by the Company or a
subsidiary of the Company.
2. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until December 31, 1999; provided,
however, that commencing on January 1, 2000, and each January 1 thereafter,
the term of this Agreement shall automatically be extended for one additional
year unless at least 90 days prior to such January 1st date, the Company or
you shall have given notice that this Agreement shall not be extended; and
provided, further, that this Agreement shall continue in effect for a period
of eighteen (18) months beyond the term provided herein if a change in
control of the Company, as defined in Section 3 hereof, shall have occurred
during such term. Notwithstanding anything in this Section 2 to the contrary,
this Agreement shall terminate if you or the Company terminate your
employment prior to a change in control of the Company.
3. CHANGE IN CONTROL. Change in Control means a change, after
January 1, 1999, in Control of the Bank of a nature that would be required to
be the subject of prior approval by the Federal Reserve Board pursuant to the
Bank Holding Company Act of 1956, as amended as of the date hereof, the
Federal Deposit Insurance Corporation ("FDIC") under the Change in Bank
Control Act, pursuant to the California Financial Code as in effect on this
date; provided that, without limitation, and without consideration of
regulatory exemptions from prior approval, such a Change in Control will be
deemed to have occurred if and when any of the following occur: (i) there is
a transfer, voluntarily or by hostile takeover or proxy contest, operation of
law, or otherwise, of Control of the Bank, (ii) the individuals who were
members of the Board of Directors of the Bank immediately prior to a meeting
of the shareholders of the Bank which meeting involves a contest for the
election of directors, do not constitute a majority of the Board of Directors
of the Bank following such meeting or election, (iii) an acquisition,
directly or indirectly, of more than 25% of the outstanding shares of any
class of voting securities of the Bank by any Person, (iv) a merger,
consolidation or sale of all or substantially all of the assets of the Bank,
or (v) there is a change, during any period of two consecutive years of a
majority of the Board of Directors of the Bank as constituted as of the
beginning of such period, unless the election of each director who is not a
director at the beginning of such period was approved by a vote of at least
two-thirds of the directors then in office who were directors at the
beginning of such period.
4. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the
events described in Section 3 hereof constituting a change in control of the
Company shall have occurred, you shall be entitled to the benefits provided
in Section 5 hereof upon the termination of your employment with the Company
within eighteen (18) months after such event, unless such termination is (a)
because of your death or Retirement, (b) by the Company for Cause or
Disability or (c) by you other than for Good Reason (as all such capitalized
terms are hereinafter defined).
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(i) DISABILITY. Termination by the Company of your employment
based on "Disability" shall mean termination because of your absence from
your duties with the Company on a full time basis for one hundred eighty
(180) consecutive days as a result of your incapacity due to physical or
mental illness, unless within thirty (30) days after Notice of Termination
(as hereinafter defined) is given to you following such absence you shall
have returned to the full time performance of your duties.
(ii) RETIREMENT. Termination by you of your employment based on
"Retirement" shall mean the voluntary termination of active employment with the
Company or a subsidiary on or about 65 years of age or at such later age as such
employee desires to discontinue his active employment with the Company or a
subsidiary.
(iii) CAUSE. Termination by the Company of your employment for
"Cause" shall mean termination upon (a) the willful and continued failure by
you to perform substantially your duties with the Company (other than any
such failure resulting from your incapacity due to physical or mental
illness) after a demand for substantial performance is delivered to you by
the Chairman of the Board or the Vice Chairman of the Board or the President
of the Company which specifically identifies the manner in which such
executive believes that you have not substantially performed your duties, or
(b) the willful engaging by you in illegal conduct which is materially and
demonstrably injurious to the Company. For purposes of this paragraph (iii),
no act, or failure to act, on your part shall be considered "willful" unless
done, or omitted to be done, by you in bad faith and without reasonable
belief that your action or omission was in, or not opposed to, the best
interests of the Company. Any act, or failure to act, based upon authority
given pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be done,
or omitted to be done, by you in good faith and in the best interests of the
Company. It is also expressly understood that your attention to matters not
directly related to the business of the Company shall not provide a basis for
termination for Cause so long as the Board has approved your engagement in
such activities. Notwithstanding the foregoing, you shall not be deemed to
have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote
of not less than three quarters of the entire membership of the Board at a
meeting of the Board called and held for the purpose (after reasonable notice
to you and an opportunity for you, together with your counsel, to be heard
before the Board), finding that in the good faith opinion of the Board you
were guilty of the conduct set forth above in (a) or (b) of this paragraph
(iii) and specifying the particulars thereof in detail.
(iv) GOOD REASON. Termination by you of your employment for "Good
Reason" shall mean termination based on:
(A) an adverse change in your status or position(s) as an executive
officer of the Company as in effect immediately prior to the change in
control, including, without limitation, any adverse change in your status
or position as a result of a material diminution in your duties or
responsibilities (other than, if applicable, any such change directly
attributable to the fact that the Company is no longer publicly owned) or
the
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assignment to you of any duties or responsibilities which, in your
reasonable judgment, are inconsistent with such status or position(s), or
any removal of you from or any failure to reappoint or reelect you to such
position(s) (except in connection with the termination of your employment
for Cause, Disability or Retirement or as a result of your death or by you
other than for Good Reason);
(B) a reduction by the Company in your base salary as in effect
immediately prior to the change in control;
(C) the failure by the Company to continue in effect any Plan (as
hereinafter defined) in which you are participating at the time of the
change in control of the Company (or Plans providing you with at least
substantially similar benefits) other than as a result of the normal
expiration of any such Plan in accordance with its terms as in effect at
the time of the change in control, or the taking of any action, or the
failure to act, by the Company which would adversely affect your continued
participation in any of such Plans on at least as favorable a basis to you
as is the case on the date of the change in control or which would
materially reduce your benefits in the future under any of such Plans or
deprive you of any material benefit under any Plan enjoyed by you at the
time of the change in control.
(D) the failure by the Company to provide and credit you with the
number of paid vacation days to which you are then entitled in accordance
with the Company's normal vacation policy as in effect immediately prior to
the change in control;
(E) the Company's requiring you to be based at an office that is
greater than 25 miles from where your office is located immediately prior
to the change in control except for required travel on the Company's
business to an extent substantially consistent with the business travel
obligations which you undertook on behalf of the Company prior to the
change in control;
(F) the failure by the Company to obtain from any Successor (as
hereinafter defined) the assent to this Agreement contemplated by Section 6
hereof; or
(G) any purported termination by the Company of your employment which
is not effected pursuant to a Notice of Termination satisfying the
requirements of paragraph (v) below (and, if applicable, paragraph (iii)
above); and for purposes of this Agreement, no such purported termination
shall be effective.
For purposes of this Agreement, "Plan" shall mean any compensation plan such as
an incentive, stock option or restricted stock plan or any employee benefit plan
such as a thrift, pension, profit sharing, medical, disability, accident, life
insurance plan or a relocation plan or policy or any other plan, program or
policy of the Company intended to benefit employees.
(v) NOTICE OF TERMINATION. Any purported termination by the
Company or by you following a change in control shall be communicated by
written Notice of Termination to the
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other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon.
(vi) DATE OF TERMINATION. "Date of Termination" following a
change in control shall mean (a) if your employment is to be terminated for
Disability, thirty (30) days after Notice of Termination is given (provided
that you shall not have returned to the performance of your duties on a
full-time basis during such thirty (30) day period), (b) if your employment
is to be terminated by the Company for Cause or by you pursuant to Sections
4(iv) (F) and 6 hereof or for any other Good Reason, the date specified in
the Notice of Termination, or (c) if your employment is to be terminated by
the Company for any reason other than Cause, the date specified in the Notice
of Termination, which in no event shall be a date earlier than ninety (90)
days after the date on which a Notice of Termination is given, unless an
earlier date has been expressly agreed to by you in writing either in advance
of, or after, receiving such Notice of Termination. In the case of
termination by the Company of your employment for Cause, if you have not
previously expressly agreed in writing to the termination, then within thirty
(30) days after receipt by you of the Notice of Termination with respect
thereto, you may notify the Company that a dispute exists concerning the
termination, in which event the Date of Termination shall be the date set
either by mutual written agreement of the parties or by the arbitrators in a
proceeding as provided in Section 13 hereof. During the pendency of any such
dispute, the Company will continue to pay you your full compensation in
effect just prior to the time the Notice of Termination is given and until
the dispute is resolved in accordance with Section 13.
5. COMPENSATION UPON TERMINATION OR DURING DISABILITY; OTHER
AGREEMENTS.
(i) During any period following a change in control of the
Company that you fail to perform your duties as a result of incapacity due to
physical or mental illness, you shall continue to receive your salary at the
rate then in effect and any benefits or awards under any Plans shall continue
to accrue during such period, to the extent not inconsistent with such Plans,
until your employment is terminated pursuant to and in accordance with
paragraphs 4(i) and 4(vi) hereof. Thereafter, your benefits shall be
determined in accordance with the Plans then in effect.
(ii) If your employment shall be terminated for Cause following a
change in control of the Company, the Company shall pay you your salary
through the Date of Termination is given plus any benefits or awards
(including both the cash and stock components) which pursuant to the terms of
any Plan have been earned or become payable, but which have not yet been paid
to you. Thereupon the Company shall have no further obligations to you under
this Agreement.
(iii) Subject to Section 8 hereof, if, within eighteen (18) months
after a change in control of the Company, as defined in Section 3 above, shall
have occurred, your employment by the Company shall be terminated (a) by the
Company other than for Cause, Disability or Retirement or (b) by you for Good
Reason, then the Company shall pay to you, no later than the fifth day following
the Date of Termination, without regard to any contrary provisions of any Plan,
the following:
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(A) your salary through the Date of Termination at the rate in effect
just prior to the time a Notice of Termination is given plus any benefits
or awards (including both the cash and stock components) which pursuant to
the terms of any Plans have been earned or become payable, but which have
not yet been paid to you (including amounts which previously had been
deferred at your request); and
(B) as severance pay and in lieu of any further salary for periods
subsequent to the Date of Termination, an amount in cash equal to one and
one-half (1-1/2) times your annual salary and bonus, such salary to be at
the rate of salary in effect immediately prior to the Date of Termination
(or, if greater, immediately prior to the change in control of the Company)
and such bonus to be equal to the total bonus paid to you during the
twelve-month period immediately preceding the Date of Termination (or, if
greater, during the twelve-month period immediately preceding the change in
control of the Company); provided, however, that in no event shall such
amount exceed 2.99 times your "annualized includible compensation for the
base period" (as defined in Section 280G(d) (1) of the Internal Revenue
Code of 1986 (the "Code").
(iv) If, within eighteen (18) months after a change in control of the
Company, as defined in Section 3 above, shall have occurred, your employment by
the Company shall be terminated (a) by the Company other than for Cause,
Disability or Retirement or (b) by you for Good Reason, then the Company shall
maintain in full force and effect, for the continued benefit of you and your
dependents for a period terminating on the earliest of (a) three years after the
Date of Termination, (b) the commencement date of equivalent benefits from a new
employer or (c) your normal retirement date under the terms of any retirement
plan, all insured and self-insured employee welfare benefit Plans in which you
were entitled to participate immediately prior to the Date of Termination,
provided that your continued participation is possible under the general terms
and provisions of such Plans (and any applicable funding media) and you continue
to pay an amount equal to your regular contribution under such plans for such
participation. If, at the end of three years after the Termination Date, you
have not reached your normal retirement date and you have not previously
received or are not then receiving equivalent benefits from a new employer, the
Company shall arrange, at its sole cost and expense, to enable you to convert
your and your dependents' coverage under such Plans to individual policies or
programs upon the same terms as employees of the Company may apply for such
conversions. In the event that your participation in any such Plan is barred,
the Company, at its sole cost and expense, shall arrange to have issued for the
benefit of you and your dependents individual policies of insurance providing
benefits substantially similar (on an after-tax basis) to those which you
otherwise would have been entitled to receive under such Plans pursuant to this
paragraph (iv) or, if such insurance is not available at a reasonable cost to
the Company, the Company shall otherwise provide you and your dependents with
equivalent benefits (on an after-tax basis). You shall not be required to pay
any premiums or other charges in an amount greater than that which you would
have paid in order to participate in such Plans.
(v) Except as specifically provided in paragraph (iv) above, the
amount of any payment provided for in this Section 5 shall not be reduced,
offset or subject to recovery by the
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Company by reason of any compensation earned by you as the result of
employment by another employer after the Date of Termination, or otherwise.
6. SUCCESSORS; BINDING AGREEMENT.
(i) The Company will seek, by written request at least five (5)
business days prior to the time a Person becomes a Successor (as hereinafter
defined), to have such Person by agreement in form and substance satisfactory
to you, assent to the fulfillment of the Company's obligations under this
Agreement. Failure of such Person to furnish such assent by the later of (A)
three (3) business days prior to the time such Person becomes a Successor or
(B) two (2) business days after such Person receives a written request to so
assent shall constitute Good Reason for termination by you of your employment
if a change in control of the Company occurs or has occurred. For purposes
of this Agreement, "Successor" shall mean any Person that succeeds to, or has
the practical ability to control (either immediately or with the passage of
time), the Company's business directly, by merger or consolidation, or
indirectly, by purchase of the Company's Voting Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you should die while any amount would still be payable to you hereunder if
you had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to your
estate.
(iii) For purposes of this Agreement, the "Company" shall include any
corporation or other entity which is the surviving or continuing entity in
respect of any merger, consolidation or form of business combination in which
the Company ceases to exist.
7. FEES AND EXPENSES; MITIGATION.
(i) The Company shall pay all reasonable legal fees and related
expenses incurred by you in connection with the Agreement following a change
in control of the Company, including, without limitation, (a) all such fees
and expenses, if any, incurred in contesting or disputing any termination of
your employment or incurred by you in seeking advice with respect to the
matters set forth in Section 8 hereof or (b) your seeking to obtain or
enforce any right or benefit provided by this Agreement; provided, however,
you shall be required to repay any such amounts to the Company to the extent
that a court issues a final and non-appealable order setting forth the
determination that the position taken by you was frivolous or advanced by you
in bad faith.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection with this
Agreement, by seeking other employment or otherwise.
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8. TAXES.
(i) All payments to be made to you under this Agreement will be
subject to required withholding of federal, state and local income and
employment taxes.
(ii) Notwithstanding anything in the foregoing to the contrary, if
any of the payments provided for in this Agreement, together with any other
payments which you have the right to receive from the Company or any
corporation which is a member of an "affiliated group" (as defined in Section
1504(a) of the Code without regard to Section 1504(b) of the Code) of which
the Company is a member, would constitute a "parachute payment" (as defined
in Section 280G(b) (2) of the Code), the payments pursuant to this Agreement
shall be reduced (reducing first the payments under Section 5(iii) (B)) to
the largest amount as will result in no portion of such payments being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that the determination as to whether any reduction in the payments
under this Agreement pursuant to this proviso is necessary shall be made by
you in good faith, and such determination shall be conclusive and binding on
the Company with respect to its treatment of the payment for tax reporting
purposes.
9. SURVIVAL. The respective obligations of, and benefits
afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 13
and 14 of this Agreement shall survive termination of this Agreement.
10. NOTICE. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid and
addressed, in the case of the Company, to the address set forth on the first
page of this Agreement or, in the case of the undersigned employee, to the
address set forth below his signature, provided that all notices to the
Company shall be directed to the attention of the Chairman of the Board or
President of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
11. MISCELLANEOUS. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge
is agreed to in a writing signed by you and approved by the Board of
Directors of the Company. No waiver by either party hereto at any time of
any breach by the other party hereto of, or of compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of California.
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12. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
13. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Luis Obispo County, California, by three (3) arbitrators in accordance
with the rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction; provided, however, that you shall be entitled to seek specific
performance of your right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with
this Agreement. The Company shall bear all costs and expenses arising in
connection with any arbitration proceeding pursuant to this Section 13.
14. EMPLOYEE'S COMMITMENT. You agree that subsequent to your
period of employment with the Company, you will not at any time communicate
or disclose to any unauthorized person, without the written consent of the
Company, any proprietary processes of the Company or any subsidiary or other
confidential information concerning their business, affairs, products,
suppliers or customers which, if disclosed, would have a material adverse
effect upon the business or operations of the Company and its subsidiaries,
taken as a whole; it being understood, however, that the obligations of this
Section 14 shall not apply to the extent that the aforesaid matters (a) are
disclosed in circumstances where you are legally required to do so or (b)
become generally known to and available for use by the public otherwise than
by your wrongful act or omission.
15. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of
this letter which will then constitute our agreement on this subject.
Sincerely,
Mid-State Bank
By: /s/ Carrol R. Pruett
---------------------------------------
Carrol R. Pruett, President
Agreed to this 11th day
of November, 1998.
/s/ Michael Gibson
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<PAGE>
EXHIBIT 10.9
CHANGE IN CONTROL AGREEMENT
November 11, 1998
Dear Debbie Zimmer:
Mid-State Bank, a California corporation (the "Company"), considers
the establishment and maintenance of a sound and vital management to be
essential to protecting and enhancing the best interests of the Company and
its shareholders. In this connection, the Company recognizes that, as is the
case with many publicly held corporations, the possibility of a change in
control may arise and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of management personnel to the detriment of the Company and its
shareholders. Accordingly, the Board of Directors of the Company (the
"Board") has determined that appropriate steps should be taken to reinforce
and encourage the continued attention and dedication of members of the
Company's management to their assigned duties without distraction in
circumstances arising from the possibility of a change in control of the
Company. In particular, the Board believes it important, should the Company
or its shareholders receive a proposal for transfer of control of the
Company, that you be able to assess and advise the Board whether such
proposal would be in the best interests of the Company and its shareholders
and to take such other action regarding such proposal as the Board might
determine to be appropriate, without being influenced by the uncertainties of
your own situation.
In order to induce you to remain in the employ of the Company, this
letter agreement, which has been approved by the Board, sets forth the
severance benefits which the Company agrees will be provided to you in the
event your employment with the Company is terminated subsequent to a "change
in control" of the Company under the circumstances described below.
1. AGREEMENT TO PROVIDE SERVICES; RIGHT TO TERMINATE.
(i) Except as otherwise provided in paragraph (ii) below, the
Company or you may terminate your employment at any time, subject to the
Company's providing the benefits hereinafter specified in accordance with the
terms hereof.
(ii) In the event a tender offer or exchange offer is made by a
Person (as hereinafter defined) for more than 25% of the combined voting
power of the Company's outstanding securities ordinarily having the right to
vote at elections of directors ("Voting Securities"), including shares of the
Common Stock, no par value, of the Company (the "Company Shares"), you agree
that you will not leave the employ of the Company (other than as a result of
Disability or upon Retirement, as such terms are hereinafter defined) and
will render the services
<PAGE>
contemplated in the recitals to this Agreement until such tender offer or
exchange offer has been abandoned or terminated or a change in control of the
Company, as defined in Section 3 hereof, has occurred. For purposes of this
Agreement, the term "Person" shall mean and include any individual,
corporation, partnership, group, association or other "person", as such term
is used in Section 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), other than the Company, a wholly owned subsidiary of the
Company or any employee benefit plan(s) sponsored by the Company or a
subsidiary of the Company.
2. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until December 31, 1999; provided,
however, that commencing on January 1, 2000, and each January 1 thereafter,
the term of this Agreement shall automatically be extended for one additional
year unless at least 90 days prior to such January 1st date, the Company or
you shall have given notice that this Agreement shall not be extended; and
provided, further, that this Agreement shall continue in effect for a period
of eighteen (18) months beyond the term provided herein if a change in
control of the Company, as defined in Section 3 hereof, shall have occurred
during such term. Notwithstanding anything in this Section 2 to the contrary,
this Agreement shall terminate if you or the Company terminate your
employment prior to a change in control of the Company.
3. CHANGE IN CONTROL. Change in Control means a change, after
January 1, 1999, in Control of the Bank of a nature that would be required to
be the subject of prior approval by the Federal Reserve Board pursuant to the
Bank Holding Company Act of 1956, as amended as of the date hereof, the
Federal Deposit Insurance Corporation ("FDIC") under the Change in Bank
Control Act, pursuant to the California Financial Code as in effect on this
date; provided that, without limitation, and without consideration of
regulatory exemptions from prior approval, such a Change in Control will be
deemed to have occurred if and when any of the following occur: (i) there is
a transfer, voluntarily or by hostile takeover or proxy contest, operation of
law, or otherwise, of Control of the Bank, (ii) the individuals who were
members of the Board of Directors of the Bank immediately prior to a meeting
of the shareholders of the Bank which meeting involves a contest for the
election of directors, do not constitute a majority of the Board of Directors
of the Bank following such meeting or election, (iii) an acquisition,
directly or indirectly, of more than 25% of the outstanding shares of any
class of voting securities of the Bank by any Person, (iv) a merger,
consolidation or sale of all or substantially all of the assets of the Bank,
or (v) there is a change, during any period of two consecutive years of a
majority of the Board of Directors of the Bank as constituted as of the
beginning of such period, unless the election of each director who is not a
director at the beginning of such period was approved by a vote of at least
two-thirds of the directors then in office who were directors at the
beginning of such period.
4. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the
events described in Section 3 hereof constituting a change in control of the
Company shall have occurred, you shall be entitled to the benefits provided
in Section 5 hereof upon the termination of your employment with the Company
within eighteen (18) months after such event, unless such termination is (a)
because of your death or Retirement, (b) by the Company for Cause or
Disability or (c) by you other than for Good Reason (as all such capitalized
terms are hereinafter defined).
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<PAGE>
(i) DISABILITY. Termination by the Company of your employment
based on "Disability" shall mean termination because of your absence from
your duties with the Company on a full time basis for one hundred eighty
(180) consecutive days as a result of your incapacity due to physical or
mental illness, unless within thirty (30) days after Notice of Termination
(as hereinafter defined) is given to you following such absence you shall
have returned to the full time performance of your duties.
(ii) RETIREMENT. Termination by you of your employment based on
"Retirement" shall mean the voluntary termination of active employment with the
Company or a subsidiary on or about 65 years of age or at such later age as such
employee desires to discontinue his active employment with the Company or a
subsidiary.
(iii) CAUSE. Termination by the Company of your employment for
"Cause" shall mean termination upon (a) the willful and continued failure by
you to perform substantially your duties with the Company (other than any
such failure resulting from your incapacity due to physical or mental
illness) after a demand for substantial performance is delivered to you by
the Chairman of the Board or the Vice Chairman of the Board or the President
of the Company which specifically identifies the manner in which such
executive believes that you have not substantially performed your duties, or
(b) the willful engaging by you in illegal conduct which is materially and
demonstrably injurious to the Company. For purposes of this paragraph (iii),
no act, or failure to act, on your part shall be considered "willful" unless
done, or omitted to be done, by you in bad faith and without reasonable
belief that your action or omission was in, or not opposed to, the best
interests of the Company. Any act, or failure to act, based upon authority
given pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be done,
or omitted to be done, by you in good faith and in the best interests of the
Company. It is also expressly understood that your attention to matters not
directly related to the business of the Company shall not provide a basis for
termination for Cause so long as the Board has approved your engagement in
such activities. Notwithstanding the foregoing, you shall not be deemed to
have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote
of not less than three quarters of the entire membership of the Board at a
meeting of the Board called and held for the purpose (after reasonable notice
to you and an opportunity for you, together with your counsel, to be heard
before the Board), finding that in the good faith opinion of the Board you
were guilty of the conduct set forth above in (a) or (b) of this paragraph
(iii) and specifying the particulars thereof in detail.
(iv) GOOD REASON. Termination by you of your employment for "Good
Reason" shall mean termination based on:
(A) an adverse change in your status or position(s) as an executive
officer of the Company as in effect immediately prior to the change in
control, including, without limitation, any adverse change in your status
or position as a result of a material diminution in your duties or
responsibilities (other than, if applicable, any such change directly
attributable to the fact that the Company is no longer publicly owned) or
the
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<PAGE>
assignment to you of any duties or responsibilities which, in your
reasonable judgment, are inconsistent with such status or position(s), or
any removal of you from or any failure to reappoint or reelect you to such
position(s) (except in connection with the termination of your employment
for Cause, Disability or Retirement or as a result of your death or by you
other than for Good Reason);
(B) a reduction by the Company in your base salary as in effect
immediately prior to the change in control;
(C) the failure by the Company to continue in effect any Plan (as
hereinafter defined) in which you are participating at the time of the
change in control of the Company (or Plans providing you with at least
substantially similar benefits) other than as a result of the normal
expiration of any such Plan in accordance with its terms as in effect at
the time of the change in control, or the taking of any action, or the
failure to act, by the Company which would adversely affect your continued
participation in any of such Plans on at least as favorable a basis to you
as is the case on the date of the change in control or which would
materially reduce your benefits in the future under any of such Plans or
deprive you of any material benefit under any Plan enjoyed by you at the
time of the change in control.
(D) the failure by the Company to provide and credit you with the
number of paid vacation days to which you are then entitled in accordance
with the Company's normal vacation policy as in effect immediately prior to
the change in control;
(E) the Company's requiring you to be based at an office that is
greater than 25 miles from where your office is located immediately prior
to the change in control except for required travel on the Company's
business to an extent substantially consistent with the business travel
obligations which you undertook on behalf of the Company prior to the
change in control;
(F) the failure by the Company to obtain from any Successor (as
hereinafter defined) the assent to this Agreement contemplated by Section 6
hereof; or
(G) any purported termination by the Company of your employment which
is not effected pursuant to a Notice of Termination satisfying the
requirements of paragraph (v) below (and, if applicable, paragraph (iii)
above); and for purposes of this Agreement, no such purported termination
shall be effective.
For purposes of this Agreement, "Plan" shall mean any compensation plan such as
an incentive, stock option or restricted stock plan or any employee benefit plan
such as a thrift, pension, profit sharing, medical, disability, accident, life
insurance plan or a relocation plan or policy or any other plan, program or
policy of the Company intended to benefit employees.
(v) NOTICE OF TERMINATION. Any purported termination by the
Company or by you following a change in control shall be communicated by
written Notice of Termination to the
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<PAGE>
other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon.
(vi) DATE OF TERMINATION. "Date of Termination" following a
change in control shall mean (a) if your employment is to be terminated for
Disability, thirty (30) days after Notice of Termination is given (provided
that you shall not have returned to the performance of your duties on a
full-time basis during such thirty (30) day period), (b) if your employment
is to be terminated by the Company for Cause or by you pursuant to Sections
4(iv) (F) and 6 hereof or for any other Good Reason, the date specified in
the Notice of Termination, or (c) if your employment is to be terminated by
the Company for any reason other than Cause, the date specified in the Notice
of Termination, which in no event shall be a date earlier than ninety (90)
days after the date on which a Notice of Termination is given, unless an
earlier date has been expressly agreed to by you in writing either in advance
of, or after, receiving such Notice of Termination. In the case of
termination by the Company of your employment for Cause, if you have not
previously expressly agreed in writing to the termination, then within thirty
(30) days after receipt by you of the Notice of Termination with respect
thereto, you may notify the Company that a dispute exists concerning the
termination, in which event the Date of Termination shall be the date set
either by mutual written agreement of the parties or by the arbitrators in a
proceeding as provided in Section 13 hereof. During the pendency of any such
dispute, the Company will continue to pay you your full compensation in
effect just prior to the time the Notice of Termination is given and until
the dispute is resolved in accordance with Section 13.
5. COMPENSATION UPON TERMINATION OR DURING DISABILITY; OTHER
AGREEMENTS.
(i) During any period following a change in control of the
Company that you fail to perform your duties as a result of incapacity due to
physical or mental illness, you shall continue to receive your salary at the
rate then in effect and any benefits or awards under any Plans shall continue
to accrue during such period, to the extent not inconsistent with such Plans,
until your employment is terminated pursuant to and in accordance with
paragraphs 4(i) and 4(vi) hereof. Thereafter, your benefits shall be
determined in accordance with the Plans then in effect.
(ii) If your employment shall be terminated for Cause following a
change in control of the Company, the Company shall pay you your salary
through the Date of Termination is given plus any benefits or awards
(including both the cash and stock components) which pursuant to the terms of
any Plan have been earned or become payable, but which have not yet been paid
to you. Thereupon the Company shall have no further obligations to you under
this Agreement.
(iii) Subject to Section 8 hereof, if, within eighteen (18) months
after a change in control of the Company, as defined in Section 3 above, shall
have occurred, your employment by the Company shall be terminated (a) by the
Company other than for Cause, Disability or Retirement or (b) by you for Good
Reason, then the Company shall pay to you, no later than the fifth day following
the Date of Termination, without regard to any contrary provisions of any Plan,
the following:
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<PAGE>
(A) your salary through the Date of Termination at the rate in effect
just prior to the time a Notice of Termination is given plus any benefits
or awards (including both the cash and stock components) which pursuant to
the terms of any Plans have been earned or become payable, but which have
not yet been paid to you (including amounts which previously had been
deferred at your request); and
(B) as severance pay and in lieu of any further salary for periods
subsequent to the Date of Termination, an amount in cash equal to one and
one-half (1-1/2) times your annual salary and bonus, such salary to be at
the rate of salary in effect immediately prior to the Date of Termination
(or, if greater, immediately prior to the change in control of the Company)
and such bonus to be equal to the total bonus paid to you during the
twelve-month period immediately preceding the Date of Termination (or, if
greater, during the twelve-month period immediately preceding the change in
control of the Company); provided, however, that in no event shall such
amount exceed 2.99 times your "annualized includible compensation for the
base period" (as defined in Section 280G(d) (1) of the Internal Revenue
Code of 1986 (the "Code").
(iv) If, within eighteen (18) months after a change in control of the
Company, as defined in Section 3 above, shall have occurred, your employment by
the Company shall be terminated (a) by the Company other than for Cause,
Disability or Retirement or (b) by you for Good Reason, then the Company shall
maintain in full force and effect, for the continued benefit of you and your
dependents for a period terminating on the earliest of (a) three years after the
Date of Termination, (b) the commencement date of equivalent benefits from a new
employer or (c) your normal retirement date under the terms of any retirement
plan, all insured and self-insured employee welfare benefit Plans in which you
were entitled to participate immediately prior to the Date of Termination,
provided that your continued participation is possible under the general terms
and provisions of such Plans (and any applicable funding media) and you continue
to pay an amount equal to your regular contribution under such plans for such
participation. If, at the end of three years after the Termination Date, you
have not reached your normal retirement date and you have not previously
received or are not then receiving equivalent benefits from a new employer, the
Company shall arrange, at its sole cost and expense, to enable you to convert
your and your dependents' coverage under such Plans to individual policies or
programs upon the same terms as employees of the Company may apply for such
conversions. In the event that your participation in any such Plan is barred,
the Company, at its sole cost and expense, shall arrange to have issued for the
benefit of you and your dependents individual policies of insurance providing
benefits substantially similar (on an after-tax basis) to those which you
otherwise would have been entitled to receive under such Plans pursuant to this
paragraph (iv) or, if such insurance is not available at a reasonable cost to
the Company, the Company shall otherwise provide you and your dependents with
equivalent benefits (on an after-tax basis). You shall not be required to pay
any premiums or other charges in an amount greater than that which you would
have paid in order to participate in such Plans.
(v) Except as specifically provided in paragraph (iv) above, the
amount of any payment provided for in this Section 5 shall not be reduced,
offset or subject to recovery by the
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<PAGE>
Company by reason of any compensation earned by you as the result of
employment by another employer after the Date of Termination, or otherwise.
6. SUCCESSORS; BINDING AGREEMENT.
(i) The Company will seek, by written request at least five (5)
business days prior to the time a Person becomes a Successor (as hereinafter
defined), to have such Person by agreement in form and substance satisfactory
to you, assent to the fulfillment of the Company's obligations under this
Agreement. Failure of such Person to furnish such assent by the later of (A)
three (3) business days prior to the time such Person becomes a Successor or
(B) two (2) business days after such Person receives a written request to so
assent shall constitute Good Reason for termination by you of your employment
if a change in control of the Company occurs or has occurred. For purposes
of this Agreement, "Successor" shall mean any Person that succeeds to, or has
the practical ability to control (either immediately or with the passage of
time), the Company's business directly, by merger or consolidation, or
indirectly, by purchase of the Company's Voting Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you should die while any amount would still be payable to you hereunder if
you had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to your
estate.
(iii) For purposes of this Agreement, the "Company" shall include
any corporation or other entity which is the surviving or continuing entity
in respect of any merger, consolidation or form of business combination in
which the Company ceases to exist.
7. FEES AND EXPENSES; MITIGATION.
(i) The Company shall pay all reasonable legal fees and related
expenses incurred by you in connection with the Agreement following a change
in control of the Company, including, without limitation, (a) all such fees
and expenses, if any, incurred in contesting or disputing any termination of
your employment or incurred by you in seeking advice with respect to the
matters set forth in Section 8 hereof or (b) your seeking to obtain or
enforce any right or benefit provided by this Agreement; provided, however,
you shall be required to repay any such amounts to the Company to the extent
that a court issues a final and non-appealable order setting forth the
determination that the position taken by you was frivolous or advanced by you
in bad faith.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection with this
Agreement, by seeking other employment or otherwise.
-7-
<PAGE>
8. TAXES.
(i) All payments to be made to you under this Agreement will be
subject to required withholding of federal, state and local income and
employment taxes.
(ii) Notwithstanding anything in the foregoing to the contrary, if
any of the payments provided for in this Agreement, together with any other
payments which you have the right to receive from the Company or any
corporation which is a member of an "affiliated group" (as defined in Section
1504(a) of the Code without regard to Section 1504(b) of the Code) of which
the Company is a member, would constitute a "parachute payment" (as defined
in Section 280G(b) (2) of the Code), the payments pursuant to this Agreement
shall be reduced (reducing first the payments under Section 5(iii) (B)) to
the largest amount as will result in no portion of such payments being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that the determination as to whether any reduction in the payments
under this Agreement pursuant to this proviso is necessary shall be made by
you in good faith, and such determination shall be conclusive and binding on
the Company with respect to its treatment of the payment for tax reporting
purposes.
9. SURVIVAL. The respective obligations of, and benefits
afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 13
and 14 of this Agreement shall survive termination of this Agreement.
10. NOTICE. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid and
addressed, in the case of the Company, to the address set forth on the first
page of this Agreement or, in the case of the undersigned employee, to the
address set forth below his signature, provided that all notices to the
Company shall be directed to the attention of the Chairman of the Board or
President of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
11. MISCELLANEOUS. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge
is agreed to in a writing signed by you and approved by the Board of
Directors of the Company. No waiver by either party hereto at any time of
any breach by the other party hereto of, or of compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of California.
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<PAGE>
12. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
13. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Luis Obispo County, California, by three (3) arbitrators in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrators' award in any court having jurisdiction; provided,
however, that you shall be entitled to seek specific performance of your right
to be paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement. The Company
shall bear all costs and expenses arising in connection with any arbitration
proceeding pursuant to this Section 13.
14. EMPLOYEE'S COMMITMENT. You agree that subsequent to your
period of employment with the Company, you will not at any time communicate
or disclose to any unauthorized person, without the written consent of the
Company, any proprietary processes of the Company or any subsidiary or other
confidential information concerning their business, affairs, products,
suppliers or customers which, if disclosed, would have a material adverse
effect upon the business or operations of the Company and its subsidiaries,
taken as a whole; it being understood, however, that the obligations of this
Section 14 shall not apply to the extent that the aforesaid matters (a) are
disclosed in circumstances where you are legally required to do so or (b)
become generally known to and available for use by the public otherwise than
by your wrongful act or omission.
15. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of
this letter which will then constitute our agreement on this subject.
Sincerely,
Mid-State Bank
By: /s/ Carrol R. Pruett
---------------------------------------
Carrol R. Pruett, President
Agreed to this 11th day
of November, 1998.
/s/ Debbie Zimmer
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<PAGE>
EXHIBIT 10.10
CHANGE IN CONTROL AGREEMENT
November 11, 1998
Dear John Arellano:
Mid-State Bank, a California corporation (the "Company"), considers
the establishment and maintenance of a sound and vital management to be
essential to protecting and enhancing the best interests of the Company and
its shareholders. In this connection, the Company recognizes that, as is the
case with many publicly held corporations, the possibility of a change in
control may arise and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of management personnel to the detriment of the Company and its
shareholders. Accordingly, the Board of Directors of the Company (the
"Board") has determined that appropriate steps should be taken to reinforce
and encourage the continued attention and dedication of members of the
Company's management to their assigned duties without distraction in
circumstances arising from the possibility of a change in control of the
Company. In particular, the Board believes it important, should the Company
or its shareholders receive a proposal for transfer of control of the
Company, that you be able to assess and advise the Board whether such
proposal would be in the best interests of the Company and its shareholders
and to take such other action regarding such proposal as the Board might
determine to be appropriate, without being influenced by the uncertainties of
your own situation.
In order to induce you to remain in the employ of the Company, this
letter agreement, which has been approved by the Board, sets forth the
severance benefits which the Company agrees will be provided to you in the
event your employment with the Company is terminated subsequent to a "change
in control" of the Company under the circumstances described below.
1. AGREEMENT TO PROVIDE SERVICES; RIGHT TO TERMINATE.
(i) Except as otherwise provided in paragraph (ii) below, the
Company or you may terminate your employment at any time, subject to the
Company's providing the benefits hereinafter specified in accordance with the
terms hereof.
(ii) In the event a tender offer or exchange offer is made by a
Person (as hereinafter defined) for more than 25% of the combined voting
power of the Company's outstanding securities ordinarily having the right to
vote at elections of directors ("Voting Securities"), including shares of the
Common Stock, no par value, of the Company (the "Company Shares"), you agree
that you will not leave the employ of the Company (other than as a result of
Disability or upon Retirement, as such terms are hereinafter defined) and
will render the services
<PAGE>
contemplated in the recitals to this Agreement until such tender offer or
exchange offer has been abandoned or terminated or a change in control of the
Company, as defined in Section 3 hereof, has occurred. For purposes of this
Agreement, the term "Person" shall mean and include any individual,
corporation, partnership, group, association or other "person", as such term
is used in Section 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), other than the Company, a wholly owned subsidiary of the
Company or any employee benefit plan(s) sponsored by the Company or a
subsidiary of the Company.
2. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until December 31, 1999; provided,
however, that commencing on January 1, 2000, and each January 1 thereafter,
the term of this Agreement shall automatically be extended for one additional
year unless at least 90 days prior to such January 1st date, the Company or
you shall have given notice that this Agreement shall not be extended; and
provided, further, that this Agreement shall continue in effect for a period
of eighteen (18) months beyond the term provided herein if a change in
control of the Company, as defined in Section 3 hereof, shall have occurred
during such term. Notwithstanding anything in this Section 2 to the contrary,
this Agreement shall terminate if you or the Company terminate your
employment prior to a change in control of the Company.
3. CHANGE IN CONTROL. Change in Control means a change, after
January 1, 1999, in Control of the Bank of a nature that would be required to
be the subject of prior approval by the Federal Reserve Board pursuant to the
Bank Holding Company Act of 1956, as amended as of the date hereof, the
Federal Deposit Insurance Corporation ("FDIC") under the Change in Bank
Control Act, pursuant to the California Financial Code as in effect on this
date; provided that, without limitation, and without consideration of
regulatory exemptions from prior approval, such a Change in Control will be
deemed to have occurred if and when any of the following occur: (i) there is
a transfer, voluntarily or by hostile takeover or proxy contest, operation of
law, or otherwise, of Control of the Bank, (ii) the individuals who were
members of the Board of Directors of the Bank immediately prior to a meeting
of the shareholders of the Bank which meeting involves a contest for the
election of directors, do not constitute a majority of the Board of Directors
of the Bank following such meeting or election, (iii) an acquisition,
directly or indirectly, of more than 25% of the outstanding shares of any
class of voting securities of the Bank by any Person, (iv) a merger,
consolidation or sale of all or substantially all of the assets of the Bank,
or (v) there is a change, during any period of two consecutive years of a
majority of the Board of Directors of the Bank as constituted as of the
beginning of such period, unless the election of each director who is not a
director at the beginning of such period was approved by a vote of at least
two-thirds of the directors then in office who were directors at the
beginning of such period.
4. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the events
described in Section 3 hereof constituting a change in control of the Company
shall have occurred, you shall be entitled to the benefits provided in Section 5
hereof upon the termination of your employment with the Company within eighteen
(18) months after such event, unless such termination is (a) because of your
death or Retirement, (b) by the Company for Cause or Disability or (c) by you
other than for Good Reason (as all such capitalized terms are hereinafter
defined).
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(i) DISABILITY. Termination by the Company of your employment
based on "Disability" shall mean termination because of your absence from
your duties with the Company on a full time basis for one hundred eighty
(180) consecutive days as a result of your incapacity due to physical or
mental illness, unless within thirty (30) days after Notice of Termination
(as hereinafter defined) is given to you following such absence you shall
have returned to the full time performance of your duties.
(ii) RETIREMENT. Termination by you of your employment based on
"Retirement" shall mean the voluntary termination of active employment with the
Company or a subsidiary on or about 65 years of age or at such later age as such
employee desires to discontinue his active employment with the Company or a
subsidiary.
(iii) CAUSE. Termination by the Company of your employment for
"Cause" shall mean termination upon (a) the willful and continued failure by
you to perform substantially your duties with the Company (other than any
such failure resulting from your incapacity due to physical or mental
illness) after a demand for substantial performance is delivered to you by
the Chairman of the Board or the Vice Chairman of the Board or the President
of the Company which specifically identifies the manner in which such
executive believes that you have not substantially performed your duties, or
(b) the willful engaging by you in illegal conduct which is materially and
demonstrably injurious to the Company. For purposes of this paragraph (iii),
no act, or failure to act, on your part shall be considered "willful" unless
done, or omitted to be done, by you in bad faith and without reasonable
belief that your action or omission was in, or not opposed to, the best
interests of the Company. Any act, or failure to act, based upon authority
given pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be done,
or omitted to be done, by you in good faith and in the best interests of the
Company. It is also expressly understood that your attention to matters not
directly related to the business of the Company shall not provide a basis for
termination for Cause so long as the Board has approved your engagement in
such activities. Notwithstanding the foregoing, you shall not be deemed to
have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote
of not less than three quarters of the entire membership of the Board at a
meeting of the Board called and held for the purpose (after reasonable notice
to you and an opportunity for you, together with your counsel, to be heard
before the Board), finding that in the good faith opinion of the Board you
were guilty of the conduct set forth above in (a) or (b) of this paragraph
(iii) and specifying the particulars thereof in detail.
(iv) GOOD REASON. Termination by you of your employment for "Good
Reason" shall mean termination based on:
(A) an adverse change in your status or position(s) as an executive
officer of the Company as in effect immediately prior to the change in
control, including, without limitation, any adverse change in your status
or position as a result of a material diminution in your duties or
responsibilities (other than, if applicable, any such change directly
attributable to the fact that the Company is no longer publicly owned) or
the
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assignment to you of any duties or responsibilities which, in your
reasonable judgment, are inconsistent with such status or position(s), or
any removal of you from or any failure to reappoint or reelect you to such
position(s) (except in connection with the termination of your employment
for Cause, Disability or Retirement or as a result of your death or by you
other than for Good Reason);
(B) a reduction by the Company in your base salary as in effect
immediately prior to the change in control;
(C) the failure by the Company to continue in effect any Plan (as
hereinafter defined) in which you are participating at the time of the
change in control of the Company (or Plans providing you with at least
substantially similar benefits) other than as a result of the normal
expiration of any such Plan in accordance with its terms as in effect at
the time of the change in control, or the taking of any action, or the
failure to act, by the Company which would adversely affect your continued
participation in any of such Plans on at least as favorable a basis to you
as is the case on the date of the change in control or which would
materially reduce your benefits in the future under any of such Plans or
deprive you of any material benefit under any Plan enjoyed by you at the
time of the change in control.
(D) the failure by the Company to provide and credit you with the
number of paid vacation days to which you are then entitled in accordance
with the Company's normal vacation policy as in effect immediately prior to
the change in control;
(E) the Company's requiring you to be based at an office that is
greater than 25 miles from where your office is located immediately prior
to the change in control except for required travel on the Company's
business to an extent substantially consistent with the business travel
obligations which you undertook on behalf of the Company prior to the
change in control;
(F) the failure by the Company to obtain from any Successor (as
hereinafter defined) the assent to this Agreement contemplated by Section 6
hereof; or
(G) any purported termination by the Company of your employment which
is not effected pursuant to a Notice of Termination satisfying the
requirements of paragraph (v) below (and, if applicable, paragraph (iii)
above); and for purposes of this Agreement, no such purported termination
shall be effective.
For purposes of this Agreement, "Plan" shall mean any compensation plan such as
an incentive, stock option or restricted stock plan or any employee benefit plan
such as a thrift, pension, profit sharing, medical, disability, accident, life
insurance plan or a relocation plan or policy or any other plan, program or
policy of the Company intended to benefit employees.
(v) NOTICE OF TERMINATION. Any purported termination by the
Company or by you following a change in control shall be communicated by
written Notice of Termination to the
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other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon.
(vi) DATE OF TERMINATION. "Date of Termination" following a
change in control shall mean (a) if your employment is to be terminated for
Disability, thirty (30) days after Notice of Termination is given (provided
that you shall not have returned to the performance of your duties on a
full-time basis during such thirty (30) day period), (b) if your employment
is to be terminated by the Company for Cause or by you pursuant to Sections
4(iv) (F) and 6 hereof or for any other Good Reason, the date specified in
the Notice of Termination, or (c) if your employment is to be terminated by
the Company for any reason other than Cause, the date specified in the Notice
of Termination, which in no event shall be a date earlier than ninety (90)
days after the date on which a Notice of Termination is given, unless an
earlier date has been expressly agreed to by you in writing either in advance
of, or after, receiving such Notice of Termination. In the case of
termination by the Company of your employment for Cause, if you have not
previously expressly agreed in writing to the termination, then within thirty
(30) days after receipt by you of the Notice of Termination with respect
thereto, you may notify the Company that a dispute exists concerning the
termination, in which event the Date of Termination shall be the date set
either by mutual written agreement of the parties or by the arbitrators in a
proceeding as provided in Section 13 hereof. During the pendency of any such
dispute, the Company will continue to pay you your full compensation in
effect just prior to the time the Notice of Termination is given and until
the dispute is resolved in accordance with Section 13.
5. COMPENSATION UPON TERMINATION OR DURING DISABILITY; OTHER
AGREEMENTS.
(i) During any period following a change in control of the
Company that you fail to perform your duties as a result of incapacity due to
physical or mental illness, you shall continue to receive your salary at the
rate then in effect and any benefits or awards under any Plans shall continue
to accrue during such period, to the extent not inconsistent with such Plans,
until your employment is terminated pursuant to and in accordance with
paragraphs 4(i) and 4(vi) hereof. Thereafter, your benefits shall be
determined in accordance with the Plans then in effect.
(ii) If your employment shall be terminated for Cause following a
change in control of the Company, the Company shall pay you your salary
through the Date of Termination is given plus any benefits or awards
(including both the cash and stock components) which pursuant to the terms of
any Plan have been earned or become payable, but which have not yet been paid
to you. Thereupon the Company shall have no further obligations to you under
this Agreement.
(iii) Subject to Section 8 hereof, if, within eighteen (18) months
after a change in control of the Company, as defined in Section 3 above, shall
have occurred, your employment by the Company shall be terminated (a) by the
Company other than for Cause, Disability or Retirement or (b) by you for Good
Reason, then the Company shall pay to you, no later than the fifth day following
the Date of Termination, without regard to any contrary provisions of any Plan,
the following:
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(A) your salary through the Date of Termination at the rate in effect
just prior to the time a Notice of Termination is given plus any benefits
or awards (including both the cash and stock components) which pursuant to
the terms of any Plans have been earned or become payable, but which have
not yet been paid to you (including amounts which previously had been
deferred at your request); and
(B) as severance pay and in lieu of any further salary for periods
subsequent to the Date of Termination, an amount in cash equal to one and
one-half (1-1/2) times your annual salary and bonus, such salary to be at
the rate of salary in effect immediately prior to the Date of Termination
(or, if greater, immediately prior to the change in control of the Company)
and such bonus to be equal to the total bonus paid to you during the
twelve-month period immediately preceding the Date of Termination (or, if
greater, during the twelve-month period immediately preceding the change in
control of the Company); provided, however, that in no event shall such
amount exceed 2.99 times your "annualized includible compensation for the
base period" (as defined in Section 280G(d) (1) of the Internal Revenue
Code of 1986 (the "Code").
(iv) If, within eighteen (18) months after a change in control of the
Company, as defined in Section 3 above, shall have occurred, your employment by
the Company shall be terminated (a) by the Company other than for Cause,
Disability or Retirement or (b) by you for Good Reason, then the Company shall
maintain in full force and effect, for the continued benefit of you and your
dependents for a period terminating on the earliest of (a) three years after the
Date of Termination, (b) the commencement date of equivalent benefits from a new
employer or (c) your normal retirement date under the terms of any retirement
plan, all insured and self-insured employee welfare benefit Plans in which you
were entitled to participate immediately prior to the Date of Termination,
provided that your continued participation is possible under the general terms
and provisions of such Plans (and any applicable funding media) and you continue
to pay an amount equal to your regular contribution under such plans for such
participation. If, at the end of three years after the Termination Date, you
have not reached your normal retirement date and you have not previously
received or are not then receiving equivalent benefits from a new employer, the
Company shall arrange, at its sole cost and expense, to enable you to convert
your and your dependents' coverage under such Plans to individual policies or
programs upon the same terms as employees of the Company may apply for such
conversions. In the event that your participation in any such Plan is barred,
the Company, at its sole cost and expense, shall arrange to have issued for the
benefit of you and your dependents individual policies of insurance providing
benefits substantially similar (on an after-tax basis) to those which you
otherwise would have been entitled to receive under such Plans pursuant to this
paragraph (iv) or, if such insurance is not available at a reasonable cost to
the Company, the Company shall otherwise provide you and your dependents with
equivalent benefits (on an after-tax basis). You shall not be required to pay
any premiums or other charges in an amount greater than that which you would
have paid in order to participate in such Plans.
(v) Except as specifically provided in paragraph (iv) above, the
amount of any payment provided for in this Section 5 shall not be reduced,
offset or subject to recovery by the
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Company by reason of any compensation earned by you as the result of
employment by another employer after the Date of Termination, or otherwise.
6. SUCCESSORS; BINDING AGREEMENT.
(i) The Company will seek, by written request at least five (5)
business days prior to the time a Person becomes a Successor (as hereinafter
defined), to have such Person by agreement in form and substance satisfactory
to you, assent to the fulfillment of the Company's obligations under this
Agreement. Failure of such Person to furnish such assent by the later of (A)
three (3) business days prior to the time such Person becomes a Successor or
(B) two (2) business days after such Person receives a written request to so
assent shall constitute Good Reason for termination by you of your employment
if a change in control of the Company occurs or has occurred. For purposes
of this Agreement, "Successor" shall mean any Person that succeeds to, or has
the practical ability to control (either immediately or with the passage of
time), the Company's business directly, by merger or consolidation, or
indirectly, by purchase of the Company's Voting Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you should die while any amount would still be payable to you hereunder if
you had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to your
estate.
(iii) For purposes of this Agreement, the "Company" shall include any
corporation or other entity which is the surviving or continuing entity in
respect of any merger, consolidation or form of business combination in which
the Company ceases to exist.
7. FEES AND EXPENSES; MITIGATION.
(i) The Company shall pay all reasonable legal fees and related
expenses incurred by you in connection with the Agreement following a change
in control of the Company, including, without limitation, (a) all such fees
and expenses, if any, incurred in contesting or disputing any termination of
your employment or incurred by you in seeking advice with respect to the
matters set forth in Section 8 hereof or (b) your seeking to obtain or
enforce any right or benefit provided by this Agreement; provided, however,
you shall be required to repay any such amounts to the Company to the extent
that a court issues a final and non-appealable order setting forth the
determination that the position taken by you was frivolous or advanced by you
in bad faith.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection with this
Agreement, by seeking other employment or otherwise.
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<PAGE>
8. TAXES.
(i) All payments to be made to you under this Agreement will be
subject to required withholding of federal, state and local income and
employment taxes.
(ii) Notwithstanding anything in the foregoing to the contrary, if
any of the payments provided for in this Agreement, together with any other
payments which you have the right to receive from the Company or any
corporation which is a member of an "affiliated group" (as defined in Section
1504(a) of the Code without regard to Section 1504(b) of the Code) of which
the Company is a member, would constitute a "parachute payment" (as defined
in Section 280G(b) (2) of the Code), the payments pursuant to this Agreement
shall be reduced (reducing first the payments under Section 5(iii) (B)) to
the largest amount as will result in no portion of such payments being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that the determination as to whether any reduction in the payments
under this Agreement pursuant to this proviso is necessary shall be made by
you in good faith, and such determination shall be conclusive and binding on
the Company with respect to its treatment of the payment for tax reporting
purposes.
9. SURVIVAL. The respective obligations of, and benefits
afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 13
and 14 of this Agreement shall survive termination of this Agreement.
10. NOTICE. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid and
addressed, in the case of the Company, to the address set forth on the first
page of this Agreement or, in the case of the undersigned employee, to the
address set forth below his signature, provided that all notices to the
Company shall be directed to the attention of the Chairman of the Board or
President of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
11. MISCELLANEOUS. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge
is agreed to in a writing signed by you and approved by the Board of
Directors of the Company. No waiver by either party hereto at any time of
any breach by the other party hereto of, or of compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of California.
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<PAGE>
12. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
13. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Luis Obispo County, California, by three (3) arbitrators in accordance
with the rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction; provided, however, that you shall be entitled to seek specific
performance of your right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with
this Agreement. The Company shall bear all costs and expenses arising in
connection with any arbitration proceeding pursuant to this Section 13.
14. EMPLOYEE'S COMMITMENT. You agree that subsequent to your
period of employment with the Company, you will not at any time communicate
or disclose to any unauthorized person, without the written consent of the
Company, any proprietary processes of the Company or any subsidiary or other
confidential information concerning their business, affairs, products,
suppliers or customers which, if disclosed, would have a material adverse
effect upon the business or operations of the Company and its subsidiaries,
taken as a whole; it being understood, however, that the obligations of this
Section 14 shall not apply to the extent that the aforesaid matters (a) are
disclosed in circumstances where you are legally required to do so or (b)
become generally known to and available for use by the public otherwise than
by your wrongful act or omission.
15. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of
this letter which will then constitute our agreement on this subject.
Sincerely,
Mid-State Bank
By: /s/ Carrol R. Pruett
--------------------------------------
Carrol R. Pruett, President
Agreed to this 11th day
of November, 1998.
/s/ John Arellano
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EXHIBIT 10.11
CHANGE IN CONTROL AGREEMENT
November 11, 1998
Dear Karen Campbell:
Mid-State Bank, a California corporation (the "Company"), considers
the establishment and maintenance of a sound and vital management to be
essential to protecting and enhancing the best interests of the Company and
its shareholders. In this connection, the Company recognizes that, as is the
case with many publicly held corporations, the possibility of a change in
control may arise and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of management personnel to the detriment of the Company and its
shareholders. Accordingly, the Board of Directors of the Company (the
"Board") has determined that appropriate steps should be taken to reinforce
and encourage the continued attention and dedication of members of the
Company's management to their assigned duties without distraction in
circumstances arising from the possibility of a change in control of the
Company. In particular, the Board believes it important, should the Company
or its shareholders receive a proposal for transfer of control of the
Company, that you be able to assess and advise the Board whether such
proposal would be in the best interests of the Company and its shareholders
and to take such other action regarding such proposal as the Board might
determine to be appropriate, without being influenced by the uncertainties of
your own situation.
In order to induce you to remain in the employ of the Company, this
letter agreement, which has been approved by the Board, sets forth the
severance benefits which the Company agrees will be provided to you in the
event your employment with the Company is terminated subsequent to a "change
in control" of the Company under the circumstances described below.
1. AGREEMENT TO PROVIDE SERVICES; RIGHT TO TERMINATE.
(i) Except as otherwise provided in paragraph (ii) below, the
Company or you may terminate your employment at any time, subject to the
Company's providing the benefits hereinafter specified in accordance with the
terms hereof.
(ii) In the event a tender offer or exchange offer is made by a
Person (as hereinafter defined) for more than 25% of the combined voting
power of the Company's outstanding securities ordinarily having the right to
vote at elections of directors ("Voting Securities"), including shares of the
Common Stock, no par value, of the Company (the "Company Shares"), you agree
that you will not leave the employ of the Company (other than as a result of
Disability or upon Retirement, as such terms are hereinafter defined) and
will render the services
<PAGE>
contemplated in the recitals to this Agreement until such tender offer or
exchange offer has been abandoned or terminated or a change in control of the
Company, as defined in Section 3 hereof, has occurred. For purposes of this
Agreement, the term "Person" shall mean and include any individual,
corporation, partnership, group, association or other "person", as such term
is used in Section 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), other than the Company, a wholly owned subsidiary of the
Company or any employee benefit plan(s) sponsored by the Company or a
subsidiary of the Company.
2. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until December 31, 1999; provided,
however, that commencing on January 1, 2000, and each January 1 thereafter,
the term of this Agreement shall automatically be extended for one additional
year unless at least 90 days prior to such January 1st date, the Company or
you shall have given notice that this Agreement shall not be extended; and
provided, further, that this Agreement shall continue in effect for a period
of eighteen (18) months beyond the term provided herein if a change in
control of the Company, as defined in Section 3 hereof, shall have occurred
during such term. Notwithstanding anything in this Section 2 to the contrary,
this Agreement shall terminate if you or the Company terminate your
employment prior to a change in control of the Company.
3. CHANGE IN CONTROL. Change in Control means a change, after
January 1, 1999, in Control of the Bank of a nature that would be required to
be the subject of prior approval by the Federal Reserve Board pursuant to the
Bank Holding Company Act of 1956, as amended as of the date hereof, the
Federal Deposit Insurance Corporation ("FDIC") under the Change in Bank
Control Act, pursuant to the California Financial Code as in effect on this
date; provided that, without limitation, and without consideration of
regulatory exemptions from prior approval, such a Change in Control will be
deemed to have occurred if and when any of the following occur: (i) there is
a transfer, voluntarily or by hostile takeover or proxy contest, operation of
law, or otherwise, of Control of the Bank, (ii) the individuals who were
members of the Board of Directors of the Bank immediately prior to a meeting
of the shareholders of the Bank which meeting involves a contest for the
election of directors, do not constitute a majority of the Board of Directors
of the Bank following such meeting or election, (iii) an acquisition,
directly or indirectly, of more than 25% of the outstanding shares of any
class of voting securities of the Bank by any Person, (iv) a merger,
consolidation or sale of all or substantially all of the assets of the Bank,
or (v) there is a change, during any period of two consecutive years of a
majority of the Board of Directors of the Bank as constituted as of the
beginning of such period, unless the election of each director who is not a
director at the beginning of such period was approved by a vote of at least
two-thirds of the directors then in office who were directors at the
beginning of such period.
4. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the events
described in Section 3 hereof constituting a change in control of the Company
shall have occurred, you shall be entitled to the benefits provided in Section 5
hereof upon the termination of your employment with the Company within eighteen
(18) months after such event, unless such termination is (a) because of your
death or Retirement, (b) by the Company for Cause or Disability or (c) by you
other than for Good Reason (as all such capitalized terms are hereinafter
defined).
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(i) DISABILITY. Termination by the Company of your employment
based on "Disability" shall mean termination because of your absence from
your duties with the Company on a full time basis for one hundred eighty
(180) consecutive days as a result of your incapacity due to physical or
mental illness, unless within thirty (30) days after Notice of Termination
(as hereinafter defined) is given to you following such absence you shall
have returned to the full time performance of your duties.
(ii) RETIREMENT. Termination by you of your employment based on
"Retirement" shall mean the voluntary termination of active employment with the
Company or a subsidiary on or about 65 years of age or at such later age as such
employee desires to discontinue his active employment with the Company or a
subsidiary.
(iii) CAUSE. Termination by the Company of your employment for
"Cause" shall mean termination upon (a) the willful and continued failure by
you to perform substantially your duties with the Company (other than any
such failure resulting from your incapacity due to physical or mental
illness) after a demand for substantial performance is delivered to you by
the Chairman of the Board or the Vice Chairman of the Board or the President
of the Company which specifically identifies the manner in which such
executive believes that you have not substantially performed your duties, or
(b) the willful engaging by you in illegal conduct which is materially and
demonstrably injurious to the Company. For purposes of this paragraph (iii),
no act, or failure to act, on your part shall be considered "willful" unless
done, or omitted to be done, by you in bad faith and without reasonable
belief that your action or omission was in, or not opposed to, the best
interests of the Company. Any act, or failure to act, based upon authority
given pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be done,
or omitted to be done, by you in good faith and in the best interests of the
Company. It is also expressly understood that your attention to matters not
directly related to the business of the Company shall not provide a basis for
termination for Cause so long as the Board has approved your engagement in
such activities. Notwithstanding the foregoing, you shall not be deemed to
have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote
of not less than three quarters of the entire membership of the Board at a
meeting of the Board called and held for the purpose (after reasonable notice
to you and an opportunity for you, together with your counsel, to be heard
before the Board), finding that in the good faith opinion of the Board you
were guilty of the conduct set forth above in (a) or (b) of this paragraph
(iii) and specifying the particulars thereof in detail.
(iv) GOOD REASON. Termination by you of your employment for "Good
Reason" shall mean termination based on:
(A) an adverse change in your status or position(s) as an executive
officer of the Company as in effect immediately prior to the change in
control, including, without limitation, any adverse change in your status
or position as a result of a material diminution in your duties or
responsibilities (other than, if applicable, any such change directly
attributable to the fact that the Company is no longer publicly owned) or
the
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assignment to you of any duties or responsibilities which, in your
reasonable judgment, are inconsistent with such status or position(s), or
any removal of you from or any failure to reappoint or reelect you to such
position(s) (except in connection with the termination of your employment
for Cause, Disability or Retirement or as a result of your death or by you
other than for Good Reason);
(B) a reduction by the Company in your base salary as in effect
immediately prior to the change in control;
(C) the failure by the Company to continue in effect any Plan (as
hereinafter defined) in which you are participating at the time of the
change in control of the Company (or Plans providing you with at least
substantially similar benefits) other than as a result of the normal
expiration of any such Plan in accordance with its terms as in effect at
the time of the change in control, or the taking of any action, or the
failure to act, by the Company which would adversely affect your continued
participation in any of such Plans on at least as favorable a basis to you
as is the case on the date of the change in control or which would
materially reduce your benefits in the future under any of such Plans or
deprive you of any material benefit under any Plan enjoyed by you at the
time of the change in control.
(D) the failure by the Company to provide and credit you with the
number of paid vacation days to which you are then entitled in accordance
with the Company's normal vacation policy as in effect immediately prior to
the change in control;
(E) the Company's requiring you to be based at an office that is
greater than 25 miles from where your office is located immediately prior
to the change in control except for required travel on the Company's
business to an extent substantially consistent with the business travel
obligations which you undertook on behalf of the Company prior to the
change in control;
(F) the failure by the Company to obtain from any Successor (as
hereinafter defined) the assent to this Agreement contemplated by Section 6
hereof; or
(G) any purported termination by the Company of your employment which
is not effected pursuant to a Notice of Termination satisfying the
requirements of paragraph (v) below (and, if applicable, paragraph (iii)
above); and for purposes of this Agreement, no such purported termination
shall be effective.
For purposes of this Agreement, "Plan" shall mean any compensation plan such as
an incentive, stock option or restricted stock plan or any employee benefit plan
such as a thrift, pension, profit sharing, medical, disability, accident, life
insurance plan or a relocation plan or policy or any other plan, program or
policy of the Company intended to benefit employees.
(v) NOTICE OF TERMINATION. Any purported termination by the
Company or by you following a change in control shall be communicated by
written Notice of Termination to the
-4-
<PAGE>
other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon.
(vi) DATE OF TERMINATION. "Date of Termination" following a
change in control shall mean (a) if your employment is to be terminated for
Disability, thirty (30) days after Notice of Termination is given (provided
that you shall not have returned to the performance of your duties on a
full-time basis during such thirty (30) day period), (b) if your employment
is to be terminated by the Company for Cause or by you pursuant to Sections
4(iv) (F) and 6 hereof or for any other Good Reason, the date specified in
the Notice of Termination, or (c) if your employment is to be terminated by
the Company for any reason other than Cause, the date specified in the Notice
of Termination, which in no event shall be a date earlier than ninety (90)
days after the date on which a Notice of Termination is given, unless an
earlier date has been expressly agreed to by you in writing either in advance
of, or after, receiving such Notice of Termination. In the case of
termination by the Company of your employment for Cause, if you have not
previously expressly agreed in writing to the termination, then within thirty
(30) days after receipt by you of the Notice of Termination with respect
thereto, you may notify the Company that a dispute exists concerning the
termination, in which event the Date of Termination shall be the date set
either by mutual written agreement of the parties or by the arbitrators in a
proceeding as provided in Section 13 hereof. During the pendency of any such
dispute, the Company will continue to pay you your full compensation in
effect just prior to the time the Notice of Termination is given and until
the dispute is resolved in accordance with Section 13.
5. COMPENSATION UPON TERMINATION OR DURING DISABILITY; OTHER
AGREEMENTS.
(i) During any period following a change in control of the
Company that you fail to perform your duties as a result of incapacity due to
physical or mental illness, you shall continue to receive your salary at the
rate then in effect and any benefits or awards under any Plans shall continue
to accrue during such period, to the extent not inconsistent with such Plans,
until your employment is terminated pursuant to and in accordance with
paragraphs 4(i) and 4(vi) hereof. Thereafter, your benefits shall be
determined in accordance with the Plans then in effect.
(ii) If your employment shall be terminated for Cause following a
change in control of the Company, the Company shall pay you your salary
through the Date of Termination is given plus any benefits or awards
(including both the cash and stock components) which pursuant to the terms of
any Plan have been earned or become payable, but which have not yet been paid
to you. Thereupon the Company shall have no further obligations to you under
this Agreement.
(iii) Subject to Section 8 hereof, if, within eighteen (18) months
after a change in control of the Company, as defined in Section 3 above, shall
have occurred, your employment by the Company shall be terminated (a) by the
Company other than for Cause, Disability or Retirement or (b) by you for Good
Reason, then the Company shall pay to you, no later than the fifth day following
the Date of Termination, without regard to any contrary provisions of any Plan,
the following:
-5-
<PAGE>
(A) your salary through the Date of Termination at the rate in effect
just prior to the time a Notice of Termination is given plus any benefits
or awards (including both the cash and stock components) which pursuant to
the terms of any Plans have been earned or become payable, but which have
not yet been paid to you (including amounts which previously had been
deferred at your request); and
(B) as severance pay and in lieu of any further salary for periods
subsequent to the Date of Termination, an amount in cash equal to one and
one-half (1-1/2) times your annual salary and bonus, such salary to be at
the rate of salary in effect immediately prior to the Date of Termination
(or, if greater, immediately prior to the change in control of the Company)
and such bonus to be equal to the total bonus paid to you during the
twelve-month period immediately preceding the Date of Termination (or, if
greater, during the twelve-month period immediately preceding the change in
control of the Company); provided, however, that in no event shall such
amount exceed 2.99 times your "annualized includible compensation for the
base period" (as defined in Section 280G(d) (1) of the Internal Revenue
Code of 1986 (the "Code").
(iv) If, within eighteen (18) months after a change in control of the
Company, as defined in Section 3 above, shall have occurred, your employment by
the Company shall be terminated (a) by the Company other than for Cause,
Disability or Retirement or (b) by you for Good Reason, then the Company shall
maintain in full force and effect, for the continued benefit of you and your
dependents for a period terminating on the earliest of (a) three years after the
Date of Termination, (b) the commencement date of equivalent benefits from a new
employer or (c) your normal retirement date under the terms of any retirement
plan, all insured and self-insured employee welfare benefit Plans in which you
were entitled to participate immediately prior to the Date of Termination,
provided that your continued participation is possible under the general terms
and provisions of such Plans (and any applicable funding media) and you continue
to pay an amount equal to your regular contribution under such plans for such
participation. If, at the end of three years after the Termination Date, you
have not reached your normal retirement date and you have not previously
received or are not then receiving equivalent benefits from a new employer, the
Company shall arrange, at its sole cost and expense, to enable you to convert
your and your dependents' coverage under such Plans to individual policies or
programs upon the same terms as employees of the Company may apply for such
conversions. In the event that your participation in any such Plan is barred,
the Company, at its sole cost and expense, shall arrange to have issued for the
benefit of you and your dependents individual policies of insurance providing
benefits substantially similar (on an after-tax basis) to those which you
otherwise would have been entitled to receive under such Plans pursuant to this
paragraph (iv) or, if such insurance is not available at a reasonable cost to
the Company, the Company shall otherwise provide you and your dependents with
equivalent benefits (on an after-tax basis). You shall not be required to pay
any premiums or other charges in an amount greater than that which you would
have paid in order to participate in such Plans.
(v) Except as specifically provided in paragraph (iv) above, the
amount of any payment provided for in this Section 5 shall not be reduced,
offset or subject to recovery by the
-6-
<PAGE>
Company by reason of any compensation earned by you as the result of
employment by another employer after the Date of Termination, or otherwise.
6. SUCCESSORS; BINDING AGREEMENT.
(i) The Company will seek, by written request at least five (5)
business days prior to the time a Person becomes a Successor (as hereinafter
defined), to have such Person by agreement in form and substance satisfactory
to you, assent to the fulfillment of the Company's obligations under this
Agreement. Failure of such Person to furnish such assent by the later of (A)
three (3) business days prior to the time such Person becomes a Successor or
(B) two (2) business days after such Person receives a written request to so
assent shall constitute Good Reason for termination by you of your employment
if a change in control of the Company occurs or has occurred. For purposes
of this Agreement, "Successor" shall mean any Person that succeeds to, or has
the practical ability to control (either immediately or with the passage of
time), the Company's business directly, by merger or consolidation, or
indirectly, by purchase of the Company's Voting Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you should die while any amount would still be payable to you hereunder if
you had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to your
estate.
(iii) For purposes of this Agreement, the "Company" shall include
any corporation or other entity which is the surviving or continuing entity
in respect of any merger, consolidation or form of business combination in
which the Company ceases to exist.
7. FEES AND EXPENSES; MITIGATION.
(i) The Company shall pay all reasonable legal fees and related
expenses incurred by you in connection with the Agreement following a change
in control of the Company, including, without limitation, (a) all such fees
and expenses, if any, incurred in contesting or disputing any termination of
your employment or incurred by you in seeking advice with respect to the
matters set forth in Section 8 hereof or (b) your seeking to obtain or
enforce any right or benefit provided by this Agreement; provided, however,
you shall be required to repay any such amounts to the Company to the extent
that a court issues a final and non-appealable order setting forth the
determination that the position taken by you was frivolous or advanced by you
in bad faith.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection with this
Agreement, by seeking other employment or otherwise.
-7-
<PAGE>
8. TAXES.
(i) All payments to be made to you under this Agreement will be
subject to required withholding of federal, state and local income and
employment taxes.
(ii) Notwithstanding anything in the foregoing to the contrary, if
any of the payments provided for in this Agreement, together with any other
payments which you have the right to receive from the Company or any
corporation which is a member of an "affiliated group" (as defined in Section
1504(a) of the Code without regard to Section 1504(b) of the Code) of which
the Company is a member, would constitute a "parachute payment" (as defined
in Section 280G(b) (2) of the Code), the payments pursuant to this Agreement
shall be reduced (reducing first the payments under Section 5(iii) (B)) to
the largest amount as will result in no portion of such payments being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that the determination as to whether any reduction in the payments
under this Agreement pursuant to this proviso is necessary shall be made by
you in good faith, and such determination shall be conclusive and binding on
the Company with respect to its treatment of the payment for tax reporting
purposes.
9. SURVIVAL. The respective obligations of, and benefits
afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 13
and 14 of this Agreement shall survive termination of this Agreement.
10. NOTICE. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid and
addressed, in the case of the Company, to the address set forth on the first
page of this Agreement or, in the case of the undersigned employee, to the
address set forth below his signature, provided that all notices to the
Company shall be directed to the attention of the Chairman of the Board or
President of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
11. MISCELLANEOUS. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge
is agreed to in a writing signed by you and approved by the Board of
Directors of the Company. No waiver by either party hereto at any time of
any breach by the other party hereto of, or of compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of California.
-8-
<PAGE>
12. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
13. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Luis Obispo County, California, by three (3) arbitrators in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrators' award in any court having jurisdiction; provided,
however, that you shall be entitled to seek specific performance of your right
to be paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement. The Company
shall bear all costs and expenses arising in connection with any arbitration
proceeding pursuant to this Section 13.
14. EMPLOYEE'S COMMITMENT. You agree that subsequent to your
period of employment with the Company, you will not at any time communicate
or disclose to any unauthorized person, without the written consent of the
Company, any proprietary processes of the Company or any subsidiary or other
confidential information concerning their business, affairs, products,
suppliers or customers which, if disclosed, would have a material adverse
effect upon the business or operations of the Company and its subsidiaries,
taken as a whole; it being understood, however, that the obligations of this
Section 14 shall not apply to the extent that the aforesaid matters (a) are
disclosed in circumstances where you are legally required to do so or (b)
become generally known to and available for use by the public otherwise than
by your wrongful act or omission.
15. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of
this letter which will then constitute our agreement on this subject.
Sincerely,
Mid-State Bank
By: /s/ Carrol R. Pruett
---------------------------------------
Carrol R. Pruett, President
Agreed to this 11th day
of November, 1998.
/s/ Karen Campbell
- ----------------------------------
-9-
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