<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1999.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PACIFIC COMMUNITY BANKING GROUP
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 6712 33-0778067
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
--------------------------
23332 MILL CREEK DRIVE, SUITE 230
LAGUNA HILLS, CALIFORNIA 92653
(949) 460-4540
(Address, including zip code, and telephone number, including area code, or
registrant's principal executive offices)
--------------------------
E. LYNN CASWELL
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PACIFIC COMMUNITY BANKING GROUP
23332 MILL CREEK DRIVE, SUITE 230
LAGUNA HILLS, CALIFORNIA 92653
(949) 460-4540
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
With copies to:
<TABLE>
<S> <C> <C>
HENRY M. FIELDS, ESQ. LOREN P. HANSEN, ESQ. GARY S. FINDLEY, ESQ.
ELLEN R. MARSHALL, ESQ. KNECHT & HANSEN GARY STEVEN FINDLEY
CHARLES S. KAUFMAN, ESQ. 1301 DOVE STREET, SUITE 900 & ASSOCIATES
MORRISON & FOERSTER LLP NEWPORT BEACH, CA 92660 1470 N. HUNDLEY ST.
555 WEST FIFTH STREET (949) 851-8070 ANAHEIM, CA 92806
LOS ANGELES, CA 90013-1024 (714) 630-7136
(213) 892-5200
<CAPTION>
HENRY M. FIELDS, ESQ. MARK E. ALDRICH, ESQ.
CHARLES S. KAUFMAN, ESQ. 18200 VON KARMAN AVE.,
MORRISON & FOERSTER LLP SU. 730
555 WEST FIFTH STREET IRVINE, CA 92623-1029
LOS ANGELES, CA 90013-1024 (949) 474-1944
(213) 892-5200
<CAPTION>
ELLEN R. MARSHALL, ESQ. ALDRICH & BONNEFIN, P.L.C.
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable following the effective time of this registration
statement and the satisfaction or waiver of all other conditions to the
acquisitions described in the enclosed joint proxy statement/prospectus.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TITLE OF EACH CLASS AMOUNT SHARE(3) PRICE(3) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, no par value.................. 5,264,913 shares(1)(2) $5.72 $30,111,892 $8,371.09
Ten-Year Warrants........................... 1,307,000 warrants $0 (4) $0 (4) $0 (4)
</TABLE>
(1) Represents the estimated maximum number of shares of Pacific Community
Banking Group common stock that may be issued upon consummation of the
acquisition of The Bank of Hemet and Valley Bank as wholly owned
subsidiaries of Pacific Community Banking Group.
(2) Includes 1,307,913 shares of common stock underlying warrants.
(3) Estimated solely for the purposes of calculating the registration fee and
calculated pursuant to Rule 457(f)(2).
(4) Pacific Community Bank Group has calculated the registration fee based on
the total book value of the securities received without allocating the
consideration between shares and warrants offered.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LOGO
THE BANK OF HEMET
, 1999
Dear Shareholder:
You are cordially invited to attend the annual meeting of the shareholders
of The Bank of Hemet, which will be held at : .m. on , 1999, at The
Anchor Restaurant, 2524 East Florida Avenue, Hemet, California.
At the annual meeting, you will be asked to consider and vote upon the
following:
1. A proposal to approve the principal terms of the First Restatement of
Agreement and Plan of Reorganization between The Bank of Hemet and Pacific
Community Banking Group. The proposal involves two distinct, but inter-related
steps. Neither of the steps will occur without the other:
- First, Pacific Community Banking Group will acquire The Bank of Hemet in a
merger transaction from its shareholders. In the merger, you will receive
3.4 shares of Pacific Community Banking Group common stock and one warrant
of Pacific Community Banking Group for each share of The Bank of Hemet
common stock you own prior to the merger; and
- Second, a portion of the Pacific Community Banking Group shares received
by The Bank of Hemet shareholders will be sold in an underwritten public
offering at a price of not less than $15 per share. This offering will
take place immediately after the merger is complete. Although you will be
able to indicate a preference for selling your new Pacific Community
Banking Group shares in the offering or keeping them, it is likely that
you will be required to sell at least 75% of the new shares that you
receive in the merger. You may also be required to keep some of the new
shares, but not in excess of 12% of the new shares you receive. The rules
regarding the amount of shares you can sell or keep are described in
detail in the enclosed joint proxy statement/ prospectus. If the shares
are sold at the minimum offering price of $15 per share and you sold all
the Pacific Community Banking Group shares you receive, you would receive
cash equal to $51 for each share of The Bank of Hemet common stock you
owned prior to the transaction.
The warrants that you receive in the first step of the transaction will give you
the right to acquire one share of Pacific Community Banking Group for a period
of ten years at a price equal to 122% of the price at which Pacific Community
Banking Group shares sell in the public offering described above.
After the completion of these transactions, The Bank of Hemet will be a
wholly owned subsidiary of Pacific Community Banking Group.
(CONTINUED)
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
JOINT PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS OR OTHER OBLIGATIONS OF ANY BANK ON NONBANK SUBSIDIARY OF ANY OF THE
PARTIES, AND THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
<PAGE>
To summarize, if the merger and offering proceed as contemplated, and you
sell in the offering all of the shares of Pacific Community Banking Group that
you receive, you will get the following per share of common stock of The Bank of
Hemet:
- A minimum of $51 in cash; and
- A warrant to purchase Pacific Community Banking Group at any time over the
next ten years at 122% of the offering price received at the conclusion of
the merger.
If you do not sell all of the Pacific Community Banking Group shares in the
offering, you will become a shareholder of that organization. You will be able
to indicate a preference for selling or keeping shares, which Pacific Community
Banking Group will do its best to respect within the limitations described in
the attached joint proxy statement/prospectus.
2. A proposal to amend Article III of the bylaws of The Bank of Hemet to
increase the range of the number of corporate directors from a range of five to
nine to a range of seven to thirteen to accommodate the terms of the First
Restatement of Agreement and Plan of Reorganization.
3. The election of seven directors for The Bank of Hemet.
If the shareholders of The Bank of Hemet approve the acquisition and all
other conditions to closing are satisfied or waived, the transaction is expected
to close by approximately June 28, 1999. Pacific Community Banking Group has
agreed that your board of directors may declare and pay the regular quarterly
dividend of $.60 per share, payable on or about May 18, 1999.
YOUR BOARD OF DIRECTORS HAS CAREFULLY REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF THE PROPOSED ACQUISITION BY PACIFIC COMMUNITY BANKING GROUP AND
THE AMENDMENT TO THE BYLAWS AND HAS DETERMINED THAT THE ACQUISITION AND THE
AMENDMENT TO THE BYLAWS ARE FAIR TO THE BANK OF HEMET AND ARE IN THE BEST
INTERESTS OF THE BANK OF HELMET'S SHAREHOLDERS. ACCORDINGLY, THE BANK OF HEMET'S
BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE ACQUISITION AND THE AMENDMENT TO
THE BYLAWS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE ACQUISITION
AND THE AMENDMENT TO THE BYLAWS.
BEFORE YOU MAKE A DECISION, YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING
ON PAGE 21 OF THE ATTACHED JOINT PROXY STATEMENT/PROSPECTUS.
Your vote is important regardless of how many shares you own. Please take a
few minutes now to review the joint proxy statement/prospectus and to sign and
date your proxy and return it in the envelope provided. You may attend the
meeting and vote in person even if you have previously returned your proxy.
Sincerely,
James B. Jaqua
President and Chief Executive Officer
<PAGE>
LOGO
THE BANK OF HEMET
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the annual meeting of the shareholders of The
Bank of Hemet will be held at : .m. on , 1999, at The Anchor
Restaurant, 2524 East Florida Avenue, Hemet, California .
At the annual meeting, you will be asked to consider and vote on the
following:
1. A proposal to approve the principal terms of the First Restatement of
Agreement and Plan of Reorganization between The Bank of Hemet and
Pacific Community Banking Group. Under the agreement, Pacific Community
Banking Group will acquire The Bank of Hemet in a merger transaction from
its shareholders. In the merger, you will receive 3.4 shares of common
stock of Pacific Community Banking Group and one warrant of Pacific
Community Banking Group for each share of The Bank of Hemet common stock
you own prior to the merger. Immediately following the merger, most of
the Pacific Community Banking Group shares received by The Bank of Hemet
shareholders will be sold in an underwritten public offering at a price
of not less than $15 per share. Although you will be able to indicate a
preference for selling your new Pacific Community Banking Group shares in
the offering or keeping them, it is likely that you will be required to
sell at least 75% of the new shares that you receive in the merger. You
may also be required to keep some of the new shares, but not in excess of
12% of the new shares you receive. The rules regarding the amount of
shares you can sell or keep are described in detail in the enclosed joint
proxy statement/prospectus. If the shares are sold at the minimum
offering price of $15 per share and you sell all the Pacific Community
Banking Group shares you receive, you will receive cash equal to $51 for
each share of The Bank of Hemet common stock you owned prior to the
transaction. You will also receive a warrant which will give you the
right to acquire one share of Pacific Community Banking Group for a
period of ten years at a price equal to 122% of the price at which
Pacific Community Banking Group shares are sold in the public offering
described above. After the completion of these transactions, The Bank of
Hemet will be a wholly owned subsidiary of Pacific Community Banking
Group.
If the requisite approvals of the shareholders of The Bank of Hemet are
received and all other conditions to closing are satisfied or waived,
The Bank of Hemet acquisition by Pacific Community Banking Group is
anticipated to close by June 28, 1999.
2. A proposal to amend Article III of the bylaws of The Bank of Hemet to
increase the range of the number of corporate directors from a range of
five to nine to a range of seven to thirteen to accommodate the terms of
The Bank of Hemet agreement with Pacific Community Banking Group.
<PAGE>
3. The election of seven persons to the board of directors. The following
persons have been nominated:
<TABLE>
<S> <C>
John B. Brudin John J. McDonough
Jack E. Gosch Joseph D. Pehl
E. Kenneth Hyatt Clayton A. Record, Jr.
James B. Jaqua
</TABLE>
4. Such other business as may properly come before The Bank of Hemet annual
meeting or any adjournments or postponements thereof.
The attached joint proxy statement/prospectus describes in detail the
proposal to approve the principal terms of The Bank of Hemet's acquisition
agreement.
The board of directors has fixed the close of business on , 1999 as
the record date for the determination of the shareholders entitled to have
notice of and to vote at The Bank of Hemet annual meeting and any adjournments
or postponements thereof. Only holders of record of the common stock of The Bank
of Hemet on the record date are entitled to vote at The Bank of Hemet annual
meeting.
In connection with the proposed acquisition by Pacific Community Banking
Group, shareholders may exercise dissenters' rights as provided in the
California General Corporation Law. If they meet all requirements of this law,
and follow all of its required procedures, shareholders may receive cash in the
amount equal to the fair market value (as determined by The Bank of Hemet or, if
required, by a court of law) of their shares of The Bank of Hemet's common stock
as of July 29, 1998, the day immediately preceding the announcement of the
transaction, excluding any appreciation in value caused by The Bank of Hemet
acquisition, instead of receiving the consideration provided in the agreement.
For additional details about dissenters' rights, please refer to "Dissenters'
Rights" in the accompanying joint proxy statement/prospectus.
If you would like to attend The Bank of Hemet annual meeting and your shares
are held by a broker, bank or other nominee, you must bring to the meeting a
recent brokerage statement or a letter from the nominee confirming your
beneficial ownership of the shares. You must also bring a form of personal
identification. In order to vote your shares at The Bank of Hemet annual
meeting, you must obtain from the nominee a proxy issued in your name.
You can ensure that your shares are voted at The Bank of Hemet annual
meeting by signing and dating the enclosed proxy and returning it in the
envelope provided. Sending in a signed proxy will not affect your right to
attend the meeting and vote in person. You may revoke your proxy at any time
before it is voted by giving written notice to the Secretary of The Bank of
Hemet at 3715 Sunnyside Drive, Riverside, California 92506, signing and
returning a later dated proxy or by voting in person at The Bank of Hemet annual
meeting.
In the election of directors, Section 2.11 of the bylaws provides as
follows:
Nominations for election of members of the board of directors may be
made by the board of directors or by any shareholders of any outstanding
class of capital stock of the corporation entitled to vote for the election
of directors. Notice of intention to make any nominations (other than for
persons named in the notice of the meeting at which such nomination is to be
made) shall be made in writing and shall be delivered or mailed to the
president of the corporation by the later of the close of business 21 days
prior to any meeting of shareholders called for the election of directors or
10 days after the date of
<PAGE>
mailing of notice of the meeting to shareholders. Such notification shall
contain the following information to the extent known to the notifying
shareholder: (a) the name and address of each proposed nominee; (b) the
principal occupation of each proposed nominee; (c) the number of shares of
capital stock of the corporation owned by each proposed nominee; (d) the
name and residence address of the notifying shareholder; (e) the number of
shares of capital stock of the corporation owned by the notifying
shareholder; (f) with the written consent of the proposed nominee, a copy of
which shall be furnished with the notification, whether the proposed nominee
has ever been convicted of or pleaded nolo contendere to any criminal
offense involving dishonesty or breach of trust, filed a petition in
bankruptcy, or been adjudged bankrupt. The notice shall be signed by the
nominating shareholder and by the nominee. Nominations not made in
accordance herewith shall be disregarded by the chairman of the meeting, and
upon his instructions, the inspectors of election shall disregard all votes
cast for each such nominee. The restrictions set forth in this paragraph
shall not apply to nomination of a person to replace a proposed nominee who
has died or otherwise become incapacitated to serve as a director between
the last day for giving notice hereunder and the date of election of
directors if the procedure called for in this paragraph was followed with
respect to the nomination of the proposed nominee.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE CANDIDATES WHO HAVE BEEN
NOMINATED.
For more information about the election of directors, refer to "OTHER
RELEVANT INFORMATION FOR THE BANK OF HEMET SHAREHOLDERS" on page 96.
WHETHER OR NOT YOU EXPECT TO ATTEND, WE URGE YOU TO SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
[ENCLOSED WITH THE ATTACHED JOINT PROXY STATEMENT/PROSPECTUS IS][BY A
SEPARATE MAILING YOU WILL RECEIVE SHORTLY] A SET OF SHAREHOLDER DOCUMENTS FOR
THE SURRENDER OF YOUR SHARES OF THE BANK OF HEMET COMMON STOCK. PLEASE FOLLOW
THE INSTRUCTIONS TO SUBMIT YOUR SHARES AND TO ELECT WHETHER TO SELL THE SHARES
OF PACIFIC COMMUNITY BANKING GROUP THAT YOU WILL RECEIVE IF THE ACQUISITION IS
APPROVED. IF THE ACQUISITION IS NOT APPROVED, YOUR SHARES OF THE BANK OF HEMET
COMMON STOCK WILL BE RETURNED TO YOU.
By order of the Board of Directors,
James B. Jaqua
President and Chief Executive Officer
<PAGE>
LOGO
VALLEY BANK
, 1999
Dear Shareholder:
You are cordially invited to attend the annual meeting of the shareholders
of Valley Bank, which will be held at 3:00 p.m. on , 1999 at The
Best Western Image Suites Hotel, 24840 Elder Avenue, Moreno Valley, California.
At the annual meeting, you will be asked to consider and vote upon the
following:
1. A proposal to approve the principal terms of the Amended First
Restatement of Agreement and Plan of Reorganization between Valley Bank and
Pacific Community Banking Group. The proposal involves two distinct, but
inter-related steps. Neither of the steps will occur without the other:
- First, Pacific Community Banking Group will acquire Valley Bank in a
merger transaction from its shareholders. In the merger, you will receive
two-thirds of a share of common stock and one-third of a warrant of
Pacific Community Banking Group for each share of Valley Bank common stock
you own prior to the merger; and
- Second, 60% of the Pacific Community Banking Group shares received by
Valley Bank shareholders will be sold in an underwritten public offering
at a price not less than $15 per share. This offering will take place
immediately after the merger is complete. Although you will be able to
indicate a preference for selling your new Pacific Community Banking Group
shares in the offering or keeping them, it is likely that you will be
required to sell about 60% of the new shares that you receive in the
merger. You may also be required to keep some of the new shares. The rules
regarding the amount of shares you can sell or keep are described in
detail in the enclosed joint proxy statement/prospectus. If the shares
are sold at the minimum offering price of $15 per share and you sold all
the Pacific Community Banking Group shares you receive, you would receive
cash equal to $10 for each share of Valley Bank common stock you owned
prior to the transaction.
The warrants that you receive in the first step of the transaction will give you
the right to acquire one share of Pacific Community Banking Group for a period
of ten years at a price equal to 122% of the price at which Pacific Community
Banking Group shares sell in the public offering described above.
After the completion of these transactions, Valley Bank will be a wholly
owned subsidiary of Pacific Community Banking Group.
(CONTINUED)
------------------------
NEITHER THE SECURITIES EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE. THESE SECURITIES ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR
OTHER OBLIGATIONS OF ANY BANK OR NONBANK SUBSIDIARY OF ANY OF THE PARTIES, AND
THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
<PAGE>
If you do not sell all of the Pacific Community Banking Group shares in the
offering, you will become a shareholder of that organization. You will be able
to indicate a preference for selling or keeping shares, which Pacific Community
Banking Group will do its best to respect within the limitations described in
the enclosed joint proxy statement/prospectus.
To summarize, if the merger and offering proceed as contemplated, and you
sell in the offering all of the shares of Pacific Community Banking Group that
you receive, you will receive:
- For each share of Valley Bank stock you own, a minimum of $10 in cash; and
- For every three shares of Valley Bank you own, one warrant to purchase
Pacific Community Banking Group at any time over the next ten years at
122% of the offering price received at the conclusion of the transaction.
In addition, at the time of the acquisition you will receive a special
dividend of $.52 per share of common stock of Valley Bank, subject to regulatory
approval. Valley Bank will then become a wholly owned subsidiary of Pacific
Community Banking Group.
You will also be asked to consider and vote on the following agenda items:
2. The election of eight directors of Valley Bank.
3. Such other business as may properly come before the Valley Bank annual
meeting or any adjournments or postponements thereof.
If the requisite approvals of the shareholders of Valley Bank are received
and all other conditions to closing are satisfied or waived, the acquisition is
anticipated to close by June 28, 1999.
YOUR BOARD OF DIRECTORS HAS CAREFULLY REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF THE PROPOSED ACQUISITION BY PACIFIC COMMUNITY BANKING GROUP AND
HAS DETERMINED THAT THE ACQUISITION IS FAIR TO VALLEY BANK AND IN THE BEST
INTERESTS OF VALLEY BANK'S SHAREHOLDERS. ACCORDINGLY, VALLEY BANK'S BOARD OF
DIRECTORS HAS APPROVED THE ACQUISITION AND RECOMMENDS THAT YOU VOTE IN FAVOR OF
THE ACQUISITION.
BEFORE YOU MAKE A DECISION, YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING
ON PAGE 21.
Your vote is important regardless of how many shares you own. Please take a
few minutes now to review the joint proxy statement/prospectus and to sign and
date your proxy and return it in the envelope provided. You may attend the
meeting and vote in person even if you have previously returned your proxy.
Sincerely,
N. Douglas Mills
President and Chief Executive Officer
<PAGE>
LOGO
VALLEY BANK
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that an annual meeting of the shareholders of Valley
Bank will be held at 3:00 p.m., local time, on , 1999, at The Best
Western Image Suites Hotel, 24840 Elder Avenue, Moreno Valley, California.
The meeting is called for the purpose of considering and voting upon:
1. A proposal to approve the principal terms of the Amended First
Restatement of Agreement and Plan of Reorganization between Valley Bank
and Pacific Community Banking Group. Under the agreement, Pacific
Community Banking Group will acquire Valley Bank in a merger transaction
from its shareholders. In the merger, you will receive two-thirds of a
share of common stock and one-third of a warrant of Pacific Community
Banking Group for each share of Valley Bank common stock you own prior to
the merger. Immediately following the merger, 60% of the Pacific
Community Banking Group shares received by the Valley Bank shareholders
will be sold in an underwritten public offering at a price not less than
$15 per share. Although you will be able to indicate a preference for
selling your new Pacific Community Banking Group shares in the offering
or keeping them, it is likely that you will be required to sell 60% of
the new shares that you receive in the merger. The rules regarding the
choices you have for selling or keeping the shares you receive are
described in detail in the enclosed joint proxy statement/prospectus. If
the shares are sold at the minimum offering price of $15 per share and
you sell all the Pacific Community Banking Group shares you receive, you
will receive cash equal to $10 for each share of Valley Bank common stock
you owned prior to the transaction. You will also receive, for every
three shares of Valley Bank common stock, a warrant which will give you
the right to acquire one share of Pacific Community Banking Group for a
period of ten years at a price equal to 122% of the price at which
Pacific Community Banking Group shares are sold in the public offering
described above. After the completion of these transactions, Valley Bank
will be a wholly owned subsidiary of Pacific Community Banking Group
Assuming the requisite approvals of the shareholders of Valley Bank are
received and all other conditions to closing are satisfied or waived, the
acquisition is anticipated to close by , 1999.
2. The election of eight persons to the board of directors. The following
persons have been nominated:
<TABLE>
<S> <C>
Marion V. Ashley Jesse Washington
Willow I. Decker George E. Wilson
N. Douglas Mills Helga Wolf
Juan Renteria Eugene H. Wood
</TABLE>
3. Such other business as may properly come before Valley Bank annual
meeting or any adjournments or postponements thereof.
The attached joint proxy statement/prospectus describes in detail the
proposal to approve the principal terms of the agreement with Pacific Community
Banking Group.
<PAGE>
With regard to the election of directors, the bylaws of Valley Bank provide
for the nomination of directors in the following manner:
Any shareholder who intends to nominate or to cause to have nominated
any candidate for election to the board of directors (other than any
candidate proposed by the bank's present management) shall notify the bank.
The notification shall be made in writing and delivered or mailed to the
President of the bank not less than 14 days nor more than 50 days prior to
any meeting of stockholders called for the election of directors, provided
however, that if less than 24 days notice of the meeting is given to
shareholders, such nomination shall be delivered or mailed to the President
of the bank, not later than the close of the tenth day following the day on
which the notice of meeting was mailed. Such notification shall contain the
following information to the extent known to the notifying shareholders:
(a) the names and addresses of the proposed nominees;
(b) the principal occupation of each proposed nominee;
(c) the total number of shares that to the knowledge of the notifying
shareholders will be voted for each purposed nominee;
(d) the name and residence address of the notifying shareholder; and
(e) the number of shares owned by the notifying shareholder.
Any such nomination for the director not made in accordance therewith may be
disregarded by the chairman of the meeting and upon his instructions the
vote tellers may disregard all votes cast for each such nominee.
FINANCIAL DISCLOSURE
Valley Bank's 1998 audited financial statements accompany this notice of
annual meeting and joint proxy statement/prospectus. Please refer to the
Financial Statements of Valley Bank commencing on page F-34 in the attached
joint proxy statement/prospectus.
In addition, in accordance with 12 Code of Federal Regulations Part 350 of
the FDIC's regulations, Valley Bank has prepared an Annual Disclosure Statement
which is available to shareholders and other interested parties. Valley Bank's
Annual Disclosure Statement is available upon request to Ms. Dianna Williams,
Chief Financial Officer, at Valley Bank, P. O. Box 188, Moreno Valley,
California 92556-0188, telephone number (909) 242-1959.
The board of directors has fixed the close of business on ,
1999 as the record date for the determination of the shareholders entitled to
have notice of and to vote at Valley Bank annual meeting and any adjournments or
postponements thereof. Only holders of record of the common stock of Valley Bank
on the record date are entitled to vote at Valley Bank annual meeting.
Shareholders may exercise dissenters' rights as provided in the California
General Corporation Law. If they meet all the requirements of this law and
follow all of its required procedures, shareholders may receive cash in the
amount equal to the fair market value (as determined by Valley Bank or, if
required, by a court of law) of their shares of Valley Bank common stock as of
July 29, 1998, the day immediately before the announcement of the transaction,
excluding any appreciation caused by the acquisition, in lieu of receiving the
consideration provided in the agreement. For additional details about
dissenters' rights, please refer to "Dissenters' Rights" in the accompanying
joint proxy statement/prospectus.
<PAGE>
If you would like to attend the Valley Bank annual meeting and your shares
are held by a broker, bank or other nominee, you must bring to the meeting a
recent brokerage statement or a letter from the nominee confirming your
beneficial ownership of the shares. You must also bring a form of personal
identification. In order to vote your shares at the Valley Bank annual meeting,
you must obtain from the nominee a proxy issued in your name.
You can ensure that your shares are voted at the Valley Bank annual meeting
by signing and dating the enclosed proxy and returning it in the envelope
provided. Sending in a signed proxy will not affect your right to attend the
meeting and vote in person. You may revoke your proxy at any time before it is
voted by giving written notice to Dianna Williams, Secretary of Valley Bank at
P.O. Box 188, Moreno Valley, California 92556-0118, signing and returning a
later dated proxy or by voting in person at Valley Bank annual meeting.
WHETHER OR NOT YOU EXPECT TO ATTEND, WE URGE YOU TO SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
[ENCLOSED WITH THE ATTACHED JOINT PROXY STATEMENT/PROSPECTUS IS][BY A
SEPARATE MAILING YOU WILL RECEIVE SHORTLY] A SET OF SHAREHOLDER DOCUMENTS FOR
THE SURRENDER OF YOUR SHARES OF VALLEY BANK COMMON STOCK. PLEASE FOLLOW THE
INSTRUCTIONS TO SUBMIT YOUR SHARES AND, IF YOU CHOOSE, TO ELECT TO RECEIVE ALL
CASH, 60% CASH, OR ALL STOCK, TO THE EXTENT AVAILABLE. IF THE ACQUISITION IS NOT
APPROVED, YOUR SHARES OF VALLEY BANK COMMON STOCK WILL BE RETURNED TO YOU.
By order of the Board of Directors,
N. Douglas Mills
President and Chief Executive Officer
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
Pacific Community Banking Group provided all of the information about
Pacific Community Banking Group contained in this joint proxy
statement/prospectus or referred to in it. The Bank of Hemet provided all of the
information about The Bank of Hemet contained in this joint proxy
statement/prospectus or referred to in it. Valley Bank provided all of the
information about Valley Bank contained in this joint proxy statement/prospectus
or referred to in it.
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION IN THIS JOINT PROXY
STATEMENT/PROSPECTUS OR OTHER INFORMATION REFERRED TO IN THIS DOCUMENT. NONE OF
PACIFIC COMMUNITY BANKING GROUP, THE BANK OF HEMET AND VALLEY BANK HAS
AUTHORIZED ANYONE TO PROVIDE YOU WITH OTHER OR DIFFERENT INFORMATION. THIS JOINT
PROXY STATEMENT/PROSPECTUS IS DATED , 1999. YOU SHOULD NOT ASSUME
THAT THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS
JOINT PROXY STATEMENT/PROSPECTUS TO SHAREHOLDERS NOR THE ISSUANCE OF PACIFIC
COMMUNITY BANKING GROUP COMMON STOCK AND WARRANTS FOR PACIFIC COMMUNITY BANKING
GROUP COMMON STOCK IN THE ACQUISITION SHALL CREATE ANY IMPLICATION TO THE
CONTRARY.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Questions and Answers About the Acquisitions.......................................... 1
Questions and Answers for Shareholders of The Bank of Hemet........................... 3
Questions and Answers for Shareholders of Valley Bank................................. 6
Summary............................................................................... 9
Risk Factors.......................................................................... 21
Pacific Community Banking Group:
Unaudited Pro Forma Combined Financial Information.................................. 30
Selected Financial Data............................................................. 33
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 34
Business............................................................................ 35
The Bank of Hemet:
The Annual Meeting.................................................................. 37
The Bank of Hemet Acquisition....................................................... 39
The Bank of Hemet Agreement......................................................... 53
Selected Financial Data............................................................. 62
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 64
Business............................................................................ 80
Other Relevant Information for The Bank of Hemet Shareholders....................... 96
Future Shareholder Proposals........................................................ 103
Valley Bank:
The Annual Meeting.................................................................. 104
The Valley Bank Acquisition......................................................... 106
The Valley Bank Agreement........................................................... 119
Selected Financial Data............................................................. 126
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 128
Business............................................................................ 142
Other Relevant Information For Valley Bank Shareholders............................. 160
Future Shareholder Proposals........................................................ 174
Supervision and Regulation............................................................ 175
Management of Pacific Community Banking Group Following Reorganization................ 181
Pacific Community Banking Group--Executive Compensation............................... 185
Certain Transactions.................................................................. 188
Stock Ownership of Pacific Community Banking Group Following Reorganization........... 188
Capital Stock and Comparison of Shareholder Rights.................................... 190
Dissenters' Rights of Appraisal....................................................... 197
Experts............................................................................... 200
Legal Matters......................................................................... 200
Where You Can Find More Information................................................... 200
Financial Statements.................................................................. F-1
Appendix A--First Restatement of Agreement and Plan of Reorganization Dated January 5,
1999 Between The Bank of Hemet and Pacific Community Banking Group.................. A-1
Appendix B--First Restatement of Agreement and Plan of Reorganization Dated January 5,
1999 Between Valley Bank and Pacific Community Banking Group........................ B-1
Appendix C--The Bank of Hemet Fairness Opinion........................................ C-1
Appendix D--Valley Bank Fairness Opinion.............................................. D-1
Appendix E--Chapter 13 of California General Corporation Law.......................... E-1
</TABLE>
i
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QUESTIONS AND ANSWERS ABOUT THE ACQUISITIONS
Q: WHAT IS PACIFIC COMMUNITY BANKING GROUP?
A: Pacific Community Banking Group is a California corporation formed in
October, 1997 to become a bank holding company offering services primarily
in southern California. It intends initially to acquire and operate two
community banks in California's Riverside county, The Bank of Hemet and
Valley Bank.
Q: WHAT IS THE BANK OF HEMET ACQUISITION?
A: Pacific Community Banking Group has reached an agreement with the board of
directors of The Bank of Hemet. Under that agreement, if the shareholders of
The Bank of Hemet consent (and some other requirements are satisfied)
Pacific Community Banking Group will acquire all of the outstanding stock of
The Bank of Hemet in exchange for Pacific Community Banking Group's common
stock and warrants to purchase shares of Pacific Community Banking Group's
common stock. The Bank of Hemet will then be a wholly owned subsidiary of
Pacific Community Banking Group. Under the agreement, The Bank of Hemet
shareholders will be entitled to sell the shares of Pacific Community
Banking Group that they receive as part of the public offering, subject to
certain limitations. IF YOU ARE A SHAREHOLDER OF THE BANK OF HEMET, YOU WILL
LEARN MORE ABOUT THIS TRANSACTION BY READING "QUESTIONS AND ANSWERS FOR
SHAREHOLDERS OF THE BANK OF HEMET" BELOW AND READING THE REST OF THIS JOINT
PROXY STATEMENT/PROSPECTUS.
Q: WHAT IS THE VALLEY BANK ACQUISITION?
A: Pacific Community Banking Group has reached an agreement with the board of
directors of Valley Bank. Under that agreement, if the shareholders of
Valley Bank consent (and some other requirements are satisfied), Pacific
Community Banking Group will acquire all of the outstanding stock of Valley
Bank in exchange for Pacific Community Banking Group's common stock and
warrants to purchase shares of Pacific Community Banking Group's common
stock. Valley Bank will then be a wholly owned subsidiary of Pacific
Community Banking Group. Under the agreement, Valley Bank shareholders will
be entitled to sell the shares of Pacific Community Banking Group that they
receive as part of the public offering, subject to certain limitations. IF
YOU ARE A SHAREHOLDER OF VALLEY BANK, YOU WILL LEARN MORE ABOUT THIS
TRANSACTION BY READING "QUESTIONS AND ANSWERS FOR SHAREHOLDERS OF VALLEY
BANK" BELOW AND READING THE REST OF THIS JOINT PROXY STATEMENT/ PROSPECTUS.
Q: WHAT IS THE PUBLIC OFFERING?
A: To raise capital for its ongoing operations, and to afford the shareholders
of The Bank of Hemet and Valley Bank the ability to receive cash for a
portion of the shares that they receive in the acquisition, Pacific
Community Banking Group has arranged with Sutro & Co. Incorporated for a
public offering of its common stock to the public. All conditions to the
public offering must be satisfied before the acquisitions will take place.
<PAGE>
Q: WHAT SHAREHOLDER APPROVALS ARE REQUIRED FOR THE ACQUISITIONS TO CLOSE?
A: Holders of a majority of the shares of The Bank of Hemet must approve The
Bank of Hemet acquisition. Holders of two-thirds of the outstanding shares
of Valley Bank common stock must approve the Valley Bank acquisition. TO
LEARN MORE ABOUT THE TERMS OF THE TWO ACQUISITIONS, REFER TO PAGES 39 AND
106.
Q: WHERE CAN I FIND MORE DETAILED INFORMATION?
A: Details about The Bank of Hemet, including its business and financial
performance, the proposed acquisition of The Bank of Hemet, and other
matters to be considered at The Bank of Hemet's annual meeting begins on
page . Details about Valley Bank, including its business and financial
performance, the proposed acquisition of Valley Bank, and other matters to
be considered at Valley Bank's annual meeting begins on page .
2
<PAGE>
QUESTIONS AND ANSWERS FOR SHAREHOLDERS OF THE BANK OF HEMET
Q: WHY IS THE BANK OF HEMET PROPOSING THIS ACQUISITION? HOW WILL I BENEFIT?
A: Pacific Community Banking Group has offered to acquire The Bank of Hemet by
paying you and every other shareholder the following in exchange for one
share of The Bank of Hemet common stock:
- 3.4 shares of Pacific Community Banking Group common stock AND
- a warrant for one share of Pacific Community common stock at 122% of the
common stock's initial price to the public.
The stock that you receive will be eligible for immediate sale in the public
offering of Pacific Community Banking Group, subject to certain
restrictions. In the public offering, shares of Pacific Community Banking
Group will be sold for a minimum of $15.00 per share. This is equivalent to
a minimum of $51.00 for each share of The Bank of Hemet common stock that is
held before the acquisition. Your board of directors has concluded that the
offered price and terms are fair to shareholders of the Bank of Hemet. The
board believes that when Pacific Community Banking Group brings The Bank of
Hemet and Valley Bank under common control, the combination will enjoy
greater efficiencies and have a better opportunity to grow and increase its
profitability in the future. In addition, because Pacific Community Banking
Group intends to list its common stock on the Nasdaq National Market, your
board of directors believes it will be easier to buy and sell than The Bank
of Hemet common stock has been. Thus the acquisition gives you immediate
cash for a portion of your The Bank of Hemet common stock, a more liquid
security for the rest of your The Bank of Hemet common stock, and, through
the warrant, a security that may rise in value if the trading price of
Pacific Community Banking Group common stock rises. TO REVIEW THE BACKGROUND
AND REASONS FOR THE ACQUISITION IN GREATER DETAIL, REFER TO PAGES 39 AND
106.
Q: HOW MANY SHARES WILL I BE ABLE TO SELL IN THE PUBLIC OFFERING?
A: No more than 88% of the shares received by The Bank of Hemet shareholders
will be sold in the public offering. If the aggregate number of shares
designated for sale in the public offering is more than 88%, the shares
included in the public offering will be prorated among the shareholders. The
method of proration is more fully described under the heading "The Bank of
Hemet Agreement--Purchase Consideration" on page . It is a condition of
the acquisition that at least 75% of the shares received by The Bank of
Hemet shareholders are designated for sale in the public offering. To meet
the 75% minimum, each shareholder may be required to sell at least a portion
of the shares they receive.
Q: WHEN CAN I SELL SHARES THAT ARE NOT INCLUDED IN THE PUBLIC OFFERING?
A: Shares of Pacific Community Banking Group common stock that are not sold in
the public offering will be eligible for sale following the public offering.
Pacific Community Banking Group intends to list these shares on the Nasdaq
National Market. However, those shareholders of The Bank of Hemet who are
directors, officers or affiliates of The
3
<PAGE>
Bank of Hemet will be restricted in the amount and time of sale of their
shares. For a description of the restrictions that will apply to directors,
officers and affiliates, please refer to the section entitled "The Bank of
Hemet Acquisition--Resale Restrictions and Lockup Agreements" on page .
Q: HOW DO THE WARRANTS WORK?
A: Each warrant represents a right to purchase one share of Pacific Community
Banking Group common stock at an exercise price that is 122% of the initial
price of the common stock to the public. You may exercise the warrant at any
time up to ten years from the date of issue. TO LEARN MORE ABOUT THE
WARRANTS, REFER TO PAGE 60.
Q: WHEN IS THE ANNUAL MEETING?
A: The annual meeting will take place on , 1999. At the meeting,
you and the other shareholders of The Bank of Hemet will be asked to approve
the acquisition and the related acquisition agreement signed by The Bank of
Hemet and Pacific Community Banking Group. You will also be asked to vote on
amending Article III of the bylaws to increase the number of directors who
serve on the board from a range of five to nine to a range of seven to 13,
to accommodate the acquisition. You will also be asked to elect seven
persons to serve on the board of directors.
Q: HOW DO I CAST MY VOTE?
A: Please mail your signed proxy card in the enclosed return envelope as soon
as possible, so that your shares may be represented at the annual meeting.
In addition, you may attend the annual meeting in person, rather than
signing and mailing your proxy card.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Just send in a signed proxy card bearing a later date before the annual
meeting or attend the meeting in person and vote.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares on the issue of the acquisition only if
you provide instructions on how to vote. You should instruct your broker to
vote your shares, following the directions provided by your broker. Without
instructions, your shares will not be voted on the issue of the acquisition,
though they may be voted on [the bylaw amendment and] the election of
directors.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: Yes. [Enclosed you will find] [You will soon receive a separate mailing
containing] a set of shareholder documents. Use this document to designate
how many of your shares of Pacific Community Banking Group common stock The
Bank of Hemet common stock will convert in 3.4 shares of Pacific Community
Banking Group common stock, to include
4
<PAGE>
in the public offering, and to submit your stock certificates. You will
receive cash and Pacific Community Banking Group shares within after
the acquisition. Detailed instructions are also enclosed with the
shareholder documents. Certificates for shares of Pacific Community Banking
Group common stock that are not sold in the offering will be returned to
you. If the acquisition is not completed, we will send The Bank of Hemet
stock certificates back to you.
Q: WHAT IF I DO NOT SEND BACK MY SHAREHOLDER DOCUMENTS AND SHARE CERTIFICATE?
A: You must send back the shareholder documents and The Bank of Hemet share
certificates (or arrange for them to be sent by your broker) in order to
have your shares included in the public offering by Sutro & Co.
Incorporated. If you do not send them back, none of the Pacific Community
Banking Group shares that you receive will be sold for cash.
Q: WILL I OWE ANY FEDERAL INCOME TAX AS A RESULT OF THE ACQUISITION?
A: You will be subject to federal income tax on the cash that you receive when
your shares of Pacific Community Banking Group common stock are sold in the
public offering, less your tax basis in The Bank of Hemet common stock you
surrender in the acquisition for those shares (usually the amount you paid
for those shares). You will not be subject to federal income tax on the
shares of Pacific Community Banking Group common stock that you retain, or
on the warrants, until you sell them. TO LEARN MORE ABOUT TAX CONSEQUENCES
OF THE ACQUISITION PLEASE REFER TO "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES" ON PAGE 49 AND CONSULT YOUR OWN TAX ADVISER AND FINANCIAL
PLANNER.
Q: HOW DO THE DIRECTORS PLAN TO VOTE?
A: All of your directors have committed that they will vote their shares in
favor of the acquisition. The directors collectively have the right to vote
449,546 shares, or 53.2% of the outstanding common stock.
Q: WHAT WILL I GET IF I DISSENT?
A: If you vote against the acquisition, or if you do not vote, and the
acquisition is approved anyway, you will receive the same consideration as
all other shareholders--the combination of cash and warrants described
above. As an alternative, if you follow the steps to perfect your
dissenters' rights, you will have the right to receive a cash amount
determined on a statutory basis. The amount of cash, though, may be less
than the minimum $51.00 in Pacific Community Banking Group common stock and
the value of the warrant that is offered in the acquisition. For details on
how to perfect dissenters' rights, and how the amount of cash is determined,
please refer to "Dissenters' Rights of Appraisal," on page 197.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: If you have any questions about the acquisition and the other matters to be
considered at the meeting, please call Leslie Besic, Assistant Corporate
Secretary of The Bank of Hemet, at (909) 784-5771 extension 127.
5
<PAGE>
QUESTIONS AND ANSWERS FOR SHAREHOLDERS OF VALLEY BANK
Q: WHY IS VALLEY BANK PROPOSING THIS ACQUISITION? HOW WILL I BENEFIT?
A: Pacific Community Banking Group has offered to acquire Valley Bank by paying
you and every other shareholder the following in exchange for your Valley
Bank common stock:
- FOR EACH SHARE of Valley Bank common stock, two-thirds of a share of
Pacific Community Banking Group common stock, PLUS
- FOR EVERY THREE SHARES of Valley Bank common stock you hold, a warrant for
one share of Pacific Community Banking Group common stock, exercisable at
122% of the common stock's initial price to the public.
The stock that you receive will be eligible for immediate sale in the public
offering of Pacific Community Banking Group, subject to certain
restrictions. In the public offering, shares of Pacific Community Banking
Group will be sold for a minimum of $15.00 per share. This is equivalent to
a minimum of $10.00 in value for each share of Valley Bank common stock that
is held before the acquisition (not counting the value of the warrants).
Your board of directors has concluded that the offered price is fair to
Valley Bank shareholders. The board believes that when Pacific Community
Banking Group brings Valley Bank and The Bank of Hemet under common control,
the combination will enjoy greater efficiencies and have a better
opportunity to grow and increase its profitability in the future. In
addition, because Pacific Community Banking Group intends to list its common
stock on the Nasdaq National Market, your board of directors believes it
will be easier to buy and sell than Valley Bank common stock has been. Thus
the acquisition gives you immediate cash for most of your Valley Bank common
stock, a more liquid security for the rest of your Valley Bank common stock,
and, through the warrant, a security that may rise in value if the trading
price of Pacific Community Banking Group common stock rises. TO REVIEW THE
BACKGROUND AND REASONS FOR THE ACQUISITION IN GREATER DETAIL, REFER TO PAGE
106.
Q: HOW MANY SHARES WILL I BE ABLE TO SELL IN THE PUBLIC OFFERING?
A: 60% of the shares received by Valley Bank shareholders will be sold in the
public offering. You may designate all of your shares for sale, 60% of your
shares for sale or none of your shares for sale. To the extent possible,
these preferences will be honored. However, if the number of shares
designated for sale in the public offering in the aggregate is more than
60%, the shares included in the public offering will be prorated among the
shareholders who have designated shares for sale. The method of proration is
more fully described under the heading "The Valley Bank Agreement--Purchase
Consideration" on page . It is a condition of the acquisition that 60% of
the shares received by Valley Bank shareholders are designated for sale in
the public offering. To meet the 60% minimum, each shareholder may be
required to sell at least a portion of the shares they receive.
6
<PAGE>
Q: WHEN CAN I SELL SHARES THAT ARE NOT INCLUDED IN THE PUBLIC OFFERING?
A: Shares of Pacific Community Banking Group common stock that are not sold in
the public offering will be eligible for sale following the public offering.
Pacific Community Banking Group intends to list the shares on the Nasdaq
National Market. However, those shareholders of Valley Bank who are
directors, officers or affiliates of Valley Bank will be restricted in the
amount and time of sale of their shares. For a description of the
restrictions that will apply to directors, officers and affiliates, please
refer to the section entitled "The Valley Bank Acquisition--Resale
Restrictions and Lockup Agreements" on page 118.
Q: HOW DO THE WARRANTS WORK?
A: Each warrant represents a right to purchase one share of Pacific Community
Banking Group common stock at an exercise price that is 122% of the initial
price of the stock to the public. You may exercise the warrant at any time
up to ten years from the date of issue. TO LEARN MORE ABOUT THE WARRANTS,
REFER TO PAGE 120.
Q: WHEN IS THE ANNUAL SHAREHOLDERS MEETING?
A: Valley Bank's annual shareholders' meeting will take place on ,
1999. At the annual meeting, you and the other Valley Bank shareholders will
be asked to approve the acquisition and the related acquisition agreement
signed by Valley Bank and Pacific Community Banking Group. You will also be
asked to elect eight persons to serve on the board of directors.
Q: HOW DO I CAST MY VOTE?
A: Please mail your signed proxy card in the enclosed return envelope as soon
as possible, so that your shares may be represented at the annual meeting.
In addition, you may attend the annual meeting in person, rather than
signing and mailing your proxy card.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Just send in a signed proxy card bearing a later date before the annual
meeting or attend the meeting in person and vote.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares on the issue of the acquisition only if
you provide instructions on how to vote. You should instruct your broker to
vote your shares, following the directions provided by your broker. Without
instructions, your shares will not be voted on the issue of the acquisition,
though they may be voted on the election of directors.
7
<PAGE>
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: Yes. [Enclosed you will find] [You will soon receive a separate mailing
containing] a set of shareholder documents. Use this document submit your
stock certificates and, if you wish, to make an election for all cash, 60%
cash or all stock. Detailed instructions are also enclosed with the
shareholder documents. Certificates for shares of Pacific Community Banking
Group common stock that are not sold in the offering will be returned to
you. If the acquisition is not completed, we will send your Valley Bank
stock certificates back to you.
Q: WHAT IF I DO NOT SEND BACK MY SHAREHOLDER DOCUMENTS AND SHARE CERTIFICATE?
A: You must send back the shareholder documents and Valley Bank share
certificates (or arrange for them to be sent by your broker) in order to
have your shares included in the public offering by Sutro & Co.
Incorporated. If you do net send them back, none of the Pacific Community
Banking Group shares that you receive will be sold for cash.
Q: WILL I OWE ANY FEDERAL INCOME TAX AS A RESULT OF THE ACQUISITION?
A: You will be subject to federal income tax on the cash that you receive when
your shares of Pacific Community Banking Group common stock are sold in the
public offering, less your tax basis in your Valley Bank common stock you
surrender in the acquisition for those shares (usually the amount you paid
for those shares). You will not be subject to federal income tax on the
shares of Pacific Community Banking Group common stock that you retain, or
on the warrants, until you sell them. TO LEARN MORE ABOUT TAX CONSEQUENCES
OF THE ACQUISITION PLEASE REFER TO "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES" ON PAGE 49 AND CONSULT YOUR OWN TAX ADVISER AND FINANCIAL
PLANNER.
Q: WHAT WILL I GET IF I DISSENT?
A: If you vote against the acquisition, or if you do not vote, and the
acquisition is approved anyway, you will receive the same consideration as
all other shareholders--the combination of stock and warrants described
above. As an alternative, if you follow the steps to perfect your
dissenters' rights, you will have the right to receive a cash amount
determined on a statutory basis. The amount of cash, though, would probably
be less than the minimum of $10.00 in Pacific Community Banking Group stock
that is offered in the acquisition. For details on how to perfect
dissenters' rights, and how the amount of cash is determined, please refer
to "Dissenters' Rights of Appraisal," on page 197.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: If you have any questions about the acquisition, please call N. Douglas
Mills, President and CEO of Valley Bank, at (909) 242-1959.
8
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS JOINT PROXY
STATEMENT/PROSPECTUS AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU. TO UNDERSTAND THE BANK OF HEMET ACQUISITION OR THE VALLEY BANK
ACQUISITION FULLY, AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
ACQUISITIONS, YOU SHOULD CAREFULLY READ THIS ENTIRE DOCUMENT AND THE DOCUMENTS
TO WHICH WE HAVE REFERRED YOU. REFER TO THE SECTION ENTITLED "WHERE YOU CAN FIND
MORE INFORMATION" ON PAGE FOR ADDITIONAL SOURCES OF INFORMATION. WE HAVE
INCLUDED PAGE REFERENCES IN PARENTHESES TO DIRECT YOU TO A MORE COMPLETE
DESCRIPTION OF THE TOPICS PRESENTED IN THIS SUMMARY.
THE COMPANIES
PACIFIC COMMUNITY BANKING GROUP
23332 Mill Creek Drive, Suite 230
Laguna Hills, California 92653
(949) 460-4540
A group of individual investors led by E. Lynn Caswell, an experienced
California community banker, formed Pacific Community Banking Group in 1997. The
goal of Pacific Community Banking Group is to become the preeminent financial
services company for independent banks in high growth areas of Southern
California, commencing with Riverside and San Bernardino counties. In pursuit of
that goal, it plans to use the net proceeds of the initial public offering of
its stock, together with shares of its common stock and warrants, to acquire two
community banks headquartered in Riverside county, California--The Bank of Hemet
and Valley Bank. Pacific Community Banking Group expects the offering and the
acquisitions to happen at the same time. The service areas of these two banks
overlap. After it acquires these banks, Pacific Community Banking Group plans to
combine their operations under The Bank of Hemet charter and increase market
share in the areas they now serve. Pacific Community Banking Group then plans to
use the Valley Bank charter to launch a new community bank in Orange county.
The Bank of Hemet and Valley Bank primarily serve Riverside and San
Bernardino counties, a region commonly known as the "Inland Empire." The Inland
Empire will be the fastest growing U.S. primary metropolitan statistical area
during the years 1993 to 2005, according to a 1996 report of the U.S. Department
of Commerce. The department projects that population will grow 32.4% during that
period.
Pacific Community Banking Group currently has no operations and only a
minimal amount of start-up capital.
BUSINESS STRATEGY
The business strategy of Pacific Community Banking Group is to:
- develop a banking presence primarily in high-growth areas of Southern
California through acquisition of strongly performing, well regarded
community banks;
- operate most acquired banks as separate subsidiaries to retain their
boards of directors and the goodwill of the communities they serve;
- consolidate operations of acquired banks which serve overlapping market
areas;
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<PAGE>
- form community banks in areas of Southern California that may have lost
many of their independent community banks through consolidation, merger,
acquisition and regulatory action;
- cross-sell services of our constituent banks;
- realize efficiencies by combining functions like financial administration,
data processing, insurance, bonding, employee benefits and contracts for
services; and
- take advantage of the combined size and diversity of our constituent banks
to access capital at lower costs.
We believe that banking customers value doing business with locally managed
institutions that can provide a full service commercial banking relationship,
understand customers' financial needs and have the flexibility to customize
products and services to meet those needs. We also believe that banks are better
able to build successful customer relationships by affiliating with a holding
company that provides cost effective administrative support services while
promoting bank autonomy and individualized service.
THE BANK OF HEMET
3715 Sunnyside Drive
Riverside, California 92506
(909) 784-5771
The Bank of Hemet is a California community bank headquartered in Hemet,
California, with assets of $253 million as of December 31, 1998. It is licensed
by the California Department of Financial Institutions. Its deposits are insured
up to the applicable legal limits by the Federal Deposit Insurance Corporation
("FDIC"). As with many state chartered banks of its size in California, it is
not a member of the Federal Reserve System. In addition to its headquarters, The
Bank of Hemet maintains five branches in Riverside county. The Bank of Hemet
emphasizes community-based commercial banking. It serves small-to-medium size
businesses, professionals, retired individuals and residents in the Hemet area,
as well as businesses and real estate owners and developers primarily throughout
Riverside, San Bernardino, Orange, Los Angeles and San Diego counties. The Bank
of Hemet also makes loans outside of its primary service area if they are
attractive to management. Most of its loans are secured by commercial real
estate. The Bank of Hemet's wholly owned subsidiary, BankLink Corporation,
provides data processing services for The Bank of Hemet and eight other banks
and item processing services for The Bank of Hemet and three other banks.
VALLEY BANK
24010 Sunnymead Boulevard
Moreno Valley, California 92553
(909) 242-1959
Valley Bank is a California community bank headquartered in Moreno Valley,
California, with assets of $86 million as of December 31, 1998. In addition to
its headquarters, Valley Bank maintains six branches in Riverside and San
Bernardino counties and two loan production offices, one in Moreno Valley and
the other in Portland, Oregon. It is licensed by the California Department of
Financial Institutions. Its deposits are insured up to the applicable legal
limits by the FDIC. As with many state chartered banks of its size in California
it is not a member of the Federal Reserve System. Moreno Valley, located in
Riverside County, is part of the Inland Empire. Valley Bank emphasizes
community-based banking, with emphasis on
10
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both business and individual customers. It serves small-to-medium size
businesses, professionals, retired individuals and residents in the Inland
Empire area, as well as businesses and real estate owners/developers throughout
the Inland Empire, and makes loans guaranteed by the United States Small
Business Administration (SBA loans) and by the U.S. Department of Agriculture,
Business and Industry Program (B & I loans) in the Inland Empire and in the
vicinity of its Portland, Oregon loan office. Over half of the loans in its
portfolio are secured by real estate.
PROFILES OF THE BANK OF HEMET AND VALLEY BANK
<TABLE>
<CAPTION>
THE BANK OF HEMET VALLEY BANK
------------------------------------ ------------------------------------
<S> <C> <C>
Total assets at December 31, 1998... $253 million $85 million
Headquarters........................ Hemet, California Moreno Valley, California
Offices............................. Five branches in Riverside county Six branches in Riverside and San
Bernardino counties and two loan
production offices, one in Moreno
Valley and one in Portland, Oregon
Principal service area.............. Riverside, San Bernardino, Orange, Riverside and San Bernardino
Los Angeles and San Diego counties counties, Portland, Oregon and
southern Washington state
Loan portfolio...................... High percentage of commercial real High percentage of real estate
estate loans loans, with a significant portion
in Small Business Administration
loans
Active subsidiaries................. Data processing subsidiary none
Charter............................. California California
Principal federal bank regulator.... FDIC FDIC
</TABLE>
INFORMATION FOR SHAREHOLDERS OF THE BANK OF HEMET
REASONS FOR THE BANK OF HEMET ACQUISITION
The Bank of Hemet believes that it must grow in order to compete with
larger, more efficient financial institutions within its marketplace. The need
has become more acute with recent consolidations in the banking industry.
Pacific Community Banking Group plans to develop and increase The Bank of
Hemet's business under the same corporate umbrella as other community banks. The
board of directors of The Bank of Hemet has received an opinion from its
financial advisors, Baxter Fentriss & Company, that the price offered by Pacific
Community Banking Group is fair from a financial point of view to the
shareholders of The Bank of Hemet. The board of directors believes that at this
time The Bank of Hemet acquisition represents a better opportunity for The Bank
of Hemet's shareholders than pursuing a strategy of increasing its business on
its own. To review The Bank of Hemet's reasons for the acquisition in further
detail, refer to the section entitled "The Bank of Hemet Acquisition," beginning
on page 39.
11
<PAGE>
RECOMMENDATION TO SHAREHOLDERS
THE BOARD OF DIRECTORS OF THE BANK OF HEMET HAS UNANIMOUSLY APPROVED THE
BANK OF HEMET ACQUISITION AND RECOMMENDS YOU VOTE YOUR SHARES "FOR" THE BANK OF
HEMET ACQUISITION. AT THE ANNUAL MEETING, HOLDERS OF THE BANK OF HEMET COMMON
STOCK WILL ALSO BE ASKED TO APPROVE A PROPOSAL TO AMEND THE BYLAWS TO INCREASE
THE NUMBER OF THE BANK OF HEMET'S DIRECTORS FROM A RANGE OF FIVE TO SEVEN TO A
RANGE OF SEVEN TO 13. THE HOLDERS OF THE BANK OF HEMET COMMON STOCK WILL ALSO BE
ASKED TO VOTE TO ELECT SEVEN PERSONS TO SERVE ON THE BOARD OF DIRECTORS. THE
DIRECTORS OF THE BANK OF HEMET HAVE INDICATED THAT THEY INTEND TO VOTE THE BANK
OF HEMET COMMON STOCK OWNED BY THEM "FOR" APPROVAL OF THE ACQUISITION AND THE
AGREEMENT, "FOR" APPROVAL OF THE PROPOSAL AMENDMENT TO THE BYLAWS, AND
"AUTHORITY GIVEN" FOR THE ELECTION OF DIRECTORS.
RECORD DATE; VOTING POWER
You are entitled to vote at the annual meeting if you owned shares as of the
close of business on , 1999, the record date for voting at the
annual meeting.
On the record date, there were 844,278 shares of The Bank of Hemet common
stock entitled to vote at the annual meeting. Each holder of The Bank of Hemet
common stock will have one vote at the annual meeting for each share of The Bank
of Hemet common stock they own on the record date.
SHAREHOLDER VOTE REQUIRED TO APPROVE THE ACQUISITION
The favorable vote of the holders of a majority of the outstanding shares of
The Bank of Hemet common stock is required to approve the acquisition and the
related acquisition agreement. Your failure to vote will have the effect of a
vote against the acquisition.
THE BANK OF HEMET AGREEMENT
You will find a complete copy of the First Restatement of Agreement and Plan
of Reorganization, as amended, attached at the back of this joint proxy
statement/prospectus as Appendix A. The agreement states the terms of the
acquisition of The Bank of Hemet. We encourage you to read the agreement.
WHAT BANK OF HEMET SHAREHOLDERS WILL RECEIVE IN THE ACQUISITION
If The Bank of Hemet acquisition is approved, holders of The Bank of Hemet
common stock will receive, for each share of The Bank of Hemet common stock, 3.4
shares of common stock of Pacific Community Banking Group and a warrant for the
purchase of one share of Pacific Community Banking Group common stock at 122% of
the price to the public in Pacific Community Banking Group's initial public
offering. Between 75% and 88% of the shares of stock received by all holders of
The Bank of Hemet common stock will be immediately sold in a public offering, as
described more fully on page .
DIVIDENDS
Pacific Community Banking Group has consented to the payment by The Bank of
Hemet of a regular quarterly dividend of $.60 per share, to holders of record on
May 10, 1999, on or about May 18, 1999. After the acquisition, Pacific Community
Banking Group does not intend to pay dividends on its common stock for the
foreseeable future.
12
<PAGE>
INTERESTS OF OFFICERS AND DIRECTORS IN THE ACQUISITION
When considering the recommendation of the board of directors of The Bank of
Hemet regarding the acquisition, please be aware that directors and certain
officers have interests in the acquisition that are different from, or in
addition to, yours. These individuals include James B. Jaqua, President, Chief
Executive Officer and director of The Bank of Hemet, who is proposed to become a
director of Pacific Community Banking Group, and Harold R. Williams Jr., Chief
Operating and Financial Officer of The Bank of Hemet, who is proposed to become
an officer and director of Pacific Community Banking Group after the
acquisition.
These interests include severance agreements, salary continuation
agreements, noncompetition and consulting agreements. The board of directors
knew about these interests and considered them in approving The Bank of Hemet
agreement. Refer to page for more information concerning these employment and
severance agreements.
PRECONDITIONS TO THE BANK OF HEMET ACQUISITION
Pacific Community Banking Group and The Bank of Hemet are not obligated to
close The Bank of Hemet acquisition until all required approvals have been
received from regulatory authorities and a majority of shareholders of The Bank
of Hemet have consented to the transaction, with no more than 10% of the
shareholders voting against The Bank of Hemet acquisition or asserting
dissenters' rights. Also, Pacific Community Banking Group is not obligated to
consummate the transaction unless all conditions to the initial public offering
of its common stock are satisfied.
TERMINATION AND TERMINATION FEES
The Bank of Hemet and Pacific Community Banking Group can terminate the
acquisition agreement by mutual consent at any time. Either party may terminate
the agreement if the other party breaches the agreement and does not cure the
breach within a period of thirty days. In that case, the party that breached
must pay the other party's costs and expenses in the terminated transaction,
plus an additional 50% of those expenses, up to a maximum of $500,000. The Bank
of Hemet must pay Pacific Community Banking Group all of its expenses in the
transaction plus 50% if Pacific Community Banking Group terminates for any of
the following reasons: The Bank of Hemet approves another sale or executed
another letter of intent, or a third party acquires 25% or more of the
outstanding shares of The Bank of Hemet, or The Bank of Hemet engages in such an
alternative transaction. If Pacific Community Banking Group fails to satisfy the
conditions for its initial public offering, either party may terminate The Bank
of Hemet agreement without an obligation to pay costs of the other party.
WARRANT AGREEMENT
The Bank of Hemet has signed a warrant agreement under which it granted to
Pacific Community Banking Group an option to purchase up to 210,800 shares of
The Bank of Hemet common stock, which would represent 19.9 percent of the shares
of The Bank of Hemet common stock outstanding on the date of exercise. The
warrant is exercisable for $46.50 per share, subject to adjustment in certain
circumstances. Pacific Community Banking Group can exercise the warrant if the
acquisition does not occur because an alternative transaction occurs.
13
<PAGE>
The purpose of the warrant agreement is to increase the likelihood that the
acquisition will be completed and to protect Pacific Community Banking Group if
the acquisition is not completed. The right to purchase common stock of The Bank
of Hemet under the warrant agreement is subject to compliance with applicable
law, including receipt of any necessary approvals under the Bank Holding Act.
The warrant agreement could have the effect of discouraging companies other than
Pacific Community Banking Group from acquiring The Bank of Hemet.
FEDERAL INCOME TAX CONSEQUENCES
Pacific Community Banking Group has received an opinion from Arthur Andersen
LLP, Pacific Community Banking Group's accountants, generally to the effect that
The Bank of Hemet acquisition will qualify as a tax-free reorganization under
the Internal Revenue Code of 1986. Provided the acquisition so qualifies,
neither The Bank of Hemet nor Pacific Community Banking Group will recognize any
gain or loss and you will not recognize any gain or loss upon your exchange of
The Bank of Hemet common stock for Pacific Community Banking Group common stock
and warrants in the acquisition, except for cash received by you in lieu of a
fractional share interest of Pacific Community Banking Group common stock.
However, you will be subject to federal income tax on any gain from your sale of
shares of Pacific Community Banking Group common stock or warrants, including a
sale of Pacific Community Banking Group common stock in the public offering.
To learn more about the federal income tax consequences of The Bank of Hemet
acquisition, please refer to "Material Federal Income Tax Consequences" on page
49 and consult your own tax adviser and financial planner
FAIRNESS OPINION
In deciding to approve the acquisition, the board of directors of The Bank
of Hemet considered an opinion from its financial advisor, Baxter Fentriss &
Company. Baxter Fentriss & Company delivered an opinion that the consideration
to be received by The Bank of Hemet shareholders in the acquisition is fair to
the shareholders from a financial point of view. The opinion is attached as
Appendix C to this joint proxy statement/prospectus. We encourage you to read
the opinion.
DISSENTERS' RIGHTS OF APPRAISAL.
Under California law, if The Bank of Hemet acquisition is completed, a
shareholder who does not vote in favor of the transaction may have dissenters'
rights. A shareholder who follows all required procedures set forth in Sections
1300 through 1312 of the California General Corporation Law will be entitled to
receive cash in the amount of the "fair market value" of The Bank of Hemet
common stock on the day before The Bank of Hemet acquisition was publicly
announced. Refer to page for summary of the California dissenters' rights
statute, and Appendix E to this joint proxy statement/prospectus for the full
text of the statute.
INFORMATION FOR VALLEY BANK SHAREHOLDERS
REASONS FOR THE VALLEY BANK ACQUISITION
The board of directors of Valley Bank believes that new regulatory
requirements and competition from larger banks will make the future more
difficult for small, unaffiliated
14
<PAGE>
community banks like Valley Bank. The board has long held the belief that
maximizing shareholder value may ultimately entail a transaction such as the
proposed Valley Bank acquisition. In the last few years, Valley Bank has
received a number of acquisition proposals. The board of directors has made a
careful evaluation of all the alternatives presented, and has concluded that
being acquired by Pacific Community Banking Group under the terms of the Valley
Bank agreement is in the best interests of Valley Bank and its shareholders.
Valley Bank has received an opinion from its financial advisors, Baxter Fentriss
& Company, stating that the price offered by Pacific Community Banking Group is
fair, from a financial point of view, to shareholders of Valley Bank. To review
Valley Bank's reasons for the acquisition in further detail, refer to page 106.
RECOMMENDATION TO SHAREHOLDERS
At the annual meeting, holders of Valley Bank common stock will also be
asked to vote on a proposal to approve the Valley Bank acquisition and elect
eight persons to serve on the board of directors. THE BOARD OF DIRECTORS OF
VALLEY BANK HAS APPROVED THE VALLEY BANK ACQUISITION AND RECOMMENDS YOU VOTE
YOUR SHARES "FOR" THE VALLEY BANK ACQUISITION AND "AUTHORITY GIVEN" FOR THE
ELECTION OF DIRECTORS.
RECORD DATE; VOTING POWER
You are entitled to vote at the annual meeting if you owned shares as of the
close of business on , 1999, the record date for voting at the
annual meeting.
On the record date, there were 1,171,906 shares of Valley Bank common stock
entitled to vote at the annual meeting. Each holder of Valley Bank common stock
will have one vote at the annual meeting for each share of Valley Bank common
stock they own on the record date.
SHAREHOLDER VOTE REQUIRED TO APPROVE THE ACQUISITION
The favorable vote of the holders of at least two-thirds of the outstanding
shares of Valley Bank common stock is required to approve the acquisition and
the related agreement. Your failure to vote will have the effect of a vote
against the acquisition.
THE VALLEY BANK AGREEMENT
You will find a complete copy of the First Restatement of Agreement and Plan
of Reorganization, as amended, attached at the back of this joint proxy
statement/prospectus as Appendix B. The agreement states the terms of the
acquisition of Valley Bank. We encourage you to read the agreement.
WHAT VALLEY BANK SHAREHOLDERS WILL RECEIVE IN THE ACQUISITION
If the Valley Bank acquisition is approved, holders of Valley Bank common
stock will receive the following:
- for each share of Valley Bank common stock surrendered, two-thirds of a
share of Pacific Community Banking Group common stock, PLUS
- for every three shares of Valley Bank common stock, a ten-year warrant
exercisable for one share of Pacific Community Banking Group common stock.
The warrants are exercisable at a price of 122% of the initial public
offering price.
15
<PAGE>
60% of the shares of stock received by all holders of Valley Bank common
stock will be immediately sold in a public offering, as described more fully on
page 114.
DIVIDENDS
Pacific Community Banking Group has agreed that, at the time of the Valley
Bank acquisition, Valley Bank may pay a special dividend of $.52 per share to
holders of record on November 24, 1998, subject to regulatory approval. Pacific
Community Banking Group does not intend to pay dividends on its common stock for
the foreseeable future.
INTERESTS OF OFFICERS AND DIRECTORS IN THE ACQUISITION
When considering the recommendation of the board of directors of Valley Bank
regarding the acquisition, please be aware that certain directors and officers
have interests in the acquisition that are different from, or in addition to,
yours. These individuals include, Mr. Marion V. Ashley, Chairman of Valley Bank
and Mr. N. Douglas Mills, currently President and Chief Executive Officer of
Valley Bank, who are both proposed directors of Pacific Community Banking Group
after the Valley Bank acquisition.
Five officers of Valley Bank have employment agreements, which Pacific
Community Banking Group has agreed to honor. In addition, Mr. Mills and Valley
Bank have agreed to amend his employment contract reducing his cash payment upon
the consummation of the Valley Bank acquisition. Mr. Mills and Valley Bank have
also agreed to amend Mr. Mills' salary continuation agreement so that his
retirement benefits will not commence until termination of his employment.
The board of directors knew about these interests and considered them in
approving the acquisition agreement. Refer to page 170 for more information
concerning these employment agreements.
PRECONDITIONS TO VALLEY BANK ACQUISITION
Pacific Community Banking Group and Valley Bank are not obligated to close
the Valley Bank acquisition until all required approvals have been received from
regulatory authorities and two-thirds of the shareholders of Valley Bank have
consented to the transaction, with no more than 10% of the shareholders voting
against Valley Bank acquisition or asserting dissenters' rights. Also, Pacific
Community Banking Group is not obligated to consummate the transaction unless
all conditions to the initial public offering of its common stock are satisfied.
TERMINATION AND TERMINATION FEES
Valley Bank and Pacific Community Banking Group can terminate the Valley
Bank agreement by mutual consent at any time. Either party may terminate the
Valley Bank agreement if the other party breaches the agreement and does not
cure the breach within a period of thirty days. In that case, the party that
breached must pay the other party's costs and expenses in the terminated
transaction, plus an additional 50% of those expenses, up to a maximum of
$500,000. If Valley Bank fails to report a material adverse change in its
condition or a change in its beneficial ownership, Pacific Community Banking
Group may terminate the Valley Bank agreement. If that happens Valley Bank must
pay Pacific Community Banking Group's costs and expenses in the terminated
transaction, plus an additional 50% of those expenses. Valley Bank must pay
Pacific Community Banking Group $1,750,000 if Pacific Community Banking Group
terminates for any of the following reasons: Valley Bank approves another sale
or
16
<PAGE>
executes another letter of intent, or a third party acquires 25% or more of the
outstanding shares of Valley Bank, or Valley Bank engages in such an alternative
transaction. If the conditions to completing Pacific Community Banking Group's
initial public offering are not satisfied, either party may terminate the Valley
Bank agreement without an obligation to pay costs of the other party.
FEDERAL INCOME TAX CONSEQUENCES
Pacific Community Banking Group has received an opinion from Arthur Andersen
LLP, Pacific Community Banking Group's accountants, generally to the effect that
the Valley Bank acquisition will qualify as a tax-free reorganization under the
Internal Revenue Code of 1986. Provided the acquisition so qualifies, neither
Valley Bank nor Pacific Community Banking Group will recognize any gain or loss
and you will not recognize any gain or loss upon your exchange of Valley Bank
common stock for Pacific Community Banking Group common stock and warrants in
the acquisition, except for cash received in lieu of a fractional share interest
of Pacific Community Banking Group common stock in the acquisition and for the
special cash dividend. However, you will be subject to federal income tax on any
gain from your sale of shares of Pacific Community Banking Group common stock or
warrants, including a sale of Pacific Community Banking Group common stock in
the public offering.
To learn more about the federal income tax consequences of the Valley Bank
acquisition, please refer to "Material Federal Income Tax Consequences" on page
115 and consult your own tax adviser and financial planner.
FAIRNESS OPINION
In deciding to approve the acquisition, the board of directors of Valley
Bank considered an opinion from its financial advisor, Baxter Fentriss &
Company. Baxter Fentriss & Company delivered an opinion that the consideration
to be received by Valley Bank's shareholders in the acquisition is fair to the
shareholders from a financial point of view. The opinion is attached as Appendix
D to this joint proxy statement/prospectus. We encourage you to read the
opinion.
DISSENTERS' RIGHTS OF APPRAISAL.
Under California law, if the Valley Bank acquisition is completed, a
shareholder who does not vote in favor of the transaction may have dissenters'
rights. A shareholder who follows all required procedures set forth in Sections
1300 through 1312 of the California General Corporation Law will be entitled to
receive cash in the amount of the "fair market value" of the Valley Bank common
stock on the day before The Valley Bank acquisition was publicly announced.
Refer to page 197 for a summary of the dissenters' rights statute, and Appendix
E to this joint proxy statement/prospectus for the full text of the statute.
17
<PAGE>
SUMMARY FINANCIAL INFORMATION
Pacific Community Banking Group was formed in October 1997, for the sole
purpose of acquiring community banking organizations. The following tables set
forth summary financial data of Pacific Community Banking Group, The Bank of
Hemet and Valley Bank. It includes pro forma financial data for the combined
companies. The historical information presented below is derived from the
financial statements of the respective companies, which have been audited by
their independent public accountants, as indicated in their reports thereon
included in this joint proxy statement/prospectus. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition"
for each of the companies and their audited financial statements appearing in
this joint proxy statement/prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE
PERIOD
AT OR FOR THE FROM INCEPTION PRO FORMA COMBINED
YEAR (OCTOBER 17, 1997) AT OR FOR THE YEAR
ENDED TO ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ------------------- ----------------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PACIFIC COMMUNITY BANKING GROUP
RESULTS OF OPERATIONS:
Interest income.................................... $ -- $ -- $ 25,597
Interest expense................................... -- -- 10,623
------- ------ --------
Net interest income................................ -- -- 14,974
------- ------ --------
Provision for loan losses.......................... -- -- 200
Noninterest expense, net........................... 513 82 10,652
Net income (loss).................................. (513) (82) 2,034
Earnings (loss) per share.......................... $ (51.34) $ (8.17) $ 0.51
BALANCE SHEET:
Cash and cash equivalents.......................... $ 396 $ 170 $ 37,048
Investment securities.............................. -- -- 40,467
Loans and leases, net.............................. -- -- 247,601
Other assets....................................... 205 27 23,473
------- ------ --------
Total assets....................................... $ 601 $ 197 $ 348,589
------- ------ --------
------- ------ --------
Deposits........................................... $ -- $ -- $ 306,124
Accrued interest and other liabilities............. 94 139 5,883
Stockholders' equity............................... 507 58 36,582
------- ------ --------
Total liabilities and stockholders' equity......... $ 601 $ 197 $ 348,589
------- ------ --------
------- ------ --------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER
31,
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
THE BANK OF HEMET
RESULTS OF OPERATIONS:
Interest income.............................................................. $ 19,416 $ 18,991 $ 19,127
Interest expense............................................................. 9,185 8,946 8,823
---------- ---------- ----------
Net interest income.......................................................... 10,231 10,045 10,304
---------- ---------- ----------
Provision for loan losses.................................................... -- 250 988
Noninterest expense, net..................................................... 5,373 4,996 6,934
Net income................................................................... $ 2,823 $ 2,802 $ 1,373
BALANCE SHEET:
Cash and cash equivalents.................................................... $ 16,996 $ 19,521 $ 15,982
Investments securities....................................................... 24,882 24,833 24,779
Loan and leases, net......................................................... 205,570 190,171 185,200
Other assets................................................................. 5,429 6,798 8,296
---------- ---------- ----------
Total assets................................................................. $ 252,877 $ 241,323 $ 234,257
---------- ---------- ----------
---------- ---------- ----------
Deposits..................................................................... $ 230,853 $ 219,211 $ 212,268
Accrued interest and other liabilities....................................... 1,468 1,884 1,887
Stockholders' equity......................................................... 21,024 20,228 20,102
---------- ---------- ----------
Total liabilities and stockholders' equity................................... $ 252,877 $ 241,323 $ 234,257
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER
31,
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
VALLEY BANK
RESULTS OF OPERATIONS:
Interest income.............................................................. $ 6,181 $ 5,978 $ 5,338
Interest expense............................................................. 1,438 1,282 1,119
---------- ---------- ----------
Net interest income.......................................................... 4,743 4,696 4,219
---------- ---------- ----------
Provision for loan losses.................................................... 200 980 360
Noninterest expense, net..................................................... 3,170 2,918 3,076
Net income................................................................... $ 789 $ 556 $ 454
BALANCE SHEET:
Cash and cash equivalents.................................................... $ 20,265 $ 10,287 $ 10,860
Investment securities........................................................ 15,585 13,856 12,928
Loans and leases, net........................................................ 42,031 44,202 42,534
Other assets................................................................. 6,828 6,221 5,038
---------- ---------- ----------
Total assets................................................................. $ 84,709 $ 74,566 $ 71,360
---------- ---------- ----------
---------- ---------- ----------
Deposits..................................................................... $ 75,739 $ 66,239 $ 63,286
Accrued interest and other liabilities....................................... 716 1,035 1,172
Stockholders' equity......................................................... 8,254 7,292 6,902
---------- ---------- ----------
Total liabilities and stockholders' equity................................... $ 84,709 $ 74,566 $ 71,360
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
19
<PAGE>
SELECTED UNAUDITED COMPARATIVE PER SHARE DATA
We have summarized below the per share data of The Bank of Hemet on a
historical basis, pro forma combined and pro forma equivalent basis, and the per
share data of Valley Bank on a historical basis and pro forma combined basis.
The information in the table is only a summary and you should read it together
with the financial statements in this joint proxy statement/prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEARS
ENDED DECEMBER 31, 1998
------------------------
THE BANK OF
HEMET VALLEY BANK
----------- -----------
<S> <C> <C>
Diluted earnings per share
Historical......................................................... $ 3.23 $ .65
Equivalent pro forma(1)............................................ .95 .97
Cash dividends per share
Historical......................................................... $ 2.40 --
Equivalent pro forma(1)............................................ .71 --
Book value per share
Historical(2)...................................................... $ 24.90 $ 7.04
Equivalent pro forma(1)............................................ 7.32 10.56
</TABLE>
- ------------------------
(1) Equivalent pro forma amounts are based on the historical information, per
share of Pacific Community Banking Group that will be held after the
acquisitions. Accordingly, amounts for The Bank of Hemet are adjusted to
reflect the ratio of 3.4 shares of Pacific Community Banking Group common
stock to be received for each share of The Bank of Hemet common stock, and
the amounts for Valley Bank are adjusted to reflect the ratio of .6666
shares of Pacific Banking Group common stock to be received for each share
of Valley Bank common stock.
(2) The historical book value per share for Valley Bank is calculated on the
basis of shares outstanding including unearned shares held in an employee
stock ownership plan.
20
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION WE PROVIDE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE
DECIDING WHETHER TO VOTE FOR THE ACQUISITIONS. THESE ARE NOT THE ONLY RISKS WE
FACE. SOME RISKS ARE NOT YET KNOWN TO US AND THERE ARE OTHERS WE DO NOT
CURRENTLY BELIEVE ARE MATERIAL BUT COULD LATER TURN OUT TO BE SO. ALL OF THESE
COULD IMPAIR OUR BUSINESS, OPERATING RESULTS OR FINANCIAL CONDITION. THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE BECAUSE OF GENERAL MARKET CONDITIONS OR
IF ANY OR ALL OF THESE RISKS CAME TO PASS, AND YOU COULD LOSE ALL OR PART OF
YOUR INVESTMENT. IN EVALUATING THE RISKS OF INVESTING IN US, YOU SHOULD ALSO
EVALUATE THE OTHER INFORMATION SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS.
WE WILL NEED TO INTEGRATE AND OPERATE THE BANKS THAT WE ACQUIRE. If we
cannot do so successfully, Pacific Community Banking Group will not succeed.
Pacific Community Banking Group has no operating history. We formed in October
1997 to act as a bank holding company. We have agreed to acquire The Bank of
Hemet and Valley Bank. Each of these banks has an operating history but not
under our management.
We may not be able to accomplish our business plan. Our business plan
requires that:
- We integrate The Bank of Hemet and Valley Bank effectively. We expect to
increase the banks' profits by reducing costs, expanding services and
integrating administrative functions. We may not be able to realize the
operating efficiencies we expect. In addition, it may take longer than we
expect to realize these efficiencies. If the integration of the banks does
not proceed as anticipated, it could hurt our business.
- We manage The Bank of Hemet and Valley Bank well. After Pacific Community
Banking Group acquires the banks, the banks will hold substantially all of
our assets and conduct substantially all of our business. If we cannot
operate the banks successfully, it will hurt our business.
Our business plan also requires that when we acquire additional banks, we
integrate and manage their businesses effectively, too. We plan to acquire other
banks and branches, if we can find appropriate acquisitions. We may not find
appropriate banks or branches to acquire. If we do make acquisitions, in each
future acquisition, we will face risks. If we cannot overcome these risks or any
other problems encountered in connection with acquisitions, it could hurt our
business. The risks of acquisitions including the acquisitions of The Bank of
Hemet and Valley Bank, include the following:
- Management will have to divert their time from regular duties to
integrating the new businesses;
- The acquired banks may have unexpected problems with loans or legal
liabilities;
- We may lose the customers and employees of the acquired banks;
- New management may not work smoothly with our established employees and
customers;
- The assimilation of new operations, sites and personnel could divert
resources from regular banking operations;
21
<PAGE>
- The new banks or branches may not generate enough revenue to offset the
acquisition costs; and
- We may have trouble maintaining uniform standards, controls, procedures
and policies.
WE MAY NOT BE ABLE TO FUND OUR PLANNED GROWTH. If adequate funds are not
available on acceptable terms, we may not be able to fund our expansion, develop
or enhance our products or services or respond to competitive pressures. Based
on our current operating plan, we expect the net proceeds of the public offering
of common stock of Pacific Community Banking Group, together with our other
available funds, to be sufficient to acquire The Bank of Hemet and Valley Bank,
provide working capital and fund our capital expenditures in the near future. We
intend to grow by acquiring more bank assets. If the shareholders of the banks
we seek to acquire will not accept our stock in exchange for their shares, we
will need to raise additional capital to acquire more bank assets for cash. We
may also need to raise additional capital if we seek to develop new or enhanced
services, or to respond to competitive pressures. Market conditions may
sometimes make it impossible to raise capital by selling our securities to the
public or to private investors. We may be unable to obtain financing from other
sources on acceptable terms.
FUTURE SALES OF SECURITIES COULD DIMINISH THE INTERESTS OF OUR
SHAREHOLDERS. If we raise additional funds by issuing equity or convertible
debt securities, the percentage ownership of our shareholders will be diluted.
Also, any new securities could have rights, preferences and privileges senior to
those of our common stock. We currently do not have any commitments for
additional financing. We cannot be certain that additional financing will be
available in the future to the extent required or that, if available, it will be
made on acceptable terms.
WE DEPEND ON KEY EMPLOYEES. If we lost, or had an interruption in, their
services, it could hurt our business, particularly if they went to work for
competitors. Our future success depends on the continued contributions of our
existing senior management personnel, particularly on the efforts of E. Lynn
Caswell, the Chief Executive Officer and the Chairman of the Board of Pacific
Community Banking Group, who will be Chairman of the Board of both The Bank of
Hemet and Valley Bank. We will also depend on the continuing services of the
management and staff of The Bank of Hemet and Valley Bank. Mr. Caswell has an
employment agreement with us, which includes provisions that would limit his
ability to compete against us at another company.
WE FACE STRONG COMPETITION. We will conduct our banking operations
primarily in Riverside county and plan to expand elsewhere in and near Southern
California if economic conditions permit. Increased competition in our markets
may result in reduced loans and deposits. Ultimately, we may not be able to
compete successfully against current and future competitors. Many competitors
offer the banking services that we offer in our service area. These competitors
include national banks, regional banks and other community banks. We also face
competition from many other types of financial institutions, including savings
and loans, finance companies, brokerage firms, insurance companies, credit
unions, mortgage banks and other financial intermediaries.
Many of our most significant competitors have greater resources and capital
than we will have. Their size gives them economies of scale and permits them to
invest heavily in technology. We believe our non-bank competitors also generally
have fewer regulatory constraints.
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<PAGE>
OUR SUCCESS DEPENDS ON ORIGINATING LOANS. Our competitors may offer better
terms or better service, or respond to changing capital and other regulatory
requirements better than we do. Some of our competitors make loans on terms that
we consider risky and therefore will not match. Any of these competitive
developments could hurt our business. Success in competing for loans depends on
such factors as:
- the quality of service to borrowers, especially the length of time it
takes to process loans;
- economic factors like interest rates;
- the terms of the loans we offer, such as rate adjustment provisions,
adjustment caps, loan maturities, loan-to-value ratios and loan fees; and
- the size of the loans we are able to offer.
ECONOMIC CONDITIONS IN SOUTHERN CALIFORNIA COULD HURT OUR BUSINESS. We
focus our business in Southern California, primarily in Riverside county. In the
early 1990's, the California economy experienced an economic recession that
increased the level of delinquencies and losses for The Bank of Hemet, Valley
Bank and many of the state's other financial institutions. Another recession
could occur. An economic slow-down in Southern California could have the
following consequences, any of which could hurt our business:
- Loan delinquencies may increase;
- Problem assets and foreclosures may increase;
- Claims and lawsuits may increase;
- Demand for the banks' products and services may decline;
- Collateral for loans made by the banks, especially real estate, may
decline in value, in turn reducing customers' borrowing power, reducing
the value of assets associated with problem loans and reducing collateral
coverage of the banks' existing loans.
A DOWNTURN IN THE REAL ESTATE MARKET COULD HURT OUR BUSINESS. The banks'
ability to recover on defaulted loans by selling the collateral would then be
diminished, and we would be more likely to suffer losses on defaulted loans. As
of December 31, 1998, approximately 95 percent of the value of The Bank of
Hemet's loan portfolio and 70 percent of the value of Valley Bank's loan
portfolio consisted of loans secured by various types of real estate. Most of
The Bank of Hemet's and Valley Bank's real property collateral is located in
Southern California. If there is a significant decline in real estate values,
especially in California, the collateral for our loans will provide less
security.
ENVIRONMENTAL LAWS COULD FORCE THE BANKS TO PAY FOR ENVIRONMENTAL
PROBLEMS. The cost of cleaning up or paying damages and penalties associated
with environmental problems would hurt our business. When a borrower defaults on
a loan secured by real property, the banks often purchase the property in
foreclosure or accept a deed to the property surrendered by the borrower. The
banks may also take over the management of commercial properties whose owners
have defaulted on loans. The banks also own and lease premises where their
branches and other facilities are located. While the banks have lending,
foreclosure and facilities guidelines intended to exclude properties with an
unreasonable risk of contamination, hazardous substances may exist on some of
the properties that the banks own, manage or
23
<PAGE>
occupy. The banks face the risk that environmental laws could force them to
clean the properties at their expense. It may cost much more to clean a property
than the property is worth. The banks could also be liable for pollution
generated by a borrower's operations if a bank took a role in managing those
operations after a default. The banks may also find it difficult or impossible
to sell contaminated properties.
WE ARE EXPOSED TO THE RISKS OF NATURAL DISASTERS. A major earthquake could
result in material loss to the banks. Our operations are concentrated in
Southern California, especially Riverside county. A significant percentage of
our loans will be secured by real estate. California is an earthquake-prone
region. The San Andreas Fault runs directly through our service area. Both of
the banks have a disaster-recovery plan with offsite data processing resources
located in Scottsdale, Arizona. However, the banks' properties and most of the
real and personal property securing loans in the banks' portfolios are in
Southern California. Many of our borrowers could suffer uninsured property
damage, experience interruption of their businesses or lose their jobs after an
earthquake. Those borrowers might not be able to repay their loans, and the
collateral for loans could decline significantly in value. Unlike a bank with
operations that are more geographically diversified, we are vulnerable to
greater losses if an earthquake, fire, flood or other natural catastrophe occurs
in Southern California.
LOAN LOSS RESERVES MAY NOT COVER ACTUAL LOAN LOSSES. If the actual loan
losses exceed the amount reserved, it will hurt our business. The banks try to
limit the risk that borrowers will fail to repay loans by carefully underwriting
the loans. Losses nevertheless occur. The banks create reserves for estimated
loan losses in their accounting records. They base these allowances on estimates
of the following:
- industry standards;
- historical experience with our loans;
- evaluation of current and predicted economic conditions;
- regular reviews of the quality mix and size of the overall loan portfolio;
- regular reviews of delinquencies; and
- the quality of the collateral underlying their loans.
OUR NON-PERFORMING ASSETS MAY INCREASE. If the level of non-performing
assets rises in the future, it could hurt our business. Non-performing assets
are mainly loans on which the borrowers are not making their required payments.
Non-performing assets also include loans that have been restructured to permit
the borrower to have smaller payments and real estate that has been acquired
through foreclosure of unpaid loans. To the extent that assets are
non-performing, the banks have less cash available for lending and other
activities.
GOVERNMENT GUARANTEED LOAN PROGRAMS MAY CHANGE, BE CURTAILED TEMPORARILY OR
BE DISCONTINUED. If Valley Bank cannot continue making and selling government
guaranteed loans, it could hurt our business. A major part of Valley Bank's
business is the origination and sale of government guaranteed loans. From time
to time, the government agencies that guarantee these loans reach their internal
limits, and cease to guarantee loans for a stated time period. In addition,
these agencies may change their rules for loans. Also, Congress may adopt
legislation that would have the effect of discontinuing or changing the
programs. Nongovernmental programs could replace government programs for some
borrowers, but the terms might not
24
<PAGE>
be equally acceptable. Therefore, if these changes occur, the volume of loans to
small business, industrial and agricultural borrowers of the types that now
qualify for government guaranteed loans could decline. Also, the profitability
of these loans could decline.
CHANGES IN INTEREST RATES AFFECT OUR PROFITABILITY. Changes in prevailing
rates may hurt our business. We derive our income mainly from the difference or
"spread" between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings and other
interest-bearing liabilities. In general, the wider the spread, the more we
earn. When market rates of interest change, the values of our interest-earning
assets and interest-bearing liabilities will have disproportionate changes in
value that can dramatically reduce our spread. In addition, interest rates
affect how much money we can lend. For example, when interest rates rise, loan
originations tend to decrease.
GOVERNMENTAL REGULATION MAY IMPAIR OUR OPERATIONS OR RESTRICT OUR
GROWTH. If we fail to comply with the federal and state bank regulations, the
regulators may limit our activities or growth, fine us or ultimately put us out
of business. Banking laws and regulations change from time to time. Bank
regulation can hinder our ability to compete with financial services companies
that are not regulated or are less regulated. In addition, bank regulators
impose material compliance costs on us.
Federal and state bank regulatory agencies regulate many aspects of our
operations. These areas include:
- the capital we must maintain;
- the kinds of activities we can do;
- the kinds and amounts of investments we can make;
- the locations of our offices;
- how much interest we can pay on demand deposits;
- insurance of our deposits and the premiums we must pay for this insurance;
and
- how much cash we must set aside as reserves for deposits.
IF VALLEY BANK FAILS TO MEET ITS COMMITMENTS TO BANK REGULATORS, IT COULD
HURT OUR BUSINESS. In October, 1998, the board of directors of Valley Bank
adopted resolutions making a commitment to bank regulators that Valley Bank
would accomplish certain goals. If the regulators are not satisfied with Valley
Bank's progress, they could impose more severe restrictions, fine the bank or
take other regulatory action, which could hurt our business. The commitments
include:
- to develop a formal written testing plan for Year 2000 issues;
- to maintain capital equal to 8% of Valley Bank's adjusted total assets;
- to improve asset quality;
- to improve earnings;
- to adopt procedures to ensure compliance with applicable law and
regulations; and
- to obtain prior FDIC approval for new directors and senior officers.
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<PAGE>
Valley Bank's management believes that Valley Bank is in compliance in these
matters. However, Valley Bank may not continue to meet these commitments.
ACQUISITIONS FOR CASH COULD REDUCE OUR EARNINGS AND REDUCE THE PRICE OF OUR
STOCK. When we seek to acquire a bank in the future, the bank's shareholders may
not accept our stock in exchange for their shares. In that case, we could raise
capital and try to acquire the bank for cash. If we are successful in acquiring
a bank for either cash or stock, for several years a portion of the purchase
price, referred to as goodwill, may be reported on our financial statements each
year as an expense. That would reduce the size of our reported earnings, which,
in turn, could reduce the price of our common stock.
THE BANKS HAVE YEAR 2000 RISKS. If the banks, their vendors, customers or
other third parties suffer a computer failure, it could hurt our business. After
the acquisition transaction is completed, we will rely primarily on the data
processing systems, hardware and software of The Bank of Hemet and Valley Bank
to conduct our operations. Each of the banks has taken steps to make its own
information and environmental systems Year 2000 compliant by the third quarter
of 1999. Each has also developed contingency plans to reduce the impact of any
failures which may occur. However, each also relies heavily on the information
systems of vendors, customers and other third parties. These third parties may
not become Year 2000 compliant soon enough. Moreover, the contingency and
remediation efforts of the two banks may not succeed. For more information on
the specific steps that the banks are taking, please refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations of Bank
of Hemet--Year 2000 Compliance" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Valley Bank--Year 2000
Compliance" below.
BANKLINK CORPORATION'S SYSTEMS MAY BECOME OBSOLETE. BankLink Corporation is
The Bank of Hemet's subsidiary that does data processing and item processing for
several banks, including The Bank of Hemet. If its systems do not remain
competitive, it may lose customers. However, the cost of upgrading systems to
remain competitive may be a financial burden. The ability of BankLink
Corporation to remain as the service provider for these banks depends on its
continuing to offer competitive services.
WE HAVE TO DEFEND A LAWSUIT. The Bank of Hemet is currently the defendant
in a class action lawsuit. If this lawsuit is lost or settled, to the extent
that insurance does not cover the cost, it will hurt our business. After Pacific
Community Banking Group acquires The Bank of Hemet, it will be at risk for the
future results in this lawsuit. The lawsuit relates to The Bank of Hemet's 1992
acquisition of Inland Savings and Loan Association. These class action
plaintiffs allege that the bank improperly adjusted the value of The Bank of
Hemet preferred stock that was issued to the plaintiffs when The Bank of Hemet
acquired Inland Savings and Loan Association. On January 14, 1999, the court
certified the case as a class action. The complaint alleges breach of contract
and breach of fiduciary duty by the directors of The Bank of Hemet, and seeks
compensatory damages in excess of $2 million, together with punitive damages.
The Bank of Hemet does not believe that the plaintiffs' claims have any merit.
It is vigorously defending against these claims and has filed a motion for
summary judgment on the breach of fiduciary duty claim. The Bank of Hemet
further believes that a substantial portion of the costs of any judgment
relating to damages other than punitive damages will be
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<PAGE>
paid by its insurance company. The Bank of Hemet has not established a reserve
in its consolidated financial statements for any possible loss caused by this
lawsuit.
AN ACTIVE TRADING MARKET FOR OUR STOCK MAY NOT DEVELOP. Any reduction in
the number of firms making a trading market in our stock may impair your ability
to sell your shares of common stock. If that happens after the offering, you may
encounter delay or have to accept a reduced price when you sell our securities.
Our common stock will be listed after the initial public offering. Sutro & Co.
Incorporated has indicated that it intends to act as a market maker of our
common stock as long as the volume of trading and other market-making
considerations justify it. We cannot be sure how active the trading market for
our common stock will be after the initial public offering.
THE PRICE OF OUR COMMON STOCK MAY CHANGE WIDELY. The initial public
offering price of Pacific Community Banking Group's common stock results from
negotiations between us and the underwriters. Given the lack of any trading
history of our common stock and our inability to predict where our common stock
will trade in the future, we cannot be sure that the initial public offering
price of our common stock will approximate the trading price of our common stock
after the offering. The price of our common stock may fluctuate widely,
depending on many factors. Some of these factors have little to do with our
operating results or our intrinsic worth. For example, the market value of our
common stock may be affected by the trading volume of the shares, announcements
of expanded services by us or our competitors, general banks in the banking
industry, general price and volume fluctuations in the stock market,
acquisitions of related companies, variations in quarterly operating results,
and the dilutive effects of future issuances of common or convertible preferred
stock. Also, if the trading market for our common stock remains limited, that
may exaggerate changes in market value, leading to more price volatility than
would occur in a more active trading market.
OUR ABILITY TO PAY DIVIDENDS IS LIMITED. We do not intend to pay dividends
on Pacific Community Banking Group's common stock for the foreseeable future.
Instead, we intend to reinvest our earnings in our business. In addition, to pay
dividends to our shareholders, Pacific Community Banking Group would need to
obtain funds from our bank subsidiaries. Their ability, in turn, to pay
dividends to us is limited by California law and federal banking law. In
particular, neither bank may pay a dividend that exceeds either of the
following:
- the bank's retained earnings; or
- the bank's net income for its last three fiscal years, minus the amount of
any prior dividend during those three years.
With the approval of the regulators, a bank may pay dividends above those
amounts, but not more than the greater of the bank's retained earnings, its net
income for its last fiscal year, or its net income for the current fiscal year.
Even if one of the banks were able to meet the dividend test described above, it
might not be able to pay dividends if the result would cause its capital to fall
below federal capital standards that apply to banks.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK
PRICE. Sales of substantial amounts of Pacific Community Banking Group's common
stock in the public market after the completion of the initial public offering
could hurt the market price of our common stock. Some shares of our common stock
are subject to a contractual lock-up agreement. Under this agreement,
shareholders will be restricted from selling their shares for either
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<PAGE>
90 or 180 days after the initial public offering. Still, sales of substantial
amounts of common stock after the offering could cause the price of Pacific
Community Banking Group's common stock to decline. That could reduce our ability
to raise capital by issuing additional common stock.
At the completion of the initial public offering and the bank acquisitions,
various shares of common stock will be subject to possible sale and issuance by
Pacific Community Banking Group. The sale of those shares could dilute the
already issued common stock. For example, after the closing of the offering and
the bank acquisitions:
- In connection with the acquisitions of The Bank of Hemet and Valley Bank,
the shareholders of those banks will receive warrants to purchase our
common stock, and shares of our common stock will be issued whenever those
warrants are exercised.
- Mr. Caswell's employment agreement provides that at the close of the
acquisitions and public offering he will be granted options to purchase up
to 5% of our common stock or 250,000 shares, whichever is greater.
- We intend to grant stock options to employees, consultants and directors
of Pacific Community Banking Group, The Bank of Hemet and Valley Bank.
Additional shares of common stock will be issued when these people
exercise their options.
- We intend to pursue acquisitions of other financial institutions from time
to time in exchange for the issuance of additional shares of our common
stock or other securities convertible into or exercisable for our common
stock.
- We will be authorized under our articles of incorporation to issue
additional shares of common stock, and preferred stock that may be
convertible into common stock, without further shareholder approval.
BANK REGULATORY LAWS COULD DISCOURAGE CHANGES IN OUR OWNERSHIP. These
regulations would delay and possibly discourage a potential acquiror who would
have been willing to pay a premium price to amass a large block of our common
stock. That in turn could decrease the value of our common stock. Before anyone
can buy enough voting stock to exercise control over a bank holding company like
us, bank regulators must approve. A shareholder must apply for regulatory
approval to own 10 percent or more of our common stock, unless the shareholder
can show that he or she will not actually exert control over us. In no case can
a shareholder own more than 25 percent of our stock without applying for
regulatory approval.
PROVISIONS IN OUR CHARTER DOCUMENTS AND AGREEMENTS WE HAVE MADE WILL DELAY
OR PREVENT CHANGES IN CONTROL OF OUR CORPORATION OR OUR MANAGEMENT. These
provisions make it more difficult for another company to acquire us, which could
reduce the market price of our common stock. These provisions include the
following:
- A provision requiring a two-thirds vote when shareholders approve certain
business combinations, approve certain amendments to the charter and
bylaws and take action by written consent;
- A requirement that shareholders give advance notice of matters to be
raised at a meeting of shareholders; and
- Staggered terms of office for members of the board of directors.
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Contractual arrangements that impede changes in control include severance
agreements for our executive officers and commitments to issue options.
THE WARRANTS WILL NOT BE TRADED ON A MARKET. If an active market does not
develop, you may not be able to sell your warrants, or to receive a price for
them that you find acceptable. While we intend to list the shares of Pacific
Community Banking Group common stock for trading on the Nasdaq National Market,
the warrants will not be traded there. Sutro & Co. Incorporated plans to make a
market in the warrants. But no assurance can be given that an active market will
develop.
THE WARRANTS MAY NOT HAVE A SIGNIFICANT VALUE. Holders of the warrants have
a right to purchase Pacific Community Banking Group common stock during the next
ten years by paying an exercise price that is 122% of the price of the common
stock to the public in the initial offering. Therefore, the warrants will have
value only to the extent that you or other investors think that the price of
Pacific Community Banking Group's common stock will, at some time in the next
ten years, rise and remain at least 22% above its price at the time of the
acquisition. Investment markets tend to accord value to warrants and similar
securities based on a combination of the amount by which the exercise price is
above or below the current market price and the length of time remaining in the
term. Therefore, the value of the warrants can be expected to vary in the future
as the price of Pacific Community Banking Group's common stock changes, and as
the remaining term of the warrants gets shorter.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this joint proxy statement/prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by the forward-looking statements. These factors include, among other things,
those listed under "Risk Factors" and elsewhere in this joint proxy
statement/prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Neither we, nor anyone else, assume
responsibility for the accuracy and completeness of such statements. We are
under no duty to update any of the forward-looking statements after the date of
this joint proxy statement/prospectus.
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined statement of operations reflects
the business combination of The Bank of Hemet, Valley Bank, and Pacific
Community Banking Group as if it had occurred on January 1, 1998. The following
unaudited pro forma combined balance sheet reflects the business combination as
if it had occurred as of December 31, 1998. Under generally accepted accounting
principles, the business combination is treated as an acquisition of Pacific
Community Banking Group and Valley Bank by The Bank of Hemet using the purchase
method of accounting. The pro forma financial information gives effect to the
business combination consistent with such principles.
The historical financial information of Pacific Community Banking Group, The
Bank of Hemet, and Valley Bank for the year ended December 31, 1998 has been
derived from their respective financial statements included elsewhere in this
joint proxy statement/prospectus. The pro forma financial information should be
read in conjunction with the accompanying notes thereto and with the financial
statements of the respective companies. The pro forma combined financial
information does not purport to be indicative of operating results which would
have been achieved had the acquisitions occurred on the dates indicated and
should not be construed as representative of future operating results. In the
opinion of Pacific Community Banking Group's management, all adjustments have
been made to reflect the effects of the acquisitions.
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<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL--YEAR ENDED
DECEMBER 31, 1998
----------------------------------------- PRO FORMA
PACIFIC COMBINED--
COMMUNITY THE BANK OF PRO FORMA YEAR ENDED
BANKING GROUP HEMET VALLEY BANK ADJUSTMENTS DECEMBER 31, 1998
--------------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Interest income.............................. $ -- $ 19,416 $ 6,181 $ -- $ 25,597
Interest expense............................. -- 9,185 1,438 -- 10,623
----- ----------- ----------- ----------- -----------------
Net interest income........................ 10,231 4,743 14,974
Provision for loan losses.................... -- -- 200 -- 200
----- ----------- ----------- ----------- -----------------
Net interest income after provision........ -- 10,231 4,543 14,774
Noninterest income........................... -- 1,363 2,915 -- 4,278
Noninterest expense
Salaries and employee benefits............. -- 3,735 3,272 682(1) 7,689
Premises and equipment..................... -- 1,066 921 -- 1,987
Other real estate owned, net............... -- (101) 41 -- (60)
Other expenses............................. 513 2,036 1,851 914(2) 5,314
----- ----------- ----------- ----------- -----------------
Total noninterest expense................ 513 6,736 6,085 1,596 14,930
----- ----------- ----------- ----------- -----------------
Income before income taxes............... (513) 4,858 1,373 (1,596) 4,122
Provision for income taxes................... -- 2,035 584 (531)(3) 2,088
----- ----------- ----------- ----------- -----------------
Net income (loss)........................ $ (513) $ 2,823 $ 789 $ (1,065) $ 2,034
----- ----------- ----------- ----------- -----------------
----- ----------- ----------- ----------- -----------------
Pro forma net income per share............... $ 0.51(4)
-----------------
-----------------
Pro forma shares outstanding................. 3,957,912(4)
-----------------
-----------------
</TABLE>
- ------------------------
(1) Reflects a provision for compensation due to certain former officers of The
Bank of Hemet, which vests in full as of the closing of the business
combination.
(2) Reflects amortization of goodwill and other intangible assets resulting from
the acquisitions as if they had been completed as of the first day of the
period presented. Goodwill is amortized using a 25-year life and other
intangible assets, which consist primarily of a core deposits intangible,
are amortized based on the expected runoff of the related deposits. The
estimated runoff of such deposits will result in amortization of the balance
of the core deposits intangible asset over a period of ten years on an
accelerated basis.
(3) Reflects the income tax effect of the pro forma adjustments at an effective
rate of 40% for the amortization of the core deposits intangible and the
additional compensation due to the former officers.
(4) Pro forma net income per share is calculated on a fully diluted basis. Pro
forma weighted average shares outstanding is calculated giving effect to the
conversion of The Bank of Hemet common stock to Pacific Community Banking
Group common stock at a conversion ratio of 3.4 to one, the shares of
Pacific Community Banking Group common stock issuable pursuant to the
acquisition of Valley Bank, and the conversion of all shares of Pacific
Community Banking Group preferred stock into shares of common stock.
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<PAGE>
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL--DECEMBER 31, 1998
------------------------------------
PACIFIC PRO FORMA
COMMUNITY COMBINED--
BANKING THE BANK VALLEY PRO FORMA DECEMBER 31,
GROUP OF HEMET BANK ADJUSTMENTS 1998
----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash and due from banks....................... $ 396 $ 6,496 $ 6,485 $ (609)(1) $ 12,768
Federal funds sold............................ -- 10,500 13,780 -- 24,280
----------- ---------- ----------- ----------- ------------
Total cash and cash equivalents............. 396 16,996 20,265 (609) 37,048
----------- ---------- ----------- ----------- ------------
Investment securities......................... 24,882 15,585 -- 40,467
Loans and leases.............................. -- 207,802 43,149 -- 250,951
Allowance for loan losses..................... -- (2,232) (1,118) -- (3,350)
----------- ---------- ----------- ----------- ------------
Loans and leases, net....................... -- 205,570 42,031 -- 247,601
----------- ---------- ----------- ----------- ------------
Premises and equipment, net................... 6 1,541 2,158 3,705
Accrued interest receivable................... 1,140 611 1,751
Other real estate owned....................... 77 1,749 1,826
Other assets.................................. 199 2,671 2,310 (360)(2) 4,820
Goodwill and other intangible assets.......... -- -- -- 11,371(3) 11,371
----------- ---------- ----------- ----------- ------------
Total assets.................................. $ 601 $ 252,877 $ 84,709 $ 10,402 $ 348,589
----------- ---------- ----------- ----------- ------------
----------- ---------- ----------- ----------- ------------
Deposits
Noninterest bearing demand deposits......... $ -- $ 33,975 $ 20,061 $ -- $ 54,036
Savings and interest-bearing demand
deposits.................................. -- 71,389 39,228 -- 110,617
Time deposits............................... -- 125,021 16,450 -- 141,471
Accrued interest and liabilities.............. 94 1,468 716 3,605 2,4 5,883
Stockholders' equity
Common stock, no par value.................. 3 3,666 5,570 11,923(5) 21,162
Preferred stock............................. 1,099 -- -- -- 1,099
Retained earnings........................... (595) 17,358 2,684 (5,126)(5) 14,321
----------- ---------- ----------- ----------- ------------
Total stockholders' equity.................. 507 21,024 8,254 6,797 36,582
----------- ---------- ----------- ----------- ------------
Total liabilities and equity.................. $ 601 $ 252,877 $ 84,709 $ 10,402 $ 348,589
----------- ---------- ----------- ----------- ------------
----------- ---------- ----------- ----------- ------------
</TABLE>
- ------------------------------
(1) Reflects a special dividend of $0.52 per common share of Valley Bank,
payable at the closing of the acquisition.
(2) To record a deferred tax liability of approximately $2,160,000 related to
the value attributable to a core deposits intangible asset, which was
recorded in accrued interest and other liabilities net of a deferred tax
asset of $730,000, as well as deferred taxes of $570,000 relating to the
severance obligations discussed below. Also includes reclassification of
$200,000 of capitalized acquisition costs to goodwill and other intangible
assets.
(3) To record the purchase of Valley Bank and Pacific Community Banking Group,
which results in the allocation of the excess of the purchase price over
their net identifiable assets of $9,700,000 and $1,671,000, respectively, to
goodwill and other intangible assets.
(4) To record a liability of $682,000 to certain former officers of The Bank of
Hemet, which was formerly payable beginning at the respective officer's
retirement date, but which vests in full as of the closing of the business
combination, and to record severance costs at Valley Bank of $743,000.
Additionally, includes an accrual for acquisition fees of $750,000 payable
upon completion of the acquisitions.
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(5) To provide for adjustments related to the application of purchase
accounting, which includes the recognition of value for the warrants issued
to Valley Bank at $3 per warrant, and to eliminate the equity accounts of
the subsidiaries. Additionally, to adjust equity accounts for the warrants
issued to shareholders of The Bank of Hemet, the value for which is charged
to retained earnings, with a corresponding increase to common equity.
PACIFIC COMMUNITY BANKING GROUP SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Pacific Community
Banking Group. The information presented below is from Pacific Community Banking
Group's financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in its report thereon included in
this joint proxy statement/prospectus. The data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition" and Pacific
Community Banking Group's audited financial statements appearing in this joint
proxy statement/prospectus.
<TABLE>
<CAPTION>
AT OR FOR PERIOD
AT OR FOR YEAR FROM INCEPTION
ENDED (OCTOBER 1997) TO
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Revenues................................................................... $ -- $ --
General and administrative expenses........................................ 525,568 82,477
Interest income............................................................ 11,326 --
----------------- --------
Net loss before taxes...................................................... 514,242 82,477
Provision for income taxes................................................. 800 800
----------------- --------
Net loss................................................................. $ 513,442 $ 81,677
----------------- --------
----------------- --------
ASSETS:
Cash....................................................................... $ 395,948 $ 170,131
Prepaid expenses........................................................... 1,333 --
Capitalized acquisition and offering costs................................. 198,127 26,814
Equipment and furniture, net of depreciation............................... 5,638 --
----------------- --------
Total Assets............................................................. $ 601,046 $ 196,945
----------------- --------
----------------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable........................................................... $ 94,429 $ 54,112
Refundable common stock subscriptions...................................... -- 85,000
Total shareholders' equity................................................. 506,617 57,833
----------------- --------
Total liabilities and shareholders' equity............................... $ 601,046 $ 196,945
----------------- --------
----------------- --------
PER SHARE DATA:
Weighted average shares outstanding........................................ 10,000 10,000
Basic and diluted earnings (loss) per share................................ $ (51.34) $ (8.17)
Common stock book value.................................................... $ 50.66 $ 5.78
Common stock dividends declared............................................ $ -- $ --
</TABLE>
33
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PACIFIC COMMUNITY BANKING GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. PACIFIC COMMUNITY BANKING GROUP'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE SECTION ENTITLED
"RISK FACTORS" AND ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to Pacific Community
Banking Group. The following discussion should be read in conjunction with the
financial statements of Pacific Community Banking Group.
RESULTS OF OPERATIONS
Pacific Community Banking Group was formed in 1997 for the purpose of
becoming a multi-bank, community oriented, independent bank holding company that
will own a number of community banks, predominantly in high-growth areas of
California. Since inception, Pacific Community Banking Group has investigated a
number of banks for possible acquisition. These discussions have resulted in
acquisition agreements with The Bank of Hemet and Valley Bank. Until these
proposed acquisitions are completed, Pacific Community Banking Group will have
had no revenue-generating operations. Since its founding, Pacific Community
Banking Group's only income has been interest earned on investments and
deposits. Nearly all of its expenses have been used for organizational purposes,
in connection with proposed acquisition opportunities, and the initial public
offering of its stock.
CAPITAL CONTRIBUTIONS
The holders of Pacific Community Banking Group's common stock have provided
approximately $2,500, and the holders of Pacific Community Banking Group's
convertible preferred stock have provided capital of approximately $1.4 million,
in each case to fund the costs associated with identifying and acquiring
selected community banks and raising the funds for the initial acquisitions and
operations. For more information about the holders of this preferred stock and
their interests in Pacific Community Banking Group after the acquisitions,
please refer to the section entitled "Stock Ownership Of Pacific Community
Banking Group Following Reorganization" on page 188.
LIQUIDITY AND CAPITAL RESOURCES
Based on its current operating plan, Pacific Community Banking Group
believes that the net proceeds of the public offering of its common stock,
together with its available funds, are sufficient to provide working capital and
fund capital expenditures in the near future. Pacific Community Banking Group
currently plans to acquire other banks. If it is unable to make future
acquisitions by exchanging its securities for those of the acquired banks,
Pacific Community Banking Group may need additional capital to make these
acquisitions or to increase the size of its operations. If so, Pacific Community
Banking Group may seek to raise capital through sales of its securities to
private investors or to the public. These sales may not be
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<PAGE>
feasible at times because of market conditions. There is no guarantee that
Pacific Community Banking Group will acquire other banks.
YEAR 2000 COMPLIANCE
Since the formation of Pacific Community Banking Group, information
technology has not played an important role in its operations. These operations
have consisted of investigating and negotiating potential bank acquisitions.
Pacific Community Banking Group has acquired all of its computer hardware and
software since October, 1997 and believes its systems are Year 2000 compliant.
This hardware and software consists only of personal computers used for word
processing and spreadsheet calculations. If, notwithstanding the assurances
received from vendors regarding the fact that these computers are Year 2000
compliant, they prove to be noncompliant, as a contingency, Pacific Community
Banking Group could obtain word processing and spreadsheet capabilities from
third party services. After the acquisitions, Pacific Community Banking Group
will not perform data processing services for its banking subsidiaries. Rather,
The Bank of Hemet will continue to conduct data processing operations through
its subsidiary, BankLink Corporation. Valley Bank will initially perform its own
data processing but will become a customer of BankLink Corporation for data
processing shortly after the acquisitions. For information on Year 2000
compliance issues for the banks, including their contingency plans, please refer
to the sections entitled "The Bank of Hemet Management's Discussion and Analysis
of Financial Condition--Year 2000 Compliance," beginning on page 76, and "Valley
Bank Management's Discussion and Analysis of Financial Condition--Year 2000
Compliance," beginning on page 139.
BUSINESS OF PACIFIC COMMUNITY BANKING GROUP
GENERAL
A private group of investors led by E. Lynn Caswell, an experienced
California community banker, formed Pacific Community Banking Group in 1997. The
company was formed to become a multi-bank, community oriented, independent bank
holding company, which plans to acquire a select number of community banks,
predominantly in high-growth areas of Southern California. Pacific Community
Banking Group intends to find strategically located community banks, each of
which has a successful history and a favorable image in its market area. Where
appropriate Pacific Community Banking Group will consolidate the operations of
acquired banks, but generally each bank will retain its separate market
identity. Pacific Community Banking Group plans to achieve economies of
management and scale by combining some administrative and support functions,
such as financial administration, data processing, insurance, bonding, employee
benefits and contracts for services.
Since inception, Pacific Community Banking Group has investigated a number
of banks for possible acquisition, and has initiated discussions with several
banks. These discussions have resulted in acquisition agreements with The Bank
of Hemet and Valley Bank, which are described elsewhere in this joint proxy
statement/prospectus. Pacific Community Banking Group intends to continue
discussing potential acquisitions with other banks where those discussions are
appropriate.
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BUSINESS STRATEGY
Pacific Community Banking Group will base its business philosophy on the
belief that banking customers value doing business with locally managed
institutions that can provide a full service commercial banking relationship
through an understanding of the customer's financial needs and the flexibility
to customize products and services to meet those needs. Pacific Community
Banking Group also believes that banks can better build successful customer
relationships by affiliating with a holding company that provides cost effective
administrative support services while promoting bank autonomy and flexibility.
To implement this philosophy, Pacific Community Banking Group intends to
operate some of its acquired banks as separate subsidiaries and retain their
independent names along with their individual boards of directors. Pacific
Community Banking Group expects that many of its acquired banks, such as The
Bank of Hemet and Valley Bank, will have established strong reputations and
customer followings in their respective market areas through attention to client
service and an understanding of client needs. Where market overlap makes a
consolidation of operations among existing banks more cost-efficient, as is the
case with Valley Bank and The Bank of Hemet, Pacific Community Banking Group
intends to take the corporate action necessary to consolidate their operations.
In addition, where Pacific Community Banking Group perceives that a community
lacks a strong independent community bank and would be an appropriate market for
one, Pacific Community Banking Group intends to form a new bank to fill that
community need. Pacific Community Banking Group intends to develop a community
bank in Orange county, based on its perception that Orange county is one such
community.
Pacific Community Banking Group intends to keep client service decisions and
day-to-day operations at the bank level. But it also plans to offer the
advantages of affiliation with a multi-bank holding company by providing
improved access to the capital markets and expanded client support services,
such as financial administration, management and accounting services. In
addition, Pacific Community Banking Group's centralized administrative
functions, including support in credit policy formulation and review, investment
management, data processing, employee benefits, accounting, insurance and other
specialized support functions, will allow the banks to focus on client service.
Pacific Community Banking Group's goal is to become the preeminent financial
services company for independent banks in high growth areas of Southern
California, commencing with Riverside and San Bernardino counties. Pacific
Community Banking Group's business strategy is to increase its market share
within the communities it serves through internal growth after it acquires The
Bank of Hemet and Valley Bank. Pacific Community Banking Group also will pursue
opportunities to expand its market share through select acquisitions and
development of banks that complement Pacific Community Banking Group's existing
businesses.
THE INLAND EMPIRE
Riverside and San Bernardino counties are commonly referred to as the
"Inland Empire." This region is experiencing dramatic population and economic
growth. The Inland Empire will be the fastest growing U.S. primary metropolitan
statistical area during the years 1993 to 2005, according to a 1996 report of
the U.S. Department of Commerce. The Department of Commerce projects that
population will grow 32.4% during that period.
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<PAGE>
EMPLOYEES
At December 31, 1998, Pacific Community Banking Group had two employees, one
of whom was an executive officer. Neither is represented by a union or covered
by a collective bargaining agreement. Pacific Community Banking Group believes
its employee relations are excellent.
PREMISES
Pacific Community Banking Group leases approximately 1,050 square feet of
space in an executive office suite in Laguna Hills, California. The lease will
expire in June 1999. Lease payments include various office support services, and
average approximately $3,000 per month. These premises are not large enough for
Pacific Community Banking Group's future needs. Pacific Community Banking Group
expects to move into larger premises.
SUPERVISION AND REGULATION
As a bank holding company, Pacific Community Banking Group will, upon
acquisition of The Bank of Hemet and Valley Bank, become subject to many
governmental rules that affect its operations. For a description of the laws and
regulations that will apply to Pacific Community Banking Group, please refer to
the section entitled "Supervision and Regulation," starting on page 175.
LITIGATION
Pacific Community Banking Group has not become involved in any litigation,
and knows of no threatened litigation against it that would be material to its
operations.
THE ANNUAL MEETING OF THE BANK OF HEMET
GENERAL
An annual meeting of the shareholders of The Bank of Hemet will be held at
: .m. on , 1999, at The Anchor Restaurant, 2524 East Florida
Avenue, Hemet, California. At the annual meeting, the holders of the common
stock of The Bank of Hemet will vote on (1) the approval of The Bank of Hemet
agreement; (2) a proposal to amend Article III of the bylaws of The Bank of
Hemet to increase the range of the number of corporate directors to a range of
seven to 13 to accommodate the terms of The Bank of Hemet agreement; (3) the
election of seven persons to serve as directors and (4) such other business as
may properly come before The Bank of Hemet annual meeting or any adjournments or
postponements thereof.
RECORD DATE; SOLICITATION OF PROXIES
The close of business on , 1999 has been fixed as the record
date for the determination of the shareholders entitled to notice of, and to
vote at, the annual meeting. At that date, there were 844,278 outstanding shares
of The Bank of Hemet common stock entitled to vote at the annual meeting.
In addition to soliciting proxies by mail, officers, directors and employees
of The Bank of Hemet, without receiving any additional compensation, may solicit
proxies by telephone, fax, in person or by other means. Arrangements will also
be made with brokerage firms and other
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<PAGE>
custodians, nominees and fiduciaries to forward proxy solicitation materials to
the beneficial owners of The Bank of Hemet common stock held of record by such
persons, and The Bank of Hemet will reimburse such brokerage firms, custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them
in connection therewith. Pacific Community Banking Group will pay all expenses
related to printing and filing this joint proxy statement/ prospectus, including
all filing fees of the Securities and Exchange Commission (the "Commission").
The required quorum for the transaction of business at the annual meeting is
a majority of the shares of The Bank of Hemet common stock entitled to vote at
the annual meeting. Shares voted in a matter are treated as being present for
purposes of establishing a quorum. Abstentions and broker nonvotes will be
counted for determining a quorum, but will not be counted for purposes of
determining the number of votes cast "FOR" or "AGAINST" any matter.
REVOCABILITY OF PROXIES
Any holder of The Bank of Hemet common stock may revoke a proxy at any time
before it is voted by filing with the Secretary of The Bank of Hemet an
instrument revoking the proxy or by returning a duly executed proxy bearing a
later date, or by attending the annual meeting and voting in person. Any such
filing should be made to the attention of the Secretary, The Bank of Hemet, 3715
Sunnyside Drive, Riverside, California 92506. Attendance at the annual meeting
will not by itself constitute revocation of a proxy.
MATTERS TO BE CONSIDERED AT THE MEETING
APPROVAL AND ADOPTION OF THE FIRST RESTATEMENT OF AGREEMENT AND PLAN OF
REORGANIZATION. At the annual meeting, you will be asked to approve and adopt
The Bank of Hemet agreement. Pursuant to The Bank of Hemet agreement, The Bank
of Hemet will become a wholly owned subsidiary of Pacific Community Banking
Group. A vote of a majority of the outstanding shares of The Bank of Hemet
common stock entitled to be cast at the annual meeting is required to approve
and adopt The Bank of Hemet agreement. AFTER CAREFUL CONSIDERATION, THE BANK OF
HEMET'S BOARD OF DIRECTORS, BY A UNANIMOUS VOTE OF THE DIRECTORS PRESENT HAS
DETERMINED THAT THE ACQUISITION IS FAIR TO AND IN THE BEST INTERESTS OF THE
SHAREHOLDERS OF THE BANK OF HEMET. ACCORDINGLY, THE BANK OF HEMET BOARD HAS
UNANIMOUSLY APPROVED THE ACQUISITION. YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE
"FOR" THIS PROPOSAL.
AMENDMENT OF BYLAWS. At the annual meeting you will be asked to consider
whether Article III of the bylaws of The Bank of Hemet should be amended to
increase the range of the number of members of the board of directors to a range
of seven to 13.
Article III of the bylaws of The Bank of Hemet currently provides that the
number of directors shall be no fewer than five and no more than nine. The Bank
of Hemet agreement provides that The Bank of Hemet shall have increased the size
of the board to permit appointment of Pacific Community Banking Group's
designees after the acquisition. The bylaw amendment will become effective only
if the acquisition is completed. To accommodate The Bank of Hemet agreement,
after careful consideration, the board of directors has determined that the
proposed change to the bylaws is in the best interests of the shareholders of
The Bank of Hemet. Accordingly, your board of directors has unanimously approved
the amendment to the Bylaws. YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THIS PROPOSAL.
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ELECTION OF DIRECTORS. At the annual meeting you will also be asked to
elect seven persons to serve as directors.
The board of directors has nominated the following persons to serve as
directors:
<TABLE>
<S> <C>
John B. Brudin John J. McDonough
Jack E. Gosch Joseph D. Pehl
E. Kenneth Hyatt Clayton A. Record, Jr.
James B. Jaqua
</TABLE>
In the election of directors, Proposal No. 3, shareholders may vote their
shares cumulatively if, prior to the voting, a shareholder present and voting at
the annual meeting gives notice to the chairman of the meeting that he or she
intends to vote cumulatively. If any shareholder of The Bank of Hemet gives such
notice, then all shareholders will be entitled to cumulate their votes.
Cumulative voting allows a shareholder to cast a number of votes equal to the
number of shares held in his or her name as of the record date, multiplied by
the number of directors to be elected. This total number of votes may be cast
for one nominee, or distributed among as many nominees or in whatever
proportions as the shareholder chooses. If cumulative voting is declared at the
meeting, the proxyholders will have discretion to cumulate the votes represented
by any proxy delivered under this joint proxy statement/ prospectus, and vote
them in accordance with the recommendations of the bank's management.
For more information about the nominees refer to "Other Relevant Information
For The Bank of Hemet Shareholders" on page 96.
THE BANK OF HEMET ACQUISITION
BACKGROUND OF THE ACQUISITION
The Bank of Hemet, based in Riverside county, California, has conducted
general banking operations to serve individuals and small- to medium-sized
businesses since June 1974. In early 1997, the bank's board of directors
evaluated the banking marketplace, the economic cycle and the historically high
acquisition prices being paid for banks of its size. The board of directors was
concerned about the rapid changes occurring in the banking industry in Southern
California. Tremendous consolidation had taken place, especially in 1996 and
1997. In order to compete with larger, more efficient financial institutions,
The Bank of Hemet's board of directors and management knew that it had to
continue to increase its core deposit base as well as its loan portfolio. While
the board believed that The Bank of Hemet was in a position to do this, because
recently banks had sold for particularly high prices, the board resolved to
solicit interest in purchasing the bank.
Throughout 1997, Mr. Jaqua met with several financial institutions that
expressed interest in acquiring The Bank of Hemet. On December 2, 1997, Mr.
Jaqua met with Jim Baxter and Larry Fentriss, the principals of Baxter Fentriss
& Company ("Baxter Fentriss"), an investment banking firm. Mr. Baxter and Mr.
Fentriss recommended that The Bank of Hemet should hold an auction to create a
greater sense of urgency among potential bidders for the bank.
Soon after, the bank's board of directors determined that it would be
helpful to hire an investment banking firm to help sell the bank. The board
agreed to hold a "beauty contest"
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and invited six investment banking firms to present their proposals for selling
the bank. Five of those investment banking firms accepted the invitation and
presented their proposals to the board. After giving due consideration to each
of the investment banking proposals, the board of directors decided to retain
Baxter Fentriss as its financial advisor, subject to the negotiation of a
satisfactory engagement contract. The Bank of Hemet executed a negotiated
contract with Baxter Fentriss on January 29, 1998 after the contract had been
approved by the bank's board of directors.
The Bank of Hemet had engaged Baxter Fentriss to help market the sale of the
bank, to evaluate and negotiate any offers to purchase the bank and to issue a
fairness opinion with respect to any acquisition to be consummated. In February
1998, Baxter Fentriss and The Bank of Hemet designed an information memorandum
on the bank for distribution to potential acquirors. The information memorandum
established March 31, 1998 as the deadline for submitting bids to purchase the
bank. Baxter Fentriss contacted more than thirty potential acquirors in
California and thirty-one outside California to determine their level of
interest in acquiring The Bank of Hemet. Baxter Fentriss then sent bid packages
to fourteen of the California companies and eight of the companies based outside
California after receiving signed confidentiality agreements from each of them.
Baxter Fentriss also met with several of the potential acquirors to obtain
additional information. Four of the companies located in California, including
Pacific Community Banking Group, and one company outside California submitted
bids to purchase the bank.
In April 1998, Mr. Jaqua met with several of the bidders to discuss their
proposals. On April 29, 1998, Baxter Fentriss met with the board of directors to
review and discuss the offers to purchase The Bank of Hemet. Baxter Fentriss
presented an analysis of each offer received. For those transactions that
contemplated an exchange of stock, they presented an analysis of the relevant
characteristics of the potential acquirors' stock. The board was particularly
impressed by the offer made by Pacific Community Banking Group. It resolved to
negotiate an agreement with Pacific Community Banking Group.
Shortly after negotiations had begun with Pacific Community Banking Group,
The Bank of Hemet learned that Pacific Community Banking Group was
simultaneously negotiating to purchase Valley Bank and that Baxter Fentriss was
also representing Valley Bank in its negotiations with Pacific Community Banking
Group. The Bank of Hemet also learned that Pacific Community Banking Group
intended to go out with an initial public offering to raise the funds necessary
to acquire The Bank of Hemet and Valley Bank.
In late May and June 1998, The Bank of Hemet held several meetings with
representatives of Pacific Community Banking Group to negotiate a definitive
agreement and to evaluate the likelihood that the proposed public offering by
Pacific Community Banking Group could be completed within a short period of
time.
On June 24, 1998, the board of directors held its monthly meeting to discuss
the two offers presented by Pacific Community Banking Group. Representatives
from Baxter Fentriss, Gary Findley, legal counsel to The Bank of Hemet and
William Cockrum, financial advisor and consultant to The Bank of Hemet attended
the meeting. Pacific Community Banking Group had offered to pay for The Bank of
Hemet with stock or with cash. Assisted by Baxter Fentriss, Mr. Findley and Mr.
Cockrum, the board considered both options in detail, including the liquidity,
marketability and value of Pacific Community Banking Group's stock. The board of
directors also discussed the impact the sale would have on its personnel and
various other
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employment issues. After a comprehensive analysis of the options, the board of
directors determined that the offer presented by Pacific Community Banking Group
provided the greatest value to The Bank of Hemet's shareholders.
Throughout June and July 1998, Pacific Community Banking Group and The Bank
of Hemet each conducted a due diligence investigation of the other company. The
Bank of Hemet also performed a due diligence review of Valley Bank by examining
and evaluating information provided to Pacific Community Banking Group by Valley
Bank. In addition, the board of directors held significant discussions with
representatives from Sutro & Co. Incorporated ("Sutro") concerning the
likelihood of completing a public offering for Pacific Community Banking Group.
On July 16, 1998, the board of directors held a special meeting to consider
the Agreement and Plan of Reorganization (the "Original Agreement"), which had
been negotiated with Pacific Community Banking Group. At the meeting, Gary
Findley presented his due diligence findings, and William Cockrum evaluated the
Original Agreement from a financial point of view. The board of directors
discussed in detail the terms of the Original Agreement and all related
documentation. After much discussion, the board of directors unanimously
approved and authorized the execution and delivery of the Original Agreement.
The Bank of Hemet executed the Original Agreement on July 30, 1998.
Shortly thereafter, in the fall of 1998, the stock market substantially
declined in value, particularly stocks of financial institutions. Consequently,
Pacific Community Banking Group was forced to rethink the practicality of
instituting an initial public offering in a depressed stock market. In November
of 1998, Pacific Community Banking Group and Sutro informed The Bank of Hemet
that it was unlikely that Pacific Community Banking Group could consummate a
public offering as contemplated by the Original Agreement because of the decline
in the stock market.
Over the next few months, representatives of The Bank of Hemet met or
otherwise communicated on various occasions with representatives from Pacific
Community Banking Group, their legal counsel, Sutro and other interested parties
to attempt to renegotiate the acquisition in light of the decline in the capital
markets. The parties considered many alternate structures for the transaction.
In December, 1998, they negotiated and drafted a revised definitive agreement
that reduced the original per share price of The Bank of Hemet common stock and
provided for the issuance of warrants to The Bank of Hemet shareholders in order
to facilitate the Pacific Community Banking Group public offering. On December
16, 1998, after (i) various board meetings to discuss the revised transaction,
(ii) several consultations with William Cockrum and Gary Findley, (iii) Baxter
Fentriss's report to the board as to the fairness of the revised transaction to
The Bank of Hemet shareholders from a financial point of view and (iv)
consideration of the terms of the newly drafted First Restatement of Agreement
and Plan of Reorganization (the "Restated Agreement," which, as subsequently
amended in nonmaterial respects, is also referred to in this joint proxy
statement/prospectus as the "Bank of Hemet agreement") and all other related
documentation, The Bank of Hemet's board of directors unanimously approved the
revised transaction and authorized the execution of the Restated Agreement. On
January 5, 1999, The Bank of Hemet and Pacific Community Banking Group executed
the Restated Agreement.
On February 24, 1999 Baxter Fentriss met with the board of directors to
present updated market and valuation information and an updated fairness
opinion. This information and the
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<PAGE>
fairness opinion were unanimously accepted by the board. On March 12, 1999 Mr.
Jaqua and Mr. Cockrum held a conference call with Mr. Caswell and Mr. Jim Hill
of Sutro & Co. to discuss the concept of further revising the transaction as
described in this joint proxy statement/prospectus: The Bank of Hemet
shareholders receiving stock and warrants, with an opportunity to sell up to 88%
of the stock received in a public offering. During the following week several
discussions were held and information was provided to the board of directors by
Pacific Community Banking Group. On March 24, 1999 at the regular monthly
meeting of the board of directors, Mr. Caswell and Mr. Hill further explained
the merits of this revision to the transaction. Baxter Fentriss provided
additional market information and an updated fairness opinion in reference to
the latest revision. After considerable discussion, the board of directors
authorized management to proceed with negotiating final versions of the First
and Second Amendments to the First Restatement of Agreement and Plan of
Reorganization. These amendments were finalized and were executed by The Bank of
Hemet on March 24, 1999 and April 2, 1999, respectively.
For a table showing quarterly high and low trading prices of The Bank of
Hemet common stock, as well as other information about the stock, during the
period of the negotiation of the acquisition, please refer to the section
entitled "Other Relevant Information for The Bank of Hemet Shareholders--Market
Price and Dividend Information" on page 102.
RECOMMENDATIONS OF THE BANK OF HEMET BOARD
The board of directors of The Bank of Hemet has concluded that the terms of
the acquisition are fair to its shareholders and in their best interest.
Although the closing of the acquisition depends upon Pacific Community Banking
Group's ability to complete a public offering of its stock, The Bank of Hemet's
board of directors has determined that the amounts of stock and warrants of
Pacific Community Banking Group, to be received by The Bank of Hemet's
shareholders in the acquisition and the amount of cash to be received in the
public offering justifies such a risk. The Bank of Hemet's board of directors
believes that the acquisition represents an attractive opportunity for all
shareholders of The Bank of Hemet to obtain a favorable price for their shares
of common stock. Shareholders will receive amounts of stock and warrants per
share in the acquisition that represents a significant premium over The Bank of
Hemet's book value per share and the prices at which shares of The Bank of Hemet
common stock have traditionally traded. In addition, The Bank of Hemet has
received an opinion from Baxter Fentriss to the effect that the consideration to
be received in the acquisition by The Bank of Hemet's shareholders is fair from
a financial point of view. For more information regarding the opinion from
Baxter Fentriss, please refer to the subsection entitled "Opinion of Baxter
Fentriss & Company" on page below and Appendix C.
The Bank of Hemet acquisition and the Valley Bank acquisition are
independent transactions. Shareholders of The Bank of Hemet should consider the
possibility that the acquisition of The Bank of Hemet may close even if the
acquisition of Valley Bank does not close. Pacific Community Banking Group is
not obligated to complete either of the acquisitions unless Sutro & Co.
Incorporated enters into a firm commitment to underwrite the public offering of
its stock and all conditions of that offering have been satisfied or waived.
THE BOARD OF DIRECTORS OF THE BANK OF HEMET HAS UNANIMOUSLY APPROVED THE
ACQUISITION UPON THE TERMS SET FORTH IN THE BANK OF HEMET AGREEMENT AND
RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE PRINCIPAL TERMS OF THE
AGREEMENT.
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OPINION OF BAXTER FENTRISS & COMPANY
Baxter Fentriss & Company has acted as financial advisor to The Bank of
Hemet in connection with the acquisition. Baxter Fentriss assisted The Bank of
Hemet in identifying prospective acquirors. On January 5, 1999, Baxter Fentriss
delivered to The Bank of Hemet its preliminary opinion, dated January 5, 1999,
that on the basis of matters referred to herein, the offer is fair, from a
financial point of view, to the holders of The Bank of Hemet's common stock. Its
preliminary opinion was updated and presented to the Bank of Hemet's board of
directors on March 24, 1999. In rendering its opinion, Baxter Fentriss consulted
with the management of The Bank of Hemet and of Pacific Community Banking Group,
reviewed The Bank of Hemet agreement and certain publicly available information
on the parties and reviewed certain additional materials made available by the
management of the respective parties.
In addition, Baxter Fentriss discussed with the management of The Bank of
Hemet, Valley Bank and Pacific Community Banking Group their respective
businesses and outlook. Baxter Fentriss was involved in the negotiations with
Pacific Community Banking Group. No limitations were imposed by The Bank of
Hemet's board of directors upon Baxter Fentriss with respect to the
investigation made or procedures followed by it in rendering its opinion. The
full text of Baxter Fentriss's written opinion is attached as Appendix C to this
joint proxy statement/prospectus and should be read in its entirety with respect
to the procedures followed, assumptions made, matters considered and
qualifications and limitations on the review undertaken by Baxter Fentriss in
connection with its opinion.
Baxter Fentriss's opinion is directed to The Bank of Hemet's board of
directors, and is directed only to the fairness, from a financial point of view,
of the consideration provided. It does not address The Bank of Hemet's
underlying business decision to effect the proposed acquisition, nor does it
constitute a recommendation to any shareholder of The Bank of Hemet as to how
the shareholder should vote with respect to the acquisition at the annual
meeting or as to any other matter.
Baxter Fentriss's opinion was one of many factors considered by The Bank of
Hemet's board of directors in making its determination to approve The Bank of
Hemet Agreement, and the receipt of Baxter Fentriss's opinion is a condition
precedent to The Bank of Hemet's obligation to consummate the acquisition. The
opinion of Baxter Fentriss does not address the relative merits of the
acquisition compared to any alternative business strategies that might exist for
The Bank of Hemet or the effect of any other business combination in which The
Bank of Hemet might engage.
Baxter Fentriss, as part of its investment banking business, is continually
engaged in the valuation of financial institutions and their securities in
connection with mergers and acquisitions and valuations for estate, corporate
and other purposes. Baxter Fentriss is a nationally recognized advisor to firms
in the financial services industry on mergers and acquisitions. The Bank of
Hemet selected Baxter Fentriss as its financial advisor because Baxter Fentriss
is an investment banking firm focusing on transactions involving community banks
and thrifts and because of the firm's extensive experience and expertise in
transactions similar to the acquisition. Baxter Fentriss is not affiliated with
Valley Bank, The Bank of Hemet or Pacific Community Banking Group. Baxter
Fentriss also represented Valley Bank in its negotiations with Pacific Community
Banking Group, and The Bank of Hemet's board of directors was aware of this
concurrent representation.
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In connection with rendering its opinion to The Bank of Hemet's board of
directors, Baxter Fentriss performed a variety of financial analyses. In
conducting its analyses and arriving at its opinion as expressed herein, Baxter
Fentriss considered such financial and other factors as it deemed appropriate
under the circumstances including, among others, the following:
- the historical and current financial condition and results of operations
of Valley Bank, The Bank of Hemet and Pacific Community Banking Group
including interest income, interest expense, interest sensitivity,
noninterest income, noninterest expense, earnings, book value, returns on
assets and equity, and possible tax consequences resulting from the
transaction,
- the business prospects of Valley Bank, The Bank of Hemet and Pacific
Community Banking Group,
- the economies of the market areas of The Bank of Hemet, Valley Bank and
Pacific Community Banking Group, and
- the nature and terms of certain other merger transactions that it believed
to be relevant.
Baxter Fentriss also considered its assessment of general economic, market,
financial and regulatory conditions and trends, as well as its knowledge of the
financial institutions industry, its experience in connection with similar
transactions, its knowledge of securities valuation generally, and its knowledge
of merger transactions in California, the West and throughout the United States.
In connection with rendering its opinion, Baxter Fentriss reviewed the
Valley Bank agreement, drafts of this joint proxy statement/prospectus, the
annual reports to shareholders of Valley Bank and The Bank of Hemet for the
years ended December 31, 1994, 1995, 1996 and 1997, the unaudited financial
statements of The Bank of Hemet as of September 30, 1998, the unaudited
financial statements of Pacific Community Banking Group for the fiscal year
ended December 31, 1997, and certain additional financial and operating
information with respect to the business, operations and prospects of Valley
Bank, The Bank of Hemet and Pacific Community Banking Group as it deemed
appropriate.
Baxter Fentriss also (a) held discussions with members of the senior
management of Valley Bank, The Bank of Hemet and Pacific Community Banking Group
regarding the historical and current business operation, financial condition and
future prospects of their respective companies; (b) compared the results of
operations of The Bank of Hemet and Pacific Community Banking Group with those
of certain banking companies that it deemed to be relevant, (c) analyzed the pro
forma financial impact of the acquisition on The Bank of Hemet, and (d)
conducted such other studies, analyses, inquiries and examinations as are
described below.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Moreover, the evaluation of fairness, from a financial point of
view, of the consideration provided to the holders of The Bank of Hemet common
stock was to some extent a subjective one based on the experience and judgment
of Baxter
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Fentriss and not merely the result of mathematical analysis of financial data.
Accordingly, notwithstanding the separate factors as summarized below, Baxter
Fentriss believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying its opinion. The ranges of valuations resulting
from any particular analysis described below should not be taken to be Baxter
Fentriss's view of the actual value of The Bank of Hemet or Pacific Community
Banking Group.
In performing its analyses, Baxter Fentriss made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of The Bank of Hemet and Pacific
Community Banking Group. The analyses performed by Baxter Fentriss are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses may actually be sold. In
rendering its opinion, Baxter Fentriss assumed that, in the course of obtaining
the necessary regulatory approvals for the acquisition, no conditions will be
imposed that will have a material adverse effect on the contemplated benefits of
the acquisition, on a pro forma basis, to The Bank of Hemet.
The following is a summary of selected analyses performed by Baxter Fentriss
in connection with its opinion.
1. STOCK PRICE HISTORY. Baxter Fentriss studied the trading prices and
volume for The Bank of Hemet common stock and compared them to publicly traded
banks in California and to the price offered by Pacific Community Banking Group.
The offer represents a premium to The Bank of Hemet shareholders.
2. COMPARATIVE ANALYSIS. Baxter Fentriss compared the price to earnings
multiple, price to book multiple, premium on deposits and price to assets
multiple of the offer with 20 publicly reported transactions in 1998 involving
California banks of comparable asset size. The Bank of Hemet's price to earnings
multiple was 14th highest, its price to book multiple was 10th highest, [its
premium on deposits was 11th highest] and its price to assets multiple was 10th
highest.
3. DISCOUNTED CASH FLOW ANALYSIS. Baxter Fentriss performed a discounted
cash flow analysis to determine hypothetical present values for a share of The
Bank of Hemet's common stock as a five and ten year investment. Under this
analysis, Baxter Fentriss considered various scenarios for the performance of
The Bank of Hemet's common stock using a range of growth rates from 4% to 10%
for The Bank of Hemet's earnings and dividends. A range of terminal values from
10 to 18 times projected earnings was also used in the analysis as well as a
discount rate of 14%. These ranges of growth rates and terminal values were
chosen based upon what Baxter Fentriss, in its judgement, considered to be
appropriate taking into account, among other things, The Bank of Hemet's past
and current performance, the general level of inflation, rates of return for
fixed income and equity securities in the marketplace generally and for
companies of similar risk profiles. The analysis concludes that Pacific
Community Banking Group's offer exceeded all other alternative strategies. Thus,
The Bank of Hemet's shareholders would be in a better financial position by
receiving the consideration than continuing to hold The Bank of Hemet's common
stock.
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4. COMPARISON OF THE BANK OF HEMET TO OTHER BANKS. Baxter Fentriss
compared key financial and operating ratios of The Bank of Hemet to ten
similarly sized California banks. The ratios included return on assets, return
on equity, net interest margin, net charge-offs to assets, non-performing asset
levels and other standard performance measurements. The Bank of Hemet's
performance was less than average for most measurements, suggesting that the
price offered, when compared to other transactions, was fair. Furthermore,
applying the capital guidelines of banking regulators, and assuming a successful
underwriting by Pacific Community Banking Group's investment bankers, Baxter
Fentriss's analysis indicated that the acquisition would not seriously dilute
the capital and earnings capacity of Pacific Community Banking Group and would,
therefore, likely not be opposed by the banking regulatory agencies from a
capital perspective. Furthermore, Baxter Fentriss considered the likely market
overlap and the Federal Reserve Board guidelines with regard to market
concentrations and did not believe there to be an issue with regard to possible
antitrust concerns.
Baxter Fentriss has relied, without any independent verification, upon the
accuracy and completeness of all financial and other information reviewed.
Baxter Fentriss has assumed that all estimates, including those as to possible
economies of scale, were reasonably prepared. Baxter Fentriss did not make an
independent appraisal of the assets or liabilities of either The Bank of Hemet
or Pacific Community Banking Group, and has not been furnished such an
appraisal.
No company or transaction used as a comparison in the above analysis is
identical to The Bank of Hemet, Pacific Community Banking Group or the
acquisition. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of the companies and other factors
that could affect the public trading value of the companies used for comparison
in the above analysis.
Baxter Fentriss will be paid a transaction fee, equal to approximately 1.25%
of the total consideration received by shareholders of The Bank of Hemet plus
reasonable out-of-pocket expenses for its services. The Bank of Hemet has agreed
to indemnify Baxter Fentriss against certain liabilities, including certain
liabilities under federal securities laws.
BENEFICIAL OWNERSHIP OF THE BANK OF HEMET
The principal owners of the capital stock of The Bank of Hemet, and stock
holdings of management, are shown in the section entitled "Shareholdings of
Certain Beneficial Owners and Management" on page 98.
INTERESTS OF MANAGEMENT IN THE ACQUISITION
Each director has signed a director's agreement with Pacific Community
Banking Group, agreeing to vote all of his or her shares in favor of The Bank of
Hemet agreement, not to encumber, sell or transfer any shares of common stock
except with the consent of Pacific Community Banking Group, to recommend
shareholder approval of the agreement and not to solicit a party other than
Pacific Community Banking Group to enter into a business combination with The
Bank of Hemet or acquire any of its stock.
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SEVERANCE AGREEMENTS AND CONSULTING AGREEMENTS
Mr. Jaqua has a salary continuation agreement that provides for a lump sum
payment if The Bank of Hemet enters into a transaction like the acquisition. The
payment will equal the present value of fifteen annual payments of $110,000,
using the annual interest rate on a ten-year treasury bond as the discount rate.
Mr. McDonough has a salary continuation agreement that provides for payments of
$15,000 per year for 15 years, upon separation from employment. These payments
will commence upon completion of the acquisition. Also, Messrs. Jaqua and
McDonough have consulting agreements that provide payment for service as
directors in the future. Mr. Jaqua has a noncompetition agreement under which he
will not compete with The Bank of Hemet in exchange for $500 per month for the
first eight months and $12,000 per month for the remaining 28 months in the term
of the agreement after the closing of the acquisition. Mr. McDonough has a
noncompetition agreement under which he will receive $2,500 per month for three
years after the closing of the acquisition.
Mr. Harold R. Williams, Jr., Chief Operating and Financial Officer of The
Bank of Hemet, has an agreement that will become effective only if the
acquisition of The Bank of Hemet by Pacific Community Banking Group is
consummated. Please refer to "Other Relevant Information for The Bank of Hemet
Shareholders--Employment Contracts and Severance Agreements" on page 101 for
details of that agreement.
The Bank of Hemet also has a severance policy under which the other
employees and officers of The Bank of Hemet will receive severance pay if they
are terminated within six months after a change in control of the bank like the
acquisition. For more details of these agreements and arrangements, please refer
to the section entitled "Other Relevant Information for The Bank of Hemet
Shareholders--Employment Contracts and Severance Agreements" on page 101 and
"Pacific Community Banking Group--Executive Compensation-- Employee Benefit
Plans" and "--Employment Agreements."
OPTIONS
Mr. Jaqua holds an incentive stock option to purchase 6,000 shares of The
Bank of Hemet common stock at the exercise price of $22.50 per share. Mr.
Williams holds incentive stock options to purchase 16,000 shares of The Bank of
Hemet common stock at the average exercise price of $15.94 per share. Mr. Robie
holds incentive stock options to purchase 16,000 shares of The Bank of Hemet
common stock at the average exercise price of $15.94 per share. Other officers
of the bank have stock options to acquire a total of 8,968 shares of The Bank of
Hemet common stock at exercise prices ranging from $12.00 to $22.50. On the
completion of the acquisition all of those options will be canceled in exchange
for the number of shares of common stock of Pacific Community Banking Group,
equal to the number of shares of The Bank of Hemet stock covered by the option,
multiplied by the number obtained by subtracting the exercise price of the
option from the $51.00 per share effective price in the acquisition, divided by
$15.00. In addition, each person who surrenders The Bank of Hemet options in the
acquisition will receive one Pacific Community Banking Group warrant for each
3.4 shares of Pacific Community Banking Group common stock received, except for
Mr. Jaqua, who waived his rights for warrants in his noncompetition agreement.
Option holders who exchange their options for shares of Pacific Community
Banking Group in the offering will have a right to sell their shares in Pacific
Community Banking Group's initial public
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offering, subject to the same terms and the same limitations as those applying
to shareholders of The Bank of Hemet.
INDEMNIFICATION AND INSURANCE
The Bank of Hemet agreement provides for certain indemnification and
insurance coverage for directors and officers of Bank of Hemet. Specifically,
The Bank of Hemet agreement requires Pacific Community Banking Group to cause
The Bank of Hemet, after the merger, to maintain in effect directors' and
officers' liability insurance that is no less advantageous than insurance
presently maintained by The Bank of Hemet. This coverage will specifically
include a "peace of mind" coverage endorsement or policy covering current The
Bank of Hemet directors with respect to all matters arising from facts or events
which occurred prior to the acquisition, for which The Bank of Hemet would have
had an obligation to indemnify its directors and officers. Pacific Community
Banking Group also agrees to take no action to impair such rights as a result of
any other consolidation or merger with another company in which Pacific
Community Banking Group is not the survivor.
PROCEDURES FOR ELECTION AND EXCHANGE OF THE BANK OF HEMET COMMON STOCK
CERTIFICATES
Shareholders of The Bank of Hemet will use a letter of transmittal to
designate shares for sale in the public offering and to surrender certificates
for common stock of The Bank of Hemet. Shareholders will send these letters and
certificates to the exchange agent, which will hold them pending completion of
the acquisition and the public offering. When the acquisition and the public
offering occur, Pacific Community Banking Group will deliver to the exchange
agent shares of its common stock and warrants, and Sutro & Co. Incorporated will
deliver to the exchange agent the proceeds of the sale of shares in the public
offering. The exchange agent will distribute these monies and securities to
shareholders of The Bank of Hemet. If the acquisition is not completed, the
exchange agent will return The Bank of Hemet share certificates to the
shareholders.
After the closing of the acquisition, certificates which represented shares
of the common stock will represent only the right to receive the cash, stock and
warrant amounts as provided in The Bank of Hemet agreement and applicable law.
FORM OF THE ACQUISITION
The acquisition will be accomplished by a statutory merger of PCBG Merger
Corporation, a wholly owned subsidiary of Pacific Community Banking Group, into
The Bank of Hemet, under California Financial Code Sections 4880 through 4891.
ACCOUNTING TREATMENT
After the business combination of Pacific Community Banking Group, The Bank
of Hemet and Valley Bank, and before the close of the public offering, the
former shareholders of The Bank of Hemet will retain the largest voting interest
in Pacific Community Banking Group shares not to be sold in the public offering.
As a result, for financial reporting purposes, the business combination will be
accounted for as an acquisition by The Bank of Hemet of Valley Bank and Pacific
Community Banking Group. The acquisition will be accounted for using the
purchase method of accounting for business combinations.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of The Bank of Hemet acquisition that apply to The Bank of Hemet
shareholders. It is based on the Internal Revenue Code of 1986, as amended (the
"Code"), applicable U.S. Treasury Regulations, judicial authority, and
administrative rulings and practice, all as of the date of this joint proxy
statement/prospectus. These laws and authorities are subject to change, possibly
with retroactive effect. The discussion below does not address any state, local
or foreign tax consequences of The Bank of Hemet acquisition. Your tax treatment
will vary depending upon your particular situation. You may also be subject to
special rules not discussed below if you are a certain kind of shareholder of
The Bank of Hemet, including:
- an individual who holds options for The Bank of Hemet common stock;
- an insurance company;
- a tax-exempt organization;
- a financial institution or broker-dealer;
- a person who is neither a citizen nor resident of the United States; or
- a holder of The Bank of Hemet common stock as part of a hedge, straddle or
conversion transaction.
The following discussion assumes that you hold The Bank of Hemet common
stock as a capital asset at the time of The Bank of Hemet acquisition and that
The Bank of Hemet is not a "collapsible corporation," within the meaning of
Section 341(b) of the Code.
Neither Pacific Community Banking Group nor The Bank of Hemet has requested
or will request an advance ruling from the Internal Revenue Service as to the
tax consequences of The Bank of Hemet acquisition or any related transaction.
The Internal Revenue Service could take different positions concerning the tax
consequences of The Bank of Hemet acquisition and related transactions discussed
below and such positions could be sustained.
You are urged to consult with your own tax adviser and financial planner
regarding the particular tax consequences of The Bank of Hemet acquisition to
you, including the applicability and effect of any state, local or foreign laws,
and the effect of possible changes in applicable tax laws.
Pacific Community Banking Group has received an opinion from Arthur Andersen
LLP, Pacific Community Banking Group's accountants, generally to the effect that
The Bank of Hemet acquisition will qualify as a tax-free reorganization under
the Code. Provided that the acquisition so qualifies:
- Neither Pacific Community Banking Group nor The Bank of Hemet will
recognize gain or loss in The Bank of Hemet acquisition.
- Except for any cash received instead of fractional shares, you will not
recognize any gain or loss as a result of the receipt of Pacific Community
Banking Group common stock and warrants pursuant to The Bank of Hemet
acquisition.
- Your aggregate tax basis for the shares of Pacific Community Banking Group
common stock received pursuant to The Bank of Hemet acquisition, including
any fractional
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share interest for which cash is received, will equal your aggregate tax
basis in shares of The Bank of Hemet common stock you held immediately
before The Bank of Hemet acquisition. You will not have any tax basis in
the Pacific Community Banking Group warrants received in The Bank of Hemet
acquisition.
- Your holding period for Pacific Community Banking Group common stock and
warrants received in The Bank of Hemet acquisition, including any
fractional share interest for which cash is received, will include the
period during which you held The Bank of Hemet common stock.
- You will be treated as receiving cash instead of a fractional share
interest of Pacific Community Banking Group common stock in exchange for
that fractional share interest and you will recognize gain or loss in an
amount equal to the difference between the amount of cash received and the
portion of your tax basis allocable to that fractional share interest. Any
gain or loss generally will be capital gain or loss, and will be long-term
capital gain or loss if you have held your shares of The Bank of Hemet
common stock for more than one year at the time of The Bank of Hemet
acquisition.
- A dissenting The Bank of Hemet shareholder who receives payment for all of
his or her shares of The Bank of Hemet common stock in cash generally will
recognize capital gain or loss equal to the difference between the cash
received and the shareholder's tax basis in such shares, provided that the
payment is neither essentially equivalent to a dividend within the meaning
of Section 302 of the Code nor has the effect of the distribution of a
dividend within the meaning of Section 356(a)(2) of the Code. A sale of
shares pursuant to an exercise of dissenter rights generally will not be
considered essentially equivalent to a dividend or have the effect of the
distribution of a dividend if, after the exercise, the shareholder owns no
shares of Pacific Community Banking Group common stock, either actually or
constructively under Section 318 of the Code.
- You will recognize gain or loss upon the sale of your Pacific Community
Banking Group common stock or warrants, including a sale of Pacific
Community Banking Group common stock in the public offering, in an amount
equal to the difference between the amount of cash you receive in the sale
and your tax basis in the sold common stock or warrants. Any gain or loss
generally will be capital gain or loss, and will be long-term capital gain
or loss if your holding period in the sold Pacific Community Banking Group
common stock or warrants exceeds one year at the time of sale. The
exercise of Pacific Community Banking Group warrants will not be taxable.
The tax opinion of Arthur Andersen LLP described above is based upon facts,
representations and assumptions set forth or referred to in the opinion and the
continued accuracy and completeness of representations made by Pacific Community
Banking Group and The Bank of Hemet. These representations include
representations made in certificates delivered to Arthur Andersen LLP by the
management of Pacific Community Banking Group and The Bank of Hemet. If any of
these representations is not correct in certain material respects, the
conclusions reached by Arthur Andersen LLP in their opinion may be jeopardized.
Furthermore, the Internal Revenue Service is not bound by this opinion. Thus,
the Internal Revenue Service could challenge a position taken by you in reliance
of this opinion, and such a challenge could be sustained.
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If The Bank of Hemet acquisition fails to qualify as a tax-free
reorganization under the Code, the acquisition will be taxable to The Bank of
Hemet based upon the difference between the fair market value of its assets and
its tax basis in the assets at the time of the acquisition. In addition, you
will recognize gain or loss on the difference between (a) the fair market value,
at the time of The Bank of Hemet acquisition, of the Pacific Community Banking
Group common stock and warrants and cash received in the acquisition and (b)
your tax basis in The Bank of Hemet common stock surrendered in the acquisition.
Any gain or loss will be capital gain or loss, and long-term capital gain or
loss if you held your shares of The Bank of Hemet common stock for more than one
year at the time of The Bank of Hemet acquisition. Furthermore, your tax basis
in the Pacific Community Banking Group common stock and warrants received will
equal their fair market value on the date of receipt and your holding period for
Pacific Community Banking Group common stock and warrants will begin on the day
after The Bank of Hemet acquisition. However, you will not recognize any
additional gain or loss on the sale of your Pacific Community Banking Group
common stock in the public offering.
REGULATORY APPROVALS
The acquisition cannot be consummated until the following take place: (A)
the parties have received, to the extent required by law or regulation, all
approval or consents of the Federal Reserve Board, the FDIC, and the California
Department of Financial Institutions; and (B) all applicable waiting periods
required by law shall have expired. The required applications for approval of
the transactions contemplated by The Bank of Hemet agreement have been filed
with the applicable regulatory agencies. This joint proxy statement/prospectus
has been prepared and proxies may be solicited from The Bank of Hemet's
shareholders prior to the receipt of these approvals.
THE TERMS OF THE BANK OF HEMET AGREEMENT ARE SUBJECT TO THE APPROVAL OF THE
REGULATORY AGENCIES. ANY AMENDMENT OF THE BANK OF HEMET AGREEMENT TO OBTAIN
REGULATORY APPROVAL WILL NOT BE SUBJECT TO THE APPROVAL OF THE SHAREHOLDERS AND
YOUR VOTE IN FAVOR OF THIS PROPOSAL CONSTITUTES A VOTE IN FAVOR OF ANY SUCH
AMENDMENTS TO THE ACQUISITION AGREEMENT WHICH MAY BE REQUIRED.
RESALE RESTRICTIONS AND LOCKUP AGREEMENTS
Under The Bank of Hemet agreement, affiliates of The Bank of Hemet who hold
stock or warrants of Pacific Community Banking Group will be subject to certain
resale restrictions under Rule 145 under the Securities Act. Among other things,
Rule 145 deems a person who was an affiliate of The Bank of Hemet at the time
the acquisition was submitted for shareholder approval to be engaged in an
underwriting of the securities acquired if such person subsequently publicly
offers or sells such securities. Notwithstanding this rule, sales of such
securities may be made in conformity with certain requirements with regard to
public information, limitations on amounts and manner of sale. The securities
sold in the public offering through Sutro & Co. Incorporated will be fully
registered under the Securities Act, and therefore will comply with these
requirements. Certain affiliates of The Bank of Hemet have signed letters
acknowledging such restrictions and agreeing to comply to applicable provisions
of Rule 145 and related provisions.
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In addition, all of the directors of The Bank of Hemet have provided lock-up
agreements at the request of Pacific Community Banking Group and its investment
advisors. Under the lock-up agreements, directors of The Bank of Hemet agree not
to sell or otherwise dispose of stock or warrants acquired in the acquisition
for a period of 90 days after the commencement of the initial public offering of
Pacific Community Banking Group's common stock.
DIVIDEND POLICY
Pacific Community does not expect to pay dividends for the foreseeable
future on Pacific Community common stock.
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THE BANK OF HEMET AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE BANK OF
HEMET AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX A TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE BANK OF HEMET
AGREEMENT.
STRUCTURE OF THE ACQUISITION
The Bank of Hemet agreement contemplates that The Bank of Hemet acquisition
will take place as follows:
- Pacific Community Banking Group will establish a new, wholly owned
subsidiary called PCBG Merger Corporation.
- Pacific Community Banking Group will deliver the shares of common stock
and warrants constituting the aggregate consideration provided in The Bank
of Hemet agreement.
- Each outstanding share of The Bank of Hemet's common stock will convert
into a right to receive a PRO RATA share of the aggregate consideration
(or, if the holder asserts dissenters' rights, his or her shares will
convert into a right to receive cash as provided in Sections 1300 through
1312 of the California General Corporation Law).
- PCBG Merger Corporation will merge with The Bank of Hemet, with The Bank
of Hemet being the surviving corporation.
- Each outstanding share of PCBG Merger Corporation stock will automatically
convert to a share of the surviving corporation, The Bank of Hemet.
As a result, Pacific Community Banking Group will be the sole shareholder of The
Bank of Hemet. The merger of PCBG Merger Corporation and The Bank of Hemet will
become effective at the time a certificate of merger is filed with the Secretary
of State of California [(or such later time as is agreed in writing by the
parties and specified in the certificate of merger)], which is expected to occur
as soon as practicable after the last condition precedent to The Bank of Hemet
acquisition stated in The Bank of Hemet agreement has been satisfied or waived.
Pacific Community Banking Group will effect an initial public offering of
its common stock, and will include in that offering those shares that
shareholders of The Bank of Hemet designate for sale in the public offering,
subject to the limits described below. The cash proceeds of the public offering
will be paid to those shareholders on the basis of the number of shares
designated, subject to the proration described below. All conditions to the
public offering must be satisfied before the acquisitions will take place.
PURCHASE CONSIDERATION
CONSIDERATION TO SHAREHOLDERS
Pacific Community Banking Group will pay each shareholder, for each share of
The Bank of Hemet common stock, 3.4 shares of common stock of Pacific Community
Banking Group, plus a warrant. In lieu of any fractional shares, Pacific
Community Banking Group will pay cash.
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IMMEDIATE SALE IN PUBLIC OFFERING
Each shareholder will have the right to make an immediate sale of the shares
of common stock received, by designating those shares for sale in the public
offering. The sale price in the public offering will be not less than $15.00 per
share of Pacific Community Banking Group common stock. Thus, for shares sold,
the amount of cash will be not less than $51.00 per share of The Bank of Hemet
common stock previously held. If the sale price in the public offering is higher
than $15.00 per share, the shareholder will receive the additional amount.
LIMIT ON SHARES INCLUDED IN PUBLIC OFFERING
Not more than 88% of the aggregate shares received by shareholders of The
Bank of Hemet may be sold in the public offering. If more than 88% of the shares
are designated for sale in the public offering, the shares sold in the public
offering by each shareholder will be reduced, in proportion to the total number
of shares designated by all shareholders in excess of 88%.
For example, suppose the total number of shares designated for sale in the
public offering is 91% of all shares paid to The Bank of Hemet shareholders.
That would represent 3% more designated shares than the 88% maximum. The number
of shares actually sold in the public offering would be limited to 88%. The
number of shares sold in the public offering for each designating shareholder
would be equal to 88/91sts of the number of shares designated, rounded to the
nearest whole share with cash paid in lieu of any fractional share.
CONSIDERATION TO OPTION HOLDERS
Each holder of options to purchase common stock of The Bank of Hemet will,
for each share subject to the option, receive shares of common stock of Pacific
Community Banking Group equal to (A) 3.4 shares minus (B) the exercise price of
the option. In addition, for each whole share of Pacific Community Banking Group
common stock received, each option holder (except Mr. Jaqua) will also receive a
ten-year warrant for one share of Pacific Community Banking Group common stock,
exercisable for 122% of the price to the public in the offering. Fractional
warrants will not be issued and no cash will be paid in place of fractional
warrants. The holders of options to purchase common stock of The Bank of Hemet
will have the opportunity to sell the shares of Pacific Community Banking Group
that they receive for their options in the public offering. The same limitations
that apply to sales of shares received in exchange for The Bank of Hemet common
stock will apply to shares received in exchange for options.
DELIVERY OF AGGREGATE PURCHASE CONSIDERATION; MANNER OF PAYMENT
U. S. Stock Transfer Corporation will act as the exchange agent. Pacific
Community Banking Group will deliver its common stock and warrants to the
exchange agent. The exchange agent will deliver those shares designated for sale
in the public offering (reduced by proration, if necessary, as described above)
to Sutro & Co. Incorporated. Sutro & Co. Incorporated will deliver to the
exchange agent the cash proceeds of the sale of such shares in the public
offering. The exchange agent will then pay the remaining common stock, the cash
proceeds and the warrants to the holders of The Bank of Hemet common stock who
have delivered or arranged for the delivery of their shares, in accordance with
the procedure described in the letter of transmittal and related instructions.
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CORPORATE GOVERNANCE CHANGES
The Bank of Hemet intends to amend its bylaws before the closing of the
acquisition to increase the number of directors from a range of five to nine to
range of seven to 13. In all other respects the articles of incorporation and
bylaws of The Bank of Hemet will remain in effect after the closing until duly
amended.
After the acquisition, Pacific Community Banking Group will be the sole
shareholder of The Bank of Hemet and will designate its management. The Bank of
Hemet agreement requires that a number of changes to the management of The Bank
of Hemet take place prior to the effective time of the merger of PCBG Merger
Corporation and The Bank of Hemet. Mr. Jaqua will resign from his position as
President, Chief Executive Officer and director of The Bank of Hemet, while
remaining as Chairman of BankLink Corporation. Mr. Caswell will be appointed
Chairman of the Board and Chief Executive Officer of The Bank of Hemet. John J.
McDonough will resign as Chairman of the Board of The Bank of Hemet but will
remain as a member of the board of directors. Pacific Community Banking Group
expects to appoint Mr. Caswell as chairman, and Messrs. Allen, Jannard, Saenz
and Schielein as directors.
Pacific Community Banking Group will appoint at least two additional members
to its board, selected from the current directors and officers of The Bank of
Hemet. Under the terms of a consulting agreement that Pacific Community Bank
Group has signed, Mr. Jaqua will serve as a director. Mr. Harold Williams is
also expected to be appointed as a director.
DIRECTOR AGREEMENTS
The Bank of Hemet agreement requires each of the directors of The Bank of
Hemet, concurrently with the execution of The Bank of Hemet agreement, to
execute an agreement to vote in favor of The Bank of Hemet agreement and to
recommend to the shareholders of The Bank of Hemet that they vote in favor of
the principal terms of The Bank of Hemet agreement. Each director of The Bank of
Hemet has executed such an agreement.
REPRESENTATIONS AND WARRANTIES
The Bank of Hemet has made representations and warranties in the agreement
about the financial condition, conduct of business and operations of The Bank of
Hemet and other customary matters. The Bank of Hemet's representations and
warranties will not survive the closing of the acquisition. If, however, they
are inaccurate in material respects, that could prevent completion of the
acquisition.
Pacific Community Banking Group has also made representations and warranties
under The Bank of Hemet agreement about itself. Pacific Community Banking
Group's representations and warranties will not survive the closing of the
acquisition.
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CONDITIONS TO THE ACQUISITION
Neither The Bank of Hemet nor Pacific Community Banking Group is obligated
to consummate The Bank of Hemet acquisition unless the following conditions are
satisfied or waived:
- All regulatory and other government approvals required to be received to
consummate The Bank of Hemet acquisition have been received and are
effective, without the imposition of conditions that would, in the
reasonable determination of Pacific Community Banking Group, materially
adversely affect the financial condition or operations of Pacific
Community Banking Group or The Bank of Hemet, or otherwise would be
materially burdensome. In addition, all applicable statutory waiting or
notice periods with respect to such government approvals shall have
expired and all conditions and requirements prescribed by law or by such
regulatory approvals have been satisfied. [As of the date of this joint
proxy statement/prospectus approvals have been received from
, and additional approvals are required from .]
- No action pending, or no order, judgment or decree is outstanding against,
the acquisition.
- The Bank of Hemet has received approval by its shareholders for the
acquisition.
- This joint proxy statement/prospectus and Pacific Community Banking
Group's registration statement relating to the offering have been declared
effective by the Securities and Exchange Commission, and all [necessary]
state blue sky authorizations have been received by Pacific Community
Banking Group. [As of the date of this joint proxy statement/prospectus
the registration statements have become effective, and the state blue sky
authorizations have been received.]
- Pacific Community Banking Group enters into a firm commitment underwriting
agreement for its public stock offering, and all conditions to the closing
of that offering (other than the bank mergers) have been satisfied or
waived.
Under The Bank of Hemet agreement, the offering must be completed by June
28, 1999, unless this deadline is extended. The deadline may be extended for an
additional 30 days by either Pacific Community Banking Group or The Bank of
Hemet if regulatory approvals and completion of the offering are relatively
imminent and are expected to be completed in the near future, and all other
conditions are satisfied. In addition, the deadline may be extended beyond 30
days by consent of Pacific Community Banking Group and The Bank of Hemet.
In addition, the parties are not obligated to close the acquisition unless
the following conditions are satisfied or waived:
- The other party has had no materially adverse changes in its financial
condition, results of operations or prospects.
- The Bank of Hemet has received prior to the solicitation of The Bank of
Hemet shareholders a fairness opinion (and that opinion has not been
withdrawn) that the contemplated transaction is fair from a financial
point of view. Prior to the date of this joint proxy statement/prospectus,
the required fairness opinion was received, as described under the heading
"Opinion of Baxter Fentriss & Company" on page 43 and Appendix C.
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- Pacific Community Banking Group receives a fairness opinion that the
contemplated transaction is fair to its shareholders from a financial
point of view.
- Pacific Community Banking Group has listed its shares of common stock
issued in the public offering on the Nasdaq National Market System.
- The Bank of Hemet shareholders voting against the transaction or giving
notice of dissent from the transaction, do not hold more than 10% of the
outstanding shares of The Bank of Hemet.
- The Bank of Hemet shareholders designate at least 75% of the shares of
Pacific Community Banking Group that they will receive for sale in the
public offering.
- The Bank of Hemet terminates its stock option plan, its employee benefit
plans, and all other contracts (except to the extent that Pacific
Community Banking Group directs that specific benefit plans and contracts
not be terminated).
- The Bank of Hemet certifies that The Bank of Hemet and BankLink
Corporation are making satisfactory progress toward compliance with Year
2000 safety and soundness issues.
- Other usual and customary conditions to closing are satisfied.
CONDUCT OF THE BANK OF HEMET'S BUSINESS PENDING THE ACQUISITION
Until the closing of the acquisition, The Bank of Hemet has agreed that it
will conduct its business only in the usual and ordinary course and will not
engage in specific kinds of transactions without the prior written consent of
Pacific Community Banking Group. The Bank of Hemet has agreed not to increase
compensation above the levels paid as of June 30, 1998, nor to pay any bonus,
without such consent and except for raises and bonuses consistent with prior
practices and paid prior to the determination date. It has also agreed not to
pay any dividend, except for a quarterly dividend of $.60 per share declared in
January, 1999 and a quarterly dividend of $.60 per share payable on or about May
18, 1999. Other commitments of The Bank of Hemet stated in the agreement include
promises to:
- use its best efforts to preserve the business organization intact;
- use its best efforts to preserve the goodwill of depositors and customers;
- meet all material contractual obligations and conform to legal
requirements;
- refrain from instituting a material claim except for actions against
borrowers, and with certain exceptions, conduct good faith settlement
negotiations of pending litigation;
- refrain from changing loan policies and procedures;
- refrain from making any material investments except in accordance with
safe and sound banking practices;
- advise Pacific Community Banking Group of any material adverse change;
- refrain from canceling or accelerating any material indebtedness owing to
The Bank of Hemet;
- refrain from selling or disposing of any real property or personal
property;
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- with certain exceptions, refrain from foreclosing or otherwise taking
title to real property without a clean "phase one" environmental report;
- commit any act which would cause a breach of any agreement that will have
a material adverse effect on The Bank of Hemet, or fail to do an act
necessary to prevent such a breach; and
- duly observe and conform to, and cause BankLink Corporation duly to
observe and conform, to, all compliance requirements for Year 2000 safety
and soundness issues.
COVENANTS OF THE BANK OF HEMET
The Bank of Hemet also agreed to provide Pacific Community Banking Group
with continuing access to all of its books, files, records, business, and to
invite a representative of Pacific Community Banking Group to attend The Bank of
Hemet's board meetings. The Bank of Hemet has agreed not to solicit, encourage
or otherwise enter into another agreement concerning the acquisition of The Bank
of Hemet or The Bank of Hemet's properties, securities, a merger, purchase of
assets or otherwise, except if The Bank of Hemet receives an unsolicited written
offer and except to the extent required by fiduciary obligations of The Bank of
Hemet board of directors. The Bank of Hemet also agreed to inform Pacific
Community Banking Group of any classified loans and promptly to notify Pacific
Community Banking Group of any event or condition that would cause a breach of
The Bank of Hemet agreement. The Bank of Hemet agreed to solicit its
shareholders for approval of the acquisition. The Bank of Hemet agreed to assist
Pacific Community Banking Group in connection with the preparation of the
materials used in its public offering. The Bank of Hemet agreed to terminate its
stock option plan and to not permit any options to be exercised before the
closing of the acquisition. The Bank of Hemet and Pacific Community Banking
Group agreed to prepare and promptly to file all necessary regulatory
applications. The Bank of Hemet also agreed to obtain all required and necessary
third party consents, such as landlord consent for assignment of leases. The
Bank of Hemet also agreed to obtain "phase one" environmental reports for all
real property owned by The Bank of Hemet.
COVENANTS OF PACIFIC COMMUNITY BANKING GROUP
Pacific Community Banking Group made similar covenants regarding the conduct
of its affairs only in the usual and ordinary course, and regarding the timely
cooperation in completing the acquisition. Pacific Community Banking Group also
agreed to cause The Bank of Hemet to maintain in effect a directors and officers
liability insurance policy (with such coverage, terms and conditions as are no
less advantageous than the insurance presently maintained by The Bank of Hemet)
for the directors and officers of The Bank of Hemet for a 3-year period after
the closing of The Bank of Hemet acquisition.
LOCK-UP AGREEMENT
All directors and executive officers of Pacific Community Banking Group and
The Bank of Hemet will enter into a lockup agreement with Sutro & Co.,
Incorporated, undertaking in writing that for 180 days (in the case of current
directors of Pacific Community Banking Group) or 90 days (in the case of current
directors and executive officers of The Bank of Hemet and Valley Bank) following
the completion of the public offering they will not sell any shares of Pacific
Community Banking Group common stock held by them (other than in the
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public offering), or warrants held by them that are exercisable into shares of
Pacific Community Banking Group common stock, unless Sutro & Co., Incorporated,
specifically grants them permission to do so. Pacific Community Banking Group
also agrees it will assure the execution and delivery of The Bank of Hemet
agreement of merger by PCBG Merger Corporation.
CLOSING
The closing of The Bank of Hemet acquisition will be on a date agreed by the
parties following satisfaction of all the conditions. If the closing does not
occur by June 28, 1999, The Bank of Hemet may terminate the agreement, except
that this deadline may be extended for an additional 30 days by Pacific
Community Banking Group or The Bank of Hemet if regulatory approvals and
completion of the initial public offering of Pacific Community Banking Group's
common stock are relatively imminent and are expected to be completed in the
near future, and all other conditions are satisfied. In addition, the deadline
may be extended beyond 30 days by consent of Pacific Community Banking Group and
The Bank of Hemet.
TERMINATION
The Bank of Hemet agreement may be terminated at any time prior to the
closing of the acquisition in the following manner:
- by mutual written consent of The Bank of Hemet and Pacific Community
Banking Group,
- by either party, after 30 days' notice, if the other party has materially
breached any covenant, agreement, representation, warranty, duty or
obligation under the agreement and the breach has not been cured within 30
days;
- by either party if any regulatory authority denies or refuses to grant
approval of the transactions contemplated by The Bank of Hemet agreement,
or a regulatory authority approves the transactions on conditions not
reasonably acceptable to Pacific Community Banking Group;
- by Pacific Community Banking Group if it does not enter into a firm
commitment underwriting agreement for its public offering of its stock or
if the conditions of such agreement are not satisfied or waived;
- by Pacific Community Banking Group if The Bank of Hemet approves a
transaction in which anyone else, or a group, acquires beneficial
ownership or control of 10% or more of the outstanding securities of The
Bank of Hemet, or an investor seeks to acquire 10% of The Bank of Hemet's
securities, and the board does not advise The Bank of Hemet's shareholders
that the board does not support that acquisition;
- by Pacific Community Banking Group if the shareholders of The Bank of
Hemet do not approve the acquisition; and
- by Pacific Community Banking Group if The Bank of Hemet solicits or enters
into an "Alternative Transaction," as defined in The Bank of Hemet
agreement. For this purpose, an "Alternative Transaction" is a transaction
with a third party for the acquisition of The Bank of Hemet, all of its
assets or a majority of its equity or debt securities.
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If the agreement is terminated by Pacific Community Banking Group because of
certain actions by The Bank of Hemet that are inconsistent with the acquisition,
Pacific Community Banking Group will have the right to purchase shares of The
Bank of Hemet pursuant to the warrant agreement described below or require
payment from The Bank of Hemet of all of its costs and expenses related to the
transaction, plus 50% of such costs and expenses.
If The Bank of Hemet terminates The Bank of Hemet agreement because of a
breach by Pacific Community Banking Group, Pacific Community Banking Group will
reimburse The Bank of Hemet for its expenses associated with the transaction,
plus an additional 50% of such expenses, up to a maximum of $500,000. If Pacific
Community Banking Group terminates The Bank of Hemet agreement because of a
breach by The Bank of Hemet, The Bank of Hemet will reimburse Pacific Community
Banking Group for its expenses associated with the transaction, plus an
additional 50% of such expenses, up to a maximum of $500,000.
The Bank of Hemet will reimburse Pacific Community Banking Group for its
expenses associated with the transaction, plus an additional 50% of such
expenses, without any maximum limit on those expenses, if Pacific Community
Banking Group terminates The Bank of Hemet agreement because any of the
following events:
- The Bank of Hemet fails to provide notice of a material change in The Bank
of Hemet's business or of an acquisition by a third party of 5% or more of
the outstanding common stock of The Bank of Hemet,
- the merger is not approved by The Bank of Hemet's shareholders,
- The Bank of Hemet executes an agreement that permits a third party to
acquire control of 25% or more of The Bank of Hemet's outstanding common
stock,
- in the event of a tender offer for 25% or more of the outstanding shares
of The Bank of Hemet common stock, The Bank of Hemet's board fails to
advise its shareholders that the board does not support the tender offer,
but supports the merger, or
- The Bank of Hemet engages in an Alternative Transaction as defined above,
and the warrant described below is not exercised.
THE WARRANT AGREEMENT
In order to induce Pacific Community Banking Group to enter into the
agreement and to discourage third party offers to acquire The Bank of Hemet, The
Bank of Hemet granted to Pacific Community Banking Group a warrant, exercisable
under certain limited circumstances, to purchase up to 210,800 shares of The
Bank of Hemet's common stock for a purchase price of $46.50 per share, subject
to adjustment for dilutive events. The shares covered by the warrant represent
19.9% of The Bank of Hemet's common stock outstanding as of December 31, 1998,
including the shares covered by the warrants. The warrant is exercisable if:
- a third party makes a tender offer or exchange offer for 25% or more of
the outstanding Bank of Hemet common stock;
- The Bank of Hemet enters into, or publicly announces an intention to enter
into, an agreement with a third party to (A) effect a merger or
consolidation of The Bank of Hemet, (B) dispose of 10% or more of The Bank
of Hemet's assets or (C) dispose of
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securities representing 10% or more of the voting power of The Bank of
Hemet's shareholders;
- a third party acquires a 25% or more beneficial ownership in The Bank of
Hemet common stock; or
- (A) The Bank of Hemet's shareholders do not approve the merger and (B) The
Bank of Hemet's board of directors withdraws its support for the merger,
in each case, after a third party has publicly disclosed its intention to
engage in one of the transaction described above or filed an application
under the Bank Holding Company Act or the Change in Bank Control Act for
approval to engage in such a transaction.
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THE BANK OF HEMET SELECTED FINANCIAL DATA
The following tables present selected historical consolidated financial
data, including per share information, for The Bank of Hemet. The following
financial data should be read in conjunction with the consolidated financial
statements of The Bank of Hemet included or incorporated by reference in this
joint proxy statement/prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Interest income........................... $ 19,416 $ 18,991 $ 19,127 $ 19,386 $ 16,601
Interest expense.......................... 9,185 8,946 8,823 9,102 6,615
Net interest income....................... 10,231 10,045 10,304 10,284 9,986
Provision for loan and lease losses....... 0 250 988 120 1,500
Noninterest income........................ 1,363 1,204 1,248 1,218 1,933
Noninterest expense....................... 6,736 6,200 8,182 7,368 9,197
Net income................................ 2,823 2,802 1,373 2,321 609
BALANCE SHEET (END OF PERIOD)
Total assets.............................. $ 252,877 $ 241,323 $ 234,257 $ 227,955 $ 223,772
Total loans............................... 207,802 192,287 187,441 185,717 185,746
Allowance for loan and lease losses....... 2,232 2,116 2,241 2,135 2,609
Nonperforming loans(1).................... 1,581 2,902 2,993 2,460 3,188
Other real estate owned................... 77 779 2,180 3,908 2,719
Total deposits............................ 230,385 219,211 212,268 207,425 203,583
Shareholders' equity...................... 21,024 20,228 20,102 19,078 17,670
BALANCE SHEET (PERIOD AVERAGE)
Total assets.............................. $ 248,297 $ 236,297 $ 231,532 $ 227,438 $ 221,431
Total loans............................... 196,675 187,298 184,307 183,632 185,708
Earning assets............................ 238,910 226,311 219,822 216,052 207,672
Total deposits............................ 226,228 214,291 209,938 207,323 200,000
Shareholders' equity...................... 20,594 20,146 20,130 18,695 18,335
CAPITAL RATIOS
Leverage ratio............................ 8.31% 8.53% 8.66% 8.21% 7.98%
Tier 1 risk-based capital................. 9.99 10.43 10.77 10.29 9.81
Total risk-based capital.................. 11.06 11.53 11.97 11.44 11.07
ASSET QUALITY RATIOS
Nonperforming loans/total loans(1)........ 0.76% 1.51% 1.60% 1.32% 1.72%
Nonperforming assets/total assets(2)...... 0.66 1.53 2.21 2.79 2.64
Allowance for loan losses/nonperforming
loans................................... 141.16 72.90 74.86 86.78 81.84
Allowance for loan losses/total loans..... 1.07 1.10 1.20 1.15 1.40
PERFORMANCE RATIOS
Return on average assets.................. 1.14% 1.19% 0.59% 1.02% 0.27%
Return on average equity.................. 13.71 13.91 6.82 12.42 3.32
Net interest margin(3).................... 4.28 4.44 4.69 4.76 4.81
Net interest spread(4).................... 3.37 3.55 3.90 4.05 4.29
Average total loans to average deposits... 86.94 87.40 87.79 88.57 92.85
Efficiency ratio(5)....................... 58.10 55.11 70.83 64.06 77.16
</TABLE>
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<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
PER SHARE INFORMATION
Basic earnings(6)......................... $ 3.34 $ 3.25 $ 1.53 $ 2.73 $ 0.74
Diluted earnings(7)....................... $ 3.23 $ 3.15 $ 1.53 $ 2.70 $ 0.70
Common stock dividends declared........... $ 2.40 $ 1.50 $ 1.00 $ 1.00 $ 0.25
Dividend payout ratio(8).................. 71.8% 46.2% 65.4% 36.6% 33.7%
Common stock book value................... $ 24.90 $ 23.96 $ 22.46 $ 23.03 $ 21.86
Common shares outstanding at period
end(9).................................. 844,278 844,278 894,901 828,398 807,594
Weighted average common shares
outstanding(10)......................... 844,278 863,262 881,705 813,661 806,244
</TABLE>
- ------------------------
(1) Nonperforming loans consist of loans on nonaccrual and loans past due 90
days or more.
(2) Nonperforming assets consist of nonperforming loans and other real estate
owned.
(3) Net interest margin is net interest income expressed as a percentage of
average total interest-earning assets.
(4) Net interest spread is the difference between the yield on average total
interest-earning assets and cost of average total interest-bearing
liabilities.
(5) The efficiency ratio is the ratio of noninterest expense to the sum of net
interest income before provision for loan losses and total noninterest
income.
(6) Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period.
(7) Diluted earnings per share reflects the potential dilution that would occur
if securities or other contracts to issue common stock were exercised or
converted into the common stock or resulted in the issuance of common stock
that then shared in earnings.
(8) The dividend payout ratio consists of the common stock dividends paid per
share of common stock divided by basic earnings per share of common stock.
(9) Based on shares outstanding at period end, excluding shares issuable upon
exercise of outstanding options.
(10) Weighted average number of shares of common stock outstanding for the
period, excluding shares issuable upon exercise of outstanding options.
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THE BANK OF HEMET
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE BANK OF HEMET'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE SECTION ENTITLED "RISK
FACTORS" AND ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to The Bank of Hemet
and its subsidiaries' financial condition, operating results, asset and
liability management, liquidity and capital resources. Averages presented in the
tables are daily average balances. The following discussion should be read in
conjunction with the consolidated financial statements of The Bank of Hemet.
FINANCIAL CONDITION
Total assets at December 31, 1998 equaled $252.9 million, an increase of
$11.6 million, or 4.8%, over total assets of $241.3 million at December 31,
1997. Total loans equaled $207.8 million at December 31, 1998, an increase of
$15.5 million, or 8.1%, over total loans of $192.3 million at December 31, 1997.
This increase was partially offset by a decrease in cash and cash equivalents,
accrued interest receivable and other real estate owned ("OREO"). The loan to
deposit ratio grew to 90.2% at year-end 1998, from 87.7% at year-end 1997. The
ratio of average total loans to average deposits, however, remained in a
relatively narrow range, equaling 86.9% in 1998, compared with 87.4% in 1997 and
87.8% in 1996.
The Bank of Hemet continued to decrease its nonperforming loans. At December
31, 1998, nonperforming loans equaled $1.6 million, or 0.76% of total loans.
This represented a reduction of $1.3 million, or 45.5%, from nonperforming loans
of $2.9 million (1.51% of total loans) at December 31, 1997. In turn, the
year-end 1997 level of nonperforming loans represented a reduction of $91,000,
or 3.04%, from nonperforming loans of $3.0 million (1.60% of total loans) at
December 31, 1996.
The allowance for loan and lease losses equaled $2.2 million at December 31,
1998, compared with an allowance of $2.1 million at December 31, 1997. The
allowance at December 31, 1998 represented 1.07% of total loans, compared with
1.10% of total loans at December 31, 1997 and 1.20% at December 31, 1996. Net
recoveries during 1998 were $116,000 compared to net charge-offs of $375,000 in
1997 and $882,000 in 1996. In addition, the allowance for loan and lease losses
represented 141.2% of nonperforming loans at December 31, 1998, compared with
72.9% at December 31, 1997 and 74.9% at December 31, 1996.
The Bank of Hemet also showed significant improvement in reducing levels of
OREO in 1998. OREO decreased by $702,000, or 90.1%, to $77,000, the lowest level
of OREO in five years. OREO equaled $779,000 at December 31, 1997 and $2.2
million at December 31, 1996.
These foregoing developments resulted in an improvement of the ratio of
earning assets to total average assets over the last three years. For 1998, the
ratio equaled 96.2%, compared with 95.8% for 1997 and 94.9% for 1996.
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Deposits were $230.4 million at December 31, 1998, an increase of $11.2
million, or 5.1%, over deposits of $219.2 million at December 31, 1997. The
increase was primarily as a result of increases in noninterest bearing demand
deposits of 15.9% and savings and interest bearing demand deposits of 13.4%.
Average interest bearing deposits represented 85.3% of average total deposits
for 1998 compared with 86.1% in 1997.
Total shareholders' equity was $21.0 million at December 31, 1998, an
increase of $796,000, or 3.9%, from $20.2 million at December 31, 1997.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
OVERVIEW. The Bank of Hemet reported net income for 1998 of $2.8 million
compared with $2.8 million in 1997 and $1.4 million in 1996. The return on
average assets was 1.14% in 1998 compared with 1.19% in 1997 and 0.59% in 1996.
The Bank of Hemet's return on average equity was 13.71% for 1998, 13.91% for
1997 and 6.82% for 1996.
Basic earnings per share equaled $3.34 in 1998 compared with $3.25 in 1997
and $1.53 in 1996. Diluted earnings per share equaled $3.23 in 1998 compared
with $3.15 in 1997 and $1.53 in 1996. Cash dividends were declared at $2.40 per
share for 1998, $1.50 per share for 1997 and $1.00 per share for 1996. This
resulted in dividend payout ratios (common stock dividends declared per share
divided by basic earnings per share) of 71.8% in 1998, 46.2% in 1997 and 65.4%
in 1996.
NET INTEREST INCOME. Net interest income is the primary source of operating
income of the bank. Net interest income represents the difference between the
interest income from earning assets and the interest paid on interest-bearing
liabilities. Net interest income for 1998 increased $186,000, or 1.9%, to $10.2
million when compared with 1997. The increase in 1998 was primarily attributable
to an increase in loan volume, partially offset by reduced loan yields and a
lower net interest spread. The net interest spread, which represents the average
yield earned on interest earning assets less the average yield paid on interest
bearing liabilities, decreased to 3.37% in 1998 from 3.55% in 1997.
Net interest income for 1997 decreased $259,000 to $10.0 million, or 2.5%,
when compared with net interest income of $10.3 million for 1996. The decrease
in 1997 was primarily attributable to reduced loan yields and a lower net
interest spread, partially offset by increased loan volume. The net interest
spread decreased to 3.55% in 1997 from 3.90% in 1996.
AVERAGE BALANCES AND RATES EARNED AND PAID. The following table presents,
for the periods indicated, consolidated average balance sheet information for
The Bank of Hemet, together with interest rates earned and paid on the various
sources and uses of its funds. The table is
65
<PAGE>
arranged to group the elements of earning assets and interest-bearing
liabilities, as these items represent the major sources of income and expense.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
INTEREST RATES INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID BALANCE EXPENSE PAID
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold................. $ 13,183 $ 704 5.34% $ 10,432 $ 563 5.40% $ 9,675 $ 509 5.26%
Investment securities(1)........... 29,052 1,610 5.54 28,581 1,633 5.71 25,840 1,416 5.48
Total loans(2)(3).................. 196,675 17,102 8.70 187,298 16,795 8.97 184,307 17,202 9.33
-------- -------- -------- -------- -------- --------
Total earning assets........... $238,910 $19,416 8.13% $226,311 $18,991 8.39% $219,822 $19,127 8.70%
Allowance for loan and lease
losses........................... (2,111) (2,116) (2,108)
Cash and due from banks............ 5,742 5,405 5,301
Premises and equipment............. 1,614 1,531 1,618
Interest receivable and other
assets........................... 4,142 5,166 6,899
-------- -------- --------
Total assets................... $248,297 $236,297 $231,532
-------- -------- --------
-------- -------- --------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest bearing demand deposits... $ 14,204 $ 152 1.07% $ 13,722 $ 151 1.10% $ 14,837 $ 168 1.13%
Money market deposits.............. 3,970 108 2.72 4,660 128 2.75 5,393 152 2.82
Savings deposits................... 48,793 1,955 4.01 47,468 1,949 4.11 41,968 1,709 4.07
Time deposits of $100,000 or
more............................. 9,036 501 5.54 8,662 489 5.65 15,537 891 5.73
Time deposits under $100,000....... 116,876 6,469 5.53 109,948 6,214 5.65 106,222 5,903 5.56
Other borrowings................... -- -- -- 249 15 6.02 -- -- --
-------- -------- -------- -------- -------- --------
Total interest bearing
liabilities...................... $192,879 $ 9,185 4.76% $184,709 $ 8,946 4.84% $183,957 $ 8,823 4.80%
Noninterest bearing demand
deposits......................... 33,349 29,831 25,981
Other liabilities.................. 1,475 1,611 1,464
Shareholders' equity............... 20,594 20,146 20,130
-------- -------- --------
Total liabilities and
shareholders' equity......... $248,297 $236,297 $231,532
-------- -------- --------
-------- -------- --------
Net interest income................ $10,231 $10,045 $10,304
-------- -------- --------
-------- -------- --------
Net interest spread(4)............. 3.37% 3.55% 3.90%
Net interest margin(5)............. 4.28% 4.44% 4.69%
</TABLE>
- ------------------------
(1) There are no tax exempt investment securities in the investment securities
portfolio for any of the reported years.
(2) Average balances are presented net of deferred loan origination fees.
Nonaccruing loans of $2.4 million for 1998, $3.2 million for 1997 and $2.9
million for 1996 are included in the table for computational purposes.
(3) Loan origination fees are included in interest income as adjustments of the
loan yields over the life of the loan using the interest method. Loan
interest income includes loan fees of $532,000 for 1998, $457,000 for 1997
and $642,000 for 1996.
(4) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(5) Net interest margin is computed by dividing net interest income by total
average earning assets.
NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE. The following table
sets forth, for the periods indicated, a summary of the changes in average asset
and liability balances and
66
<PAGE>
interest earned and paid resulting from changes in average asset and liability
balances ("volume") and changes in average interest rates. The changes in
interest due to both rate and volume are designated as "Mix."
<TABLE>
<CAPTION>
1998 COMPARED WITH 1997 1997 COMPARED WITH 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
CHANGE IN: CHANGE IN:
------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE MIX TOTAL VOLUME RATE MIX TOTAL
------- ------- ---- ----- ------- ------- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME
Federal funds sold........................................ $ 149 $ (6) $ (2) $ 141 $ 40 $ 13 $ 1 $ 54
Investment securities(1).................................. 27 (49) (1) (23) 151 60 6 217
Loans(2)(3)............................................... 841 (509) (25) 307 279 (675) (11) (407)
------- ------- ---- ----- ------- ------- ---- -----
Total................................................... $ 1,017 $(564) $(28) $ 425 $ 470 $(602) $ (4) $(136)
------- ------- ---- ----- ------- ------- ---- -----
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest bearing demand deposits.......................... $ 5 $ (4) $ 0 $ 1 $ (12) $ (5) $ 0 $ (17)
Money market deposits..................................... (19) (1) 0 (20) (21) (4) 1 (24)
Savings deposits.......................................... 54 (47) (1) 6 224 14 2 240
Time deposits of $100,000 or more......................... 21 (9) (0) 12 (394) (14) 6 (402)
Time deposits under $100,000.............................. 391 (128) (8) 255 207 100 4 311
Other borrowings.......................................... (15) (15) 15 (15) 0 0 15 15
------- ------- ---- ----- ------- ------- ---- -----
Total................................................... 437 (204) 6 239 4 91 28 123
------- ------- ---- ----- ------- ------- ---- -----
TOTAL CHANGE IN NET INTEREST INCOME................... $ 580 $(360) $(34) $ 186 $ 466 $(693) $(32) $(259)
------- ------- ---- ----- ------- ------- ---- -----
------- ------- ---- ----- ------- ------- ---- -----
</TABLE>
- ------------------------
(1) There are no tax exempt investment securities in the investment securities
portfolio for any of the reported years.
(2) Average balances are presented net of deferred loan origination fees.
Nonaccruing loans of $2.4 million for 1998, $3.2 million for 1997 and $2.9
million for 1996 are included in the table for computational purposes.
(3) Loan origination fees are included in interest income as adjustments of the
loan yields over the life of the loan using the interest method. Loan income
includes loan fees of $532,000 for 1998, $457,000 for 1997 and $642,000 for
1996.
PROVISION FOR LOAN AND LEASE LOSSES. The provision for loan and lease
losses charged to operations reflects management's judgment of the adequacy of
the allowance for loan and lease losses. The provision is determined through
periodic analysis, which includes a detailed review of the classification and
categorization of problem loans to be charged off; an assessment of the overall
quality and collectability of the portfolio; and consideration of the loan loss
experience, trends in problem loans and concentrations of credit risk,
evaluation of collateral, as well as current and expected economic conditions,
particularly in segments of The Bank of Hemet's market area. Such reviews also
assist management in establishing the recommended level of the allowance for
loan and lease losses. The Bank of Hemet's board of directors approves the
adequacy of the allowance for loan and lease losses on a quarterly basis.
For 1998, The Bank of Hemet recorded no provision for loan and lease losses,
compared with provisions of $250,000 for 1997 and $988,000 for 1996. In 1998 net
recoveries totaled $116,000, compared with net charge-offs of $375,000 in 1997
and $882,000 in 1996. The lack
67
<PAGE>
of a provision in 1998 and the substantial decrease in the provision in 1997
over 1996 reflected management's view of the improved asset quality of The Bank
of Hemet's loan portfolio, which benefited from strengthening of the Southern
California economy.
NONINTEREST INCOME. Noninterest income for 1998 increased $159,000, or
13.2%, to $1.4 million, compared with $1.2 million for 1997. The increase in
1998 was principally attributable to increased data processing fees generated by
BankLink Corporation, partially offset by a reduction in fees earned for the
servicing of certain real estate secured loans for third parties, and a
reduction in fees and service charges on deposits.
Noninterest income in 1997 remained at the same level, $1.2 million, as in
1996. The lack of change was attributable to a decrease in revenue from
processing of merchant credit card drafts and a reduction in fees earned for the
servicing of certain real estate secured loans for third parties, offset by
increased data processing fees generated by BankLink Corporation.
NONINTEREST EXPENSE. Noninterest expense for 1998 was $6.7 million,
compared with $6.2 million for 1997 and $8.2 million for 1996. The principal
components of the increase in 1998 were:
- Salaries and employee benefits. Salaries and employee benefits increased
in 1998 by $273,000, or 7.9%, as The Bank of Hemet increased the number of
full time equivalent employees to 86 at December 31, 1998 from 77 at
December 31, 1997.
- OREO expenses. OREO expenses for 1998 resulted in a net credit of
$101,000. The primary components of the credit were net gains on the sale
of OREO properties of $173,000, partially offset by OREO holding costs of
$61,000 and OREO writedowns of $11,000. However, the 1998 net credit was
below that of $187,000 for 1997, contributing to the increase in such
noninterest expenses. The net credit for 1997 benefited, in particular,
from the reversal of an OREO loss reserve of $182,000 and net gains on the
sale of OREO of $128,000, offset by OREO holding costs of $123,000.
- Premises and equipment expenses. Premises and equipment expense increased
$79,000, or 8.0%, in 1998 over 1997, primarily as a result of increased
equipment depreciation and maintenance expense.
- Other expenses. Other expenses increased in 1998 by $98,000, or 5.1%. This
category of expense includes costs for outside processing services, FDIC
and other insurance expense, professional fees and other miscellaneous
expense. The increase in 1998 is mainly the result of increased fees paid
to third parties for analyzed business deposit accounts and increased
professional fees.
In 1997, noninterest expense decreased by 24.2% over the 1996 level. The
principal component of the decrease was OREO expenses. The OREO expense category
decreased by $1.4 million in 1997 as a result of a decrease in writedowns of
$1.2 million, decreased carrying costs of $179,000 and an increase in gains on
sale of OREO of $91,000. Other expenses also decreased in 1997 compared with
1996. The decrease in other expenses for 1997 of $359,000 is mainly the result
of a special one-time assessment of $402,000 in 1996 on deposits acquired from a
savings and loan association in 1992. The special assessment was part of a
deposit insurance recapitalization plan enacted by Congress, and applied to all
institutions holding deposits derived from savings institutions. Other expenses
related to the processing of merchant credit card drafts also decreased. These
decreases were partially offset by an
68
<PAGE>
increase in 1997 of professional fees related to litigation. Salaries and
employee benefits also decreased in 1997 by $178,000, or 4.9% as a result of an
operational restructuring commencing the second quarter of 1996, designed to
streamline branch operations and support staff. Premises and equipment expense
also decreased slightly in 1997 over 1996, primarily by reason of reduced
depreciation expense related to BankLink Corporation's mainframe computer.
The Bank of Hemet's efficiency ratio--which is the ratio of noninterest
expense to the sum of net interest income before provision for loan losses and
total noninterest income--was 58.1% in 1998, compared with 55.1% in 1997 and
70.8% in 1996. The improvement in the ratio in 1997 and 1998, over 1996 reflects
primarily the significant reduction in OREO expenses from the levels experienced
in 1996.
PROVISION FOR INCOME TAXES. The Bank of Hemet's provision for income taxes
was $2.0 million in 1998, $2.0 million in 1997 and $1.0 million in 1996. These
changes corresponded directly to changes in pre-tax income. The effective income
tax rate was 41.9% in 1998 compared with 41.6% in 1997 and 42.4% in 1996.
NET INCOME. Net income in 1998 remained at the 1997 level of $2.8 million.
In 1998, The Bank of Hemet experienced increases in net interest income of
$186,000, primarily from increased loan volume. Noninterest income increased by
$159,000, primarily from The Bank of Hemet's data processing subsidiary. In
addition, the provision for loan and lease losses decreased by $250,000 as no
provision was taken in 1998. However, these favorable developments were almost
entirely offset by increased noninterest expenses of $536,000, primarily
relating to increases in salaries and employee benefits.
In 1997, net income increased $1.4 million, or 104.1%, to $2.8 million from
the 1996 level of $1.4 million. This increase was attributable to two major
components. First, noninterest expense decreased by approximately $2.0 million,
or 24.2%, principally as a result of reductions in expenses associated with the
disposition of OREO, as explained above. Second, the provision for loan losses
decreased by $738,000, or 74.7%. These increases were partially offset by
decreases in net interest income and noninterest income.
SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents a summary of selected quarterly financial data,
which should be read in conjunction with The Bank of Hemet's consolidated
financial statements and notes thereto included elsewhere in this joint proxy
statement/prospectus. In the opinion of management, this information has been
prepared on the same basis as the consolidated financial statements appearing
elsewhere in this joint proxy statement/prospectus, and includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the
69
<PAGE>
unaudited results set forth herein. The operating results for any quarter are
not necessarily indicative of results for any subsequent period or for the
entire year.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-----------------------------------------------------------------------------------
DECEMBER SEPTEMBER JUNE MARCH DECEMBER SEPTEMBER JUNE
1998 1998 1998 1998 1997 1997 1997
----------- ----------- --------- --------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income.................... $ 2,491 $ 2,596 $ 2,573 $ 2,571 $ 2,530 $ 2,475 $ 2,582
Provision for loan and lease losses.... (125) 0 125 0 190 60 0
Net income............................. 789 694 661 679 741 645 743
Basic earnings per share(1)............ $0.94 $0.82 $0.78 $0.80 $0.88 $0.77 $0.85
Diluted earnings per share(2).......... $0.91 $0.79 $0.75 $0.78 $0.84 $0.74 $0.83
<CAPTION>
MARCH
1997
---------
<S> <C>
Net interest income.................... $ 2,458
Provision for loan and lease losses.... 0
Net income............................. 673
Basic earnings per share(1)............ $0.75
Diluted earnings per share(2).......... $0.74
</TABLE>
- ------------------------
(1) Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period.
(2) Diluted earnings per share reflects the potential dilution that would occur
if securities or other contracts to issue common stock were exercised or
converted into the common stock or resulted in the issuance of common stock
that then shared in earnings.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is an integral part of managing a banking
institution's primary source of income, net interest income. The Bank of Hemet
manages the balance between rate-sensitive assets and rate-sensitive liabilities
being repriced in any given period with the objective of stabilizing net
interest income during periods of fluctuating interest rates. The Bank of Hemet
considers its rate-sensitive assets to be those which either contain a provision
to adjust the interest rate or mature within one year. These assets include
certain loans and investment securities and federal funds sold. Rate-sensitive
liabilities are those which allow for periodic interest rate changes within one
year: they include maturing time certificates, savings deposits, money market
and interest-bearing demand deposits. The difference between the aggregate
amount of assets and liabilities that reprice or mature within various time
frames is called the "gap." Generally, if repricing assets exceed repricing
liabilities in a time period, The Bank of Hemet would be deemed to be
asset-sensitive--a "positive gap." If repricing liabilities exceed repricing
assets in a time period, The Bank of Hemet would be deemed to be
liability-sensitive--a "negative gap." A positive gap will generally produce a
higher net interest margin in a rising rate environment and a lower net interest
margin in a declining rate environment. Conversely, a negative gap will
generally produce a lower net interest margin in a rising rate environment and a
higher net interest margin in a declining rate environment. However, because
interest rates for different asset and liability products offered by depository
institutions respond in a different manner, both in terms of the responsiveness,
as well as the extent of responsiveness to changes in interest rate environment,
the gap is only a general indicator of interest sensitivity.
Generally, The Bank of Hemet seeks to maintain a balanced position in which
there is a narrow range of asset or liability sensitivity within a one-year
period. This kind of balanced position, in principle, should ensure net interest
margin stability in times of volatile interest rates. This balanced position is
accomplished through maintaining a significant level of loans, investment
securities and deposits available for repricing or maturity within one year.
70
<PAGE>
The following table sets forth the interest rate sensitivity of The Bank of
Hemet's interest-earning assets and interest-bearing liabilities at December 31,
1998, using the interest rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate-sensitive within a
specified period when it can be repriced or matures within its contractual
terms.
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AFTER 1
AFTER 3 BUT BUT
WITHIN WITHIN WITHIN AFTER NONINTEREST-
3 MONTHS 12 MONTHS 5 YEARS 5 YEARS BEARING TOTAL
---------- ----------- --------- --------- ----------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold....................... $ 10,500 $ 0 $ 0 $ 0 $ 0 $ 10,500
Investment securities.................... 2,882 16,000 6,000 0 0 24,882
Loans(1)................................. 83,518 61,381 52,942 9,179 0 207,020
Other-interest bearing assets............ 5 0 0 0 0 5
---------- ----------- --------- --------- ----------- ----------
Total earning assets................... 96,905 77,381 58,942 9,179 0 242,407
Noninterest-bearing assets and allowances
for loan and lease losses.............. 0 0 0 0 10,470 10,470
---------- ----------- --------- --------- ----------- ----------
Total assets........................... $ 96,905 $ 77,381 $ 58,942 $ 9,179 $ 10,470 $ 252,877
---------- ----------- --------- --------- ----------- ----------
---------- ----------- --------- --------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing demand, money market and
savings deposits....................... $ 71,389 $ 0 $ 0 $ 0 $ 0 $ 71,389
Time deposits of $100,000 or more........ 2,641 4,625 875 0 0 8,141
Time deposits under $100,000............. 29,684 80,143 7,024 29 0 116,880
Other interest-bearing liabilities....... 0 0 0 0 0 0
---------- ----------- --------- --------- ----------- ----------
Total interest bearing liabilities....... 103,714 84,768 7,899 29 0 196,410
Other liabilities and shareholders'
equity................................. 0 0 0 0 56,467 56,467
---------- ----------- --------- --------- ----------- ----------
Total liabilities and shareholders'
equity................................. $ 103,714 $ 84,768 $ 7,899 $ 29 $ 56,467 $ 252,877
---------- ----------- --------- --------- ----------- ----------
---------- ----------- --------- --------- ----------- ----------
Incremental gap.......................... $ (6,809) $ (7,387) $ 51,043 $ 9,150 $ (45,997)
Cumulative gap........................... $ (6,809) $ (14,196) $ 36,847 $ 45,997
Cumulative gap/earning assets............ (2.8%) (5.9%) 15.2% 19.0%
Cumulative gap/total assets.............. (2.7%) (5.6%) 14.6% 18.2%
</TABLE>
- ------------------------
(1) Loan amounts do not include nonaccrual loans of $1.6 million.
The majority of The Bank of Hemet's loan portfolio, excluding nonaccrual
loans, continues to consist of floating or adjustable rate loans. The percentage
of such loans decreased to 86.7% at December 31, 1998 from 87.5% at December 31,
1997. Noninterest bearing demand deposits as a percentage of total deposits
increased to 14.8% at December 31, 1998 from 13.4% at December 31, 1997. The
Bank of Hemet's policy is to maintain a ratio of rate sensitive assets less rate
sensitive liabilities in a range between -10% and +10% of total assets for
assets and liabilities repricing within three months, and after three months but
within 12 months. At December 31, 1998, the amount of rate sensitive liabilities
that reprice within one year exceeded rate sensitive assets by $14.2 million, or
negative 5.6% of total
71
<PAGE>
assets. In other words, The Bank of Hemet was liability-sensitive with a
negative cumulative one-year gap of $14.2 million at December 31, 1998. In
general, based upon The Bank of Hemet's mix of deposits, loans and investments,
increases in interest rates would be expected to result in a decrease in The
Bank of Hemet's net interest margin.
The interest rate gaps reported in the table above arises when assets are
funded with liabilities having different repricing intervals. Since these gaps
are actively managed and change daily as adjustments are made for changes in
interest rates and market outlook, positions at the end of any period may not be
reflective of The Bank of Hemet's interest rate sensitivity in subsequent
periods. Active management dictates that longer-term economic views are balanced
against prospects for short-term interest rate changes in all repricing
intervals. For purposes of the analysis above, repricing of fixed-rate
instruments is based upon the contractual maturity of the applicable
instruments. Actual payment patterns may differ from contractual payment
patterns. The change in net interest margin may not always follow the general
expectations of an asset-sensitive or liability-sensitive balance sheet during
periods of changing interest rates, because interest rates earned or paid may
change by differing increments and at different time intervals for each type of
interest-sensitive asset and liability. As a result of these factors, at any
given time, The Bank of Hemet may be more sensitive or less sensitive to changes
in interest rates than indicated in the above table.
MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or to
future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rate and other market changes. Market risk is attributed to
all market risk sensitive financial instruments, including investment
securities, loans, deposits and borrowings.
The Bank of Hemet does not engage in trading activities for its own account
and does not participate in foreign currency transactions for its own account.
Accordingly, The Bank of Hemet's exposure to market risk is primarily a function
of its asset and liability management activities. The principal market risk to
The Bank of Hemet is the interest rate risk inherent in its lending, investing
and deposit-taking activities. This is because interest-earning assets and
interest-bearing liabilities of the bank do not change at the same speed, to the
same extent or on the same basis.
The Bank of Hemet's interest rate sensitivity analysis is discussed in the
preceding section. The table on page 71 measures The Bank of Hemet's interest
rate sensitivity gap, in other words, the difference between earning assets and
liabilities maturing or repricing within specified periods. However, gap
analysis has significant limitations as a method for measuring interest rate
risk since changes in interest rates do not affect all categories of assets and
liabilities in the same way or at the same time. Further, it has limitations in
helping The Bank of Hemet to manage the difference in behavior of lending and
funding rates--so-called "basis risk."
To address the limitations inherent in gap analysis, The Bank of Hemet
monitors its expected change in earnings based on changes in interest rates
through a detailed model. This model's estimate of interest rate sensitivity
takes into account the differing time intervals and differing rate change
increments of each type of interest-sensitive asset and liability. It then
measures the projected impact of changes in market interest rates on The Bank of
Hemet's
72
<PAGE>
return on equity. Based upon the December 31, 1998 mix of interest-sensitive
assets and liabilities, given an immediate and sustained increase in the federal
funds rate (and other key rates indexes) of 2%, this model estimates The Bank of
Hemet's cumulative return on equity over the next year would increase by about
.35%. However, the actual return on equity might decrease by the same relative
amount in response to a 2% decrease in these key rates.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. In order to maintain adequate liquidity, The Bank of Hemet must
have sufficient resources available at all times to meet its cash flow
requirements. The need for liquidity in a banking institution arises principally
to provide for deposit withdrawals, the credit needs of its customers and to
take advantage of investment opportunities as they arise. A financial
institution may achieve desired liquidity from both assets and liabilities. The
Bank of Hemet considers cash and deposits held in other banks, federal funds
sold, other short term investments, maturing loans and investments, payments of
principal and interest on loans and investments as sources of asset liquidity.
Deposit growth and access to borrowing lines of credit and market sources of
funds are considered by The Bank of Hemet as sources of liability liquidity.
The Bank of Hemet reviews its liquidity position on a regular basis based
upon its current position and expected trends as mentioned above. Liquid assets
include cash and deposits in other banks, unpledged securities and federal funds
sold. The Bank of Hemet's liquid assets totaled $31.9 million (12.6% of total
assets) at December 31, 1998, compared with $37.4 million (15.5% of total
assets) at December 31, 1997. Liquidity is also affected by the collateral
requirements of public deposits and certain borrowings. Total pledged securities
were $10.0 million at December 31, 1998 compared with $7.0 million at December
31, 1997 and $7.0 million at December 31, 1996.
Management believes that The Bank of Hemet maintains adequate amounts of
liquid assets and has adequate borrowing lines of credit with the Federal Home
Loan Bank and others to meet its liquidity needs. The Bank of Hemet's liquidity
might be insufficient if deposit withdrawals were to exceed anticipated levels.
Deposit withdrawals can increase if an insured depository financial institution
experiences financial difficulties or receives adverse publicity for other
reasons, or if its pricing, products or services are not competitive with those
offered by other institutions.
The Bank of Hemet's primary sources of liquidity include liquid assets and a
stable deposit base. To supplement these, The Bank of Hemet maintains a
borrowing line of credit with the Federal Home Loan Bank of San Francisco in the
amount of $14.2 million as of December 31, 1998. This line is secured by
approved residential and commercial real estate mortgage loans totaling $21.3
million as of December 31, 1998. At December 31, 1998, there were no advances
outstanding under this line of credit, and the line was not used during 1998.
Additionally, The Bank of Hemet has available reverse repurchase agreement lines
of credit with two broker-dealers aggregating $30.0 million at December 31,
1998. These lines are subject to normal terms for such arrangements. These lines
were not used during 1998 or 1996. In 1997, the average amount outstanding under
them was $249,000, and the maximum amount outstanding was $3.9 million. At
December 31, 1998, marketable securities with a market value of approximately
$14.0 million were available for the reverse repurchase lines of credit.
73
<PAGE>
CAPITAL. Capital serves as a source of funds and helps protect creditors
and uninsured depositors against potential losses. The primary source of capital
for The Bank of Hemet has been internally generated capital through retained
earnings. The Bank of Hemet's shareholders' equity increased $796,000, or 3.9%,
to $21.0 million at December 31, 1998 from $20.2 million at December 31, 1997.
The increase resulted from net income of $2.8 million, partially offset by
dividends of $2.0 million.
In May 1997, The Bank of Hemet concluded an issuer tender offer, which
resulted in the repurchase of 50,626 shares of common stock at the offering
price of $27.00 a share, for a total of $1.4 million.
Federal regulations establish guidelines for calculating risk-adjusted
capital ratios. These guidelines establish a systematic approach of assigning
risk weights to bank assets and off-balance sheet items making the regulatory
capital requirements more sensitive to differences in risk profiles among
banking organizations. Under these regulations, banks are required to maintain a
total risk-based capital ratio of 8.0%; that is, "Tier 1" plus "Tier 2" capital
must equal at least 8.0% of risk-weighted assets plus off-balance sheet items,
and Tier 1 capital (primarily shareholders' equity) must constitute at least 50%
of qualifying capital. Tier 1 capital consists primarily of shareholders' equity
excluding goodwill, and Tier 2 capital includes subordinated debt and, subject
to a limit of 1.25% of risk-weighted assets, the allowance for loan and lease
losses.
At December 31, 1998, The Bank of Hemet had a Tier 1 risk-based capital
ratio of 9.99% and a total risk-based capital ratio of 11.06%. In addition,
regulators have adopted a minimum leverage capital ratio standard. This standard
is designed to ensure that all financial institutions, irrespective of their
risk profile, maintain minimum levels of core capital, which by definition
excludes the allowance for loan and lease losses. These minimum standards for
top-rated institutions may be as low as 3.0%; however, regulatory agencies have
stated that most institutions should maintain ratios at least 1 to 2 percentage
points above the 3.0% minimum. At December 31, 1998, the Bank's leverage capital
ratio equaled 8.31%.
Banks with Tier 1 risk-based capital of 6.0%, total-risk-based capital of at
least 10.0% and a leverage capital ratio of at least 5.0% are considered "well
capitalized" by federal banking agencies.
The Bank of Hemet's policy is not to declare any dividends that would cause
its leverage capital ratio to be below 8.0% or its total risk-based capital
ratio to be below 10.0%.
The following table summarizes the minimum capital ratios required by
current FDIC regulations, the ratios at which a bank is considered
well-capitalized by the FDIC, and the capital ratios of The Bank of Hemet at
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
REGULATORY CAPITAL REQUIREMENTS THE BANK OF HEMET AT DECEMBER
31,
-------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
MINIMUM WELL-CAPITALIZED 1998 1997 1996
------------- ----------------- --------- --------- ---------
Tier-1 risk-based capital................................... 4.0% 6.0% 9.99% 10.43% 10.77%
Total risk-based capital.................................... 8.0% 10.0% 11.06% 11.53% 11.97%
Leverage capital ratio(1)................................... 4.0% 5.0% 8.31% 8.53% 8.66%
</TABLE>
- ------------------------
(1) Tier 1 capital to total quarterly average assets.
74
<PAGE>
Failure to meet minimum capital requirements can trigger mandatory actions
by the regulators that, if undertaken, could have a material effect on The Bank
of Hemet's financial statements and operations.
IMPACT OF INFLATION
The financial statements and related financial data presented in this joint
proxy statement/prospectus have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates are likely to have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
During periods of inflation, interest rates do not necessarily move in the same
direction or with the same magnitude as the price of goods and services. The
Bank of Hemet seeks to manage its interest sensitivity gap to minimize the
potential adverse effect of inflation and other market forces on its net
interest income and capital.
Financial institutions are also affected by inflation's impact on
noninterest expenses, such as salaries and occupancy expenses. During 1996, 1997
and 1998, inflation remained relatively stable, and The Bank of Hemet's level of
noninterest expense was relatively unaffected by inflation.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement provides that all
enterprises report comprehensive income as a measure of overall performance.
This new standard is effective for 1998 and did not have a material effect on
the current disclosures of The Bank of Hemet.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement changes the way public
companies report selected information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. This new standard
is effective for 1998 and did not have a material effect on the current
disclosures of The Bank of Hemet.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
new standard is effective for 2000 and is not expected to have a material impact
on the financial statements of The Bank of Hemet.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for certain activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar. SFAS No. 134 requires that after the securitization of mortgage loans
held for sale, the resulting mortgage-backed securities and other retained
interests should be classified in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and
75
<PAGE>
Equity Securities," based on its ability and intent to sell or hold these
investments. This new standard is effective for 1999 and is not expected to have
a material impact on the financial statements of The Bank of Hemet.
YEAR 2000 COMPLIANCE
OVERVIEW. The Year 2000 problem arises when computer programs have been
written using two digits rather than four to define the applicable year. As a
result, date-sensitive hardware and software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or other disruption of operations and impede normal business activities.
In June 1996, the Federal Financial Institutions Examination Council
("FFIEC") alerted the banking industry of the serious challenges that would be
encountered with Year 2000 issues. The FDIC has also implemented a plan to
require compliance with Year 2000 issues and regularly examines the progress of
banks, including The Bank of Hemet and its subsidiary, BankLink Corporation.
STATE OF READINESS OF THE BANK OF HEMET AND BANKLINK CORPORATION.
OVERALL PLAN. In accordance with FDIC guidelines, The Bank of Hemet and
BankLink Corporation have developed a comprehensive plan to deal with the Year
2000 issue. The Bank of Hemet and BankLink Corporation believe the plan, if
properly implemented, will result in timely and adequate modifications of its
systems and technology and those of its outside vendors to address Year 2000
issues appropriately. The plan has five phases:
- Awareness--defining the Year 2000 problem, gaining support and resources,
developing a plan, and establishing a project team.
- Assessment--assessing the size and complexity of the project, and
identifying all systems affected by the Year 2000 date change.
- Renovation--hardware and software upgrades, and outside vendor
certifications.
- Validation--testing systems including connections with other systems, and
acceptance of such by internal and external users.
- Implementation--developing a contingency plan.
Except as indicated hereafter, The Bank of Hemet has substantially completed
the five phases of its plan. However, to ensure success, The Bank of Hemet plans
to:
- engage in ongoing discussions with outside vendors to determine if they
have been successful in validating their compliance with their Year 2000
plans;
- use its best efforts to ensure that new systems or subsequent changes in
existing systems are verified as Year 2000 compliant;
- test certain third-party systems which have computerized interfaces with
The Bank of Hemet and BankLink Corporation's systems; and
- continue to refine its contingency plan.
The Bank of Hemet and BankLink Corporation rely substantially on outside
vendors to provide computer hardware and software systems for their operations.
Consequently, the Year
76
<PAGE>
2000 plan places heavy emphasis on compliance by outside vendors. The plan
prioritizes outside vendors by the degree of dependence on the computer systems
they provide. The plan also addresses customer capabilities to become Year 2000
compliant. Finally, the plan requires review of non-information technology
systems, such as alarm systems.
The Bank of Hemet's Audit Committee has engaged the services of an
independent consultant to review the overall Year 2000 project. The consultant
has been requested to emphasize testing of vendor-reliant, mission-critical
systems and to assist in the development of a contingency plan.
VENDORS. The Bank of Hemet and BankLink Corporation rely heavily on outside
vendors to provide the hardware and software used in their computer operations.
To determine the readiness of outside vendors, The Bank of Hemet and BankLink
Corporation have solicited written communications from each major outside vendor
about its compliance with Year 2000. Most outside vendors have responded that
they are Year 2000 compliant. For those outside vendors who provide mission
critical systems and have certified these systems as Year 2000 compliant, The
Bank of Hemet and BankLink Corporation have conducted in-house testing of these
systems, using various Year 2000-critical dates. The testing has included the
creation of a duplicate database on BankLink Corporation's mainframe computer
used for Year 2000 testing purposes.
For those outside vendors that have responded they are working toward Year
2000 compliance and that The Bank of Hemet and BankLink Corporation have
determined to be significant, The Bank of Hemet and BankLink Corporation will
follow up on a regular basis throughout 1999. These outside vendors have advised
The Bank of Hemet and BankLink Corporation that they expect to be Year 2000
compliant prior to December 31, 1999, and there are no Year 2000 compliance
issues which appear to be unresolvable by that date. For such outside vendors
that provide mission critical systems, The Bank of Hemet and BankLink
Corporation will be conducting ongoing testing to validate Year 2000 compliance.
The Bank of Hemet and BankLink Corporation have determined that other
outside vendors will not have a material impact on their operations, whether or
not they are Year 2000 compliant.
CUSTOMERS. The Bank of Hemet has sent a questionnaire to each of its
significant borrowers and depositors to determine the extent of risk created by
any failure by them to remediate their own Year 2000 issues. Most customers have
responded. Each borrower and depositor is categorized according to its state of
readiness based on its response to the questionnaire and The Bank of Hemet's
review of the customer. The Bank of Hemet has also taken steps to ensure
liquidity for depositors with high Year 2000 risks. It will make a reassessment
on each customer's risk on a regular basis. BankLink Corporation has organized a
client bank information group to exchange Year 2000 readiness and testing
information.
NON-INFORMATION TECHNOLOGY SYSTEMS. The Bank of Hemet and BankLink
Corporation have tested their non-information technology systems, such as
microprocessors controlling its environmental and alarm systems, and found them
to be Year 2000 compliant.
COSTS TO ADDRESS YEAR 2000 ISSUES FOR THE BANK OF HEMET AND BANKLINK
CORPORATION. Some of The Bank of Hemet's and BankLink Corporation's computer
hardware and software applications were modified or replaced in order to
maintain their functionality as the year
77
<PAGE>
2000 approaches. The Bank of Hemet and BankLink Corporation have spent
approximately $120,000 as of December 31, 1998 to address Year 2000 issues and
estimates their total expenditures over the two-year period 1998 through 1999 to
be approximately $200,000. This estimate includes some costs, such as the
purchase of computer hardware and software upgrades, that will qualify as
depreciable assets for accounting purposes, with the related depreciation
expense recognized over the estimated useful lives of the applicable assets.
However, the majority of costs, including in-house staff time, will be expensed
as incurred, in compliance with generally accepted accounting principles.
BankLink Corporation expects to recover a portion of its total costs by
recognizing non-interest income over the fifteen month period ending December
31, 1999 from fees charged to its client banks for Year 2000 testing and other
costs incurred. The Bank of Hemet does not anticipate that any of these costs
will materially impact its consolidated results of operations in any one
reporting period.
In light of the complexity of the Year 2000 problem and its potential impact
on both The Bank of Hemet and BankLink Corporation and third parties that
interact with them, there can be no assurance that the costs associated with the
Year 2000 issue will be as estimated. The Bank of Hemet and BankLink Corporation
do not intend to obtain insurance against any Year 2000 risks.
RISKS OF THE YEAR 2000 ISSUES FOR THE BANK OF HEMET AND BANKLINK
CORPORATION. Management believes that it is likely that the foregoing efforts
will be successful. However, it is possible that necessary remediation of
vendor-reliant systems may not be completed in a timely manner, or third-party
systems with which The Bank of Hemet and BankLink Corporation have computerized
interfaces may create Year 2000 issues. It is also possible that the expenses or
liabilities to which The Bank of Hemet and BankLink Corporation may become
subject as a result of such issues could be material. Any such event or
occurrence could have a material adverse effect on The Bank of Hemet's and
BankLink Corporation's business, prospects, operating results and financial
condition. Ultimately, the potential impact of the Year 2000 issue on The Bank
of Hemet and BankLink Corporation will depend on a series of complex factors,
including the following:
- the corrective measures undertaken by The Bank of Hemet and BankLink
Corporation themselves;
- the measures undertaken by outside vendors to become Year 2000 compliant;
- the accuracy of representations made by outside vendors to The Bank of
Hemet and BankLink Corporation concerning their state of readiness;
- the degree of compliance by governmental agencies, businesses (including
telephone and other utility companies), and other entities which engage in
essential communications or third-party computerized interfaces with The
Bank of Hemet and BankLink Corporation and its customers; and
- the degree of compliance by customers.
At worst, The Bank of Hemet's and BankLink Corporation's customers and
outside vendors will face severe Year 2000 issues. Large customers negatively
affected by Year 2000 issues could lead to deposit outflows or increased risk in
collecting loans. The Bank of Hemet and BankLink Corporation may also be
required to replace noncompliant outside vendors with more expensive Year 2000
compliant outside vendors.
78
<PAGE>
The Bank of Hemet and BankLink Corporation have taken steps to avail
themselves of the safe harbor provision of the newly enacted Year 2000
Information and Readiness Disclosure Act by clearly labeling written
communications to customers and vendors as a "Year 2000 Readiness Disclosure,"
thereby promoting a prompt, candid and thorough exchange of information on Year
2000 readiness and limiting liability for any errors.
CONTINGENCY PLANS OF THE BANK OF HEMET AND BANKLINK CORPORATION. The Bank
of Hemet and BankLink Corporation have created a contingency plan to take effect
should there be circumstances preventing timely implementation. If those outside
vendors do not demonstrate compliance by a certain date, The Bank of Hemet and
BankLink Corporation will seek alternatives in accordance with its contingency
plan. Outside vendors of mission critical systems are major U.S. companies, and
management has assessed the relevant financial and operational capabilities of
their hardware and software to provide Year 2000 processing. The time frame to
convert to another outside vendor in the Year 2000 is relatively long, and
therefore the ability to obtain replacement outside vendors will be limited.
In addition, for each mission critical system, The Bank of Hemet and
BankLink Corporation have identified alternate procedures to achieve a
successful resumption of business in case its computer systems, or those of its
mission critical outside vendors, fail. The alternative procedures include
development of a manual process for implementing the system and identifying
alternative outside vendors.
79
<PAGE>
BUSINESS OF THE BANK OF HEMET
GENERAL
The Bank of Hemet is a California community bank headquartered in Hemet,
California. In addition to its headquarters, The Bank of Hemet maintains five
branches in Riverside county. Riverside county and neighboring San Bernardino
county are experiencing significant population and economic growth.
The Bank of Hemet's primary service area is the area of California commonly
referred to as the Inland Empire, a region primarily consisting of Riverside and
San Bernardino counties. These counties are experiencing significant population
and economic growth, much of which has been fueled by the migration of
manufacturing, distribution and export service firms from adjacent Los Angeles,
Orange and San Diego counties.
The Bank of Hemet was incorporated in 1974 under the California General
Corporation Law and is licensed by the California Department of Financial
Institutions to conduct a general banking business. Its deposits are insured up
to the applicable legal limits by the FDIC. The Bank of Hemet is not a member of
the Federal Reserve System.
The Bank of Hemet emphasizes community-based commercial banking. It serves
small-to-medium size businesses, professionals, retired individuals and
residents in the Hemet area, as well as businesses and real estate
owners/developers primarily throughout Riverside, San Bernardino, Orange, Los
Angeles and San Diego counties. The Bank of Hemet also makes commercial real
estate loans meeting its underwriting criteria in the San Francisco bay area, in
the Sacramento area and in other areas outside of its primary service area,
including Arizona.
The Bank of Hemet offers a full range of commercial, real estate, personal,
home improvement, automobile and other installment and term loans. The Bank of
Hemet's primary lending focus has historically been and continues to be
commercial real estate and construction lending.
Deposit services offered by The Bank of Hemet include personal and business
checking and savings accounts, money market deposit accounts, certificates of
deposit, and individual retirement accounts. Other operational services include
safe deposit boxes, travelers checks, wire transfers, overdraft lines of credit,
electronic banking for businesses, 24-hour telephone banking, merchant bankcard,
automated clearing house origination, automatic teller machines on the Instant
Teller, Maestro and Cirrus networks and other standard depository functions.
The Bank of Hemet's wholly owned subsidiary, BankLink Corporation, provides
data processing services to The Bank of Hemet and eight other banks and item
processing services to The Bank of Hemet and three other banks. At December 31,
1998, BankLink Corporation had total assets of $931,000 and pre-tax earnings for
the year ended December 31, 1998 of $146,000. The Bank has four other
subsidiaries which are not active.
BUSINESS STRATEGY
The Bank of Hemet's business strategy is to:
- maintain asset quality;
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<PAGE>
- increase the volume and diversity of good quality, mini-perm real estate
and commercial loans;
- remix its deposit base to lower its cost of funds;
- provide high quality value based banking services and products to its
customers;
- continue a pace of moderate growth; and
- increase operating efficiencies.
The Bank of Hemet has focused on, and will continue to focus on, marketing
efforts to implement its business strategy. These efforts include obtaining
increased loan and deposit business from existing customers, word-of-mouth
referrals, advertising and personal solicitation of customers by officers,
directors and stockholders. Management assigns responsibility to all loan and
business development officers to make regular calls on potential customers and
obtain referrals from existing customers. The Bank of Hemet directs promotional
efforts toward individuals and small-to-medium sized businesses.
PREMISES
The following table sets forth information about The Bank of Hemet's banking
offices.
<TABLE>
<CAPTION>
OWNED/
LOCATION TYPE OF OFFICE LEASED SIZE SINCE
- ------------------------------------------------ ---------------- --------- ---------------- ---------
<S> <C> <C> <C> <C>
1600 East Florida Avenue, Hemet................. Main branch Leased 7,200 sq./ft 1988
1555 W. Florida Avenue, Hemet................... Branch Leased 5,300 sq./ft 1986
1497 S. San Jacinto Street, San Jacinto......... Branch Leased 3,300 sq./ft 1992
56525 Highway 371, Anza......................... Branch Owned 1,920 sq./ft 1992
3545 Central Avenue, Riverside.................. Branch(1) Leased 4,600 sq./ft 1993
3715 Sunnyside Drive, Riverside................. Branch and Owned 7,100 sq./ft(3) 1993
Administrative
offices(2)
</TABLE>
- ------------------------
(1) The bank does not currently accept deposits at this location. These are the
premises of The Bank of Hemet's wholly owned data processing subsidiary,
BankLink Corporation.
(2) These premises are occupied by The Bank of Hemet's loan, note, human
resources, marketing and finance departments.
(3) Includes enclosed parking area.
Aggregate annual rentals for The Bank of Hemet and its subsidiaries for
leased premises were $376,000 for the year ended December 31, 1998.
INVESTMENT PORTFOLIO
The following table sets forth the book values of securities at the dates
indicated. Under SFAS No. 115, "Accounting for Certain Agency Investments in
Debt and Equity Securities," The Bank of Hemet has designated all of its U.S.
government agency securities and other
81
<PAGE>
securities as "held-to-maturity." The Bank of Hemet does not have any tax exempt
securities in its investment portfolio.
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. government agencies(1).................................. $ 24,000 $ 24,000 $ 23,996
Other securities(2).......................................... 882 833 783
--------- --------- ---------
Total.................................................... $ 24,882 $ 24,833 $ 24,779
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) At December 31, 1998, $10.0 million of these securities were pledged to
secure public funds deposited with The Bank of Hemet, compared with $7.0
million at December 31, 1997 and $7.0 million at December 31, 1996.
(2) Consists of perpetual preferred stock of the Federal Home Loan Bank of San
Francisco.
The following table sets forth the maturities of The Bank of Hemet's
investment securities at December 31, 1998 and the weighted average yields of
those securities calculated on the basis of the cost and effective yields based
on the scheduled maturity of each security.
<TABLE>
<CAPTION>
AFTER ONE TO AFTER FIVE TO
ONE YEAR OR LESS FIVE YEARS TEN YEARS AFTER TEN YEARS
---------------------- ---------------------- ------------------------ ------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ----- --------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. government
agencies................ $ 18,000 5.08% $ 6,000 5.04% -- --% $ 0 0.00%
Other securities(1)....... 0 0.00 0 0.00 -- -- 882 5.86
--------- --------- --- -----
Total..................... $ 18,000 5.08% $ 6,000 5.04% -- -- $ 882 5.86%
--------- --------- -----
--------- --------- -----
Estimated fair value...... $ 18,005 $ 5,997 $ 882
--------- --------- -----
--------- --------- -----
<CAPTION>
TOTAL
----------------------
AMOUNT YIELD
--------- -----
<S> <C> <C>
U.S. government
agencies................ $ 24,000 5.07%
Other securities(1)....... 882 5.86
---------
Total..................... $ 24,882 5.09%
---------
---------
Estimated fair value...... $ 24,884
---------
---------
</TABLE>
- ------------------------
(1) Consists of perpetual preferred stock of the Federal Home Loan Bank of San
Francisco. These securities are held as "available for sale," and their
carrying value is equal to their cost of acquisition.
The Bank of Hemet does not own securities of a single issuer (other than
U.S. government agencies) whose aggregate book value is in excess of 10% of its
total equity.
LENDING ACTIVITIES
The Bank of Hemet originates loans for its own portfolio. Lending activities
include commercial real estate mortgage, real estate construction, commercial
and consumer loans. The Bank of Hemet's primary asset category continues to be
its loan portfolio, which comprised 79.2% of average total assets in 1998. At
December 31, 1998, The Bank of Hemet had no foreign loans outstanding and has
not engaged in the business of making foreign loans.
82
<PAGE>
LOAN PORTFOLIO
COMPOSITION OF LOANS. The following table shows the composition of loans by
type of loan or type of borrower at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate--construction............................ $ 1,941 $ 6,627 $ 8,268 $ 12,169 $ 6,885
Real estate--mortgage(1)............................. 195,248 174,897 167,979 163,684 164,784
Commercial........................................... 10,016 10,033 10,401 8,525 11,762
Consumer............................................. 1,002 1,065 1,043 1,264 1,542
Municipal leases..................................... -- -- 24 292 833
All other loans...................................... 391 411 482 489 761
---------- ---------- ---------- ---------- ----------
208,598 193,033 188,197 186,423 186,567
Deferred origination fees........................ (796) (746) (756) (706) (821)
---------- ---------- ---------- ---------- ----------
Total loans.......................................... $ 207,802 $ 192,287 $ 187,441 $ 185,717 $ 185,746
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Includes commercial real estate and residential mortgage loans.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES. The
following table shows the maturity distribution of the loan portfolio excluding
nonaccrual loans and deferred origination fees at December 31, 1998, and the
loan portfolio's sensitivity to changes in interest rates. The principal
balances of loans due after one year are indicated by both fixed and floating
rate categories.
<TABLE>
<CAPTION>
FLOATING
AFTER ONE RATE: FIXED RATE:
WITHIN ONE BUT WITHIN AFTER DUE AFTER DUE AFTER
YEAR FIVE YEARS FIVE YEARS ONE YEAR ONE YEAR(1)
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Real estate--construction............................. $ 1,941 $ 0 $ 0 $ 0 $ 0
Real estate--mortgage................................. 10,786 89,783 93,101 162,982 19,902
Commercial............................................ 7,449 2,568 0 2,035 533
Consumer.............................................. 491 353 158 36 475
Municipal leases...................................... 0 0 0 0 0
All other loans....................................... 391 0 0 0 0
---------- ----------- ----------- ---------- -----------
Total............................................. $ 21,058 $ 92,704 $ 93,259 $ 165,053 $ 20,910
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
</TABLE>
- ------------------------
(1) Includes real estate mortgage floating rate loans of $8,773,000 which are
accruing interest at floor rates.
LOANS SECURED BY REAL ESTATE
At December 31, 1998, $197.2 million, or approximately 94.5% of The Bank of
Hemet's loans were secured by first deeds of trust on real estate. The
concentration in loans secured by real estate is monitored on a quarterly basis
and taken into account in the computation of the adequacy of the allowance for
loan and lease losses. The non-residential real estate loan portfolio is
segregated into various categories on which annual concentration limits are
recommended by management and approved by the board of directors. The categories
include
83
<PAGE>
industrial, medical office, commercial office, mini-storage and retail. "Retail"
is further broken down into subcategories, including anchored, automotive,
office and strip center. Additionally, the portfolio is geographically
categorized by state and county.
The three largest categories of loans secured by real estate are shown in
the following table:
<TABLE>
<CAPTION>
AMOUNT AT
DECEMBER 31, PERCENTAGE OF LOANS
TYPE OF REAL ESTATE LOAN 1998 IN PORTFOLIO
- -------------------------------------------- -------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial mortgage loans................... $ 166,179 79.7%
Residential mortgage loans.................. 29,069 13.9
Construction loans.......................... 1,941 0.9
-------------- ---
Total real estate loans..................... $ 197,189 94.5%
-------------- ---
-------------- ---
</TABLE>
COMMERCIAL MORTGAGE LOANS. The Bank of Hemet provides intermediate term
commercial real estate loans collateralized by first deeds of trust on real
property. Approximately one percent of the commercial mortgage portfolio
consists of loans made outside California. Within California, at December 31,
1998, approximately 43% of commercial mortgage loans were secured by real
property in Riverside county, 28% in Orange county, 11% in San Bernardino county
and 7% in Los Angeles county.
The value of real estate collateral is supported by formal appraisals in
compliance with applicable federal regulations. Generally, these types of loans
are made for a period of up to five years, loan-to-value ratios are 65% or less,
and debt coverage ratios, are 1.30:1 or better. The loans generally carry
adjustable interest rates indexed to the one-year or, to a lesser extent, the
three- or five-year Treasury constant maturity index. Rate adjustments vary from
quarterly to five years. Amortization may be up to 30 years.
Repayment on loans secured by such properties depends on successful
operation and management of the collateral properties. The value of the
collateral is also subject to the real estate market and general economic
conditions. The Bank of Hemet attempts to address these risks through its
underwriting criteria, including the loan-to-value ratios and debt service
coverages described above. The collateral quality and type must meet The Bank of
Hemet's standards, the property must have quality leases extended beyond the
maturity date if applicable, and the borrower/guarantor must have strong
liquidity. The Bank of Hemet generally requires continuing guaranties from
borrowers/owners. All of the properties securing The Bank of Hemet's real estate
portfolio are inspected by The Bank of Hemet's lending administration personnel
before the loan is made.
The Bank of Hemet requires title insurance insuring the status of its lien
on all of the real estate secured loans. The Bank of Hemet also requires that
fire and extended coverage casualty insurance (and, if the property is in a
flood zone, flood insurance) is maintained in an amount at least equal to the
outstanding loan balance, subject to applicable law that in some circumstances
may limit the required amount of hazard insurance to the cost to replace the
insured improvements.
RESIDENTIAL MORTGAGE LOANS. As of December 31, 1998, the total of all
residential mortgage loans held in portfolio by The Bank of Hemet was $29.1
million, or 13.9% of total loans. The portfolio is primarily secured by first
deeds of trust on single-family residences located in
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<PAGE>
the Riverside and San Bernardino counties of California. Approximately $25.1
million or 86.4% of this portfolio consists of variable rate loans.
From time to time, The Bank of Hemet has originated first mortgages for
resale on the secondary market to Federal Home Loan Mortgage Corporation (FHLMC)
and Federal National Mortgage Association (FNMA). However, since 1995 The Bank
of Hemet has chosen not to originate residential mortgage loans either for its
own portfolio or for sale in the secondary market due to competitive issues. The
Bank of Hemet retains the servicing rights to the loans sold. Servicing
arrangements provide for The Bank of Hemet to maintain records related to the
servicing agreement, to assume responsibility for billing mortgagors, to collect
periodic mortgage payments, and to perform various other activities necessary to
the mortgage servicing function. The Bank of Hemet receives as compensation a
servicing fee based on the principal balance of the outstanding loans. Servicing
fee income amounted to $57,000 during 1998, and the total unpaid principal
balance of the mortgage servicing portfolio amounted to approximately $18.3
million at December 31, 1998.
REAL ESTATE CONSTRUCTION LOANS. The Bank of Hemet finances the construction
of residential, commercial and industrial properties. The Bank of Hemet's
construction loans typically have the following characteristics:
- First mortgages on the collateral real estate;
- Maturities of one year or less;
- A floating rate of interest based on the Bank of America prime rate;
- Minimum cash equity of 30% of project cost;
- Reserve for anticipated interest costs during construction;
- Loan-to-value ratios generally not exceeding 65%; and
- Recourse against the borrower or a guarantor in the event of a default.
For commercial and industrial properties, The Bank of Hemet typically issues
a stand-by commitment for a "take-out" mini-perm loan on the property. The Bank
of Hemet does not participate in joint ventures or take an equity interest in
connection with its construction lending.
Construction loans involve additional risks compared with loans secured by
existing improved real property. These include:
- The uncertain value of the project prior to completion;
- The inherent uncertainty in estimating construction costs;
- Possible difficulties encountered by municipal or other governmental
regulation during construction; and
- The inherent uncertainty of the market value of the completed project.
As a result of these uncertainties, repayment depends, in large part, on the
success of the ultimate project. If The Bank of Hemet is forced to foreclose on
a project before or at completion because of a default, The Bank of Hemet may
not be able to recover all of the unpaid balance of the loan, and its accrued
interest, as well as the related foreclosure and
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holding costs. In addition, The Bank of Hemet may find it necessary to pay
additional amounts to complete a project and may have to hold the property for
an indeterminate time. Further, future local or national economic conditions
could have an adverse impact on the potential success of construction projects
financed by The Bank of Hemet and on collateral securing these loans.
COMMERCIAL LOANS
At December 31, 1998, approximately $10.0 million, or 4.8% of The Bank of
Hemet's total loan portfolio, consisted of commercial loans. The Bank of Hemet
provides intermediate and short-term commercial loans that are either unsecured,
partially secured or fully secured. The majority of these loans are in Riverside
and San Bernardino counties. Loan maturities range from 90 days to five years.
The Bank of Hemet requires complete re-analysis before making any extension. The
Bank of Hemet makes these loans to individuals, professionals and businesses.
The Bank of Hemet takes collateral whenever possible regardless of the loan
purpose. Collateral may include cash, liens on accounts receivable and/or
equipment. As a matter of policy, The Bank of Hemet requires all principals of a
business to be guarantors on all commercial loans. All borrowers must
demonstrate the ability to service and repay not only The Bank of Hemet debt but
all outstanding debt, on the basis of historical cash flow or conversion of
assets.
CONSUMER LOANS
As of December 31, 1998, the total of all consumer loans held by The Bank of
Hemet was $1.0 million or .5% of total loans. Consumer loans may be secured or
unsecured, and are extended for a variety of purposes, including the purchase or
finance of automobiles, home improvement, home equity lines and overdraft
protection. Consumer loan underwriting standards include an examination of the
applicant's credit history and payment record on other debts and an evaluation
of his or her ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is of primary importance, the
underwriting process also includes a comparison of the value of the security, if
any, to the proposed loan amount.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance because the collateral is more likely
to suffer damage, loss or depreciation. The remaining deficiency often does not
warrant further collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability. Furthermore, various federal and
state laws, including federal and state bankruptcy and insolvency laws, often
limit the amount that the lender can recover on these loans.
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<PAGE>
OFF-BALANCE SHEET COMMITMENTS
The Bank of Hemet may issue formal commitments or lines of credit to a
limited number of well-established, financially responsible, local commercial
enterprises. Such commitments can be either secured or unsecured. These
commitments may take the form of revolving lines of credit, letters of credit,
real estate construction or real estate mortgage loans. Standby letters of
credit are conditional commitments issued by The Bank of Hemet to guarantee the
performance of a customer to a third party. The Bank of Hemet does not enter
into any interest rate swaps or caps, or forward or future contracts.
The following table shows the distribution of The Bank of Hemet's
undisbursed loan commitments at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Real estate--construction................................................ $ 2,404 $ 2,160
Real estate--mortgage.................................................... 1,472 822
Standby letters of credit................................................ 1,116 282
Undisbursed lines of credit.............................................. 5,876 6,436
--------- ---------
Total................................................................ $ 10,868 $ 9,700
--------- ---------
--------- ---------
</TABLE>
LENDING PROCEDURES AND CREDIT APPROVAL PROCESS
The board of directors' loan committee approves all loans in excess of
$500,000 and reviews all loans under $500,000. Lending limits are authorized for
the Chief Executive Officer and the Chief Credit Officer by the loan committee
through authority delegated by the board of directors of The Bank of Hemet. The
directors' loan committee approves all loans which would create a total borrower
liability in excess of a lending officer's lending authority. The Chief Credit
Officer is responsible for evaluating the authority limits for individual credit
officers and recommends lending limits to the directors' loan committee for
approval.
The highest individual lending authority in The Bank of Hemet is currently
$500,000, which requires the approval and signature of the Chief Credit Officer.
The second highest lending authority is $150,000 for the manager of the real
estate loan department. All other individual lending authorities are
substantially less, with the next largest authority being $100,000.
At December 31, 1998, The Bank of Hemet's authorized legal lending limits
were approximately $3.5 million for unsecured loans and approximately $5.8
million for secured loans. Legal lending limits are calculated in conformance
with California law, which prohibits a bank from lending to any one individual
or entity or its related interests an aggregate amount which exceeds 15% of
primary capital plus the allowance for loan and lease losses on an unsecured
basis and 25% on a secured basis. The Bank of Hemet's primary capital plus
allowance for loan and lease losses at December 31, 1998 totaled $23.3 million.
The Bank of Hemet's largest borrower as of December 31, 1998 had an aggregate
loan liability totaling $5.8 million.
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The Bank of Hemet seeks to mitigate the risks inherent in its loan portfolio
by adhering to certain underwriting practices. These practices include analysis
of prior credit histories, financial statements, tax returns and cash flow
projections, valuation of collateral based on reports of independent appraisers
and verification of liquid assets. Although management believes that its
underwriting criteria are appropriate for the various kinds of loans it makes,
The Bank of Hemet may incur losses on loans which meet its underwriting
criteria, and these losses may exceed the amounts set aside as reserves for such
losses in the allowance for loan and lease losses.
ASSET QUALITY
NONPERFORMING ASSETS. Nonperforming assets include nonperforming loans and
other real estate owned ("OREO").
NONPERFORMING LOANS. Nonperforming loans are those which the borrower fails
to perform in accordance with the original terms of the obligation and fall into
two categories:
- Nonaccrual loans. The Bank of Hemet generally places loans on nonaccrual
status when interest or principal payments become 90 days or more past due
unless the outstanding principal and interest is well-secured and, in the
opinion of management, is deemed in the process of collection. When loans
are placed on nonaccrual status, accrued but unpaid interest is reversed
against the current year's income. The Bank of Hemet may treat payments on
nonaccrual loans as interest income or return of principal depending upon
management's opinion of the ultimate risk of loss on the individual loan.
Cash payments are treated as interest income where management believes the
remaining principal balance is fully collectible. Additionally, The Bank
of Hemet may place loans not 90 days past due on nonaccrual status if
management reasonably believes the borrower will not be able to comply
with the contractual loan repayment terms and collection of principal or
interest is in question.
- Accruing loans 90 days or more past due. The Bank of Hemet classifies a
loan in this category when the borrower is more than 90 days late in
making a payment of principal or interest but the loan has not been placed
on nonaccrual status.
Nearly all nonperforming loans during the periods reported were secured by
first deeds of trust on real property. The collateral securing these
nonperforming loans at December 31, 1998 may not be sufficient to prevent losses
on such loans.
OTHER REAL ESTATE OWNED ("OREO"). This category of nonperforming assets
consists of real estate to which The Bank of Hemet has taken title by reason of
foreclosure or by taking a deed in lieu of foreclosure from the borrower. The
Bank of Hemet has been actively managing its OREO while attempting to
expeditiously dispose of the properties. At December 31, 1998, the bank owned
one OREO property, consisting of a single family residence valued at $77,000.
For a more complete discussion of changes in OREO during the last three years,
please refer to "The Bank of Hemet Management's Discussion and Analysis of
Results of Operations--Noninterest Expense."
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The following table summarizes The Bank of Hemet's nonperforming assets at
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans(1).............................................. $ 1,578 $ 2,902 $ 2,976 $ 2,446 $ 3,188
Loans past due 90 days or more................................... 3 0 17 14 0
Total nonperforming loans...................................... 1,581 2,902 2,993 2,460 3,188
Other real estate owned.......................................... 77 779 2,180 3,908 2,719
--------- --------- --------- --------- ---------
Total nonperforming assets..................................... $ 1,658 $ 3,681 $ 5,173 $ 6,368 $ 5,907
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming loans as a percent of total loans.................. 0.76% 1.51% 1.60% 1.32% 1.72%
Nonperforming assets as a percent of total assets................ 0.66% 1.53% 2.21% 2.79% 2.64%
</TABLE>
- ------------------------
(1) Interest income in the amount of $277,000 would have accrued during 1998 on
loans on nonaccrual status if interest had been accrued. Income of $115,000
was in fact recognized on nonaccrual loans in 1998 based on receipt of
actual interest payments.
IMPAIRED LOANS. Management defines impaired loans, regardless of past due
status on loans, as those on which principal and interest are not expected to be
collected under the original contractual loan repayment terms. The Bank of Hemet
charges off an impaired loan at the time management believes it has exhausted
the collection process. The Bank of Hemet values impaired loans based on the
present value of future cash flows discounted at the loan's effective rate, the
loan's observable market price or the fair value of collateral if the loan is
collateral-dependent. Impaired loans at December 31, 1998 were $3.3 million
($1.6 million of which were also nonaccrual loans). On account of these impaired
loans, The Bank of Hemet had an allowance for loan and lease losses of $287,000
at December 31, 1998. The average outstanding principal balance of impaired
loans was $4.0 million during 1998. Substantially all of the impaired loans at
December 31, 1998 were collateral dependent and management measured them using
the fair value of the collateral.
SUBSTANDARD AND DOUBTFUL LOANS. The Bank of Hemet classifies loans as
"substandard" in accordance with regulatory requirements when they are
inadequately protected by the current sound worth and paying capacity of the
borrower or of the loan collateral, if any. Substandard loans generally have
well-defined weaknesses that jeopardize repayment. They are characterized by the
distinct possibility that a bank will sustain some loss if the deficiencies are
not corrected.
The Bank of Hemet classifies loans as "doubtful," in accordance with
regulatory requirements, when the loans have the inherent weaknesses of
substandard loans and, in addition, the weaknesses make collection or repayment
in full, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable. However, in such loans, certain important
and reasonably specific pending factors may work to the advantage and
strengthening of the asset. Accordingly, with respect to such loans, the
estimated loss is deferred until its more exact status may be determined.
RESTRUCTURED LOANS. The Bank of Hemet considers restructured loans as loans
on which interest accrues at a below market rate or on which certain principal
has been forgiven to help the borrower make the final repayment of the loan. Any
interest previously accrued, but
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not yet collected, is reversed against current income when the loan is placed in
this category. Interest is then reported on a cash basis until the borrower
establishes an ability to service the restructured loan in accordance with its
terms, The Bank of Hemet does not have any loans categorized as restructured
loans.
Except as disclosed above, there were no assets as of December 31, 1998
where known information about possible credit problems of borrowers caused
management to have serious doubts as to the ability of the borrower to comply
with the present loan repayment terms. However, it is always possible that
current credit problems may exist that may not have been discovered by
management. Given the high percentage of The Bank of Hemet's loans that are
secured by real estate, the real estate market in Southern California and the
overall economy in The Bank of Hemet's market area are likely to continue to
have a significant effect on the quality of The Bank of Hemet's assets in the
future.
ALLOWANCES AND PROVISIONS FOR LOAN AND LEASE LOSSES
The following table sets forth an analysis of the allowance for loan and
lease losses and provisions for loan and lease losses for the periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....................... $ 2,116 $ 2,241 $ 2,135 $ 2,609 $ 2,520
Loans charged off:
Real estate--construction.......................... -- -- -- -- 625
Real estate--mortgage.............................. 139 274 562 179 776
Commercial......................................... 0 159 272 348 43
Consumer........................................... 43 18 68 90 17
---------- ---------- ---------- ---------- ----------
Total charge-offs................................ 182 451 902 617 1,461
---------- ---------- ---------- ---------- ----------
Recoveries:
Real estate--construction.......................... -- -- -- -- --
Real estate--mortgage.............................. 225 57 16 18 9
Commercial......................................... 47 10 2 -- 35
Consumer........................................... 26 9 2 5 6
---------- ---------- ---------- ---------- ----------
Total recoveries................................. 298 76 20 23 50
---------- ---------- ---------- ---------- ----------
Net charge-offs...................................... (116) 375 882 594 1,411
---------- ---------- ---------- ---------- ----------
Provision for possible loans losses.................. -- 250 988 120 1,500
---------- ---------- ---------- ---------- ----------
Balance at end of period............................. $ 2,232 $ 2,116 $ 2,241 $ 2,135 $ 2,609
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Average total loans outstanding(1)................... $ 196,675 $ 187,298 $ 184,307 $ 183,632 $ 185,708
Total loans at end of period(1)...................... 207,802 192,287 187,441 185,717 185,746
Net charge-offs/average total loans outstanding...... (0.06)% 0.20% 0.48% 0.32% 0.76%
Allowance at end of period/total loans outstanding... 1.07% 1.10% 1.20% 1.15% 1.40%
Allowance/nonperforming loans........................ 141.16% 72.90% 74.86% 86.78% 81.84%
</TABLE>
- ------------------------
(1) Net of deferred loan origination fees.
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The Bank of Hemet maintains an allowance for loan and lease losses at a
level consid-
ered by management to be adequate to cover the inherent risks of loss associated
with its loan portfolio under prevailing and anticipated economic conditions. In
determining the adequacy of the allowance, management takes into consideration
primarily the credit quality of the portfolio and prior loan loss experience.
The specific calculation of the allowance for loan and lease losses is based on
the risk rating system that The Bank of Hemet uses to grade its loans. This
system classifies all loans into one of eight grades according to a risk-rating
matrix that evaluates each of the five following factors:
- the dependability of the primary repayment source;
- the dependability of the secondary repayment source;
- the value of the collateral in relation to the size of the loan, and the
liquidity of the collateral;
- the character/relationship of the borrower; and
- the strength, stability and potential of the industry in which the
borrower is operating.
Different reserve percentages are assigned to each different class of loan,
as summarized in the following table.
<TABLE>
<CAPTION>
LOAN GRADE RESERVE PERCENTAGE
- -------------------------------- ------------------------------------------------
<S> <C>
Class I ("Pass") 0.10%
Class II ("Pass") 0.20%
Class III ("Pass") Historical loan loss experience factor
Class IV ("Watch") Calculated on a loan by loan basis
Class V ("Special Mention") Calculated on a loan by loan basis
Class VI ("Substandard") Calculated on a loan by loan basis
Class VII ("Doubtful") Minimum of 50.00%
Class VIII ("Loss") 100.00%
</TABLE>
Management assigns reserve percentages to the first two classes, reflecting
management's judgment of the likelihood of loss in each risk category. For the
third grade, in which most "pass loans" fall, management assigns a reserve
percentage to each of the following kinds of loans: commercial loans, commercial
real estate loans, residential real estate loans, construction loans and
consumer loans. The reserve percentage represents the historical loss rate on
this category of loans for the preceding 36 months. For the next three
categories, management assigns specific reserves based on a risk analysis of
each loan. The Bank of Hemet's board of directors approves the adequacy of the
allowance for loan and lease losses on a quarterly basis.
The balance in the allowance is affected by amounts provided from
operations, amounts charged-off and recoveries of previously charged-off loans.
For 1998, The Bank of Hemet recorded no provision for loan and lease losses,
compared with provisions of $250,000 for 1997 and $988,000 for 1996. The lack of
a provision in 1998 resulted from management's determination, in accordance with
the policy discussed above, that the allowance was adequate at December 31,
1998. In fact, the allowance had grown in 1998 by reason of net recoveries on
loans previously charged-off in the amount of $116,000, compared with net
charge-offs of $375,000 in 1997 and $882,000 in 1996. These trends reflected,
among other factors, the
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<PAGE>
strengthening of the Southern California economy. The decreased provision in
1997 as compared with 1996 reflected the significant decrease in net charge-offs
during 1997 as compared with 1996. The increased provision in 1996 mainly
resulted from the decline in real estate collateral value for one borrower in
that year.
At December 31, 1998 the allowance for loan and lease losses stood at $2.2
million or 1.07% of total loans outstanding, compared with $2.1 million or 1.10%
of total loans outstanding at December 31, 1997, and $2.2 million, or 1.20% of
total loans outstanding at December 31, 1996.
Management anticipates the continued stabilization of the economy in
segments of The Bank of Hemet's market area. However, underlying trends in the
economic cycle will influence credit quality, particularly in Southern
California, Management cannot completely predict these trends. Consequently, The
Bank of Hemet may sustain loan losses, in any particular period, that are
sizable in relation to the allowance for loan and lease losses. Additionally, a
subsequent evaluation of the loan portfolio, in light of factors then
prevailing, by The Bank of Hemet and its regulators may indicate a requirement
for increases in the allowance for loan and lease losses through charges to the
provision for loan and lease losses.
The following table summarizes a breakdown of the allowance for loan and
lease losses by loan category and the allocation in each category as a
percentage of total loans in each category at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
(DOLLARS IN THOUSANDS)
% OF LOANS IN % OF LOANS IN % OF LOANS IN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Real estate--construction............... $ 3 0.1% $ 66 3.1% $ 83 3.7%
Real estate--mortgage................... 2,042 91.5 1,984 93.8 2,082 92.9
Commercial.............................. 171 7.7 47 2.2 56 2.5
Consumer................................ 16 0.7 19 0.9 20 0.9
--------- ----- --------- ----- --------- -----
Total................................... $ 2,232 100.0% $ 2,116 100.0% $ 2,241 100.0%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
</TABLE>
Allocations of the loan and lease losses by category are not available in
The Bank of Hemet's records for 1995 and 1994. However, real-estate mortgage
loans constituted 87.8% of The Bank of Hemet's portfolio in 1995 and 88.3% in
1994. Accordingly, management believes that more than 90% of the allowance in
1995 and 1994 was allocable to real-estate mortgage loans as it was in 1998,
1997 and 1996.
The allocation of the allowance to loan and lease categories is an estimate
by management of the relative risk characteristics of loans in those categories.
Losses in one or more loan categories may exceed the portion of the allowance
allocated to that category or even exceed the entire allowance. The Bank of
Hemet did not make an allocation of loan loss reserves by loan category in 1995
or 1994.
DEPOSITS
Deposits are The Bank of Hemet's primary source of funds. At December 31,
1998, The Bank of Hemet had a deposit mix of 54.3% in time deposits, 29.4% in
savings and interest-
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bearing checking accounts, 14.7% in noninterest-bearing demand accounts and 1.6%
in money market accounts.
Noninterest-bearing demand deposits enhance The Bank of Hemet's net interest
income by lowering its cost of funds. The Bank is committed to continuing its
recent efforts to increase core deposits through increased business development
efforts, diversification of its customer base, product line enhancements and
superior customer service. Currently, deposits from the local market area are
increasing, thus decreasing reliance on potentially unstable sources of funds.
The Bank of Hemet obtains deposits primarily from the communities it serves.
No material portion of its deposits has been obtained from or is dependent on
any one person or industry. The Bank of Hemet's business is not seasonal in
nature. The Bank of Hemet accepts deposits in excess of $100,000 from customers.
These deposits are priced to remain competitive. At December 31, 1998, The Bank
of Hemet had no brokered deposits.
The following table sets forth the average balances and the average rates
paid for the major categories of deposits for the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
(DOLLARS IN THOUSANDS)
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand................. $ 33,349 --% $ 29,831 --% $ 25,981 --%
Interest-bearing demand.................... 14,204 1.07 13,722 1.10 14,837 1.13
Money market deposits...................... 3,970 2.72 4,660 2.75 5,393 2.82
Savings deposits........................... 48,793 4.01 47,468 4.11 41,968 4.07
Time deposits of $100,000 or more.......... 9,036 5.54 8,662 5.65 15,537 5.73
Time deposits under $100,000............... 116,876 5.53 109,948 5.65 106,222 5.56
--------- --------- ---------
Total average deposits..................... $ 226,228 4.06 $ 214,291 4.17 $ 209,938 4.20
--------- --------- ---------
--------- --------- ---------
</TABLE>
MATURITIES OF TIME CERTIFICATES OF DEPOSIT
Maturities of time certificates of deposits outstanding at December 31, 1998
are summarized as follows:
<TABLE>
<CAPTION>
$100,000 OR LESS THAN
MORE $100,000
--------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Three months or less......................................... $ 2,642 $ 29,684
Over three to six months..................................... 1,649 26,310
Over six to twelve months.................................... 2,976 53,833
Over twelve months........................................... 874 7,053
------ --------------
Total........................................................ $ 8,141 $ 116,880
------ --------------
------ --------------
</TABLE>
DATA PROCESSING SERVICES--BANKLINK CORPORATION
BankLink Corporation, a wholly owned subsidiary of The Bank of Hemet located
in Riverside, California, provides data processing services and item processing
services to The Bank of Hemet and other financial institutions. BankLink
Corporation currently serves nine client banks. BankLink Corporation is a
licensee of Information Technology Incorporated
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(ITI) application software and uses that software to provide high volume
processing capabilities and systems support services for deposit and loan
transactions, treasury functions and loan servicing. These services encompass
all of the normal banking applications, including accounts payable, fixed
assets, ACH origination, automated exception processing, asset liability,
corporate cash management, voice response systems, and account analysis.
For the year ended December 31, 1998, BankLink Corporation had revenues from
its operations of $1.1 million.
SUPERVISION AND REGULATION
As a California licensed FDIC insured bank, The Bank of Hemet is subject to
many governmental rules that affect its operations. For a description of the
laws and regulations that apply to The Bank of Hemet, please refer to the
section entitled "Supervision and Regulation," starting on page 175.
COMPETITION
The Bank of Hemet considers its primary service area to include Riverside
and San Bernardino counties of California. The banking business is highly
competitive in California, including this region. A number of major banks and
savings and loan associations have offices in this area. They currently dominate
loan and deposit origination. The Bank of Hemet also competes for deposits and
loans with finance companies, industrial loan companies, securities and
brokerage companies, mortgage companies, insurance companies, money market
funds, credit unions and other financial institutions.
Major banks and savings and loan associations exercise certain competitive
advantages over community banks like The Bank of Hemet. They can finance
extensive advertising campaigns and offer the convenience of many retail
outlets. Many offer services, such as trust and international banking services,
which The Bank of Hemet does not offer directly. They can invest greater
resources in technology, which may afford them economies of scale, particularly
with respect to consumer financial services, by reason of their larger customer
bases. In addition, these larger institutions likely have lower costs of capital
and substantially higher lending limits.
To compete with larger financial institutions, The Bank of Hemet relies upon
responsive handling of customer needs, local promotional activity, and personal
contacts by its officers, directors and staff. For customers whose loan demands
exceed The Bank of Hemet's lending limits, The Bank of Hemet seeks to arrange
funding on a participation basis with its correspondent banks or other
independent commercial banks. The Bank of Hemet also assists customers requiring
services not offered by it to obtain such services from its correspondent banks.
In commercial real estate lending, The Bank of Hemet competes against larger
institutions. Management seeks to assert its competitive advantage in this
market through its depth of experience and ability to respond in customized ways
to the needs of its customers. In its deposit gathering, The Bank of Hemet
competes by having convenient branches located in areas of high bank deposits
per person, and by providing consumer-friendly environments at those branches.
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<PAGE>
EMPLOYEES
At December 31, 1998, The Bank of Hemet employed a total of 86 full-time
equivalent employees, including four executive officers. None is presently
represented by a union or covered by a collective bargaining agreement. The Bank
of Hemet believes its employee relations are excellent.
LITIGATION
In April 1997, litigation relating to the acquisition of Inland Savings and
Loan in 1992 by The Bank of Hemet was filed against The Bank of Hemet and
certain of its directors. The legal action alleges improper adjustments to the
value of the preferred stock of The Bank of Hemet issued to Inland Savings and
Loan shareholders in connection with the 1992 acquisition. The named plaintiffs
have sued on behalf of a class consisting of former owners of preferred stock of
The Bank of Hemet. The action alleges breach of contract and breach of fiduciary
duty and seeks compensatory damages in excess of $2 million, together with
punitive damages. In 1998, the court granted The Bank of Hemet's motion to
remove the fraud cause of action. On January 14, 1999, the court certified the
case as a class action. The Bank of Hemet contends that the allegations in the
case are without merit, and intends to vigorously defend against these claims.
Any potential losses to The Bank of Hemet as a result of this action are not
reasonably estimable, and accordingly no reserve for loss has been established
in The Bank of Hemet's consolidated financial statements. Any losses which might
be suffered by The Bank of Hemet related to this proceeding could impact The
Bank of Hemet's future profitability.
From time to time, The Bank of Hemet is involved in other litigation as an
incident to its business. In the opinion of management, no such other pending or
threatened litigation is likely to have a material adverse effect on The Bank of
Hemet's financial condition or results of operations.
INSURANCE
The Bank of Hemet maintains financial institution bond and commercial
insurance at levels deemed adequate by The Bank of Hemet's management to protect
it from certain damage.
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OTHER RELEVANT INFORMATION FOR THE BANK OF HEMET SHAREHOLDERS
In addition to voting on Proposal No. 1 to approve the acquisition,
shareholders will be asked to vote on two additional matters at the annual
meeting.
AMENDMENT OF THE BYLAWS
Article III of the bylaws of The Bank of Hemet provides that the bank shall
have between five and nine directors, with the exact number set at seven. To
accommodate appointments of directors of Pacific Community Banking Group after
the acquisition, the board of directors has resolved to increase the size of the
board to a range of seven to 13. The shareholders will vote on approval of the
amendment as Proposal No. 2. This amendment to the bylaws will be effective only
if the acquisition closes.
ELECTION OF DIRECTORS
The persons named below, all of whom are current members of the board of
directors of The Bank of Hemet, have been nominated for election as directors at
the annual meeting to serve until the 2000 annual meeting of Shareholders and
until their successors are elected and have been qualified or until the
consummation of The Bank of Hemet acquisition. Unless otherwise instructed,
proxyholders for The Bank of Hemet will vote the proxies received by them "FOR"
the election of the nominees named below. Votes will be cast by the proxyholders
in such a way to effect, if possible, the election of the nominees named below.
The seven nominees for directors receiving the most votes will be elected
directors. In the event that any of the nominees should be unable to serve as
director, it is intended that The Bank of Hemet proxy will be voted for the
election of such substitute nominee, if any, as shall be designated by The Bank
of Hemet board of directors. The Bank of Hemet board of directors has no reason
to believe that any of the nominees named below will be unable to serve if
elected.
96
<PAGE>
The following table sets forth as of March 31, 1999, the names of and
certain information concerning the persons nominated by The Bank of Hemet board
of directors for election as directors.
<TABLE>
<CAPTION>
YEAR FIRST
APPOINTED
NAME AND TITLE AGE DIRECTOR
- --------------------------------------------- --- -----------
<S> <C> <C>
John B. Brudin .............................. 69 1974
Director
Jack E. Gosch ............................... 70 1974
Director
E. Kenneth Hyatt ............................ 54 1982
Director
James B. Jaqua .............................. 56 1983
President, Chief Executive Officer and
Director
John J. McDonough ........................... 67 1974
Chairman of the Board and Director
Joseph D. Pehl .............................. 67 1992
Director
Clayton A. Record, Jr. ...................... 71 1974
Director
</TABLE>
None of the directors were selected pursuant to any arrangement or
understanding other than with the directors and executive officers of The Bank
of Hemet acting within their capacities as such. There are no family
relationships between any of the directors and executive officers of The Bank of
Hemet.
MR. JOHN H. BRUDIN is a director of The Bank of Hemet and is General Manager
of the Eastern Municipal Water District. He has been an employee with the
Eastern Municipal Water District since 1994. He is the former President of
NBS/Lowry, Inc. Engineers and Planners.
MR. JACK E. GOSCH is director of The Bank of Hemet and is President of Jack
Gosch Ford, Inc. and Hemet Toyota, automobile dealerships. Mr. Gosch has been
the president of each of the automobile dealerships since 1964 and 1972,
respectively.
MR. E. KENNETH HYATT is a director of The Bank of Hemet and is President of
Hemet Insurance Services, Inc. Mr. Hyatt has been the President of Hemet
Insurance Services, Inc. since 1984.
MR. JAMES B. JAQUA is a director and President and Chief Executive Officer
of The Bank of Hemet. Mr. Jaqua has been with The Bank of Hemet since January
1984.
MR. JOHN H. MCDONOUGH is Chairman of the Board of Directors of The Bank of
Hemet and has been with the bank since 1974.
MR. JOSEPH D. PEHL is a director of The Bank of Hemet and is the President
of Cornell Consulting Inc. (financial consulting). Mr. Pehl has been President
of Cornell Consulting since 1996. Mr. Pehl was President of Fairchild Sunglasses
(sunglass distributor) from 1995 to 1998, President of Yucaipa Disposal, Inc.
from 1972 to 1995. President of Empire Disposal from 1972 to 1995 and President
of Triple J Enterprises (disposal company) from 1972 to 1995.
97
<PAGE>
MR. CLAYTON A. RECORD is a director of The Bank of Hemet and is a director
of the Eastern Municipal Water District. Mr. Record has been a director of the
Eastern Municipal Water District since 1995.
SHAREHOLDINGS OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Management of The Bank of Hemet knows of no person who owns, beneficially or
of record, either individually or together with associates, five percent or more
of the outstanding shares of The Bank of Hemet common stock and common stock
equivalents, except as set forth in the table below. The following table sets
forth as of March 31, 1999 the number and percentage of shares of The Bank of
Hemet common stock beneficially owned, directly or indirectly, by each of The
Bank of Hemet's directors, executive officers and principal shareholders and by
the directors and named executive officers of The Bank of Hemet as a group. The
shares "beneficially owned" are determined under Security and Exchange
Commission Rules, and do not necessarily indicate ownership for any other
purpose. In general, beneficial ownership includes shares over which the
director, principal shareholder or executive officer has sole or shared voting
or investment power and shares which such person has the right to acquire within
60 days of March 31, 1999. Unless otherwise indicated, the persons listed below
have sole voting and investment powers of the shares beneficially owned.
Management is not aware of any arrangements which may, at a subsequent date,
result in a change of control of The Bank of Hemet other than the acquisition
described in Proposal 1.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP CLASS(5)
- ------------------------------------------------------------- -------------------- -----------
<S> <C> <C>
John B. Brudin(6)............................................ 71,458 8.2%
Jack E. Gosch(6)............................................. 108,128(1) 12.5%
E. Kenneth Hyatt............................................. 30,729 3.5%
James B. Jaqua(6)............................................ 160,101(2) 18.5%
John J. McDonough(6)......................................... 21,751(3) 2.5%
Joseph D. Pehl(6)............................................ 4,518(7) .5%
Clayton A. Record(6)......................................... 56,861 6.6%
Robert I. Robie.............................................. 10,400(4) 1.2%
Harold R. Williams, Jr....................................... 10,400(4) 1.2%
Total for directors and Named Executive Officers as a group
(numbering 9).............................................. 474,346 54.7%
</TABLE>
- ------------------------
(1) The amount includes 9,965 shares owned by Jack Gosch Ford, Inc. Retirement
Plan and Trust, and 6,575 owned by TASP, Incorporated, in all of which Mr.
Gosch has shared ownership.
(2) The amount includes 141,178 shares owned in the name of The Jaqua Trust of
1989, 7,243 shares of common stock owned in the name of James B. Jaqua IRA,
4,813 shares owned in the name of James B. Jaqua, and 4,467 shares owned in
the name of M. Susan Jaqua IRA. This amount includes 2,400 shares acquirable
by stock options that are vested or will be vested within 60 days of March
31, 1999.
(3) The amount includes 1,210 shares held by Mr. McDonough's spouse in her own
name, as to which Mr. McDonough has shared voting and investment powers.
98
<PAGE>
(4) The amount includes 10,400 shares acquirable by stock options that are
vested or will be vested within 60 days of March 31, 1999.
(5) Assumes a total of 867,478 shares, composed of the 844,278 outstanding
shares of The Bank of Hemet common stock and 23,200 shares of The Bank of
Hemet common stock acquirable by exercise of stock options that are vested
within 60 days of January 4, 1999.
(6) The address of each of these persons is care of The Bank of Hemet, 3715
Sunnyside Drive, Riverside, California 92506.
(7) Includes 2,496 shares held in Joseph D. Pehl Keogh Retirement Account. Mr.
Pehl plans on gifting approximately 1,600 shares subsequent to March 31,
1999 without retaining voting power.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities and Exchange Act of 1934 requires The Bank
of Hemet's officers and directors, and persons who own more than ten percent of
a registered class of The Bank of Hemet's equity securities, to file report of
ownership and change in ownership with the FDIC. Such persons are required by
FDIC regulation to furnish The Bank of Hemet with copies of all Section 16(a)
forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no FDIC Form 4's
were required for those persons, The Bank of Hemet believes that, during 1998,
its officers, directors and more than ten-percent beneficial owners complied
with all filing requirements applicable to them.
COMPENSATION OF DIRECTORS
Directors' fees are in the form of a retainer of $1,200 per month, plus $400
for each regular board meeting attended, and $200 for each committee meeting
attended. No directors' fees are paid to Messrs. Jaqua and McDonough.
THE BOARD OF DIRECTORS AND COMMITTEES
The Bank of Hemet's board of directors met fifteen times during 1998. All
the directors attended at least 75 percent of all board of directors meetings
and committee meetings of which they were members held during 1998.
The Bank of Hemet has no standing nominating committee. It has a standing
audit committee which reviews audits of the bank and considers the adequacy of
auditing procedures. The Bank of Hemet's audit committee consists of Messrs.
Record, Pehl and Hyatt. The audit committee met three times in 1998. The Bank of
Hemet has a loan committee which reviews and approves loans in excess of the
delegated authority of management. The loan committee consists of all directors
of The Bank of Hemet. It met twenty-two times in 1998. The compensation
committee is composed of Messrs. Hyatt, Gosch and Brudin. The function of the
compensation committee is to establish compensation policies including employee
compensation plans, and approve specific compensation levels for executive
officers. The compensation committee met two times in 1998.
99
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth as of March 31, 1999, the names of and
certain information concerning executive officers of The Bank of Hemet.
<TABLE>
<CAPTION>
NAME AGE SINCE POSITION AND PRINCIPAL OCCUPATION
- --------------------------------- --- --------- -----------------------------------------------------------------
<S> <C> <C> <C>
James B. Jaqua................... 56 1983 President and Chief Executive Officer
John J. McDonough................ 67 1974 Chairman of the Board
Robert I. Robie.................. 60 1994 Executive Vice President and Chief Credit Officer since February
1996. Senior Vice President and Chief Credit Officer from 1994.
Former Executive Vice President, Chief Credit Officer and
Director of Commerce Bank, Newport Beach, California. Former
President and Director of Preferred Bank, Los Angeles,
California. Former Vice Chairman and Chief Credit Officer of
Metrobank, Los Angeles, California.
Harold R. Williams, Jr........... 52 1994 Chief Operating and Financial Officer since February 1996. Senior
Vice President and Chief Financial Officer from 1994. Former
Executive Vice President, Chief Financial Officer and Director of
Commerce Bank, Newport Beach, California. Former Director,
President and Chief Financial Officer of Independence Bank,
Encino, California.
</TABLE>
Mr. Williams was also the former Executive Vice President, Chief Financial
Officer and Director of Commerce Bancorp, and his term of employment was within
two years of Commerce Bancorp filing for bankruptcy in 1994.
EXECUTIVE COMPENSATION
The following table sets out a summary of the compensation for certain
officers and the chairman of the board of directors.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------------
ANNUAL COMPENSATION
------------------------------------- AWARDS
OTHER -------------------------- PAYOUT
ANNUAL RESTRICTED -----------
COMPEN- STOCK OPTIONS/ LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($) AWARD(S)($) SARS (#) PAYOUT($)
- ----------------------------------- --------- ----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
James B. Jaqua .................... 1998 $ 214,000 $ 130,000 -- -- 0 --
President and Chief Executive 1997 203,910 0 -- -- 6,000 --
Officer 1996 192,708 100,000 -- -- 0 --
John J. McDonough ................. 1998 98,936 5,000 -- -- 0 --
Chairman of the Board 1997 98,936 0 -- -- 0 --
1996 98,936 0 -- -- 0 --
Harold R. Williams, Jr. ........... 1998 158,848 40,000 -- -- 0 --
Chief Operating and Financial 1997 151,259 35,000 -- -- 6,000 --
Officer 1996 143,325 35,000 -- -- 0 --
Robert I. Robie ................... 1998 155,240 35,000 -- -- 0 --
Executive Vice President and 1997 147,829 25,000 -- -- 6,000 --
Chief Credit Officer 1996 140,569 25,000 -- -- 0 --
<CAPTION>
ALL OTHER
COMPEN-
NAME AND PRINCIPAL POSITION SATION ($)(1)
- ----------------------------------- -------------
<S> <C>
James B. Jaqua .................... $ 2,288
President and Chief Executive 881
Officer 0
John J. McDonough ................. 8,083
Chairman of the Board 6,081
5,661
Harold R. Williams, Jr. ........... 2,059
Chief Operating and Financial 381
Officer 0
Robert I. Robie ................... 2,058
Executive Vice President and 393
Chief Credit Officer 0
</TABLE>
- ------------------------------
(1) The amounts for Messrs. Jaqua, Williams and Robie represent The Bank of
Hemet's matching contribution to The Bank of Hemet 401(k) Plan commencing
August 1, 1997. The matching contribution for Mr. McDonough in 1998 and 1997
was $1,979 and $420, respectively, and the remainder represents The Bank of
Hemet's cost of premiums for life insurance for which Mr. McDonough is the
owner and insured, and the beneficiary is selected by Mr. McDonough.
100
<PAGE>
AGGREGATED OPTION(1) EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/98 (#) AT 12/31/98 ($)(2)
SHARES ACQUIRED VALUE REALIZED ------------------------------ --------------------------
NAME ON EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------------- --------------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James B. Jaqua.................. 0 N/A 1,200 4,800 $ 29,700 $ 118,800
John J. McDonough............... 0 N/A 0 0 0 0
Harold R. Williams, Jr.......... 0 N/A 9,200 6,800 311,700 189,300
Robert I. Robie................. 0 N/A 9,200 6,800 311,700 189,300
</TABLE>
- ------------------------------
(1) The Bank of Hemet has no plans pursuant to which stock appreciation rights
may be granted.
(2) Value of unexercised "in-the-money" options is the difference between the
fair market value of the securities underlying the options and the exercise
or base price of the options at exercise or fiscal year-end, respectively.
EMPLOYMENT CONTRACTS AND SEVERANCE AGREEMENTS
Mr. Jaqua and Mr. McDonough have salary continuation agreements with The
Bank of Hemet. Under Mr. Jaqua's agreement, he will receive a salary of $110,000
per year for 15 years beginning when he reaches age 65, so long as he is
employed by The Bank of Hemet at that age. Under Mr. McDonough's agreement, he
will receive a salary of $15,000 per year for 15 years beginning when he reaches
age 65, so long as he is employed by The Bank of Hemet at that age. If either
Mr. Jaqua or Mr. McDonough dies before that time, his beneficiary will receive
the remaining payments. If Mr. Jaqua is terminated, or if The Bank of Hemet is
sold or merged with another entity (as in the acquisition), then he will receive
a lump sum payment equal to the present value (using an annual discount rate
equal to the annual interest rate of a ten year Treasury note) of fifteen annual
payments of $110,000. The Bank of Hemet may reduce the payment made to Mr. Jaqua
if, when aggregated with other payments, the amount would constitute an "excess
parachute payment" under the Internal Revenue Code of 1986, as amended.
The Bank of Hemet entered into an employment agreement, effective January 1,
1998, with Mr. Jaqua to serve as President and Chief Executive Officer of The
Bank of Hemet for a term that expires on December 31, 1999, but may be
terminated if the acquisition closes. The agreement provides for an annual base
salary of $214,000 for 1998, and $224,000 for 1999, with an annual increase and
bonus at the discretion of the board of directors. The agreement afforded
certain health, accidental and disability insurance benefits to Mr. Jaqua and
his spouse.
On July 16, 1998, the board of directors of The Bank of Hemet amended The
Bank of Hemet's severance policy. The Bank of Hemet's severance policy provides
that in the event of a change of control such as the acquisition, any officer or
employee whose employment is terminated within six months following the change
of control because of a job elimination or layoff would receive severance pay
based on their position and years of service. The severance payment for a senior
vice president whose employment is terminated due to a job elimination or layoff
within six months of a qualifying change of control would be 12 weeks of current
salary for less than two years of service and 12 weeks of current salary plus
two weeks of current salary for each additional year of service after two years
up to a maximum of 26 weeks of current salary. The severance payment for the
chief operating and financial officer (Mr. Williams) and chief credit officer
(Mr. Robie), if employment is terminated due to a job
101
<PAGE>
elimination or layoff within six months of a qualifying change of control would
be 22 months of current salary, subject to agreeing not to compete with The Bank
of Hemet.
Mr. Harold R. Williams, Jr., Chief Operating and Financial Officer of The
Bank of Hemet has an agreement that will become effective only if the
acquisition of The Bank of Hemet by Pacific Community Banking Group is
consummated and will replace the severance benefits described above. The
agreement provides that Mr. Williams will serve as Executive Vice President and
Chief Financial Officer of Pacific Community Banking Group and remain as Chief
Operating and Financial Officer of The Bank of Hemet. The agreement will apply
from the time of the consummation of the acquisition to December 31, 2002 and
provides Mr. Williams with severance benefits if he is terminated by Pacific
Community Banking Group or The Bank of Hemet, or if he terminates employment
because of a reduction in salary or benefits or a material diminution in title,
authority or responsibilities. If such a termination occurs within the first 12
months of the effective date of the agreement, Mr. Williams will receive 18
months of base salary, payable in a lump sum, and health and other benefits for
18 months. If such a termination occurs during the remaining term of the
agreement, Mr. Williams will receive 12 months of base salary, payable in a lump
sum, and health and other benefits for 12 months. Pacific Community Bank Group
can reduce the severance benefits to the extent they are not deductible expenses
under Section 280G of the Internal Revenue Code of 1986, as amended. The
agreement also provides Mr. Williams with a bonus in the minimum amount of
$60,000 payable February 29, 2000 and stock options for 50,000 shares of Pacific
Community Banking Group common stock at an exercise price equal to the initial
offering price of Pacific Community Banking Group common stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of The Bank of Hemet's directors and executive officers and their
immediate families, as well as the companies with which they are associated, are
customers of, or have had banking transactions with, The Bank of Hemet in the
ordinary course of The Bank of Hemet's business, and The Bank of Hemet expects
to have banking transactions with such persons in the future. In The Bank of
Hemet management's opinion, all loans and commitments to lend included in such
transactions were made in compliance with applicable laws on substantially the
same terms, including interest rates and collateral, as those prevailing for
comparable transactions with other persons of similar credit-worthiness and, in
the opinion of management, did not involve more than a normal risk of
collectability or present other unfavorable features. All loans and extensions
of credit made to The Bank of Hemet's directors and executive officers are
current and performing as agreed upon. No director or executive officer of The
Bank of Hemet had indebtedness in excess of 10% of The Bank of Hemet's equity
capital accounts.
MARKET PRICE AND DIVIDEND INFORMATION
The Bank of Hemet's common stock is registered with the FDIC under the
Securities Exchange Act of 1934. The Bank of Hemet common stock is not listed on
a national exchange, and there is no established public market for The Bank of
Hemet common stock. The Bank of Hemet management is not aware of any market
makers for The Bank of Hemet common stock. The high and low sales prices and per
share cash dividends on The Bank of Hemet common stock are provided in the chart
below. The source of information for the high
102
<PAGE>
and low sales prices for the chart below was from Merrill Lynch until August
1997 and thereafter from the internet at Yahoo and PC Quote.
<TABLE>
<CAPTION>
1997 HIGH LOW DIVIDEND(1)
- ------------------------------------------------------------- --------- --------- -------------
<S> <C> <C> <C>
First quarter................................................ $ 23.00 $ 22.50 $ 0.25
Second quarter............................................... 27.00 25.00 0.25
Third quarter................................................ 33.00 31.00 0.50
Fourth quarter............................................... 41.25 33.00 0.50
<CAPTION>
1998
- -------------------------------------------------------------
<S> <C> <C> <C>
First quarter................................................ 41.50 37.50 0.60
Second quarter............................................... 60.00 39.50 0.60
Third quarter................................................ 53.00 48.00 0.60
Fourth quarter............................................... 47.50 37.00 0.60
<CAPTION>
1999
- -------------------------------------------------------------
<S> <C> <C> <C>
First Quarter to March 26, 1999.............................. 44.25 38.00 0.60
</TABLE>
- ------------------------
(1) The Bank of Hemet did not pay any stock dividends in the periods indicated.
The date before the first public announcement of the acquisition was July
29, 1998; however, management of The Bank of Hemet is unaware of any trades of
The Bank of Hemet common stock as of that date. The most recent trade preceding
the announcement was reported on the Electronic's Bulletin Board operated by
Nasdaq as having been on July 16, 1998 for 100 shares at a sales price of
$48.88. As of July 31, 1998, there were approximately 456 stockholders of record
of The Bank of Hemet's common stock.
The frequency and amount of dividends to be paid are determined by The Bank
of Hemet's board of directors. In issuing dividends the board of directors
consider the experience and expectations of The Bank of Hemet, including net
income generated, strategic plans, and the level of capital of The Bank of
Hemet. The Bank of Hemet Agreement limits the payment of near future dividends,
except that The Bank of Hemet is permitted to pay a quarterly dividend of $0.60
per share in the first two quarters of 1999.
FUTURE SHAREHOLDER PROPOSALS
If The Bank of Hemet acquisition is not completed, any shareholder who
intends to submit a proposal for inclusion in the 2000 annual meeting of The
Bank of Hemet shareholders must submit the proposal to James B. Jaqua, President
and Chief Executive Officer of The Bank of Hemet, no later than March 1, 2000.
103
<PAGE>
THE ANNUAL MEETING OF VALLEY BANK
THE ANNUAL MEETING OF VALLEY BANK
The annual meeting of the shareholders of Valley Bank will be held at
.m. on , 1999 at the Best Western Image Suites Hotel,
24840 Elder Avenue, Moreno Valley, California. At the annual meeting, the
holders of the common stock of Valley Bank will vote on (1) the approval of the
First Restatement of Agreement and Plan of Reorganization as amended; (2) the
election of eight (8) directors; and (3) such other business as may properly
come before the Valley Bank annual meeting or any adjournments or postponements
thereof.
RECORD DATE; VOTING SECURITIES
The close of business on has been fixed as the record date for
the determination of the shareholders entitled to notice of, and to vote at, the
annual meeting. At that date, there were 1,171,906 outstanding shares of Valley
Bank common stock entitled to vote at the annual meeting.
On any matter submitted to the vote of the shareholders, each holder of
common stock will be entitled to one vote, in person or by proxy, for each share
of common stock held of record on the books of the bank as of the record date.
The affirmative vote of the holders of at least two-thirds of the
outstanding shares is required to approve Proposal No. 1, the approval of the
Valley Bank agreement. Abstentions and any shares as to which a broker or
nominee has indicated that it does not have discretionary authority to vote
("broker non-votes") have the effect of votes in opposition; however,
abstentions and broker non-votes are NOT treated as "no" votes for dissenters'
rights' purposes. (Refer to "Dissenters' Rights of Appraisal" on page 197.)
Moreover, abstentions will be treated as shares present and entitled to vote for
purposes of determining the presence of a quorum but broker non-votes will not
be treated as shares present for purposes of determining the presence of a
quorum.
In connection with the election of directors, Proposal No. 2, shares may be
voted cumulatively if, prior to the voting, a shareholder present and voting at
the annual meeting gives notice to the chairman of the meeting that he or she
intends to vote cumulatively. If any shareholder of Valley Bank gives such
notice, then all shareholders will be entitled to cumulate their votes.
Cumulative voting allows a shareholder to cast a number of votes equal to the
number of shares held in his or her name as of the record date, multiplied by
the number of directors to be elected. This total number of votes may be cast
for one nominee, or distributed among as many nominees or in such proportions as
the shareholder sees fit. If cumulative voting is declared at the annual
meeting, votes represented by proxies delivered pursuant to this proxy
statement/prospectus may be cumulated at the discretion of the Proxyholders, in
accordance with the recommendations of the bank's management.
SOLICITATION OF PROXIES
In addition to soliciting proxies by mail, officers, directors and employees
of Valley Bank, without receiving any additional compensation, may solicit
proxies by telephone, fax, in person or by other means. Arrangements will also
be made with brokerage firms and other custodians, nominees and fiduciaries to
forward proxy solicitation materials to the beneficial owners
104
<PAGE>
of Valley Bank common stock held of record by such persons, and Valley Bank will
reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
Pacific Community will pay all expenses related to printing and filing this
joint proxy statement/prospectus, including all filing fees of the Securities
and Exchange Commission (the "Commission").
REVOCABILITY OF PROXIES
A form of proxy for voting your shares at the meeting is enclosed. Any
holder of Valley Bank common stock may revoke a proxy at any time before it is
voted, by filing with the Corporate Secretary of Valley Bank an instrument
revoking the proxy or by returning a duly executed proxy bearing a later date,
or by attending the annual meeting and voting in person. Any such filing should
be made to the attention of Dianna Williams, Secretary, Valley Bank, P.O. Box
188, Moreno Valley, California 92556-0188. All shares represented by a properly
executed proxy received in time for the annual meeting will be voted by the
proxy holders in accordance with the instructions specified on the proxy, unless
the proxy has been revoked. Attendance at the annual meeting will not by itself
constitute revocation of a proxy. IF YOU SUBMIT AN EXECUTED PROXY WITH NO
INSTRUCTION MARKED FOR A PROPOSAL TO BE ACTED UPON, THE SHARES REPRESENTED BY
YOUR PROXY WILL BE VOTED "FOR" PROPOSAL NO. 1 AND "AUTHORITY GIVEN" FOR PROPOSAL
NO. 2 LISTED ON THE PROXY. IF ANY OTHER BUSINESS IS PROPERLY PRESENTED AT THE
ANNUAL MEETING, THE PROXY WILL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATIONS
OF THE PROXY HOLDERS.
MATTERS TO BE CONSIDERED AT THE MEETING
APPROVAL AND ADOPTION OF THE FIRST RESTATEMENT OF AGREEMENT AND PLAN OF
REORGANIZATION. At the annual meeting, you will be asked to approve and adopt
the acquisition agreement with Pacific Community Banking Group. Under this
agreement, Valley Bank will become a wholly owned subsidiary of Pacific
Community Banking Group. A vote of two thirds of the outstanding shares of
Valley Bank common stock entitled to be cast at the annual meeting is required
to approve and adopt the Valley Bank agreement. AFTER CAREFUL CONSIDERATION,
VALLEY BANK'S BOARD OF DIRECTORS HAS DETERMINED THAT THE ACQUISITION IS FAIR TO
AND IN THE BEST INTERESTS OF THE SHAREHOLDERS OF VALLEY BANK. ACCORDINGLY,
VALLEY BANK'S BOARD HAS APPROVED THE ACQUISITION. YOUR BOARD OF DIRECTORS
RECOMMENDS A VOTE "FOR" APPROVAL OF THIS PROPOSAL.
ELECTION OF DIRECTORS. At the annual meeting you will be asked to elect
eight directors of Valley Bank to serve until the next annual meeting or until
their successors have been duly elected and qualified. The eight nominees for
director are the following persons, all current members of the Valley Bank board
of directors:
Marion V. Ashley Jesse Washington
Willow I. Decker George Wilson
N. Douglas Mills Helga Wolf
Juan Renteria Eugene Wood
For more information about the election of directors, refer to "Other
Relevant Information for Valley Bank Shareholders" on page 160. YOUR BOARD OF
DIRECTORS RECOMMENDS A VOTE OF "AUTHORITY GIVEN" FOR THE ELECTION OF DIRECTORS.
105
<PAGE>
THE VALLEY BANK ACQUISITION
BACKGROUND OF THE ACQUISITION; REASONS FOR THE ACQUISITION
The board of directors of Valley Bank has long held the belief that
maximizing shareholder value may ultimately entail a transaction such as the
proposed acquisition. Although Valley Bank has been operated pursuant to long
term strategic plans, the board of directors has kept in mind its fiduciary
duties to maximize shareholder value. In the last few years, the board of
directors has been presented with various alternative acquisition proposals
regarding Valley Bank and has determined, based upon a careful evaluation of all
of the alternatives presented, that the acquisition is in the best interests of
Valley Bank and its shareholders. The board of directors has come to believe
that the future for a small independent bank is likely to become even more
difficult in the coming years. Recent changes in applicable law have placed on
banks significant additional capital requirements. These requirements will, in
the opinion of the board of directors, restrict the ability of financial
institutions to grow and continue to achieve acceptable levels of profitability.
It is the judgment of the board of directors that, as a result of these changes
and regulatory and competitive uncertainties, smaller independent banks, such as
Valley Bank, will face increased capital demands making it more difficult to
achieve successful results. Because of this situation, the board of directors
has determined that it would be in the best interest of Valley Bank and its
shareholders to consider seeking a merger or acquisition offer.
In October 1997, Valley Bank retained Baxter Fentriss & Company ("Baxter
Fentriss") as its investment banker and financial advisor to analyze and
evaluate interest for acquisition of Valley Bank. During early 1998, the Valley
Bank board of directors met with representatives of Baxter Fentriss at five
separate board meetings to discuss information about the marketability of Valley
Bank and to evaluate similar market transactions. Specifically, the board was
informed about the various forms of consideration, market premiums and market
factors to be considered. Negotiations with respect to a different all stock
transaction with Pacific Community Banking Group were commenced in January 1998.
However, discussions were terminated in February 1998 due to the consideration
of a competing proposal. However, discussions later resumed with Pacific
Community Banking Group in May 1998 based on an all cash transaction. After
evaluating the offer with Baxter Fentriss, the board of directors then approved
in principle the general terms and conditions of a proposed transaction and the
details of the agreement for the acquisition were thereafter negotiated. This
agreement (the "Original Agreement") was ultimately executed by the parties as
of July 30, 1998. A significant decline in the overall stock market, and
specifically in the price of bank stocks, during the fall of 1998 made it
necessary to reconsider the Original Agreement. Pacific Community Banking Group
indicated that uncertainty in the stock market and its effect on the proposed
initial public offering made it necessary to consider a discount to its original
offer and a part-stock transaction.
The parties then engaged in several weeks of negotiation. Valley Bank's
representatives conducted additional due diligence regarding Pacific Community
Banking Group and The Bank of Hemet. The Valley Bank board of directors again
consulted its advisors and received additional updated market information from
Baxter Fentriss. Several alternative forms of consideration were initially
rejected. Later, Pacific Community Banking Group's representatives proposed a
split of stock, cash and warrants, with an election of all stock or all cash,
and a mechanism where the proportion of cash and stock could be increased based
on the success
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of the public offering. It was also agreed that a special dividend to Valley
Bank shareholders would be permitted at $.52 per share, payable at closing.
Baxter Fentriss provided an opinion that the proposal was fair from a financial
point of view. Valley Bank then approved the revised terms and the Valley Bank
agreement was eventually agreed upon and announced publicly on January 5, 1999.
The board of directors believes that the proposed acquisition is in the best
interests of Valley Bank's shareholders, employees and customers. In March 1999,
Valley Bank and Pacific Community Banking Group amended the Valley Bank
agreement to provide for the structure now proposed, in which the consideration
will be stock and warrants of Pacific Community Banking Group, with 60% of the
stock being eligible for inclusion in the public offering concurrent with the
completion of the acquisition.
The purchase price and other terms of the Valley Bank agreement are the
result of extensive arm's-length negotiations between representatives of Valley
Bank and Pacific Community Banking Group. Among the various factors considered
in determining the purchase price were: (1) the current financial condition of
Valley Bank; (2) the operations, properties, earnings and personnel of Valley
Bank; and (3) the prospects and future values of Valley Bank and its assets.
In evaluating the adequacy of the purchase price, the board of directors
received an opinion from its financial advisor, Baxter Fentriss, that the
consideration to be received by Valley Bank's shareholders in exchange for their
common stock is fair from a financial point of view, as discussed further below.
The board of directors retained Baxter Fentriss on the basis of the firm's
reputation, experience and familiarity with the banking industry. As stated in
the letter, Baxter Fentriss has not independently verified the information
reviewed and relied upon by it, including the bank's assets and financial
projections. Under its agreement with Baxter Fentriss, in the event the
acquisition is consummated, Valley Bank agrees to pay Baxter Fentriss a fee
equal to 1.5% of the aggregate consideration exchanged for the acquisition plus
expenses, or approximately $270,000. That fee includes the cost of the fairness
opinion. The full text of the Baxter Fentriss fairness opinion is attached
hereto as Appendix D. This summary of the fairness opinion is qualified in its
entirety by reference to the full text of the letter attached as Appendix D to
this joint proxy statement/prospectus.
Additional factors considered by the board of directors were: (1) the
prospects and managerial strength of Pacific Community Banking Group, as
anticipated by the initial public offering to be underwritten by Sutro; and (2)
the opportunity afforded to Valley Bank's shareholders to receive consideration,
in exchange for their shares of common stock, consisting of a combination of
cash and stock, subject to adjustment, plus warrants and a special cash dividend
of $.52 per share, subject to regulatory requirements, allowed to be paid under
the Valley Bank agreement to shareholders of record of Valley Bank common stock
as of November 24, 1998. In addition, the anticipated acquisition of The Bank of
Hemet by Pacific Community Banking Group, a transaction which is expected to be
funded by the same initial public offering which will fund Pacific Community
Banking Group's purchase of Valley Bank, is expected to increase the quality and
range of banking services offered in the communities served by Valley Bank after
Valley Bank's operations are combined with The Bank of Hemet in a subsequent
purchase and assumption of Valley Bank's assets into The Bank of Hemet. While
the Valley Bank acquisition is not conditioned on Pacific Community Banking
Group's acquisition of The Bank of Hemet, the potential acquisition of The Bank
of Hemet enhanced the attractiveness of the acquisition. Based on all of these
factors, the board of directors of
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Valley Bank believes that the acquisition is in the best interests of Valley
Bank and its shareholders.
The Valley Bank acquisition and The Bank of Hemet acquisition are
independent transactions. Shareholders of Valley Bank should consider the
possibility that the acquisition of Valley Bank may close even if the
acquisition of The Bank of Hemet does not close. Pacific Community Banking Group
is not obligated to complete either of the acquisitions unless Sutro & Co.
Incorporated enters into a firm commitment to underwrite the public offering of
its stock and all conditions to that offering are satisfied or waived.
For information regarding Valley Bank's common stock trading history, refer
to page 160, "Other Relevant Information For Valley Bank Shareholders--Market
Price and Dividend Information."
RECOMMENDATIONS OF VALLEY BANK BOARD
BASED UPON ALL OF THE CONSIDERATIONS DESCRIBED ABOVE AND ELSEWHERE HEREIN,
THE VALLEY BANK BOARD OF DIRECTORS HAS APPROVED THE ACQUISITION AND STRONGLY
RECOMMENDS THAT VALLEY BANK'S SHAREHOLDERS VOTE "FOR" THE ACQUISITION.
As of March 31, 1999, the executive officers and directors of Valley Bank
beneficially own approximately 546,616 shares of Valley Bank's common stock, or
39.26% of the total shares outstanding (for details, refer to "Shareholdings of
Certain Beneficial Owners and Management") and will receive the same price per
share under the Valley Bank agreement as all other shareholders. All except one
of the directors of Valley Bank who own Valley Bank common stock, and the
trustees of the Valley Bank Employee Stock Ownership Plan, have entered into
shareholders' agreement whereby each of those persons agreed to vote their
common stock in favor of the Valley Bank agreement and the acquisition, and to
recommend in this joint proxy statement/prospectus that Valley Bank's
shareholders vote to approve the Valley Bank agreement and the acquisition,
consistent with his or her fiduciary duties.
OPINION OF BAXTER FENTRISS & COMPANY
Baxter Fentriss has acted as financial advisor to Valley Bank in connection
with the acquisition. Baxter Fentriss assisted Valley Bank in identifying
prospective acquirors. On March 29, 1999, Baxter Fentriss delivered to Valley
Bank its opinion, dated March 29, 1999, that on the basis of matters referred to
herein, the offer is fair, from a financial point of view, to the holders of
Valley Bank's common stock. In rendering its opinion Baxter Fentriss consulted
with the management of Valley Bank and Pacific Community Banking Group, reviewed
the Valley Bank agreement and certain publicly available information on the
parties and reviewed certain additional materials made available by the
management of the respective parties.
In addition Baxter Fentriss discussed with the management of Valley Bank,
The Bank of Hemet and Pacific Community Banking Group their respective
businesses and outlook. Baxter Fentriss was involved in the negotiations with
Pacific Community Banking Group. No limitations were imposed by Valley Bank's
board of directors upon Baxter Fentriss with respect to the investigation made
or procedures followed by it in rendering its opinion. The full text of Baxter
Fentriss' written opinion is attached as Appendix D to this joint proxy
statement/
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prospectus and should be read in its entirety with respect to the procedures
followed, assumptions made, matters considered and qualifications and
limitations on the review undertaken by Baxter Fentriss in connection with its
opinion.
Baxter Fentriss's opinion is directed to Valley Bank's board of directors,
and is directed only to the fairness, from a financial point of view, of the
consideration provided. It does not address Valley Bank's underlying business
decision to effect the proposed acquisition, nor does it constitute a
recommendation to any Valley Bank shareholder as to how such shareholder should
vote with respect to the acquisition at the annual meeting or as to any other
matter.
Baxter Fentriss's opinion was one of many factors taken into consideration
by Valley Bank's board of directors in making its determination to approve the
agreement with Pacific Community Banking Group, and the receipt of Baxter
Fentriss' opinion is a condition precedent to Valley Bank's consummating the
acquisition. The opinion of Baxter Fentriss does not address the relative merits
of the acquisition as compared to any alternative business strategies that might
exist for Valley Bank or the effect of any other business combination in which
Valley Bank might engage.
Baxter Fentriss, as part of its investment banking business, is continually
engaged in the valuation of financial institutions and their securities in
connection with mergers and acquisitions and valuations for estate, corporate
and other purposes. Baxter Fentriss is a nationally ranked advisor to firms in
the financial services industry on mergers and acquisitions. Valley Bank
selected Baxter Fentriss as its financial advisor because Baxter Fentriss is an
investment banking firm focusing on transactions involving community banks and
thrifts and because of the firm's extensive experience and expertise in
transactions similar to the acquisition. Baxter Fentriss is not affiliated with
Valley Bank, The Bank of Hemet or Pacific Community Banking Group. Baxter
Fentriss also represented The Bank of Hemet in its negotiations with Pacific
Community Banking Group, and Valley Bank's board of directors was aware of this
concurrent representation.
In connection with rendering its opinion to Valley Bank's board of
directors, Baxter Fentriss performed a variety of financial analyses. In
conducting its analyses and arriving at its opinion as expressed herein, Baxter
Fentriss considered such financial and other factors as it deemed appropriate
under the circumstances including, among others, the following:
- the historical and current financial condition and results of operations
of Valley Bank, The Bank of Hemet and Pacific Community Banking Group
including interest income, interest expense, interest sensitivity,
noninterest income, noninterest expense, earnings, book value, returns on
assets and equity, and possible tax consequences resulting from the
transaction;
- the business prospects of Valley Bank, The Bank of Hemet and Pacific
Community Banking Group;
- the economies of Valley Bank's, The Bank of Hemet's and Pacific Community
Banking Group's respective market areas, and
- the nature and terms of certain other merger transactions that it believed
to be relevant.
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Baxter Fentriss also considered its assessment of general economic, market,
financial and regulatory conditions and trends, as well as its knowledge of the
financial institutions industry, its experience in connection with similar
transactions, its knowledge of securities valuation generally, and its knowledge
of merger transactions in California, the West and throughout the United States.
In connection with rendering its opinion, Baxter Fentriss reviewed the
Valley Bank agreement; drafts of this joint proxy statement/prospectus; the
annual reports to shareholders of Valley Bank and The Bank of Hemet for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998; the unaudited
financial statements of Valley Bank as of September 30, 1998; the unaudited
financial statements of Pacific Community Banking Group for the fiscal year
ended December 31, 1997; and certain additional financial and operating
information with respect to the business, operations and prospects of Valley
Bank, The Bank of Hemet and Pacific Community Banking Group as it deemed
appropriate. Baxter Fentriss also (a) held discussions with members of the
senior management of Valley Bank, The Bank of Hemet and Pacific Community
Banking Group regarding the historical and current business operation, financial
condition and future prospects of their respective companies; (b) compared the
results of operations of Valley Bank and Pacific Community Banking Group with
those of certain banking companies that it deemed to be relevant; (c) analyzed
the pro forma financial impact of the acquisition on Valley Bank; and (d)
conducted such other studies, analyses, inquiries and examinations described
below.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Moreover, the evaluation of fairness, from a financial point of
view, of the consideration provided to the holders of Valley Bank common stock
was to some extent a subjective one based on the experience and judgment of
Baxter Fentriss and not merely the result of mathematical analysis of financial
data. Accordingly, notwithstanding the separate factors as summarized below,
Baxter Fentriss believes that its analyses must be considered as a whole and
that selecting portions of its analyses and of the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the evaluation process underlying its opinion. The ranges of valuations
resulting from any particular analysis described below should not be taken to be
Baxter Fentriss' view of the actual value of Valley Bank or Pacific Community
Banking Group.
In performing its analyses, Baxter Fentriss made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of Valley Bank and Pacific
Community Banking Group. The analyses performed by Baxter Fentriss are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses may actually be sold. In
rendering its opinion, Baxter Fentriss assumed that, in the course of obtaining
the necessary regulatory approvals for the acquisition, no conditions will be
imposed that will have a material adverse effect on the contemplated benefits of
the acquisition, on a pro forma basis to Valley Bank.
The following is a summary of selected analyses performed by Baxter Fentriss
in connection with its opinion.
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1. STOCK PRICE HISTORY. Baxter Fentriss studied the trading prices and
volume for Valley Bank common stock and compared them to publicly traded banks
in California and to the price offered by Pacific Community Banking Group. The
offer represents a premium to Valley Bank shareholders for much of 1998.
2. COMPARATIVE ANALYSIS. Baxter Fentriss compared the price to earnings
multiple, price to book multiple and price to assets multiple of the offer with
12 other 1998 California transactions involving institutions with less than $90
million in assets. Valley Bank's price to earnings multiple was the fifth
highest, its price to book multiple was sixth highest, and its price to assets
multiple was fourth highest.
3. DISCOUNTED CASH FLOW ANALYSIS. Baxter Fentriss performed a discounted
cash flow analysis to determine hypothetical present values for a share of
Valley Bank's common stock as a five and ten year investment. Under this
analysis, Baxter Fentriss considered various scenarios for the performance of
Valley Bank's common stock using a range of growth rates from 4% to 10% for
Valley Bank's earnings and dividends. A range of terminal values from 10 to 18
times projected earnings was also used in the analysis as well as a range of
discount rates from 12% to 15%. These ranges of growth rates, discount rates,
and terminal values were chosen based upon what Baxter Fentriss in its judgment,
considered to be appropriate taking into account, among other things, Valley
Bank's past and current performance, the general level of inflation, rates of
return for fixed income and equity securities in the marketplace generally and
for companies of similar risk profiles. The analysis concluded that Pacific
Community Banking Group's offer exceeded all other alternative strategies. Thus,
Valley Bank shareholders would be in a better financial position by receiving
the consideration than continuing holding Valley Bank common stock.
4. COMPARISON OF VALLEY BANK TO OTHER BANKS. Baxter Fentriss compared key
financial operating ratios of Valley Bank to nine similar sized California
banks. The ratios included return on assets, return on equity, net interest
margin, net charge-offs to assets, non-performing asset levels and other
standard performance measurements. Valley Bank's performance was less than
average for most measurements, suggesting that the price offered, when compared
to other transactions, was fair. Furthermore, applying the capital guidelines of
banking regulators, and assuming a successful underwriting by Pacific Community
Banking Group's investment bankers, Baxter Fentriss's analysis indicated that
the acquisition would not seriously dilute the capital and earnings capacity of
Pacific Community Banking Group and would, therefore, likely not be opposed by
the banking regulatory agencies from a capital perspective. Furthermore, Baxter
Fentriss considered the likely market overlap and the Federal Reserve Board
guidelines with regard to market concentrations and did not believe there to be
an issue with regard to possible antitrust concerns.
Baxter Fentriss has relied, without any independent verification, upon the
accuracy and completeness of all financial and other information reviewed.
Baxter Fentriss has assumed that all estimates, including those as to possible
economies of scale, were reasonably prepared. Baxter Fentriss did not make an
independent appraisal of the assets or liabilities of either Valley Bank or
Pacific Community Banking Group, and has not been furnished such an appraisal.
No company or transaction used as a comparison in the above analysis is
identical to Valley Bank, Pacific Community Banking Group or the acquisition.
Accordingly, an analysis of
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the results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading value of
the companies used for comparison in the above analysis.
Baxter Fentriss will be paid a merger fee, equal to approximately 1.50% of
the total consideration received plus reasonable out-of-pocket expenses for its
services. Valley Bank has agreed to indemnify Baxter Fentriss against certain
liabilities, including certain liabilities under federal securities laws.
INTERESTS OF MANAGEMENT IN THE ACQUISITION
In connection with the acquisition, all but one of the directors of Valley
Bank who own Valley Bank common stock, and the Trustees of the Valley Bank
Employee Stock Ownership Plan, have entered into shareholders' agreements with
Pacific Community Banking Group under which each of those persons (A) has
agreed, to the extent consistent with his or her fiduciary duties, to recommend
approval of the acquisition to Valley Bank's shareholders; and (B) has agreed to
vote or cause to be voted his or her individual shares and all other shares of
Valley Bank's common stock over which he or she has voting power for approval of
the acquisition. Each director and officer will receive the same consideration
for his shares of common stock and stock options as all other shareholders.
Five officers of Valley Bank have employment agreements. Each of the
employment agreements entitles the officer, upon the acquisition, to cash
payments equal to two years' salary, multiplied by a factor of 140%, unless
Pacific Community Banking Group assumes and honors their employment contracts.
However, Pacific Community Banking Group has agreed to honor those employment
contracts. Mr. Mills and Valley Bank have agreed to amend his employment
contract so that he will receive a cash payment of $393,992 upon the
consummation of the Valley Bank acquisition. Mr. Mills also has a salary
continuation agreement. Mr. Mills and Valley Bank have agreed to amend the
salary continuation agreement so that his retirement benefits will not commence
until termination of his employment. Also, these agreements allow the officers
to receive severance pay if their employment is terminated under some
circumstances, such as termination without cause. If all officers entitled to
those payments were terminated without cause following the Valley Bank
acquisition, the total compensation would be $434,000. It is anticipated that
the employment agreements of all other Valley Bank officers will not be
terminated. For a description of these agreements, refer to "Other Relevant
Information for Valley Bank Shareholders--Employment Agreements," on page 170.
In addition, in the event of termination of employment due to a transfer of
the controlling ownership or sale of Valley Bank, Mr. Mills rights under the
salary continuation agreement will not vest until December 31, 1999, unless
accelerated earlier by Valley Bank.
EMPLOYEE SEVERANCE PLAN
The Valley Bank agreement provides that regular full and part-time employees
of Valley Bank will be entitled to a severance payment if they are terminated
without cause within three months after the acquisition. Other than employees
who have employment agreements, any employee entitled to the severance payment
will receive one week of salary at the regular
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rate of pay for each completed year of service, or monthly proration thereof, up
to a maximum of 15 weeks pay. Employees who have employment agreements will
receive severance compensation, if applicable, according to such agreements. For
more information about employment agreements of Valley Bank officers, refer to
"--Employment Agreements" on page 170.
INDEMNIFICATION AND INSURANCE
The Valley Bank agreement provides for certain indemnification and insurance
coverage for directors and officers of Valley Bank. Specifically, the Valley
Bank agreement requires Pacific Community Banking Group to cause Valley Bank,
after the acquisition, to maintain in effect directors' and officers' liability
insurance no less advantageous than insurance presently maintained by Valley
Bank. This coverage will specifically include a "peace of mind" coverage
endorsement or policy covering current Valley Bank directors with respect to all
matters arising from facts or events which occurred prior to the acquisition,
for which Valley Bank would have had an obligation to indemnify its directors
and officers. Pacific Community Banking Group also agrees to take no action to
impair such rights as a result of any other consolidation or merger with another
company in which Pacific Community Banking Group is not the survivor.
FORM OF THE ACQUISITION
The acquisition will be accomplished by a statutory merger of Valley Bank
into Interim Valley Bank under California Financial Code Section 4880 through
4891.
ACQUISITION CONSIDERATION
Under the terms of the Valley Bank agreement, the aggregate purchase price
for all of the outstanding shares of Valley Bank common stock will be two-thirds
of a share of Pacific Community Banking Group common stock plus, for each three
shares of Valley Bank stock surrendered, a warrant for the purchase of one share
of Pacific Community Banking Group common stock, plus payment for outstanding
stock options, subject to certain discounts and adjustments.
Each holder of a Valley Bank stock option will receive at the time of the
acquisition an amount of Pacific Community Banking Group stock and warrants
equal to the number of shares of Valley Bank common stock covered by such
option, multiplied by the number obtained by subtracting the exercise price of
such option from the $10.00 per share effective price in the acquisition,
divided by $15.00.
SPECIAL CASH DIVIDEND
The Valley Bank agreement permits Valley Bank to declare a special cash
dividend of $.52 per share. The special cash dividend would be payable only to
shareholders of record of Valley Bank common stock as of November 24, 1998, and
would be payable by Valley Bank at the closing of the acquisition.
Although the Valley Bank agreement permits Valley Bank to declare a special
cash dividend, certain regulatory requirements must be satisfied before the
dividend may be paid.
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California Financial Code Section 642 ET SEQ. imposes certain limits on
distributions to shareholders.
EFFECTIVE TIME
Under the terms of the Valley Bank agreement, the closing of the acquisition
will occur, unless the parties otherwise agree, on the first Friday or as soon
as possible after the Determination Date, the last day of the month prior to the
satisfaction of all terms and conditions of the Valley Bank agreement, and in no
case more than 30 days following the receipt of all required approvals,
expiration of applicable waiting periods, the satisfaction or waiver of all
conditions to the public offering of Pacific Community Banking Group's common
stock other than the acquisitions, and the satisfaction of all other conditions
to the transaction as contemplated by the Valley Bank agreement. While no
assurance can be given, it is anticipated that the closing will be on or before
June 28, 1999. If the closing does not occur by June 28, 1999, either Valley
Bank or Pacific Community Banking Group may terminate the Valley Bank agreement
and the acquisition.
The parties to the acquisitions intend that the public offering of Pacific
Community Banking Group's stock will not commence until all conditions precedent
to the obligations of the banks to close the acquisitions have been met, except
for the payment of consideration for the common stock of the banks. The offering
will then begin.
PROCEDURES FOR ELECTION AND EXCHANGE OF VALLEY BANK COMMON STOCK
CERTIFICATES
Shareholders of Valley Bank will use a letter of transmittal to designate
shares for sale in the public offering and to surrender certificates for common
stock of Valley Bank. Shareholders will send these letters and certificates to
the exchange agent, which will hold them pending completion of the acquisition
and the public offering. When the acquisition and the public offering occur,
Pacific Community Banking Group will deliver to the exchange agent shares of its
common stock and warrants, and Sutro & Co. Incorporated will deliver to the
exchange agent the proceeds of the sale of shares in the public offering. The
exchange agent will distribute these monies and securities to shareholders of
Valley Bank. If the acquisition is not completed, the exchange agent will return
the Valley Bank share certificates to the shareholders.
After the closing of the acquisition, certificates which represented shares
of the common stock will represent only the right to receive the cash, stock and
warrant amounts as provided in the Valley Bank agreement and applicable law.
ACCOUNTING TREATMENT
After the business combination of Pacific Community Banking Group, The Bank
of Hemet and Valley Bank, and before the close of the public offering, the
former shareholders of The Bank of Hemet will retain the largest voting interest
in Pacific Community Banking Group shares not to be sold in the public offering.
As a result, for financial reporting purposes, the business combination will be
accounted for as an acquisition by The Bank of Hemet of Valley Bank and Pacific
Community Banking Group. The acquisition will be accounted for using the
purchase method of accounting for business combinations.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of the Valley Bank acquisition that apply to Valley Bank
shareholders. It is based on the Internal Revenue Code of 1986, as amended (the
"Code"), applicable U.S. Treasury Regulations, judicial authority, and
administrative rulings and practice, all as of the date of this joint proxy
statement/prospectus. These laws and authorities are subject to change, possibly
with retroactive effect. The discussion below does not address any state, local
or foreign tax consequences of the Valley Bank acquisition. Your tax treatment
will vary depending upon your particular situation. You may also be subject to
special rules not discussed below if you are a certain kind of shareholder of
Valley Bank, including:
- an individual who holds options for Valley Bank common stock;
- an insurance company;
- a tax-exempt organization;
- a financial institution or broker-dealer;
- a person who is neither a citizen nor resident of the United States; or
- a holder of Valley Bank common stock as part of a hedge, straddle or
conversion transaction.
The following discussion assumes that you hold Valley Bank common stock as a
capital asset at the time of the Valley Bank acquisition and that Valley Bank is
not a "collapsible corporation," within the meaning of Section 341(b) of the
Code.
Neither Pacific Community Banking Group nor Valley Bank has requested or
will request an advance ruling from the Internal Revenue Service as to the tax
consequences of the Valley Bank acquisition or any related transaction. The
Internal Revenue Service could take different positions concerning the tax
consequences of the Valley Bank acquisition and related transactions discussed
below and such positions could be sustained.
You are urged to consult with your own tax adviser and financial planner
regarding the particular tax consequences of the Valley Bank acquisition to you,
including the applicability and effect of any state, local or foreign laws, and
the effect of possible changes in applicable tax laws.
Pacific Community Banking Group has received an opinion from Arthur Andersen
LLP, Pacific Community Banking Group's accountants, generally to the effect that
the Valley Bank acquisition will qualify as a tax-free reorganization under the
Code. Provided that the acquisition so qualifies:
- Neither Pacific Community Banking Group nor Valley Bank will recognize
gain or loss in the Valley Bank acquisition.
- Except for any cash received instead of fractional shares and possibly for
the special cash dividend as discussed further below, you will not
recognize any gain or loss as a result of the receipt of Pacific Community
Banking Group common stock and warrants pursuant to the Valley Bank
acquisition.
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- Your aggregate tax basis for the shares of Pacific Community Banking Group
common stock received pursuant to the Valley Bank acquisition, including
any fractional share interest for which cash is received, will equal your
aggregate tax basis in shares of Valley Bank common stock you held
immediately before the Valley Bank acquisition. You will not have any tax
basis in the Pacific Community Banking Group warrants received in the
Valley Bank acquisition.
- Your holding period for Pacific Community Banking Group common stock and
warrants received in the Valley Bank acquisition, including any fractional
share interest for which cash is received, will include the period during
which you held Valley Bank common stock.
- You will be treated as receiving cash instead of a fractional share
interest of Pacific Community Banking Group common stock in exchange for
that fractional share interest and you will recognize gain or loss in an
amount equal to the difference between the amount of cash received and the
portion of your tax basis allocable to that fractional share interest. Any
gain or loss generally will be capital gain or loss, and will be long-term
capital gain or loss if you have held your shares of Valley Bank common
stock for more than one year at the time of the Valley Bank acquisition.
- A dissenting Valley Bank shareholder who receives payment for all of his
or her shares of Valley Bank common stock in cash generally will recognize
capital gain or loss equal to the difference between the cash received and
the shareholder's tax basis in such shares, provided that the payment is
neither essentially equivalent to a dividend within the meaning of Section
302 of the Code nor has the effect of the distribution of a dividend
within the meaning of Section 356(a)(2) of the Code. A sale of shares
pursuant to an exercise of dissenter rights generally will not be
considered essentially equivalent to a dividend or have the effect of the
distribution of a dividend if, after the exercise, the shareholder owns no
shares of Pacific Community Banking Group common stock, either actually or
constructively under Section 318 of the Code.
- In the event of the payment of the special cash dividend, you should be
taxed on the amount received for the dividend as ordinary income, provided
that Valley Bank has "earnings and profits" for federal income tax
purposes equal to or exceeding the amount of the dividend. However, the
Internal Revenue Service may assert that the special cash dividend
represents partial consideration for the acquisition of the shares of
Valley Bank common stock by Pacific Community Banking Group. Under this
position, you generally would be taxed on the special cash dividend as
capital gain, and long-term capital gain if you held your Valley Bank
common stock for greater than one year at the time of the Valley Bank
acquisition. This assertion by the Internal Revenue Service could be
sustained. Even if the assertion was sustained, however, the payment of
the special cash dividend will not effect whether the Valley Bank
acquisition qualifies as a tax-free reorganization under the Code.
- You will recognize gain or loss upon the sale of your Pacific Community
Banking Group common stock or warrants, including a sale of Pacific
Community Banking Group common stock in the public offering, in an amount
equal to the difference between the amount of cash you receive in the sale
and your tax basis in the sold common stock or warrants. Any gain or loss
generally will be capital gain or loss, and
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will be long-term capital gain or loss if your holding period in the sold
Pacific Community Banking Group common stock or warrants exceeds one year
at the time of sale. The exercise of Pacific Community Banking Group
warrants will not be taxable.
The tax opinion of Arthur Andersen LLP described above is based upon facts,
representations and assumptions set forth or referred to in the opinion and the
continued accuracy and completeness of representations made by Pacific Community
Banking Group and Valley Bank. These representations include representations
made in certificates delivered to Arthur Andersen LLP by the management of
Pacific Community Banking Group and Valley Bank. If any of these representations
is not correct in certain material respects, the conclusions reached by Arthur
Andersen LLP in their opinion may be jeopardized. Furthermore, the Internal
Revenue Service is not bound by this opinion. Thus, the Internal Revenue Service
could challenge a position taken by you in reliance of this opinion, and such
challenge could be sustained.
If the Valley Bank acquisition fails to qualify as a tax-free reorganization
under the Code, the acquisition will be taxable to Valley Bank based upon the
difference between the fair market value of its assets and its tax basis in the
assets at the time of the acquisition. In addition, you will recognize gain or
loss on the difference between (a) the fair market value, at the time of the
Valley Bank acquisition, of the Pacific Community Banking Group common stock and
warrants and cash received in the acquisition, possibly including the special
cash dividend, and (b) your tax basis in the Valley Bank common stock
surrendered in the acquisition. Any gain or loss will be capital gain or loss,
and long-term capital gain or loss if you held your shares of Valley Bank common
stock for more than one year at the time of the Valley Bank acquisition.
Furthermore, your tax basis in the Pacific Community Banking Group common stock
and warrants received will equal their fair market value on the date of receipt
and your holding period for Pacific Community Banking Group common stock and
warrants will begin on the day after Valley Bank acquisition. However, you will
not recognize any additional gain or loss on the sale of your Pacific Community
Banking Group common stock in the public offering.
REGULATORY APPROVALS
The acquisition cannot be consummated until the following take place: (A)
the parties have received, to the extent required by law or regulation, all
approval or consents of the Federal Reserve Board, the FDIC, and the California
Department of Financial Institutions; and (B) all applicable waiting periods
required by law have expired. The required applications for approval of the
transactions contemplated by the Valley Bank agreement have been filed with the
applicable regulatory agencies. This joint proxy statement/prospectus has been
prepared and proxies may be solicited from Valley Bank's shareholders prior to
the receipt of these approvals.
THE TERMS OF THE VALLEY BANK AGREEMENT ARE SUBJECT TO THE APPROVAL OF THE
REGULATORY AGENCIES. ANY AMENDMENT OF THE VALLEY BANK AGREEMENT TO OBTAIN
REGULATORY APPROVAL WILL NOT BE SUBJECT TO THE APPROVAL OF THE SHAREHOLDERS AND
YOUR VOTE IN FAVOR OF THIS PROPOSAL CONSTITUTES A VOTE IN FAVOR OF ANY
AMENDMENTS TO THE ACQUISITION AGREEMENT WHICH MAY BE REQUIRED.
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RESALE RESTRICTIONS AND LOCKUP AGREEMENTS
Under the Valley Bank agreement, affiliates of Valley Bank who hold stock or
warrants of Pacific Community Banking Group will be subject to certain resale
restrictions under Rule 145 under the Securities Act of 1933. Among other
things, Rule 145 deems a person who was an affiliate of Valley Bank at the time
the acquisition was submitted for shareholder approval to be engaged in an
underwriting of the securities acquired if such person subsequently publicly
offers or sells such securities. Notwithstanding this rule, sales of such
securities may be made in conformity with certain requirements with regard to
public information, limitations on amounts and manner of sale. The securities
sold in the public offering through Sutro & Co. Incorporated will be fully
registered under the Securities Act, and therefore will comply with these
requirements. Certain affiliates of Valley Bank have signed letters
acknowledging such restrictions and agreeing to comply to applicable provisions
of Rule 145 and related provisions.
In addition, all but one director of Valley Bank have provided lock-up
agreements at the request of Pacific Community Banking Group and its investment
advisors. Under the lock-up agreements, directors of Valley Bank agree not to
sell or otherwise dispose of stock or warrants acquired in the acquisition for a
period of 90 days after the commencement of the initial public offering of
Pacific Community Banking Group's common stock.
DIVIDEND POLICY
Pacific Community Banking Group does not expect to pay dividends for the
foreseeable future on Pacific Community Banking Group common stock.
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VALLEY BANK AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE VALLEY
BANK AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX B TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE VALLEY BANK
AGREEMENT.
STRUCTURE OF THE ACQUISITION
The Valley Bank agreement contemplates that the Valley Bank acquisition will
take place as follows:
- Pacific Community Banking Group will establish a new, wholly owned
subsidiary called Interim Valley Bank.
- Pacific Community Banking Group will pay the aggregate consideration with
a combination of cash, shares of its common stock and warrants to purchase
shares of its common stock as provided in the Valley Bank agreement.
- Each outstanding share of Valley Bank's common stock and each outstanding
option to purchase Valley Bank's common stock will convert into a right to
receive a pro rata share of the aggregate consideration (or, if the holder
asserts dissenters' rights, his or her shares will convert into a right to
receive cash as provided in Sections 1300 through 1312 of the California
General Corporation Law).
- Valley Bank will merge into Interim Valley Bank, and Interim Valley Bank
will be the surviving entity but will assume the regulatory permits and
the name of Valley Bank.
- Valley Bank shareholders and option holders will receive a combination of
stock and warrants of Pacific Community Banking Group in exchange for
their Valley Bank common stock or options, as applicable.
After the acquisition, Pacific Community Banking Group will be the sole
shareholder of Valley Bank. The merger of Interim Valley Bank and Valley Bank
will occur as soon as practicable after all conditions precedent to the Valley
Bank acquisition stated in the Valley Bank agreement have been satisfied or
waived.
Pacific Community Banking Group will effect an initial public offering of
its common stock, and will include in that offering those shares that
shareholders of Valley Bank designate for sale in the public offering. The cash
proceeds of the public offering will be paid to those shareholders on the basis
of the number of shares designated, subject to the proration described below.
All conditions to the public offering must be satisfied before the acquisitions
will take place.
PURCHASE CONSIDERATION
CONSIDERATION TO SHAREHOLDERS
Pacific Community Banking Group will pay Valley Bank shareholders a per
share consideration of (A) 2/3 of a share of Pacific Community Banking Group's
common stock, most of which will immediately be sold for cash as described in
the following paragraphs, plus, (B) for every three shares of Valley Bank common
stock surrendered, one warrant.
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IMMEDIATE SALE IN PUBLIC OFFERING
Sutro & Co. Incorporated will immediately sell 60% of the shares of the
common stock received by Valley Bank shareholders in the public offering. The
sale price in the public offering will be not less than $15.00 per share of
Pacific Community Banking Group common stock. Thus, for shares sold, the amount
of cash will be not less than $10.00 per share of Valley Bank common stock
previously held. If the sale price in the public offering is higher than $15.00
per share, the shareholder will receive the additional amount.
LIMIT ON SHARES INCLUDED IN PUBLIC OFFERING
Each Valley Bank shareholder will retain all of the Pacific Community
Banking Group stock received, unless the shareholder makes an alternative
election. The Valley Bank shareholders will have the option to elect all cash or
all stock, or 60% cash and 40% stock. These elections will be honored to the
extent possible, so long as the aggregate of all cash and stock received by
Valley Bank shareholders is 60% cash and 40% stock. However, if the proportion
of elections is different, the relative amounts of cash and stock may be
adjusted, so that the aggregate amounts remain in this proportion.
CONSIDERATION TO OPTION HOLDERS
Each holder of options to purchase common stock of Valley Bank may elect to
cancel the options and receive consideration, for each Valley Bank share subject
to option, equal to (A) the aggregate consideration paid at closing for a share
of Valley Bank common stock, including warrants and any upward adjustment to the
consideration as described above, minus (B) the exercise price of the option.
All options not properly converted in this manner will be cancelled immediately
prior to the acquisition transaction. The holders of options to purchase common
stock of Valley Bank will have the opportunity to sell the shares of Pacific
Community Banking Group that they receive in the public offering. The same
limitations that apply to sales of shares received in exchange for Valley Bank
common stock will apply to shares received in exchange for options.
DELIVERY OF AGGREGATE PURCHASE CONSIDERATION; MANNER OF PAYMENT
U. S. Stock Transfer Corporation will act as the exchange agent. Pacific
Community Banking Group will deliver its common stock and warrants to the
exchange agent. The exchange agent will cause those shares designated for sale
in the public offering (reduced by proration, if necessary, as described above)
to Sutro & Co. Incorporated. Sutro & Co. Incorporated will deliver to the
exchange agent the cash proceeds of the sale of such shares in the public
offering. The exchange agent will then pay the remaining common stock, the cash
proceeds and the warrants to the holders of Valley Bank common stock who have
delivered or arrange for the delivery of their shares, in accordance with the
procedure described in the letter of transmittal and related instructions.
WARRANTS
Each whole warrant will grant a right to purchase one share of Pacific
Community Banking Group common stock, exercisable for 122% of the price paid by
the public in the public stock offering. Pacific Community Banking Group will
not pay cash for any fractional warrants.
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CORPORATE GOVERNANCE CHANGES
After the acquisition, Pacific Community Banking Group will be the sole
shareholder of Valley Bank and will designate its management. The Valley Bank
agreement requires that a number of changes to the management of Valley Bank
take place prior to the effective time of the merger of Interim Valley Bank and
Valley Bank. Mr. Caswell will be appointed Chairman of the Board and Chief
Executive Officer of Valley Bank. Pacific Community Banking Group expects to
appoint Messrs. Allen, Jannard, Saenz and Schielein as directors. Mr. Mills will
likely retain his position as President, Chief Executive Officer and director of
Valley Bank after the acquisitions until Pacific Community Banking Group
combines the operations of Valley Bank with those of The Bank of Hemet.
DIRECTOR AGREEMENTS. The Valley Bank agreement requires that each of the
directors of Valley Bank, concurrently with the execution of the Valley Bank
agreement, execute an agreement to vote in favor of the Valley Bank agreement
and to recommend to the shareholders of Valley Bank that they vote in favor of
the principal terms of the Valley Bank agreement. Each director of Valley Bank
executed a director's agreement when the Agreement and Plan of Reorganization
was executed on July 30, 1998. Every director, except for one, confirmed the
effectiveness of their respective directors' agreements upon the execution of
the First Restatement of Agreement and Plan of Reorganization of Valley Bank. In
addition, every director except for one owning Valley Bank common stock, and the
trustees of the Valley Bank Employee Stock Ownership Plan, have executed a
similar shareholders' agreement agreeing to vote in favor of the Valley Bank
agreement and to recommend to the shareholders of Valley Bank that they vote in
favor of the principal terms of the Valley Bank agreement as of January 5, 1999,
as amended.
REPRESENTATIONS AND WARRANTIES
Valley Bank has made representations and warranties in the agreement about
the financial condition, conduct of business and operations of Valley Bank and
other customary matters. Valley Bank's representations and warranties will not
survive the closing of the acquisition. If, however, they are inaccurate in
material respects, that could prevent completion of the acquisition.
Pacific Community Banking Group has also made representations and warranties
under the Valley Bank agreement about itself. Pacific Community Banking Group's
representations and warranties will not survive the closing of the acquisition.
CONDITIONS TO THE ACQUISITION
Neither Valley Bank nor Pacific Community Banking Group is obligated to
consummate the Valley Bank acquisition unless the following conditions are
satisfied or waived:
- All regulatory and other government approvals required to be received to
consummate the Valley Bank acquisition have been received and are
effective, without the imposition of conditions that would, in the
reasonable determination of Pacific Community Banking Group, materially
adversely affect the financial condition or operations of Pacific
Community Banking Group or Valley Bank, or otherwise would be materially
burdensome. In addition, all applicable statutory waiting or notice
periods with respect to such government approvals shall have expired and
all conditions and requirements
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prescribed by law or by such regulatory approvals have been satisfied. [As
of the date of this joint proxy statement/prospectus approvals have been
received from , and additional approvals are required from
.]
- No action is pending, and no order, judgment or decree is outstanding,
against the acquisition.
- Valley Bank has received the requisite approval of its shareholders to the
acquisition.
- This joint proxy statement/prospectus and Pacific Community Banking
Group's registration statement relating to the Offering have been declared
effective by the SEC, and all [necessary] state blue sky authorizations
have been received by Pacific Community Banking Group. [As of the date of
this joint proxy statement/prospectus the registration statements have
become effective, and the state blue sky authorizations have been
received.
- Pacific Community Banking Group enters into a firm commitment underwriting
agreement for its public stock offering and all conditions to completing
that offering (other than the mergers) are satisfied or waived.
Under the Valley Bank agreement, the offering must be completed by June 28,
1999, unless this deadline is extended. The deadline may be extended for an
additional 30 days by either Pacific Community Banking Group or Valley Bank if
regulatory approvals and completion of the offering are relatively imminent and
are expected to be completed in the near future and all other conditions are
satisfied. In addition, the deadline may be extended beyond 30 days by consent
of Pacific Community Banking Group and Valley Bank.
In addition, the parties are not obligated to close the acquisition unless
the following conditions are satisfied or waived:
- The other party has had no materially adverse changes in its financial
condition, results of operations or prospects.
- Valley Bank has received prior to the solicitation of Valley Bank
shareholders a fairness opinion (and that opinion has not been withdrawn)
that the contemplated transaction is fair from a financial point of view.
Prior to the date of this joint proxy statement/ prospectus, the required
fairness opinion was received, as described under the heading "The Valley
Bank Acquisition--Opinion of Baxter Fentriss & Company."
- Pacific Community Banking Group receives a fairness opinion that the
contemplated transaction is fair to its shareholders from a financial
point of view.
- Pacific Community Banking Group has listed its shares of common stock
issued in the public offering on the Nasdaq National Market System.
- Valley Bank shareholders voting against the transaction or giving notice
of dissent from the transaction, do not hold more than 10% of the
outstanding shares of Valley Bank.
- Valley Bank shareholders submit their transmittal letters authorizing the
sale of at least 60% of the shares in the public offering.
- Valley Bank terminates its stock option plan, its employee benefit plans,
and all other contracts (except to the extent that Pacific Community
Banking Group directs that specific benefit plans and contracts not be
terminated).
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- Valley Bank certifies that Valley Bank is making satisfactory progress
toward compliance with Year 2000 safety and soundness issues.
- Other usual and customary conditions to closing are satisfied.
CONDUCT OF VALLEY BANK'S BUSINESS PENDING THE ACQUISITION. Until the
closing of the acquisition, Valley Bank has agreed that it will conduct its
business only in the usual and ordinary course and will not engage in specific
kinds of transactions without the prior written consent of Pacific Community
Banking Group. Valley Bank has agreed not to increase compensation above the
levels paid as of June 30, 1998, nor to pay any bonus, without such consent. It
has also agreed not to pay any dividend, except for a dividend of $.52 per share
for shareholders as of November 24 1998 payable at the closing of the
acquisition. Other commitments of Valley Bank stated in the agreement include
promises to:
- use its best efforts to preserve the business organization intact;
- use its best efforts to preserve the goodwill of depositors and customers;
- meet all material contractual obligations and conform to legal
requirements;
- refrain from instituting a material claim except for actions against
borrowers, and with certain exceptions, conduct good faith settlement
negotiations of pending litigation;
- refrain from changing loan policies and procedures;
- refrain from making any material investments except in accordance with
safe and sound banking practices;
- advise Pacific Community Banking Group of any material adverse change;
- refrain from canceling or accelerating any material indebtedness owing to
Valley Bank;
- refrain from selling or disposing of any real property or personal
property;
- with certain exceptions, refrain from foreclosing or otherwise taking
title to real property without a clean "phase one" environmental report;
- commit any act which would cause a breach of any agreement that will have
a material adverse effect on Valley Bank, or fail to do an act necessary
to prevent such a breach; and
- duly observe and conform to all compliance requirements for Year 2000
safety and soundness issues.
COVENANTS OF VALLEY BANK
Valley Bank also agreed to provide Pacific Community Banking Group with
continuing access to all of its books, files, records, business, and to invite a
representative of Pacific Community Banking Group to attend Valley Bank's board
meetings. Valley Bank has agreed not to solicit, encourage or otherwise enter
into another agreement concerning the acquisition of Valley Bank or Valley
Bank's properties, securities, a merger, purchase of assets or otherwise, except
if Valley Bank receives an unsolicited written offer and except to the extent
required by fiduciary obligations of Valley Bank board of directors. Valley Bank
also agreed to inform Pacific Community Banking Group of any classified loans
and promptly to notify Pacific Community Banking Group of any event or condition
that would cause a breach of the
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Valley Bank agreement. Valley Bank agreed to solicit its shareholders for
approval of the acquisition by Pacific Community Banking Group by June 21, 1999,
or as soon thereafter as is reasonably possible. Valley Bank agreed to assist
Pacific Community Banking Group in connection with the preparation of the
materials used in its public offering. Valley Bank agreed to terminate its stock
option plan and to not permit any options to be exercised before the closing of
the acquisition. Valley Bank and Pacific Community Banking Group agreed to
prepare and promptly to file all necessary regulatory applications. Valley Bank
also agreed to obtain all required and necessary third party consents, such as
landlord consent for assignment of leases. Valley Bank also agreed to obtain
"phase one" environmental reports for all real property owned by Valley Bank.
COVENANTS OF PACIFIC COMMUNITY BANKING GROUP
Pacific Community Banking Group made similar covenants regarding the conduct
of its affairs only in the usual and ordinary course, and regarding the timely
cooperation in completing the acquisition. Pacific Community Banking Group also
agreed to cause Valley Bank to maintain in effect a directors and officers
liability insurance policy (with such coverage, terms and conditions as are no
less advantageous than the insurance presently maintained by Valley Bank) for
the directors and officers of Valley Bank after the closing of the Valley Bank
acquisition.
LOCK-UP AGREEMENT
All directors and executive officers of Pacific Community Banking Group and
Valley Bank are required to enter into a lock-up agreement with Sutro & Co.
Incorporated, undertaking in writing that for 90 days following the completion
of the public offering they will not sell any shares of Pacific Community
Banking Group common stock held by them, or warrants held by them that are
exercisable into shares of Pacific Community Banking Group common stock, unless
Sutro & Co. Incorporated specifically grants them permission to do so.
CLOSING
The closing of the Valley Bank acquisition will be on a date agreed by the
parties following satisfaction of all the conditions. If the closing does not
occur by June 28, 1999, Valley Bank may terminate the agreement, except that
this deadline may be extended for an additional 30 days by Pacific Community
Banking Group or Valley Bank if regulatory approvals and completion of the
public offering are relatively imminent and are expected to be completed within
30 days, and all other conditions are satisfied. In addition, the deadline may
be extended beyond 30 days by consent of Pacific Community Banking Group and
Valley Bank.
TERMINATION
The Valley Bank agreement may be terminated at any time prior to the closing
of the acquisition in the following manner:
- by mutual written consent of Valley Bank and Pacific Community Banking
Group,
- by either party, after 30 days' notice, if the other party has materially
breached any covenant, agreement, representation, warranty, duty or
obligation under the Valley Bank agreement and the breach has not been
cured within 30 days, or
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- by either party if any regulatory authority denies or refuses to grant
approval of the transactions contemplated by the Valley Bank agreement, or
a regulatory authority approves the transactions on conditions not
reasonably acceptable to Pacific Community Banking Group;
- by Pacific Community Banking Group or Valley Bank if it does not enter
into a firm commitment underwriting agreement for the public offering of
its stock or the conditions of such agreement are not satisfied or waived;
- by Pacific Community Banking Group or Valley Bank if Valley Bank approves
a transaction in which anyone else, or a group, acquires beneficial
ownership or control of 25% or more of the outstanding securities of
Valley Bank, or an investor seeks to acquire 25% of Valley Bank's
securities and the board does not advise Valley Bank's shareholders that
it does not support that acquisition;
- by Pacific Community Banking Group or Valley Bank if the shareholders of
Valley Bank do not approve the acquisition; and
- by Pacific Community Banking Group or Valley Bank if Valley Bank solicits
or enters into an "Alternative Transaction," as defined in the Valley Bank
agreement. For this purpose, an "Alternative Transaction "is a transaction
with a third party for the acquisition of Valley Bank, all of its assets
or a majority of its equity or debt securities.
If the Valley Bank agreement is terminated by mutual consent or as a result
of a failure to complete the offering, however, then neither Pacific Community
Banking Group nor Valley Bank will be obligated to pay damages to the other
party.
If Valley Bank terminates the Valley Bank agreement because of a breach by
Pacific Community Banking Group, Pacific Community Banking Group will reimburse
Valley Bank for its expenses associated with the transaction, plus an additional
50% of such expenses, up to a maximum of $500,000. If Pacific Community Banking
Group terminates the Valley Bank agreement because of a breach by Valley Bank,
Valley Bank will reimburse Pacific Community Banking Group for its expenses
associated with the transaction, plus an additional 50% of such expenses, up to
a maximum of $500,000.
If Pacific Community Banking Group terminates the Valley Bank agreement
because (A) Valley Bank fails to provide notice of a material change in Valley
Bank's business or of an acquisition by a third party of 5% or more of the
outstanding Valley Bank common stock or (B) the merger is not approved by Valley
Bank's shareholders, Valley Bank will reimburse Pacific Community Banking Group
for its expenses associated with the transaction, plus an additional 50% of such
expenses, without any maximum limit on those expenses. If Pacific Community
Banking Group terminates the Valley Bank agreement because (A) Valley Bank
executes an agreement that permits a third party to acquire control of 25% or
more of Valley Bank's outstanding common stock, (B) in the event of a tender
offer for 25% or more of the outstanding shares of Valley Bank common stock, the
Valley Bank board fails to advise its shareholders that the board does not
support such tender offer, but supports the merger or (C) Valley Bank engages in
an Alternative Transaction as defined above, Valley Bank will pay $1,750,000 to
Pacific Community Banking Group as liquidated damages.
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VALLEY BANK SELECTED FINANCIAL DATA
Set forth below is the selected financial data and operating data of Valley
Bank for the periods indicated, which have been derived from Valley Bank's
audited financial statements. The selected financial data set forth below should
be read in conjunction with Valley Bank's financial statements included
elsewhere in this joint proxy statement/prospectus and "Valley Bank Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Interest income.................................. $ 6,181 $ 5,978 $ 5,338 $ 4,954 $ 4,237
Interest expense................................. 1,438 1,282 1,119 1,007 857
Net interest income.............................. 4,743 4,696 4,219 3,947 3,380
Provision for loan and lease losses.............. 200 980 360 610 160
Noninterest income............................... 2,915 2,719 2,135 2,170 1,895
Noninterest expense.............................. 6,085 5,637 5,211 4,902 4,484
Provision for income taxes....................... 584 242 329 199 210
Net income....................................... 789 556 454 406 421
BALANCE SHEET (END OF PERIOD)
Total assets..................................... $ 84,709 $ 74,566 $ 71,070 $ 65,989 $ 64,868
Total loans...................................... 43,149 45,260 42,999 34,292 32,882
Allowance for loan and lease losses.............. 1,118 1,058 756 497 574
Nonperforming loans.............................. 5,008 3,227 1,245 1,235 3,173
Other real estate owned.......................... 1,749 1,711 1,144 2,555 1,143
Total deposits................................... 75,739 66,239 63,286 59,001 58,334
Shareholders' equity............................. 8,254 7,292 6,902 6,762 6,356
BALANCE SHEET (PERIOD AVERAGE)
Total assets..................................... $ 81,248 $ 74,409 $ 69,940 $ 66,525 $ 65,101
Total loans...................................... 48,512 43,921 41,649 34,552 28,678
Earning assets................................... 70,839 64,794 61,116 55,776 54,013
Total deposits................................... 72,434 66,267 62,517 59,496 58,275
Shareholders' equity............................. 7,716 6,972 6,796 6,505 5,182
CAPITAL RATIOS
Leverage ratio................................... 10.20% 9.80% 9.70% 10.20% 9.80%
Tier 1 risk-based capital........................ 15.50 13.50 13.90 15.70 15.80
Total risk-based capital......................... 16.70 14.50 14.90 14.50 17.00
ASSET QUALITY RATIOS
Nonperforming loans/total loans(1)............... 11.61% 7.13% 2.90% 3.60% 9.65%
Nonperforming assets/total assets(2)............. 7.98 6.62 3.36 5.74 6.65
Allowance for loan losses/ nonperforming loans... 22.32 32.79 60.72 40.24 18.09
Allowance for loan losses/total loans............ 2.59 2.34 1.76 1.45 1.75
PERFORMANCE RATIOS
Return on average assets......................... 0.97% 0.75% 0.65% 0.61% 0.65%
Return on average equity......................... 10.23 7.97 6.68 6.24 8.12
Net interest margin(3)........................... 6.77 7.28 6.96 6.89 6.26
</TABLE>
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<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Net interest spread(4)........................... 6.12% 6.63% 6.57% 6.39% 5.90%
Average loans to average deposits................ 66.97% 66.28% 66.62% 58.07% 49.21%
Efficiency ratio(5).............................. 79.46% 76.02% 82.01% 80.14% 85.00%
PER SHARE INFORMATION
Basic earnings(6)................................ $ 0.73 $ 0.53 $ 0.41 $ 0.35 $ 0.36
Diluted earnings(7).............................. $ 0.65 $ 0.51 $ 0.41 $ 0.34 $ 0.36
Dividends declared............................... $ 0 $ 0 $ 0 $ 0 $ 0
Dividend payout ratio(8)......................... 0% 0% 0% 0% 0%
Book value....................................... $ 7.04 $ 6.22 $ 5.93 $ 5.81 $ 5.46
Shares outstanding at period end(9).............. 1,171,906 1,171,906 1,164,034 1,164,034 1,164,034
Weighted average shares outstanding(9)........... 1,084,112 1,055,293 1,094,211 1,164,034 1,164,034
</TABLE>
- ------------------------
(1) Nonperforming loans consist of loans on nonaccrual, loans past due 90 days
or more and restructured loans.
(2) Nonperforming assets consist of nonperforming loans and other real estate
owned.
(3) Net interest margin is net interest income expressed as a percentage of
average total interest-earning assets.
(4) Net interest spread is the difference between the yield on average total
interest-earning assets and cost of average total interest-bearing
liabilities.
(5) The efficiency ratio is the ratio of noninterest expense to the sum of net
interest income before provision for loan losses and total noninterest
income.
(6) Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period.
(7) Diluted earnings per share reflects the potential dilution that would occur
if securities or other contracts to issue common stock were exercised or
converted into the common stock or resulted in the issuance of common stock
that then shared in earnings.
(8) The dividend payout ratio consists of the dividends paid per share divided
by basic earnings per share.
(9) Shares outstanding at period end include unearned ESOP shares and exclude
shares issuable upon exercise of outstanding options. Weighted average
shares outstanding, used to calculate earnings per share, do not include
unearned ESOP shares.
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VALLEY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. VALLEY BANK'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH IN THE SECTION ENTITLED "RISK FACTORS" AND
ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to Valley Bank's
financial condition, operating results, asset and liability management,
liquidity and capital resources. The following discussion should be read in
conjunction with the financial statements of Valley Bank.
FINANCIAL CONDITION
Total assets at December 31, 1998 were $84.7 million compared to $74.6
million at December 31, 1997, up approximately 13.6%. This increase is
attributable to an $9.0 million increase in federal funds sold, a $1.7 million
increase in securities, a $998,000 increase in cash due from banks, and a
$382,000 increase in other assets, offset by a $2.8 million decrease in net
loans. Total deposits increased from $66.2 million as of December 31, 1997 to
$75.7 million as of December 31, 1998. Stockholders' equity was $8.3 million at
December 31, 1998, up from its $7.3 million level a year earlier, owing
primarily to net income of $789,000 and a decrease in the amount of unearned
Employee Stock Ownership Plan shares of $108,000.
Valley Bank's loan portfolio (including loans held for sale of $594,000)
decreased by approximately $2.2 million during the fiscal year ended December
31, 1998. The largest components of this decrease were in residential lending,
which decreased $2.3 million from $7.1 million in 1997 to $4.8 million in 1998,
and loans secured by unimproved residential lots, which decreased $1.5 million
from $6.4 million in 1997 to $4.9 million in 1998. These decreases were
partially offset by increases of $907,000 and $796,000 in commercial and
industrial loans and government guaranteed loans, respectively. The loan
portfolio decrease was also attributable to an increase in the sale of
government guaranteed loans, from $12.0 million in 1997 to $14.6 million in
1998. As the economy in Southern California continues to improve, there is a
greater demand for both business and construction lending, thus allowing the
Bank the opportunity to originate loans to finance these demands. Loan demand in
the Pacific Northwest has remained strong and steady during the past two years.
Valley Bank expects loan demand in its market areas to remain strong. Because
Valley Bank expects to continue to sell government guaranteed loans in the
secondary market, strong loan originations will not necessarily result in
increases in the size of its loan portfolio.
128
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
The following table sets forth the average balances of each principal
category of Valley Bank's assets, liabilities and capital accounts for the
periods indicated, as well as the percentage of each category to total assets
for the periods indicated. Average balances used throughout this joint proxy
statement/prospectus are based on daily averages.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL
BALANCE ASSETS BALANCE ASSETS BALANCE ASSETS
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks.................. $ 5,883 7.2% $ 5,584 7.5% $ 5,076 7.3%
Federal funds sold....................... 8,631 10.6% 6,506 8.7% 5,060 7.2%
Investment securities--taxable........... 12,022 14.8% 12,246 16.5% 11,804 16.9%
Investment securities--non-taxable....... 987 1.2% 1,474 2.0% 1,976 2.8%
Loans, net of allowance for loan losses
and net of deferred loan fees and
unearned income........................ 47,436 58.4% 42,925 57.7% 40,996 58.6%
Premises and equipment................... 2,185 2.7% 2,184 2.9% 2,280 3.3%
Other assets............................. 4,104 5.1% 3,490 4.7% 2,748 3.9%
--------- --------- --------- --------- --------- ---------
Total assets........................... 81,248 100.0% 74,409 100.0% 69,940 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Liabilities and shareholders' equity:
Deposits:
Demand................................. 19,212 23.7% 18,098 24.3% 16,502 23.6%
Savings and interest-bearing demand.... 38,063 46.9% 35,773 48.1% 35,553 50.8%
Time deposits of $100,000 or more...... 2,909 3.6% 1,761 2.4% 1,625 2.3%
Time deposits under $100,000........... 12,250 15.1% 10,635 14.3% 8,837 12.6%
--------- --------- --------- --------- --------- ---------
Total deposits....................... 72,434 89.2% 66,267 89.0% 62,517 89.4%
Accrued interest payable and other
liabilities............................ 1,098 1.4% 1,170 1.6% 627 0.9%
--------- --------- --------- --------- --------- ---------
Total liabilities.................... 73,532 90.5% 67,437 90.6% 63,144 90.3%
Common stock............................. 5,860 7.2% 5,761 7.7% 5,544 7.9%
Retained earnings........................ 1,856 2.3% 1,211 1.6% 1,252 1.8%
--------- --------- --------- --------- --------- ---------
Total shareholders' equity........... 7,716 9.5% 6,972 9.4% 6,796 9.7%
--------- --------- --------- --------- --------- ---------
Total liabilities and shareholders'
equity............................. $ 81,248 100.0% $ 74,409 100.0% $ 69,940 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
OVERVIEW. Net income for 1998 was $789,000 compared with $556,000 in 1997
and $454,000 in 1996. Basic earnings per share were $0.73 in 1998 compared with
$0.53 in 1997 and $0.41 in 1996. The return on average assets was 0.97% in 1998
compared with 0.75% in 1997 and 0.65% in 1996. Valley Bank's return on average
equity was 10.23% for 1998, 7.97% for 1997 and 6.68% for 1996. Factors that
significantly affected net income for 1998 as compared to 1997 included a
reduction of $780,000 in the provision for loan and lease loss reserves, a gain
on the sale of loans of $285,000, an increase in legal and professional expenses
of $334,000 and a significant recovery that offset OREO expenses for the year.
129
<PAGE>
NET INTEREST INCOME. Total interest and fee income on earning assets
increased to $6.2 million from $6.0 million, or 3.4%, in 1998 compared with
1997. Net interest income increased to $4.8 million from $4.7 million, or 1.0%,
in 1998 from 1997. Average interest-earning assets in 1998 were $70.8 million
compared with $64.8 million in 1997, an increase of $6.0 million or 9.3%. The
1998 increase in interest income was primarily the result of the growth in
interest-earning assets. The 1997 increase in interest income was also
attributable to growth in interest-earning assets.
Total average interest-bearing liabilities in 1998 were $53.7 million
compared with $48.7 million in 1997, an increase of $5.0 million, or 10.3%. This
amount reflects a significant increase in lower cost deposit accounts, primarily
NOW accounts, as a result of consolidation in the local banking market. Total
interest expense increased from $1.3 million to $1.4 million, or 12.2%, in 1998
compared with 1997 and increased from $1.1 million to $1.3 million, or 14.6% in
1997 compared with 1996. This was largely the result of the 10.3% increase in
1998 and 5.2% increase in 1997 in the amount of interest-bearing liabilities.
Valley Bank's net interest margin was 6.77% for 1998, compared with 7.28%
for 1997 and 6.96% for 1996. The reduction in net interest margin in 1998, as
compared with 1997, was a direct result of the prime rate and federal funds rate
reductions experienced in 1998. These rate reductions affected the rates
received on Valley Bank's loan portfolio and other assets more than they
affected the interest paid by it on deposits and other liabilities. Despite
reduction in its net interest margin, Valley Bank's overall net interest income
increased, primarily as a result of an increase in its volume of earning assets.
The increase in net interest margin in 1997, as compared with 1996, was the
direct result of the increase in the amount of loans outstanding.
AVERAGE BALANCES AND RATES EARNED AND PAID. The following table presents,
for the periods indicated, average balance sheet information for Valley Bank,
together with interest rates earned and paid on the various sources and uses of
its funds. The table is arranged to group the elements of interest-earning
assets and interest-bearing liabilities, these items being the major sources of
income and expense. Nonaccruing loans are included in the calculation of average
loan balances, but the nonaccrued interest thereon is excluded.
130
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------- ------------------------------------- -----------
INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE
BALANCE EXPENSE PAID BALANCE EXPENSE PAID BALANCE
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:(1)
Federal funds sold....................... $ 8,631 $ 444 5.14% $ 6,506 $ 354 5.44% $ 5,060
Securities, taxable...................... 12,022 724 6.02% 12,246 764 6.24% 11,804
Securities, nontaxable................... 987 54 5.47% 1,474 76 5.16% 1,976
----------- ----------- ----------- ----------- -----------
Total investments.................... $ 21,640 $ 1,222 5.65% $ 20,226 $ 1,194 5.90% $ 18,840
----------- ----------- ----------- ----------- -----------
Loans(2):
Commercial............................... 3,892 339 8.71% 2,273 220 9.68% 2,051
Real estate.............................. 44,174 4,567 10.34% 41,199 4,511 10.95% 39,203
Installment.............................. 446 53 11.88% 449 53 11.80% 395
----------- ----------- ----------- ----------- -----------
Total loans.......................... $ 48,512 $ 4,959 10.22% $ 43,921 $ 4,784 10.89% $ 41,649
Cash value of life insurance............. 687 52 7.57% 647 23 3.55% 627
----------- ----------- ----------- ----------- -----------
Total earning assets..................... $ 70,839 $ 6,233 8.80% $ 64,794 $ 6,001 9.26% $ 61,116
----------- -----------
Non earning assets:
Allowance for loan and lease losses...... (1,076) (996) (653)
Cash and due from banks.................. 5,883 5,584 5,076
Premises and equipment................... 2,185 2,184 2,280
Interest receivable and other assets..... 3,417 2,843 2,121
----------- ----------- -----------
Total assets......................... $ 81,248 $ 74,409 $ 69,940
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
NOW.................................... 19,297 200 1.04% 17,373 180 1.04% 16,652
Savings................................ 11,505 229 1.99% 11,220 223 1.99% 11,080
Money market........................... 7,261 181 2.49% 7,180 176 2.45% 7,821
Certificates of deposit under
$100,000............................. 12,250 629 5.13% 10,635 534 5.02% 8,837
Certificates of deposit of $100,000 or
more................................. 2,909 148 5.09% 1,761 114 6.47% 1,625
----------- ----------- ----------- ----------- -----------
Total interest bearing deposits...... 53,222 1,387 2.61% 48,169 1,227 2.55% 46,015
Other borrowings....................... 527 51 9.68% 561 55 9.80% 327
----------- ----------- ----------- ----------- -----------
Total interest bearing liabilities... 53,749 $ 1,438 2.68% 48,730 $ 1,282 2.63% 46,342
----------- -----------
Noninterest bearing deposits............. 19,212 18,098 16,502
Other liabilities........................ 571 609 300
Stockholders' equity..................... 7,716 6,972 6,796
----------- ----------- -----------
Total liabilities and stockholders'
equity............................... $ 81,248 $ 74,409 $ 69,940
----------- ----------- -----------
----------- ----------- -----------
Net interest income...................... $ 4,795 $ 4,719
Net interest spread(3)................... 6.12% 6.63%
Net interest margin(4)................... 6.77% 7.28%
<CAPTION>
INTEREST RATES
INCOME/ EARNED/
EXPENSE PAID
----------- -----------
<S> <C> <C>
ASSETS
Investments:(1)
Federal funds sold....................... $ 269 5.32%
Securities, taxable...................... 703 5.96%
Securities, nontaxable................... 100 5.06%
-----------
Total investments.................... $ 1,072 5.69%
-----------
Loans(2):
Commercial............................... 216 10.53%
Real estate.............................. 4,004 10.39%
Installment.............................. 46 11.55%
-----------
Total loans.......................... $ 4,266 10.41%
Cash value of life insurance............. 33 5.28%
-----------
Total earning assets..................... $ 5,371 8.98%
-----------
Non earning assets:
Allowance for loan and lease losses......
Cash and due from banks..................
Premises and equipment...................
Interest receivable and other assets.....
Total assets.........................
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
NOW.................................... 173 1.04%
Savings................................ 227 2.05%
Money market........................... 192 2.45%
Certificates of deposit under
$100,000............................. 425 4.81%
Certificates of deposit of $100,000 or
more................................. 92 5.66%
-----------
Total interest bearing deposits...... 1,109 2.41%
Other borrowings....................... 10 3.06%
-----------
Total interest bearing liabilities... $ 1,119 2.41%
-----------
Noninterest bearing deposits.............
Other liabilities........................
Stockholders' equity.....................
Total liabilities and stockholders'
equity...............................
Net interest income...................... $ 4,252
Net interest spread(3)................... 6.57%
Net interest margin(4)................... 6.96%
</TABLE>
- ------------------------------
(1) The yield for securities reflects that Valley Bank's entire investment
portfolio is classified as held-to-maturity and is based on historical
amortized cost balances. Municipal securities are not reported on a
tax-exempt equivalent basis.
(2) Loans, net of unearned income, include non-accrual loans but do not reflect
average reserves for possible loan losses. Loan fees of $307,000 in 1998,
$417,000 in 1997 and $229,000 in 1996 are included in loan interest income.
There were non-accruing loans totaling approximately $4,752,000 at December
31, 1998, $3,227,000 at December 31, 1997, and $1,245,000 at December 31,
1996.
(3) Net interest spread is the difference between the yield on average total
interest-earning assets and cost of average total interest-bearing
liabilities.
(4) Net interest margin is net interest income expressed as a percentage of
average total interest-earning assets.
NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE. The following table
sets forth, for the periods indicated, a summary of the changes in average asset
and liability balances and
131
<PAGE>
interest earned and interest paid resulting from changes in average asset and
liability balances (volume) and changes in average interest rates. The changes
in interest due to both rate and volume have been allocated to the change in
average rate. Nonaccruing loans are included in the table for computational
purposes, but the nonaccrued interest thereon is excluded.
<TABLE>
<CAPTION>
1998 COMPARED WITH 1997 1997 COMPARED WITH 1996
INCREASE (DECREASE) DUE TO CHANGE INCREASE (DECREASE) DUE
IN: TO CHANGE IN:
----------------------------------- ------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE
----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST AND FEE INCOME
Investment securities:
Federal funds sold......................................... $ 116 $ (26) $ 90 $ 77 $ 8
U.S. Treasury & U.S. government agency securities.......... (14) (26) (40) 26 35
State and political subdivisions........................... (25) 3 (22) (25) 1
----- ----- --------- ----- -----
Total investment securities.............................. $ 77 $ (49) $ 28 $ 78 $ 44
----- ----- --------- ----- -----
Loans:
Commercial................................................. 157 (38) 119 24 (20)
Real estate................................................ 326 (270) 56 204 303
Installment................................................ -- -- -- 6 1
----- ----- --------- ----- -----
Total loans.............................................. 483 (308) 175 234 284
----- ----- --------- ----- -----
Cash surrender value of life insurance..................... 1 28 29 1 (11)
----- ----- --------- ----- -----
Total earning assets....................................... $ 561 $ (329) $ 232 $ 313 $ 317
----- ----- --------- ----- -----
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest bearing deposits:
NOW...................................................... $ 20 $ -- $ 20 $ 7 $ --
Savings.................................................. 6 -- 6 3 (7)
Money market............................................. 2 3 5 (16) --
Certificates of deposit under $100,000................... 81 14 95 86 23
Certificates of deposit of $100,000 or more.............. 74 (40) 34 8 14
----- ----- --------- ----- -----
Total interest bearing deposits.......................... 183 (23) 160 88 30
Other borrowings........................................... (3) (1) (4) 7 38
----- ----- --------- ----- -----
Total interest bearing liabilities......................... 180 (24) 156 95 68
----- ----- --------- ----- -----
TOTAL CHANGE IN NET INTEREST INCOME...................... $ 381 $ (305) $ 76 $ 218 $ 249
----- ----- --------- ----- -----
----- ----- --------- ----- -----
<CAPTION>
TOTAL
---------
<S> <C>
INCREASE (DECREASE) IN INTEREST AND FEE INCOME
Investment securities:
Federal funds sold......................................... $ 85
U.S. Treasury & U.S. government agency securities.......... 61
State and political subdivisions........................... (24)
---------
Total investment securities.............................. $ 122
---------
Loans:
Commercial................................................. 4
Real estate................................................ 507
Installment................................................ 7
---------
Total loans.............................................. 518
---------
Cash surrender value of life insurance..................... (10)
---------
Total earning assets....................................... $ 630
---------
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest bearing deposits:
NOW...................................................... $ 7
Savings.................................................. (4)
Money market............................................. (16)
Certificates of deposit under $100,000................... 109
Certificates of deposit of $100,000 or more.............. 22
---------
Total interest bearing deposits.......................... 118
Other borrowings........................................... 45
---------
Total interest bearing liabilities......................... 163
---------
TOTAL CHANGE IN NET INTEREST INCOME...................... $ 467
---------
---------
</TABLE>
PROVISIONS FOR LOAN AND LEASE LOSSES. For 1998, Valley Bank recorded a
provision for loan and lease losses of $200,000 compared with provisions of
$980,000 for 1997 and $360,000 for 1996. In 1998 net charge offs totaled
$140,000 compared with net charge offs of $678,000 for 1997 and $101,000 in
1996. The decreased provision in 1998 was the direct result of a large recovery
received on a loan, which had been charged off in a prior year. The increased
provision in 1997 was a result of an increased provision mandated by banking
regulators relating to certain loans secured by unimproved real property in Fort
Mohave, Arizona.
NONINTEREST INCOME. Noninterest income in 1998 increased to $2.9 million
from $2.7 million in 1997, an increase of $196,000 or 7.2%. The increase for
1998 is attributable primarily to the increase in the gain from sale of
government guaranteed loans of $285,000, offset by a decrease in service charges
and other fees of $144,000. Noninterest income in 1997 increased
132
<PAGE>
to $2.7 million from $2.1 million in 1996, an increase of $584,000 or 27.4%. The
increase for 1997 is attributable primarily to the increase in gain on the sale
of government guaranteed loans of $397,000 and the increase in service charges
of $201,000.
NONINTEREST EXPENSE. Noninterest expense in 1998 was $6.1 million, an
increase of $448,000, or 7.9%, compared with 1997. Noninterest expense in 1997
was $5.6 million, an increase of $426,000, or 8.2%, compared with noninterest
expense of $5.2 million in 1996. The principal component of noninterest expense
was salaries and employee benefits, which increased to $3.3 million in 1998,
from $3.0 million in 1997 and $2.6 million in 1996. Legal and professional fees
increased $334,000 in 1998 with a portion of that increase being attributable to
the merger with Pacific Community Banking Group. Expenses for other real estate
owned decreased from $294,000 in 1997 to $41,000 in 1998 partially due to the
receipt of reimbursements for other real estate owned expenses. Other expenses
increased from $5.2 million in 1996 to $5.6 million in 1997 or 8.2%. This
increase is due to an increase in salaries and employee benefits which was
partially due to the opening of a new loan production office in Oregon, as well
as other normal salary increases. In addition, other real estate owned expenses
decreased from $401,000 in 1996 to $294,000 in 1997.
PROVISION FOR INCOME TAXES. Valley Bank's provision for income taxes was
$584,000 in 1998, $242,000 in 1997 and $329,000 in 1996. The effective income
tax rate was 42.5% in 1998 compared with 30.3% in 1997 and 42.0% in 1996. In
1997, the decrease in effective income tax rate was primarily due to a decrease
in the valuation allowance for deferred taxes of $134,000. The valuation
allowance was reduced because management believes it is more likely than not
that deferred tax assets will be realized.
NET INCOME. Net income for 1998 was $789,000 compared with $556,000 in 1997
and $454,000 in 1996. Basic earnings per share were $0.73 in 1998 compared with
$0.53 in 1997 and $0.41 in 1996. The return on average assets was 0.97% in 1998
compared with 0.75% in 1997 and 0.65% in 1996. Valley Bank's return on average
equity was 10.23% for 1998, 7.97% for 1997 and 6.68% for 1996. Factors which
significantly impacted net income for 1998 as compared to 1997 included a
reduction of $780,000 in provisions for loan loss reserves, an increase in gain
on the sale of loans of $285,000, an increase in legal and professional expenses
of $334,000 and a significant recovery which offset the expense of holding
foreclosed real estate (commonly referred to as other real estate owned, or
OREO) for the year.
SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents a summary of selected quarterly financial data
which should be read in conjunction with Valley Bank's financial statements
included elsewhere in this joint proxy statement/prospectus. In the opinion of
management, this information has been prepared on the same basis as the
Financial Statements appearing elsewhere in this joint proxy
statement/prospectus, and includes all adjustments, consisting only of normal
recurring adjustments necessary to present fairly the unaudited results set
forth herein. The operating results
133
<PAGE>
for any quarter are not necessarily indicative of results for any subsequent
period or for the entire year.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-----------------------------------------------------------------------------------
DECEMBER SEPTEMBER JUNE MARCH DECEMBER SEPTEMBER JUNE
1998 1998 1998 1998 1997 1997 1997
----------- ----------- --------- --------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income..................... $ 1,009 $ 1,183 $ 1,320 $ 1,231 $ 1,274 $ 1,230 $ 1,204
Provision for loan losses............... 75 (125) 100 150 165 435 210
Net income (loss)....................... 59 208 531 (9) 65 99 173
Net income (loss) per share--
basic(1).............................. $ .06 $ .19 $ .49 $ (.01) $ .06 $ .09 $ .17
Net income (loss) per share--
diluted(2)............................ $ .05 $ .17 $ .44 $ (.01) $ .06 $ .09 $ .16
<CAPTION>
MARCH
1997
-----------
<S> <C>
Net interest income..................... $ 988
Provision for loan losses............... 170
Net income (loss)....................... 219
Net income (loss) per share--
basic(1).............................. $ .21
Net income (loss) per share--
diluted(2)............................ $ .20
</TABLE>
- ------------------------
(1) Net income (loss) per share--basic is based on the weighted average shares
of common stock outstanding during the period.
(2) Net income (loss) per share--diluted is based on the weighted average shares
of common stock and common stock equivalents determined using the treasury
stock method.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is an integral part of managing a banking
institution's primary source of income, net interest income. Valley Bank manages
the balance between rate-sensitive assets and rate-sensitive liabilities being
repriced in any given period with the objective of stabilizing net interest
income during periods of fluctuating interest rates. Valley Bank considers its
rate-sensitive assets to be those which either contain a provision to adjust the
interest rate periodically or mature within one year. These assets include
certain loans and investment securities and federal funds sold. Rate-sensitive
liabilities are those which allow for periodic interest rate changes within one
year and include maturing time certificates, certain savings deposits and
interest-bearing demand deposits. The difference between the aggregate amount of
assets and liabilities that reprice within various time frames is called the
"gap." Generally, if repricing assets exceed repricing liabilities in a time
period Valley Bank would be deemed to be asset-sensitive. If repricing
liabilities exceed repricing assets in a time period Valley Bank would be deemed
to be liability-sensitive. Generally, Valley Bank seeks to maintain a balanced
position whereby there is no significant asset or liability sensitivity within a
one-year period to ensure net interest margin stability in times of volatile
interest rates. This is accomplished through maintaining a significant level of
loans, investment securities and deposits available for repricing within one
year.
The following table sets forth the interest rate sensitivity of the bank's
interest-earning assets and interest-bearing liabilities at December 31, 1998,
using the interest rate sensitivity
134
<PAGE>
gap ratio. For purposes of the following table, an asset or liability is
considered rate-sensitive within a specified period when it can be repriced or
matures within its contractual terms.
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AFTER 1
AFTER 3 BUT BUT
WITHIN WITHIN WITHIN AFTER NONINTEREST
3 MONTHS 12 MONTHS 5 YEARS 5 YEARS BEARING TOTAL
---------- ----------- --------- --------- ----------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold......................... $ 13,780 $ -- $ -- $ -- $ -- $ 13,780
Investment securities...................... 999 10,150 4,436 -- -- 15,585
Net loans (1).............................. 28,727 4,217 4,080 1,298 -- 38,322
---------- ----------- --------- --------- ----------- ---------
Total earning assets..................... $ 43,506 $ 14,367 $ 8,516 $ 1,298 $ -- $ 67,687
Noninterest-bearing assets................. -- -- -- -- 17,022 17,022
---------- ----------- --------- --------- ----------- ---------
Total assets............................. $ 43,506 $ 14,367 $ 8,516 $ 1,298 $ 17,022 $ 84,709
---------- ----------- --------- --------- ----------- ---------
---------- ----------- --------- --------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits............... -- -- -- -- 20,061 20,061
Interest-bearing deposits.................. 23,477 16,755 15,571 -- -- 55,803
Borrowings................................. 478 -- -- -- -- 478
Other liabilities and stockholders'
equity................................... -- -- -- -- 8,367 8,367
---------- ----------- --------- --------- ----------- ---------
Total liabilities and stockholders'
equity................................... $ 23,955 $ 16,755 $ 15,571 $ -- $ 28,428 $ 84,709
---------- ----------- --------- --------- ----------- ---------
---------- ----------- --------- --------- ----------- ---------
Incremental interest rate sensitivity
gap...................................... $ 19,551 $ (2,388) $ (7,055) $ 1,298
Cumulative interest rate sensitivity gap... $ 19,551 $ 17,163 $ 10,108 $ 11,406
Cumulative interest rate sensitivity gap as
a % of earning assets.................... 28.9% 25.4% 14.9% 16.9%
</TABLE>
- ------------------------
(1) Balance does not include non-accrual loans of $4,827,000.
Valley Bank was asset-sensitive with a positive cumulative one-year gap of
$17.2 million or 25.36% of interest-earnings assets at December 31, 1998. In
general, based upon Valley Bank's mix of deposits, loans and investments,
increases in interest rates would be expected to result in an increase in Valley
Bank's net interest margin.
The interest rate gaps reported in the tables arise when assets are funded
with liabilities having different repricing intervals. Since these gaps are
actively managed and change daily as adjustments are made in interest rate views
and market outlook, positions at the end of any period may not be reflective of
Valley Bank's interest rate sensitivity in subsequent periods. Active management
dictates that longer-term economic views are balanced against prospects for
short-term interest rate changes in all repricing intervals. For purposes of the
analysis above, repricing of fixed-rate instruments is based upon the
contractual maturity of the applicable instruments. Actual payment patterns may
differ from contractual payment patterns. The change in net interest income may
not always follow the general expectations of an asset-sensitive or
liability-sensitive balance sheet during periods of changing interest rates,
because
135
<PAGE>
interest rates earned or paid may change by differing increments and at
different time intervals for each type of interest-sensitive asset and
liability. As a result of these factors, at any given time, Valley Bank may be
more sensitive or less sensitive to changes in interest rates than indicated in
the above tables. Greater sensitivity would have a more adverse effect on net
interest margin if market interest rates were to increase, and a more favorable
effect if rates were to decrease.
MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or to
future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, exchange rates, commodity prices, equity prices and
other market changes. Market risk is attributed to all market risk sensitive
financial instruments, including investment securities, loans, deposits and
borrowings.
Valley Bank does not engage in trading activities for its own account and
does not participate in foreign currency transactions for its own account.
Accordingly, Valley Bank's exposure to market risk is primarily a function of
its asset and liability management activities. The principal market risk to the
bank is the interest rate risk inherent in its lending, investing and
deposit-taking activities. This is because interest earning assets and
interest-bearing liabilities of the bank do not change at the same speed, to the
same extent or on the same basis.
Valley Bank's interest rate sensitivity analysis is discussed in the
preceding section. The table on page 135 measures the bank's interest rate
sensitivity gap, in other words, the difference between earning assets and
liabilities maturing or repricing within specified periods. However, gap
analysis has significant limitations as a method for measuring interest rate
risk since changes in interest rates do not affect all categories of assets and
liabilities in the same way or at the same time. Further, it has limitations in
helping Valley Bank to manage the difference in behavior of lending and funding
rates--so-called "basis risk."
To address the limitations inherent in gap analysis, Valley Bank monitors
its expected change in earnings based on changes in interest rates through a
detailed financial model. This model's estimate of interest rate sensitivity
takes into account the differing time intervals and differing rate change
increments of each type of interest-sensitive asset and liability. It then
measures the projected impact of changes in market interest rates on Valley
Bank's return on equity and return on average assets. Based upon the December
31, 1998 mix of interest-sensitive assets and liabilities, given an immediate
and sustained increase in the prime rate of 1%, this model estimates Valley
Bank's cumulative return on equity over the next year would increase by less
than 5.3% and the cumulative return on average assets over the next year would
increase by less than 0.5%, as compared with a flat interest rate environment.
Given an immediate and sustained decrease in the prime rate of 1%, this model
estimates Valley Bank's cumulative return on equity over the next year would
decrease by less than 6.1% and the cumulative return on average assets would
decrease by less than 0.6%, as compared with a flat interest rate environment.
However, this model is based on a series of assumptions which may or may not
come to pass. In the event of a 1% rise in interest rates, the actual return on
equity and return on average assets might not increase at all, or might, in
fact, decrease. Conversely, in the event of a 1% decline in interest rates, and
the actual return on equity and return on average assets might not decrease at
all, or might, in fact, increase. Further, the economic value of Valley Bank's
loan and deposit portfolios would also change under the
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interest rate variances previously discussed. The amount of change would depend
upon the profiles of each loan and deposit class, which include: the rate, the
likelihood of prepayment or repayment, whether its rate is fixed or floating,
the maturity of the instrument and the particular circumstances of the customer.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. In order to maintain adequate liquidity, Valley Bank must have
sufficient resources available at all times to meet its cash flow requirements.
The need for liquidity in a banking institution arises principally to provide
for deposit withdrawals, the credit needs of its customers and to take advantage
of investment opportunities as they arise. A company may achieve desired
liquidity from both assets and liabilities. Valley Bank considers cash, federal
funds sold, other short term investments, maturing loans and investments,
payments of principal and interest on loans and investments and potential loan
sales as sources of asset liquidity. Deposit growth and access to credit lines
established with correspondent banks and market sources of funds are considered
by Valley Bank as sources of liability liquidity.
Valley Bank monitors its liquidity position daily. Valley Bank had liquid
assets (cash, deposits in other financial institutions and investment
securities) as a percent of total liabilities of 29.3% and 35.5% as of December
31, 1998 and 1997, respectively. While liquidity has marginally declined,
management believes it is sufficient to meet current and anticipated funding
needs. Liquid assets represented approximately 32.0% of total assets at December
31, 1998. Valley Bank's loan to deposit ratio was 57.0% and 68.3% as of December
31, 1998 and 1997, respectively. This means that there are less deposits
invested in the loan portfolio, which tends to be a less liquid asset than a
typical investment security.
Valley Bank's primary sources of liquidity include liquid assets and a
stable deposit base. To supplement these, Valley Bank maintains lines of credit
with Union Bank of California in the amount of $1.5 million, and with the
Federal Reserve Bank of San Francisco in an amount equal to the corresponding
amount of eligible securities available for pledge (approximately $8.0 million
at December 31, 1998). Management believes that Valley Bank maintains adequate
amounts of liquid assets to meet its liquidity needs. Valley Bank's liquidity
might be insufficient if deposit withdrawals were to exceed anticipated levels.
Deposit withdrawals can increase if a company experiences financial difficulties
or receives adverse publicity for other reasons, or if its pricing, products or
services are not competitive with those offered by other institutions.
CAPITAL. Capital serves as a source of funds and helps protect depositors
against potential losses. The primary source of capital for Valley Bank has been
internally generated capital through retained earnings. Valley Bank's
shareholders' equity increased by $962,000, or 13.2% from December 31, 1997 to
December 31, 1998. The increase was attributable to net income of $789,000 and
an increase in ESOP shares released of $173,000.
Federal regulations establish guidelines for calculating risk-adjusted
capital ratios. These guidelines establish a systematic approach of assigning
risk weights to bank assets and off-balance sheet items making capital
requirements more sensitive to differences in risk profiles among banking
organizations. Under these regulations, banks and bank holding companies are
required to maintain a risk-based capital ratio of 8.0%; that is, "Tier 1" plus
"Tier 2" capital must equal at least 8% of risk-weighted assets plus off-balance
sheet items, and
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Tier 1 capital (primarily shareholders' equity) must constitute at least 50% of
qualifying capital. Tier 1 capital consists primarily of shareholders' equity
excluding good will, and Tier 2 capital includes subordinated debt and, subject
to a limit of 1.25% of risk-weighted assets, the allowance for loan and lease
losses. It is Valley Bank's intention to maintain risk-based capital ratios at
levels characterized as "well capitalized" for banking organizations: Tier 1
risk-based capital of 6% or above and total risk-based capital at 10% or above.
At December 31, 1998, Valley Bank had a Tier 1 risk-based capital ratio of 15.5%
and a total risk-based capital ratio of 16.7%.
In addition, regulators have adopted a minimum leverage capital ratio
standard. This standard is designed to ensure that all financial institutions,
irrespective of their risk profile, maintain minimum levels of core capital,
which by definition excludes the allowance for loan and lease losses. These
minimum standards for top-rated institutions may be as low as 3%; however,
regulatory agencies have stated that most institutions should maintain ratios at
least 1 to 2 percentage points above the 3% minimum. It is Valley Bank's
intention to maintain the leverage ratio above the 5% minimum for "well
capitalized" banks. At December 31, 1998, Valley Bank's leverage capital ratio
equaled 10.2%.
Failure to meet minimum capital requirements can trigger mandatory and
possibly additional discretionary actions by the regulators that, if undertaken,
could have a material effect on Valley Bank's financial statements and
operations. Refer to "Risk Factors--Government Regulation and Legislation" and
"Regulation and Supervision."
As part of its October 1998 resolution described elsewhere herein, Valley
Bank's board of directors resolved to maintain capital at a minimum of $5.5
million, and at least 8% of assets. Please refer to "Risk Factors--If Valley
Bank fails to meet its commitments to bank regulators, it could hurt our
business" for a description of this resolution.
For a presentation of the actual and pro forma capitalization of The Bank of
Hemet and Valley Bank, refer to "Capitalization."
IMPACT OF INFLATION
The financial statements and related financial data presented in this joint
proxy statement/prospectus have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates are likely to have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
During periods of inflation, interest rates do not necessarily move in the same
direction or with the same magnitude as the price of goods and services. Valley
Bank seeks to manage its interest sensitivity gap to minimize the potential
adverse effect of inflation and other market forces on its net interest income
and therefore on its earnings and capital.
Financial institutions are also affected by inflation's impact on
noninterest expenses, such as salaries and occupancy expenses. During 1996, 1997
and 1998, inflation remained relatively stable, and Valley Bank's level of
noninterest expense was relatively unaffected by inflation.
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IMPACT OF PENDING ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB issued SFAS 132, EMPLOYER'S DISCLOSURES ABOUT
PENSIONS AND OTHER POST-RETIREMENT BENEFITS. This Statement standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable. This new standard is effective for 1998 and did not have a
material effect on the financial condition or results of operations of Valley
Bank.
In June 1998, the FASB issued SFAS 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
new standard is effective for 2000 and is not expected to have a material impact
on the financial statements of Valley Bank.
In October 1998, the FASB issues SFAS No. 134, ACCOUNTING FOR
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS
HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE, (AN AMENDMENT OF FASB STATEMENT
NO. 65). This Statement establishes accounting and reporting standards for
certain activities of mortgage banking enterprises and other enterprises that
conduct operations that are substantially similar to the primary operations of a
mortgage banking enterprise. Statement No. 134 will be effective for the first
fiscal quarter beginning after December 15, 1998. The Bank does not engage in
mortgage banking activities.
YEAR 2000 COMPLIANCE
OVERVIEW. The Year 2000 problem arises when computer programs have been
written using two digits rather than four to define the applicable year. As a
result, date-sensitive software and/or hardware may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or other disruption of operations and impede normal business activities.
In June 1996, the Federal Financial Institutions Examination Council
("FFIEC") alerted the banking industry of the serious challenges that would be
encountered with Year 2000 issues. The Federal Deposit Insurance Corporation
("FDIC") has also implemented a plan to require compliance with Year 2000 issues
and regularly examines our progress.
STATE OF READINESS OF VALLEY BANK.
OVERALL PLAN. Valley Bank has initiated an enterprise-wide program to
prepare the bank's computer systems and applications for the year 2000. The Bank
has examined its primary integrated bank operating system, Information
Technology Inc. (ITI) and has been advised by the vendor that the software is
year 2000 compliant. This advice was validated by a review of ITI by the Federal
Financial Institutions Examination Council (FFIEC). This review was conducted by
the FFIEC on January 20, 1998. The Bank determined, however, that its hardware,
a mainframe computer, may not be compliant. As a result, the bank purchased, in
December 1998, a previously owned vendor certified Year 2000 ready Unisys A-11
computer for data processing, at a cost of approximately $25,000. The computer
has been installed, tested and is presently being utilized as the bank's
mainframe. As a redundant validation regime, both the hardware and software were
successfully Year 2000 tested during February and March, 1999.
VENDORS. Valley Bank relies exclusively on outside vendors to provide the
hardware and software used in its computer operations. To determine the
readiness of vendors, Valley Bank
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has sent a letter to each vendor inquiring about its compliance with Year 2000.
Many of the vendors have responded that they are Year 2000 compliant. Valley
Bank has determined that some vendors will not have a material impact on the
bank's operations, whether or not they are Year 2000 compliant. In these two
situations, no further work is performed. For those vendors that have responded
they are working towards Year 2000 compliance and that Valley Bank has
determined to be significant, the bank is following up on a regular basis
through 1999. Most of these vendors have advised Valley Bank that they expect to
be Year 2000 compliant prior to December 31, 1999. If critical vendors do not
demonstrate compliance by a certain date, Valley Bank will seek other
alternatives in accordance with its contingency plan. This may include seeking
replacement vendors.
CUSTOMERS. To determine the readiness of customers, Valley Bank has
personally met with, and interviewed by way of a questionnaire, each of its
significant borrowers and depositors to determine the extent of risk created by
any failure by them to remediate their own Year 2000 issues. Each borrower and
depositor is categorized as to its level of readiness and risk based on its
response to the questionnaire. New borrowers and large depositors are screened
utilizing the same questionnaire approach. In February, April and July of 1998
and April of 1999, Valley Bank has communicated by letter, to each of its
depositors and borrowers, information about Year 2000 issues and problems, and
furnished sources of information that they might utilize to address these issues
and problems. Additional written communication is planned for 1999. Management
and staff of Valley Bank have also served as speakers at community forums to
raise the level of awareness of Year 2000 issues.
COSTS TO ADDRESS YEAR 2000 ISSUES FOR VALLEY BANK. Some of Valley Bank's
computer hardware and software applications were modified or replaced in order
to maintain their functionality as the year 2000 approaches. Valley Bank has
spent approximately $100,000 as of December 31, 1998 to address Year 2000 issues
and estimates its total costs over the three-year period 1998 - 2000 to be
approximately $150,000. In addition, staff time of approximately 1,000 hours has
been devoted to these matters, with an additional 200 hours of time expected
during the remainder of 1999. These costs have been paid for out of general
operating funds. Valley Bank does not anticipate that any of these costs will
materially impact its results of operations in any one reporting period.
RISKS OF YEAR 2000 ISSUES FOR VALLEY BANK. Ultimately, the potential impact
of the Year 2000 issue on Valley Bank will depend on a series of complex
factors, including the following:
- the corrective measures undertaken by Valley Bank itself;
- the measures undertaken by third-party vendors to become Year 2000
compliant;
- the accuracy of representations made by third-party vendors to Valley Bank
concerning their state of readiness;
- the degree of compliance by governmental agencies, businesses (including
telephone companies), and other entities which engage in essential
communications with Valley Bank; and
- the degree of compliance of customers.
At worst, Valley Bank's customers and vendors will face severe Year 2000
issues. In this case, Valley Bank may be unable to service its customers, and
borrowers may become unable
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to pay back their loans. Valley Bank may also be required to replace
non-compliant vendors with more expensive Year 2000-compliant vendors. At this
time Valley Bank cannot determine the financial effect on it if significant
customer or vendor remediation efforts are not resolved in a timely manner.
CONTINGENCY PLANS OF VALLEY BANK. Valley Bank has developed a business
continuation contingency plan to provide service to customers should there be an
environment in which electrical and communication services may not be available
for a brief period of time after the century date change. The Bank's data
processing system and other mission critical systems have been tested and are
Year 2000 compliant. In the event its computer system or other mission critical
system should fail, Valley Bank has alternate procedures to achieve a successful
resumption of business. These alternative procedures include reverting to manual
systems for processing some forms of work as well as contractual arrangements
with Year 2000 compliant outside vendors for data processing.
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BUSINESS OF VALLEY BANK
GENERAL
Valley Bank is a California community bank headquartered in Moreno Valley,
California. In addition to its headquarters, Valley Bank maintains six branches
in the Inland Empire and two loan production offices, one in Moreno Valley and
the other in Portland, Oregon. Valley Bank was originally organized as a
national banking association in 1960, and was reincorporated in 1980 under the
California General Corporation Law as a state-licensed bank. It is licensed by
the California Department of Financial Institutions. Its deposits are insured up
to the applicable legal limits by the FDIC. As with many state chartered banks
of its size in California, it is not a member of the Federal Reserve System.
Moreno Valley is located in a region commonly referred to as the Inland
Empire, an area southeast of Los Angeles county and northeast of San Diego
county, consisting of Riverside and San Bernardino counties. These counties are
experiencing significant population and economic growth, much of which has been
fueled by the migration of manufacturing, distribution and export service firms
from adjacent Los Angeles, Orange and San Diego counties.
Valley Bank emphasizes community-based banking, concentrating on both
business and individual customers. It serves small-to-medium size businesses,
professionals, retired individuals and residents in the Inland Empire area, as
well as businesses and real estate owners/ developers throughout the Inland
Empire, and makes loans guaranteed by the United States Small Business
Administration (SBA loans) and by the U. S. Department of Agriculture's Business
and Industry program (B&I loans) in the Inland Empire and in the vicinity of its
Portland, Oregon loan office.
Valley Bank offers a full complement of business lending activities which
include SBA and B&I loans, term loans, commercial loans, construction financing,
and domestic letters of credit. In the area of deposit services, Valley Bank
offers business checking, savings, money market and time deposit accounts.
Commercial loans may be unsecured or secured by real estate, equipment, accounts
receivable, deposit accounts or any combination of such collateral. Historically
Valley Bank has primarily focused its lending on government guaranteed loans,
construction and conventional loans secured by real estate, commercial loans and
installment loans. This continues to be its focus.
Valley Bank's consumer services complement its business emphasis by offering
a range of personal and private banking financial services such as
interest-bearing checking, fee-based checking, savings, money market accounts,
and tailored time certificates of deposit. In the area of consumer loans, Valley
Bank offers new and used automobile loans, home improvement loans, overdraft
lines of credit, and unsecured personal loans. Other operational services
include safe deposit boxes, night deposit facilities, travelers checks, wire
transfers, cashier's checks, 24-hour access to banking information by telephone,
24-hour automatic teller machine availability on the Cirrus and Star networks
and other standard depository functions.
BUSINESS STRATEGY
Valley Bank's business strategy is to support the banking needs of small
businesses, mainly in the Inland Empire areas served by its branches and in the
Portland, Oregon area served by its loan production office. To this end, Valley
Bank offers an array of business
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lending services including SBA and other government guaranteed loans, term
loans, commercial notes, commercial real estate financing, construction loans,
domestic letters of credit, and business, checking, savings, money market and
time deposit accounts. Valley Bank has focused on marketing efforts to implement
its business strategy of continuing to increase core deposits through business
development efforts, diversifying its customer base, enhancing its product
lines; and providing superior customer service.
These efforts include obtaining increased loan and deposit business from
existing customers, word-of-mouth referrals, a focused direct mail marketing
program and personal solicitation of customers by officers, directors and
stockholders. Management assigns responsibility to all loan and business
development officers to make regular calls on potential customers and obtain
referrals from existing customers. Valley Bank directs promotional efforts
toward residents and small-to-medium sized businesses.
Recognizing that its greatest strategic advantage is its niche experience
with government guaranteed loans, Valley Bank emphasizes this business. It
opened a loan production office in Portland, Oregon in 1996 after conducting a
market research study. That office serves small businesses in the State of
Oregon and in southern Washington. Valley Bank is considering further expansion
of that business.
PREMISES
The following table sets forth information about Valley Bank's banking
offices.
<TABLE>
<CAPTION>
LOCATION TYPE OF OFFICE OWNED/LEASED SIZE SINCE
- ---------------------------------------------------- ----------------------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
24010 Sunnymead Boulevard, Moreno Valley............ Main branch Owned 9,000 sq/ft 1960
26670 McCall Boulevard, Sun City.................... Branch Owned 4,500 sq/ft 1975
16820 Van Buren Boulevard (Woodcrest), Riverside.... Branch Owned 3,000 sq/ft 1976
22729 Barton Road, Grand Terrace.................... Branch Owned 3,000 sq/ft 1982
255 South Riverside Avenue, Rialto.................. Branch Owned 3,000 sq/ft 1987
211 East 4th Street, Perris......................... Branch Leased 3,000 sq/ft 1974
29614 Nuevo Road, Nuevo............................. Branch Leased 1,500 sq/ft 1990
24081 Postal Avenue, Moreno Valley.................. Loan production(1) Owned 2,600 sq/ft 1993
10180 S.W. Nimbus Avenue, Suite H-1, Portland,
Oregon............................................ Loan production(1) Leased 1,481 sq/ft 1996
25400 Allesandro Boulevard, Moreno Valley........... Administrative(1)(2) Leased 3,084 sq/ft 1993
</TABLE>
- ------------------------
(1) Deposits are not accepted at this facility.
(2) Data processing center.
Aggregate annual rentals for Valley Bank for leased premises were $101,000
for the year ended December 31, 1998. Valley Bank considers its present
facilities to be sufficient for its current operations.
INVESTMENT PORTFOLIO
The following table sets forth the book and market values of securities held
for maturity at the dates indicated. Under Statement of Financial Accounting
Standards No. 115,
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"Accounting for Certain Investments in Debt and Equity Securities," Valley Bank
has designated all of its investment securities listed as "held-to-maturity."
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. government agencies......................................................... $ 15,004 $ 11,957 $ 9,979
Mortgage-backed securities....................................................... 0 781 1,291
Securities, nontaxable........................................................... 581 1,118 1,658
--------- --------- ---------
Total........................................................................ $ 15,585 $ 13,856 $ 12,928
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the maturities of Valley Bank's investment
securities at December 31, 1998 and the weighted average yields of such
securities calculated on the basis of the cost and effective yields based on the
scheduled maturity of each security. Yields on municipal securities have not
been calculated on a tax-equivalent basis.
<TABLE>
<CAPTION>
AFTER ONE TO FIVE AFTER FIVE TO TEN YEARS
WITHIN ONE YEAR YEARS AFTER TEN YEARS
---------------------- ---------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ----- --------- ----- ------------- ----- ------------- -----
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government
agencies................ $ 10,999 5.5% $ 4,006 5.8% $ 0 0.00% $ 0 0.00
Securities, nontaxable.... $ 150 4.8% $ 430 6.1% $ 0 0.00% $ 0 0.00%
-- --
--------- ---------
Total..................... $ 11,149 5.5% $ 4,436 5.8% $ 0 0.00% $ 0 0.00%
-- --
-- --
--------- ---------
--------- ---------
Estimated fair value...... $ 11,170 $ 4,472 $ 0 $ 0
-- --
-- --
--------- ---------
--------- ---------
<CAPTION>
TOTAL
----------------------
<S> <C> <C>
AMOUNT YIELD
--------- -----
<S> <C> <C>
U.S. government
agencies................ $ 15,005 5.6%
Securities, nontaxable.... $ 580 5.8%
---------
Total..................... $ 15,585 5.6%
---------
---------
Estimated fair value...... $ 15,642
---------
---------
</TABLE>
Valley Bank does not own securities of a single issuer whose aggregate book
value is in excess of 10% of its total equity.
LENDING ACTIVITIES
Valley Bank originates and sells loans. Please refer to "--Lending
Procedures and Loan Approval Process" for a description of applicable
regulations which limit lending in relation to shareholders' equity. Valley Bank
originates loans for its own portfolio and for sale in the secondary market.
Lending activities include SBA and other government guaranteed loans, real
estate construction loans, real estate mortgage loans, commercial loans and
consumer installment loans.
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LOAN PORTFOLIO
COMPOSITION OF LOAN PORTFOLIO. The following table shows the composition of
loans by type of loan or type of borrower at the date indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate--construction.................................. $ 6,733 $ 6,873 $ 2,138 $ 1,943 $ 1,259
Real estate--residential................................... 4,848 7,116 8,552 9,745 6,398
Real estate--unimproved residential lots................... 4,898 6,369 7,963 501 1,569
Real estate--commercial.................................... 13,910 14,535 14,776 14,271 10,232
Commercial and industrial.................................. 2,653 1,746 1,908 1,638 4,579
Government guaranteed...................................... 9,173 8,377 6,681 5,591 8,549
Loans to individuals....................................... 504 435 484 401 458
Loans held for sale........................................ 594 -- 670 379 --
--------- --------- --------- --------- ---------
Total loans............................................ $ 43,313 $ 45,451 $ 43,172 $ 34,469 $ 33,044
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES. The
following table shows the maturity distribution of the loan portfolio at
December 31, 1998, and the loan portfolio's sensitivity to changes in interest
rates. Loans due after one year are shown in the fixed and floating rate
categories.
<TABLE>
<CAPTION>
FLOATING
AFTER ONE BUT RATE:
WITHIN WITHIN FIVE AFTER DUE AFTER FIXED RATE: DUE
ONE YEAR YEARS FIVE YEARS ONE YEAR AFTER ONE YEAR
--------- --------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Real estate--construction................... $ 6,733 $ -- $ -- $ -- $ --
Real estate--residential.................... 573 775 3,500 3,702 573
Real estate--unimproved residential
lots...................................... 1,842 1,638 1,418 362 2,694
Real estate--commercial..................... 1,543 1,152 11,215 12,011 356
Commercial and industrial................... 1,340 887 426 1,067 246
Government guaranteed....................... -- 3 9,170 9,173 --
Loans to individuals........................ 141 229 134 138 225
Loans held for sale......................... 594 -- -- -- --
--------- ------ ----------- ------------ ------
Total....................................... $ 12,766 $ 4,684 $ 25,863 $ 26,453 $ 4,094
--------- ------ ----------- ------------ ------
--------- ------ ----------- ------------ ------
</TABLE>
GOVERNMENT GUARANTEED LOANS
Valley Bank actively originates loans qualifying for guarantees issued by
the United States Small Business Administration (the "SBA"), an independent
agency of the federal government. The SBA guarantees on such loans currently
range from 75% to 80% of the principal and accrued interest. Under certain
circumstances, the guarantee of principal and interest may be less than 75%. The
guaranteed percentage is less than 75% for loans over $1.0 million. Valley Bank
generally limits the amount available to any one borrower under this program to
$1.5 million. Valley Bank typically requires that SBA loans be secured by first
or second lien deeds of trust on real property. Valley Bank also obtains
additional collateral such as personal property or other real property. SBA
loans have terms ranging from seven to 25 years
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depending on the use of the proceeds. To qualify for an SBA loan, a borrower
must demonstrate the capacity to service and repay the loan, exclusive of the
collateral, on the basis of historical earnings or reliable projections.
In 1997, Valley Bank expanded its government guaranteed loan program to
include loans guaranteed by the U.S. Department of Agriculture under that
department's business and industry ("B&I") loan program for rural areas. These
loans tend to be larger than SBA loans, with different, but similar, rules for
origination. During 1998 Valley Bank closed its first B&I loan, in the amount of
$4.6 million, and concurrently sold the guaranteed portion of the loan. Valley
Bank has several other B&I loans under review.
Valley Bank generally sells substantially all of the guaranteed portion of
the government guaranteed loans that it originates. Pursuant to a 1998 change in
the governmental rules for SBA loans, Valley Bank has also commenced to sell the
non-guaranteed portion of SBA loans, in some cases. In 1998, Valley Bank
originated $13.9 million of government guaranteed loans (including its first B&I
loan) and sold $14.6 million of government guaranteed loans. In 1997, Valley
Bank originated $10.1 million of government guaranteed loans and sold $12.1
million of guaranteed loans. When Valley Bank sells a government guaranteed
loan, it generally retains the obligation to repurchase the loan for 90 days
after the sale, if the loan fails to comply with certain representations and
warranties given by Valley Bank. Valley Bank retains the obligation to service
the government guaranteed loans, for which it receives a servicing fee. Those
portions of the sold government guaranteed loans that remain owned by Valley
Bank, and those government guaranteed loans that have not yet been sold, are
included in Valley Bank's balance sheet. At December 31, 1998, Valley Bank had
$9.8 million in government guaranteed loans remaining on its balance sheet. At
December 31, 1998, Valley Bank was servicing $28.6 million in government
guaranteed loans that had been sold to others.
LOANS SECURED BY REAL ESTATE
At December 31, 1998, $30.4 million, or approximately 71% of Valley Bank's
loans, were secured by real estate. The four largest categories were loans
secured by commercial properties (32% of the loan portfolio), loans secured by
residential properties (11% of the loan portfolio), construction loans (15% of
the loan portfolio) and loans for unimproved residential lots (11% of the loan
portfolio). All of the real estate construction and conventional loans are
secured by deeds of trust or mortgages on underlying real estate.
Real estate lending involves risks associated with the potential for decline
in the value of underlying real estate collateral and the cash flow from income
producing properties. Such declines in real estate values and cash flows can be
caused by a number of factors, including adversity in general economic
conditions, rising interest rates, changes in tax and other governmental
policies affecting the holding real estate, environmental conditions,
governmental and other use restrictions, development of competitive properties
and increasing vacancy rates. Valley Bank's real estate dependence increases the
risk of loss both in Valley Bank's loan portfolio and its holdings of other real
estate owned when real estate values decline.
COMMERCIAL MORTGAGE LOANS. Valley Bank provides intermediate and long-term
commercial real estate loans. Collateral includes first deeds of trust on real
property. Typically, real estate collateral is owner-occupied, and the value of
the real estate collateral is supported by formal appraisals in accordance with
applicable regulations. The majority of the properties securing these loans are
located in Riverside and San Bernardino counties.
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Valley Bank also provides commercial real estate loans principally secured
by owner-occupied/rental commercial and industrial buildings. Generally, these
types of loans are made for a period of up to twenty years, with monthly
payments based on a portion of the principal plus interest, and with a
loan-to-value ratio of 70% or less, using an adjustable rate indexed to the
prime rate (as appearing in the West Coast edition of THE WALL STREET JOURNAL).
Valley Bank also offers fixed rate loans, but rate adjustments are typically
required in intervals of one to five years. Amortization schedules for
commercial loans generally do not exceed 20 years.
Payments on loans secured by such properties are often dependent on
successful operation or management of the properties. Repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. Valley Bank seeks to minimize these risks in a variety of
ways, including limiting the size of such loans and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. When possible, Valley Bank also
attempts to obtain loan guaranties from financially capable parties.
Substantially all of the properties securing Valley Bank's real estate loans are
inspected by Valley Bank's lending personnel before the loan is made.
Valley Bank requires title insurance insuring the status of its lien on all
of the real estate secured loans when a first trust deed on the real estate is
taken as collateral. Valley Bank also requires that fire and extended coverage
casualty insurance (and, if the property is in a flood zone, flood insurance) is
maintained in an amount at least equal to the outstanding loan balance, subject
to applicable law that in some circumstances may limit the required amount of
hazard insurance to the cost to replace the insured improvements. Valley Bank's
lending policies generally limit the loan-to-value ratio on mortgage loans
secured by owner-occupied properties to 70% of the lesser of the appraised value
or the purchase price. No assurance can be given that these procedures will
protect the Bank against losses on loans secured by real property. Please refer
to "Risk Factors--A downturn in the real estate market could hurt our business."
for a discussion of the possible effects of a decline in real estate values.
REAL ESTATE CONSTRUCTION LOANS. Valley Bank finances the construction of
residential, commercial and industrial properties. To limit risks inherent in
its construction loan portfolio, Valley Bank has restricted such lending to
owner-builder construction loans. No assurance can be given pertaining to future
conditions relating to the local economy nor its effect on the collateral values
of such loans. Please refer to "Risk Factors--A downturn in the real estate
market could hurt our business" for a discussion of the possible effects of a
decline in real estate values.
Valley Bank's construction loans typically have the following
characteristics:
- maturities of one year or less;
- a floating rate of interest based on Valley Bank's base lending rate;
- minimum cash equity of 20% to 30% of project cost;
- advance of anticipated interest costs during construction; advance of
fees;
- first lien position on the underlying real estate;
- loan-to-value ratios generally not exceeding 70%; and
- recourse against the borrower or a guarantor in the event of default.
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Valley Bank does not typically commit to make the permanent loan on the
property unless the permanent loan is to be a government guaranteed loan. Valley
Bank does not participate in joint ventures or take an equity interest in
connection with its construction lending.
Construction loans involve additional risks compared to loans secured by
existing improved real property. These include the uncertain value of the
project prior to completion; the inherent uncertainty in estimating construction
costs (which is often beyond the control of the borrower); construction delays
and cost overruns; possible difficulties encountered by municipal or other
governmental regulation during siting or construction; and the difficulty in
accurately evaluating the market value of the completed project.
As a result of these uncertainties, construction lending often involves the
disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project rather than the ability of the borrower or
guarantor to repay principal and interest. If Valley Bank is forced to foreclose
on a project prior to or at completion due to a default, there can be no
assurance that Valley Bank will be able to recover all of the unpaid balance of,
and accrued interest on, the loan as well as the related foreclosure and holding
costs. In addition, Valley Bank may be required to fund additional amounts to
complete a project and may have to hold the property for an indeterminable
period of time. Valley Bank has underwriting procedures designed to identify
what it believes to be acceptable levels of risk in construction lending. Among
other things, qualified and bonded third parties are engaged to provide progress
reports and recommendations for construction disbursements. No assurance can be
given that these procedures will prevent losses arising from the risks described
above.
LOANS ON UNIMPROVED RESIDENTIAL LOTS. Substantially all of the Valley Bank
loans secured by unimproved residential lots relate to a single real estate
project in Fort Mohave, Arizona. In 1996, Valley Bank acquired 200 loans, each
secured by a residential lot in this project, at a cost of approximately $7.9
million. These loans were acquired in a swap transaction in which Valley Bank
exchanged real property that it had previously acquired in foreclosure for these
loans. Since the time of their acquisition, almost half of the loans have been
repaid. As of December 31, 1998, 107 of these loans remain, in the aggregate
amount of $4.8 million, or 11% of the loan portfolio.
RESIDENTIAL MORTGAGE LOANS. Valley Bank originates fixed-rate mortgage
loans secured by one-to-four family properties with amortization schedules of 15
to 30 years and maturities of up to five years. The loan fees charged, interest
rates and other provisions of Valley Bank's residential loans are determined by
an analysis of Valley Bank's cost of funds, cost of origination, cost of
servicing, risk factors and portfolio needs.
COMMERCIAL LOANS
Valley Bank makes relatively few commercial loans, other than government
guaranteed loans. The commercial loans are for intermediate and short-terms and
may be unsecured, partially secured or fully secured. The majority of these
loans are in Riverside county. Loan maturities are normally 12 months. Valley
Bank requires a complete re-analysis before considering any extension. Depending
on the creditworthiness of the business, certain types of open-ended loans to
$100,000 and non-open-ended renewable products are also available. Valley Bank
makes these loans to any size business, and to businesses organized as sole
proprietorships, partnerships and corporations. Most are to small businesses. In
general, it is
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the intent of Valley Bank to take collateral whenever possible regardless of the
loan purpose. Collateral may include liens on inventory, accounts receivable,
fixtures and office furniture and equipment and, in some cases, leasehold
improvements and real estate. As a matter of policy, the Bank requires all
principals of a business to be co-obligors on all loan instruments and all
significant stockholders of corporations to execute a specific debt guaranty.
All borrowers must demonstrate the ability to service and repay not only Valley
Bank debt but all outstanding business debt, exclusive of collateral, on the
basis of historical earnings or reliable projections.
LOANS TO INDIVIDUALS
Loans to individuals, also termed consumer loans, are extended for a variety
of purposes. Most are for the purchase of automobiles and other vehicles. Others
include secured and unsecured personal loans, home improvement, equity lines,
overdraft protection loans, and unsecured lines of credit. Valley Bank's
underwriting standards for loans to individuals include an examination of the
applicant's credit history and payment record on other debts and an evaluation
of their ability to meet existing obligations and payments on the proposed loan.
Although creditworthiness of the applicant is of primary importance, the
underwriting process also includes a comparison of the value of the security, if
any, to the proposed loan amount. Most of Valley Bank's loans to individuals are
repayable on an installment basis.
Loans to individuals generally entail greater risk than do residential
mortgage loans, particularly in the case of those loans that are unsecured or
secured by rapidly depreciating assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance because the collateral is
more likely to suffer damage, loss or depreciation. The remaining deficiency
often does not warrant further collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, the collection of loans to
individuals is dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, various federal and state laws, including
federal and state bankruptcy and insolvency laws, often limit the amount which
the lender can recover on loans to individuals. Loans to individuals may also
give rise to claims and defenses by a consumer loan borrower against the lender
on these loans, such as Valley Bank, and a borrower may be able to assert
against such assignee claims and defenses that it has against the seller of the
underlying collateral.
As of December 31, 1998, the total of all loans to individuals held by
Valley Bank was $504,000 or 1.2% of total loans.
OFF-BALANCE SHEET COMMITMENTS
As part of its service to its small- to medium-sized business customers,
Valley Bank from time to time issues formal commitments and lines of credit.
These commitments can be either secured or unsecured. They may be in the form of
revolving lines of credit for seasonal working capital needs. However, these
commitments may also take the form of letters of credit. Standby letters of
credit are conditional commitments issued by Valley Bank to guarantee the
performance of a customer to a third party. Valley Bank does not enter into any
interest rate swaps or caps, or forward or future contracts. At December 31,
1998, Valley Bank had commitments to extend credit of approximately $2.6 million
and obligations under standby letters of credit of approximately $178,000.
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The following table shows the distribution of Valley Bank's undisbursed loan
commitments at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit, including unsecured loan commitments............................. $ 2,582 $ 6,664
Standby letters of credit...................................................................... 178 212
--------- ---------
Total.......................................................................................... $ 2,760 $ 6,876
--------- ---------
--------- ---------
</TABLE>
LENDING PROCEDURES AND LOAN APPROVAL PROCESS
Loan applications may be approved by the board of directors' loan committee,
by Valley Bank's management and lending officers, or by individual lending
officers to the extent of their loan authority. Individual lending authority is
granted to the Chief Executive Officer, the Senior Credit Officer, branch and
department managers and other key lending officers. Loans for which direct and
indirect borrower liability would exceed an individual's lending authority are
referred to Valley Bank's management and, for those in excess of management's
approval limits, to the loan committee.
At December 31, 1998, Valley Bank's authorized legal lending limits were
$1,405,000 for unsecured loans plus an additional $937,000 for certain secured
loans. Legal lending limits are calculated in conformance with California law,
which prohibits a bank from lending to any one individual or entity or its
related interests an aggregate amount which exceeds 15% of primary capital plus
the allowance for loan losses on an unsecured basis (plus an additional 10% on a
secured basis). Valley Bank's primary capital plus allowance for loan losses at
December 31, 1998 totaled $9.4 million. Valley Bank's largest borrower as of
December 31, 1998 had an aggregate loan liability totaling $1.7 million in
secured loans.
The highest individual lending authority in Valley Bank is the combined
administrative lending authority for unsecured and secured lending of $500,000,
which requires the approval and signatures of the Chief Executive Officer and
the Senior Credit Officer. The second highest lending authority is $250,000 for
each of the Chief Executive Officer and the Senior Credit Officer, each acting
singly. All other individual lending authority is substantially less, with the
next largest authority for secured loans being $25,000.
Lending limits are authorized for the Chief Executive Officer, the Senior
Credit Officer and other officers by the board of directors of Valley Bank. The
Senior Credit Officer is responsible for evaluating the authority limits for
individual credit officers and recommends lending limits for all other officers
to the board of directors for approval.
The review of each loan application includes the applicant's credit history,
income level and cash flow analysis, financial condition and the value of any
collateral to secure the loan (which, in the case of real estate loans over a
certain amount, utilizes a review of an appraisal report prepared by an
independent bank approved appraiser).
With respect to any approved commercial or real estate loan, Valley Bank
generally issues a written commitment to the applicant, setting forth the terms
under which the loan will be extended.
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Valley Bank seeks to mitigate the risks inherent in its loan portfolio by
adhering to certain underwriting practices. These practices include analysis of
prior credit histories, financial statements, tax returns and cash flow
projections of its potential borrowers, valuation of collateral based on reports
of independent appraisers and audits of accounts receivable or inventory pledged
as security.
OTHER EARNING ASSETS
The following table relates to other earning assets not disclosed previously
for the dates indicated. This item consists of a salary continuation plan for
Valley Bank's President. The plan is informally linked with universal life
insurance policies for the salary continuation plan. Income from these policies
is reflected in noninterest income.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
Cash surrender value of life insurance............................. $ 712,000 $ 661,000 $ 637,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
ASSET QUALITY
NONPERFORMING ASSETS. Nonperforming assets include non performing loans and
other real estate owned.
NONPERFORMING LOANS. Nonperforming loans are those which the borrower fails
to perform in accordance with the original terms of the obligation and fall into
one of three categories:
- Nonaccrual loans. Valley Bank generally places loans on nonaccrual status
when interest or principal payments become 90 days or more past due unless
the outstanding principal and interest is adequately secured and, in the
opinion of management, is deemed in the process of collection. When loans
are placed on nonaccrual status, accrued but unpaid interest is reversed
against the current year's income. Interest income on nonaccrual loans is
recorded on a cash basis. Valley Bank may treat payments as interest
income or return of principal depending upon management's opinion of the
ultimate risk of loss on the individual loan. Cash payments are treated as
interest income where management believes the remaining principal balance
is fully collectible. Additionally, Valley Bank may place loans that are
not 90 days past due on nonaccrual status if management reasonably
believes the borrower will not be able to comply with the contractual loan
repayment terms and collection of principal or interest is in question.
- Loans 90 days or more past due. Valley Bank classifies a loan in this
category when the borrower is more than 90 days late in making a payment
of principal or interest.
- Restructured loans. These are loans on which interest accrues at a below
market rate or upon which certain principal has been forgiven so as to aid
the borrower in the final repayment of the loan, with any interest
previously accrued, but not yet collected, being reversed against current
income. Interest is reported on a cash basis until the borrower's ability
to service the restructured loan in accordance with its terms is
established.
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OTHER REAL ESTATE OWNED (OREO). This category of nonperforming assets
consists of real estate to which Valley Bank has taken title by reason of
foreclosure or by taking a deed in lieu of foreclosure from the borrower. Before
Valley Bank takes title to OREO, it generally obtains an environmental review.
The following table summarizes Valley Bank's nonperforming assets at the
dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans(1)................................. $ 4,752 $ 3,227 $ 1,245 $ 1,110 $ 3,173
Loans past due 90 days or more...................... 256 0 0 125 0
Restructured loans.................................. 0 0 0 0 0
--------- --------- --------- --------- ---------
Total nonperforming loans(1)...................... 5,008 3,227 1,245 1,235 3,173
Other real estate owned............................. 1,749 1,711 1,144 2,555 1,143
--------- --------- --------- --------- ---------
Total nonperforming assets........................ $ 6,757 $ 4,938 $ 2,389 $ 3,790 $ 4,316
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming loans as a percent of total loans..... 11.61% 7.13% 2.90% 3.60% 9.65%
Nonperforming assets as a percent of total assets... 7.98% 6.62% 3.36% 5.74% 6.65%
</TABLE>
- ------------------------
(1) Interest income during 1998 on loans on nonaccrual status would have been
$424,000 if the loans had been accruing. Interest collected on these loans
in 1998 was $0.
At December 31, 1998, nonperforming assets represented 7.98% of total
assets. Nonperforming loans that were secured by first deeds of trust on real
property were $4.4 million at December 31, 1998, $1.9 million at December 31,
1997, $1.1 million at December 31, 1996, $1.2 million at December 31, 1995 and
$3.1 million at December 31, 1994. Other forms of collateral such as inventory
and equipment secured the remaining nonperforming loans as of each date. The
collateral securing nonperforming loans may not be sufficient to prevent losses
on such loans.
Nonperforming loans have occurred mainly among the loans secured by real
estate. During the early 1990's Valley Bank made many interim construction loans
to builders building "on spec," that is, without a committed purchaser for the
finished building. When recession hit Southern California, some borrowers
abandoned their construction projects, and their loans became nonperforming.
Valley Bank foreclosed, and then attempted to liquidate the resulting OREO
property. The soft real estate market then prevailing, however, made sale
difficult. As the economy improved in Southern California, sale of these
properties became easier. During 1998, the remaining early-1990's nonperforming
assets were resolved.
As of December 31, 1998, Valley Bank had approximately $4.8 million in
non-performing non-accrual loans. As of March 31, 1999, Valley Bank had
approximately $4.5 million in non-performing non-accrual loans.
The largest non-performing loan, in the amount of approximately $1.6
million, is a construction loan secured by an eighty room motel on which
construction is now complete. Valley Bank is a 53% participant in this loan and
has taken the lead to bring it to resolution. Problems arose as a result of
construction delays. The property is currently managed by a hotel management
company. The hotel management company, which is also acting as the
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court-appointed receiver, has submitted cash flow statements indicating that the
motel can be opened for business on approximately May 1, 1999.
A second non-performing loan relationship is comprised of two construction
loans, totaling approximately $900,000, secured by a service
station/mini-mart/fast food facility. The SBA has provided a commitment to
guarantee a permanent loan when construction is completed. At December 31, 1998,
these loans were on non-accrual status. At March 31, 1999 these loans were
placed on accrual status based on the SBA's confirmation of its takeout loan
commitment.
A third non-performing loan, in the amount of approximately $800,000,
involves a loan made to renovate and convert a facility to a sports bar and
restaurant. This loan is 100% guaranteed by the City of San Bernardino Economic
Development Agency. After renovation, the lessee was unable to operate the
facility successfully. The facility has now been leased to an experienced and
successful southern California chain operator and an additional restructuring
has been reached with the borrower/owner.
A fourth non-performing loan, in the amount of approximately $700,000,
involves a ten-unit low-income home development project in the city of Colton,
California. Six homes have sold, two are expected to close escrow in the second
quarter of 1999, one is utilized as a model home, and one remains unsold. In
addition, the bank has located a buyer who has indicated his willingness to
purchase the non-performing loan at a discount. The anticipated purchase price
of the loan plus the anticipated net proceeds from the early second quarter home
sale is expected to result in a loss of approximately $80,000, or approximately
50% of the loan loss reserve specifically allocated to this loan.
A fifth non-performing loan, in the amount of approximately $1.1 million,
involves a service station/car wash/mini-market operation. This loan was not
considered a non-accrual loan at December 31, 1998, but was placed on
non-accrual status during the first quarter of 1999. The City of San Bernardino
Economic Development Agency is a guarantor. Valley Bank is now in the process of
making demand on the city to bring the payments current and maintain them in
that regard or to pay off the loan.
As of December 31, 1998, Valley Bank had OREO of approximately $1.8 million.
At March 31, 1999, Valley Bank had OREO of approximately $1.6 million. The first
largest OREO property, with an approximate book balance of $400,000, is an
office building located in the Moreno Valley area. The second largest OREO
property, with an approximate book balance of $400,000, is a residential planned
unit development located in the Hemet, California area. The third largest OREO
property, with an approximate book balance of $275,000, is a land parcel located
in Moreno Valley, California.
SUBSTANDARD AND DOUBTFUL LOANS. Valley Bank monitors all loans in the loan
portfolio to identify problem credits. Additionally, as an integral part of the
credit review process of Valley Bank, credit reviews are performed by an outside
financial institution consulting firm semi-annually to assure accuracy of
documentation and the identification of problem credits. Valley Bank and its
loans are also reviewed by the FDIC and State of California Department of
Financial Institutions during an annual safety and soundness examination.
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There are three classifications for problem loans:
Substandard--An asset is classified as "substandard" if it is inadequately
protected by the current sound worth and paying capacity of the borrower, or of
the collateral pledged, if any. Credits in this category have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. They are
characterized by the distinct possibility that Valley Bank will sustain some
loss if the deficiencies are not corrected.
Doubtful--An asset is classified as "doubtful" if it has all the weaknesses
inherent in one classified "substandard," and has the added characteristic that
the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and improbable. The
possibility of loss is extremely high, but because of certain important and
reasonably specific pending factors which may work to the advantage and
strengthening of the assets, its classification as an estimated loss is deferred
until its more exact status may be determined.
Loss--An asset is classified as a "loss" if it is considered uncollectible
and of such little value that its continuance as a bankable asset is not
warranted. This classification does not mean that the asset has absolutely no
recovery or salvage value, but rather it is not practical or desirable to defer
writing off this basically worthless asset even though partial recovery may be
effected in the future. Any potential recovery is considered too small and the
realization too distant in the future to justify retention as an asset on Valley
Bank's books.
Another category, designated as "special mention," is maintained for loans
which do not currently expose Valley Bank to a significant degree of risk to
warrant classification in a "substandard," "doubtful" or "loss" category, but do
possess credit deficiencies or potential weaknesses deserving management's close
attention.
As of December 31, 1998, Valley Bank's classified loans consisted of $3.8
million in the "substandard" category and no loans in the "doubtful" category.
Valley Bank's $3.8 million of loans classified as "substandard" consisted of
$222,000 of performing loans and $3.6 million of non-accrual loans.
Additionally, as of December 31, 1998, Valley Bank's loans categorized in the
"special mention" category consisted of $2.4 million of performing loans.
IMPAIRED LOANS. Valley Bank defines impaired loans, regardless of past due
status, as those on which principal and interest are not expected to be
collected under the original contractual loan repayment terms. Valley Bank
charges off an impaired loan at the time management believes the collection
process has been exhausted. Valley Bank measures impaired loans based on the
present value of future cash flows discounted at the loan's effective rate, the
loan's observable market price or the fair value of collateral if the loan is
collateral-dependent. Impaired loans at December 31, 1998 were $3.9 million (all
of which were also nonaccrual loans). Allowance for loan losses related to
impaired loans was $502,000 at December 31, 1998.
Except as disclosed above, there were no assets as of December 31, 1998
where known information about possible credit problems of borrowers caused
management to have serious doubts as to the ability of the borrower to comply
with the present loan repayment terms. However, it is always possible that
current credit problems may exist that may not have been discovered by
management. Please refer to "--Allowance and Provisions for Loan Losses."
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ALLOWANCE AND PROVISIONS FOR LOAN LOSSES
The following table sets forth an analysis of the allowance for loan losses
and provisions for loan losses for the periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................. $ 1,058 $ 756 $ 497 $ 574 $ 1,047
--------- --------- --------- --------- ---------
Loans charged off
Real estate--construction.................... -- -- -- -- 225
Real estate--residential..................... -- 79 66 469 224
Real estate--unimproved residential lots..... -- -- -- -- --
Real estate--commercial...................... -- -- 55 355 248
Commercial and industrial.................... 9 26 -- 1 4
Government guaranteed........................ 403 653 -- -- --
Loans to individuals......................... -- 1 -- -- 82
--------- --------- --------- --------- ---------
Total charge-offs.............................. 412 759 121 825 783
--------- --------- --------- --------- ---------
Recoveries
Real estate--construction.................... -- 16 6 128 149
Real estate--residential..................... 225 46 13 6 --
Real estate--unimproved residential lots..... -- -- -- -- --
Real estate--commercial...................... 7 6 1 -- --
Commercial and industrial.................... -- -- -- 3 1
Government guaranteed........................ 40 13 -- -- --
Loans to individuals......................... -- -- -- 1 --
--------- --------- --------- --------- ---------
Total recoveries............................... 272 81 20 138 150
--------- --------- --------- --------- ---------
Net charge-offs................................ 140 678 101 687 633
Additions charged to operations................ 200 980 360 610 160
--------- --------- --------- --------- ---------
Balance at end of period....................... $ 1,118 $ 1,058 $ 756 $ 497 $ 574
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Average loans outstanding, gross............... $ 48,512 $ 43,921 $ 41,649 $ 34,552 $ 28,678
--------- --------- --------- --------- ---------
Total loans at end of period, gross............ $ 43,313 $ 45,451 $ 43,172 $ 34,469 $ 33,044
--------- --------- --------- --------- ---------
Net charge-offs/average loans outstanding...... 0.29% 1.54% 0.24% 1.99% 2.21%
Allowance at end of period/loans outstanding... 2.59% 2.34% 1.76% 1.45% 1.75%
Allowance/nonperforming loans.................. 22.32% 32.79% 60.72% 40.24% 18.09%
</TABLE>
Valley Bank maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent risks of loss associated with
its loan portfolio under prevailing and anticipated economic conditions. In
determining the adequacy of the allowance for loan losses, management takes into
consideration the following factors among others:
- changes in lending policies and procedures, including underwriting
standards and collection, charge-off, and recovery practices
- changes in national and local economic and business conditions and
developments, including the condition of various market segments
- changes in the nature and volume of the portfolio
- changes in the experience, ability, and depth of the lending management
and staff
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- changes in the trend of the volume and severity of past due and classified
loans
- trends in the volume of non-accrual loans, troubled debt restructuring and
other loan modifications
- changes in the quality of the loan review system and degree of oversight
by the institution's board of directors
- the existence and effect of any concentrations of credit, and changes in
the level of such concentrations
- the effect of external factors such as competition and legal and
regulatory requirements on the level of estimated credit losses in the
institution's current portfolio
Valley Bank follows the "Interagency Policy Statement on the Allowance for
Loan and Lease Losses" and analyzes the Allowance for Loan Losses using the
above factors on a quarterly basis. In addition, as an integral part of the
semi-annual credit review process of Valley Bank, performed by an outside
financial institution consulting firm, the Allowance for Loan Losses is reviewed
for adequacy. Furthermore, the adequacy of the Allowance for Loan Losses is
reviewed by FDIC and State of California Department of Financial Institutions in
an annual safety and soundness examination. The FDIC and/or State of California
Department of Financial Institutions may require Valley Bank to recognize
additions to the Allowance for Loan Losses based upon its judgment of the
information available to it at the time of its examination. Valley Bank was most
recently examined by the FDIC and State of California Department of Financial
Institutions on December 21, 1997.
Valley Bank's Senior Credit Officer reports monthly to Valley Bank's board
of directors and continuously reviews loan quality and loan classifications.
Such reviews assist the Board in establishing the level of the allowance for
loan and lease losses. Valley Bank's board of directors reviews the adequacy of
the allowance on a monthly basis.
Valley Bank uses a methodology known as migration analysis for assistance in
determining the appropriate level of its allowance for loan losses. This method
applies relevant risk factors to the entire loan portfolio, including
nonperforming loans. The methodology is based, in part, on the Bank's loan
grading and classification system. The Bank grades its loans through internal
reviews and periodically subjects loans to external reviews which then are
assessed by the Bank's board of directors. External credit reviews are performed
on a semi-annual basis and the quality grading process occurs on a quarterly
basis. The "migration" of loans from grade to grade is then tracked to help
predict future losses and thus more accurately set allowance levels. Risk
factors applied to the performing loan portfolio are based on Valley Bank's past
loss history considering the current portfolio's characteristics, current
economic conditions and other relevant factors. General reserves are applied to
various categories of loans at percentages ranging up to 50% based on the Bank's
assessment of credit risks for each category. Risk factors are applied to the
carrying value of each classified loan:
- loans internally graded "Watch" or "Special Mention" carry a risk factor
from 1.0% to 2.0%;
- "Substandard" loans carry a risk factor that is typically 15%, but ranges
from 0% (in the case of a government guaranteed loan on which the
guarantee has not yet been honored) to 40% depending on collateral
securing the loan, if any;
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<PAGE>
- "Doubtful" loans carry a 50% risk factor; and
- "Loss" loans are charged off 100%.
In addition, a portion of the allowance is specially allocated to identified
problem credits. The analysis also includes reference to factors such as the
delinquency status of the loan portfolio, inherent risk by type of loans,
industry statistical data, recommendations made by Valley Bank's regulatory
authorities and outside loan reviewers, and current economic environment.
Important components of the overall credit rating process are the asset quality
rating process and the internal loan review process.
The balance in the allowance is affected by amounts provided from
operations, amounts charged off and recoveries of previously charged off loans.
For 1998, Valley Bank recorded a provision for credit losses of $200,000
compared with provisions of $980,000 for 1997 and $360,000 for 1996. In 1998 net
charge offs totaled $140,000, compared with net charge offs of $678,000 for 1997
and $101,000 in 1996. The relatively higher level of charge offs in 1997
reflected primarily government guaranteed loans that had been originated in
previous years without sufficient attention to government requirements for
documentation of lien positions and similar matters. The employee responsible
for these oversights is no longer with Valley Bank, and the Bank has since
implemented more stringent procedures for loan documentation. At December 31,
1998 the allowance for loan losses was $1.1 million or 2.59% of total loans
outstanding, compared with $1.1 million or 2.34% of total loans outstanding at
December 31, 1997.
The allowance is based on estimates and ultimate future losses may vary from
current estimates. Management anticipates the continued stabilization of the
economy in segments of Valley Bank's market area. However, credit quality will
be influenced by underlying trends in the economic cycle, particularly in
Southern California, which management cannot completely predict. It is always
possible that future economic or other factors may adversely affect Valley
Bank's borrowers. As a result, Valley Bank may sustain loan losses, in any
particular period, that are sizable in relation to the allowance, or exceed the
allowance. In addition, Valley Bank's asset quality may deteriorate through a
number of possible factors, including:
- rapid growth;
- failure to enforce underwriting standards;
- failure to maintain appropriate underwriting standards;
- failure to maintain an adequate number of qualified loan personnel; and
- failure to identify and monitor potential problem loans.
Based on these and other factors, loan losses may be substantial in relation
to the allowance, or exceed the allowance. Please refer to "Risk Factors--Loan
loss reserves may not cover actual loan losses."
157
<PAGE>
The following table summarizes a breakdown of the allowance for loan losses
by loan category and the allocation in each category as a percentage of total
loans in each category at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995
---------------------- ---------------------- ------------------------ ------------------------
% OF LOANS % OF LOANS % OF LOANS % OF LOANS
IN IN IN IN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
--------- ----------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-
construction.......... $ 490 15.8% $ 141 15.1% $ 29 5.0% $ 28 5.7%
Real estate-
residential........... 62 11.3 70 15.7 66 20.1 90 28.6
Real estate-unimproved
residential lots...... 175 11.5 146 14.0 139 18.8 11 1.5
Real estate-
commercial............ 200 32.5 423 32.0 303 34.8 201 41.9
Commercial and
industrial............ 37 6.2 54 3.8 70 4.5 72 4.8
Government guaranteed... 150 21.5 213 18.4 141 15.7 89 16.4
Loans to individuals.... 4 1.2 11 1.0 8 1.1 6 1.2
--------- ----- --------- ----- ----- ----- ----- -----
Total................... $ 1,118 100.0% $ 1,058 100.0% $ 756 100.0% $ 497 100.0%
--------- ----- --------- ----- ----- ----- ----- -----
--------- ----- --------- ----- ----- ----- ----- -----
<CAPTION>
1994
------------------------
% OF LOANS
IN
AMOUNT CATEGORY
----------- -----------
<S> <C> <C>
Real estate-
construction.......... $ 22 3.8%
Real estate-
residential........... 102 17.8
Real estate-unimproved
residential lots...... 12 2.1
Real estate-
commercial............ 210 36.6
Commercial and
industrial............ 72 12.5
Government guaranteed... 148 25.8
Loans to individuals.... 8 1.4
----- -----
Total................... $ 574 100.0%
----- -----
----- -----
</TABLE>
The allocation of the allowance to loan categories is an estimate by management
of the relative risk characteristics of loans in those categories. Losses in one
or more loan categories may exceed the portion of the allowance allocated to
that category or even exceed the entire allowance. Please refer to "Risk
Factors--Loan loss reserves may not cover actual loan losses."
DEPOSITS
Deposits are Valley Bank's primary source of funds. At December 31, 1998,
Valley Bank had a deposit mix of 21.7% in time deposits, 41.7% in savings and
interest-bearing checking accounts, 26.5% in noninterest-bearing demand accounts
and 10.1% in money market accounts. Noninterest-bearing demand deposits enhance
Valley Bank's net interest income by lowering its costs of funds.
Valley Bank obtains deposits primarily from the communities it serves. No
material portion of its deposits has been obtained from or is dependent on any
one person or industry. Valley Bank's business is not seasonal in nature. Valley
Bank accepts deposits in excess of $100,000 from customers. These deposits are
priced to remain competitive. At December 31, 1998, Valley Bank had no brokered
deposits.
158
<PAGE>
The following table sets forth the average balances and the average rates
paid for the major categories of deposits for the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995
---------------------- ---------------------- ---------------------- ----------------------
<CAPTION>
AVERAGE AVERAGE AVERAGE AVERAGE
AVERAGE RATE AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE PAID BALANCE PAID BALANCE PAID BALANCE PAID
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts............. $ 19,212 -- $ 18,098 -- $ 16,502 -- $ 15,591 --
Savings accounts............ 11,505 1.99% 11,220 1.99% 11,080 2.05% 11,532 1.99%
Money market accounts....... 7,261 2.49 7,180 2.45 7,821 2.45 8,636 2.45
NOW accounts................ 19,297 1.04 17,373 1.04 16,652 1.04 14,937 1.05
Certificates of deposits
under $100,000............ 12,250 5.13 10,635 5.02 8,837 4.81 7,108 4.61
Certificates of deposits of
$100,000 or more.......... 2,909 5.09 1,761 6.47 1,625 5.66 1,692 4.73
--------- --------- --------- ---------
Total deposits.............. $ 72,434 2.61% $ 66,267 2.55% $ 62,517 2.41% $ 59,496 2.29%
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
<S> <C> <C>
1994
----------------------
AVERAGE
AVERAGE RATE
BALANCE PAID
--------- -----------
<S> <C> <C>
Demand accounts............. $ 14,594 --
Savings accounts............ 12,423 2.00%
Money market accounts....... 9,583 2.16
NOW accounts................ 14,254 1.08
Certificates of deposits
under $100,000............ 6,241 3.36
Certificates of deposits of
$100,000 or more.......... 1,180 3.14
---------
Total deposits.............. $ 58,275 1.96%
---------
---------
</TABLE>
MATURITIES OF TIME CERTIFICATES OF DEPOSIT
Maturities of time certificates of deposits outstanding at December 31, 1998
are summarized as follows:
<TABLE>
<CAPTION>
LESS THAN
$100,000 OR MORE $100,000
----------------- -----------------
<S> <C> <C>
(IN THOUSANDS)
Three months or less..................................... $ 1,545 $ 6,048
Over three to twelve months.............................. 898 5,924
Over twelve months....................................... -- 2,035
------ -------
Total.................................................... $ 2,443 $ 14,007
------ -------
------ -------
</TABLE>
SUPERVISION AND REGULATION
As a California licensed FDIC insured bank, Valley Bank is subject to many
governmental rules that affect its operations. For a description of the laws and
regulations that apply to Valley Bank, please refer to the section entitled
"Supervision and Regulation," starting on page 175.
COMPETITION
Valley Bank considers its primary service area to include Riverside and San
Bernardino counties in California and, for government guaranteed loans,
Portland, Oregon and parts of Washington. The Riverside and San Bernardino
county region is commonly referred to the Inland Empire.
The banking business in California is highly competitive with respect to
both loans and deposits and is dominated by a relatively small number of major
banks which have many offices operating over wide geographic areas. Valley Bank
competes for deposits and loans principally with these banks, as well as with
savings and loan associations, thrift and loan associations, credit unions,
mortgage companies, insurance companies, and other lending institutions. Among
the advantages certain of these institutions have over Valley Bank are their
159
<PAGE>
ability to finance extensive advertising campaigns and to allocate their
investment assets to regions of highest yield and demand. Many of the major
commercial banks operating in Valley Bank's service areas are larger banks and,
as such, possess certain competitive advantages over Valley Bank. By virtue of
their greater total capitalization, these major commercial banks have
substantially higher lending limits than Valley Bank. In addition, other
entities (both public and private) seeking to raise capital through the issuance
and sale of debt or equity securities will also compete with Valley Bank in the
acquisition of deposits. Valley Bank also competes with money market funds and,
to a lesser extent, other types of mutual funds. Valley Bank's marketing
emphasis niche has been individual customers, as well as businesses in the
professional, commercial and industrial fields.
In order to compete with other financial institutions in its primary service
areas, Valley Bank relies principally upon regional promotional activity, direct
mail, and personal contacts by its officers. For clients whose loan demands
exceed Valley Bank's lending limits, Valley Bank attempts to arrange for these
loans on a participation basis with other banks and financial institutions.
Valley Bank also assists clients requiring services not offered by Valley to
obtain these services from its correspondent banks.
EMPLOYEES
At December 31, 1998, Valley Bank employed a total of 86 full-time
equivalent employees, including three executive officers. None is presently
represented by a union or covered by a collective bargaining agreement. Valley
Bank believes its employee relations are excellent.
LITIGATION
From time to time, Valley Bank is involved in litigation as an incident to
its business. In the opinion of management, no such pending or threatened
litigation is likely to have a material adverse effect on Valley Bank's
financial condition or results of operations.
INSURANCE
Valley Bank maintains financial institution bond and commercial insurance at
levels deemed adequate by Valley Bank's management to protect it from certain
damage.
OTHER RELEVANT INFORMATION FOR VALLEY BANK SHAREHOLDERS
In addition to voting on Proposal No. 1 to approve the acquisition, Valley
Bank shareholders will be asked to vote on the election of directors.
ELECTION OF DIRECTORS
Valley Bank's bylaws provide for a range of seven to 13 directors, and
permit the exact number of directors of Valley Bank to be fixed by board of
directors or shareholder action. The board of directors has fixed the number of
directors of Valley Bank at eight.
The persons named below will be nominated for election as directors of
Valley Bank to serve until the 2000 annual meeting of shareholders and until
their successors are elected and have qualified. Votes will be cast in such a
way as to effect the election of all eight nominees, or as many thereof as
possible under the rules of cumulative voting. In the event that any of the
nominees should be unable to serve as a director, it is intended that each proxy
will be
160
<PAGE>
voted for the election of such substitute nominees, if any, as shall be
designated by the board of directors. The board of directors has no reason to
believe that any of the nominees will be unavailable to serve if elected.
Additional nominations can only be made by complying with the notice provision
set forth in the bylaws of Valley Bank, an extract of which is included in the
notice of annual meeting of shareholders accompanying this joint proxy
statement/prospectus. This bylaws provision is designed to give the board of
directors advance notice of competing nominations, if any, and the
qualifications of nominees, and may have the effect of precluding third-party
nominations if the notice provisions are not followed.
None of the directors, nominees or executive officers of Valley Bank were
selected pursuant to any arrangement or understanding, other than with the
directors and executive officers of Valley Bank, acting within their capacities
as such. There are no family relationships between the directors and executive
officers of Valley Bank, and none of the directors or executive officers of
Valley Bank serve as directors of any company which has a class of securities
registered under, or which is subject to the periodic reporting requirements of,
the Securities Exchange Act of 1934 or any investment company registered under
the Investment Company Act of 1940.
The following table sets forth the names and certain information, as of
March 31, 1999 concerning the persons to be nominated at the annual meeting by
the board of directors for election as directors of Valley Bank:
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED
NAME AND POSITION OR APPOINTED BUSINESS EXPERIENCE DURING
(OTHER THAN DIRECTOR) AGE DIRECTOR THE PAST FIVE YEARS
- ---------------------------------------- --- ----------------- -------------------------------------------------
<S> <C> <C> <C>
Marion V. Ashley ....................... 63 1979 President, Chief Executive Officer and 90% owner
Chairman of the Board of Ashley Capital. President, Treasurer and 20%
owner of County Lands, Inc. General partner in
various real estate-related partnerships.
Willow I. Decker........................ 83 1972 Retired.
N. Douglas Mills ....................... 59 1992 President and Chief Executive Officer of Valley
President & CEO Bank since 1992.
Juan Renteria........................... 54 1993 Owner and President, J.R. Pipeline Co., Inc., a
construction firm. Owner and President, J.P.R.
Properties, a property management firm. 51% owner
and President, Universal Satellite
Communications, Inc., a television communication
services firm.
Jesse Washington........................ 59 1995 Owner of rental properties.
</TABLE>
161
<PAGE>
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED
NAME AND POSITION OR APPOINTED BUSINESS EXPERIENCE DURING
(OTHER THAN DIRECTOR) AGE DIRECTOR THE PAST FIVE YEARS
- ---------------------------------------- --- ----------------- -------------------------------------------------
<S> <C> <C> <C>
George Wilson........................... 59 1991 Previously, Director of Administration and
Finance, Mojave Water Agency. Retired, December
1997.
Helga Wolf.............................. 49 1995 Corporate Secretary and Treasurer, Co-Owner,
Germania Construction Corporation.
Eugene Wood............................. 54 1993 Owner and President, E.H. Wood & Associates, a
consulting firm for bond and private financing.
</TABLE>
MR. MARION V. ASHLEY is the Chairman of the board of directors of Valley
Bank. Mr. Ashley has been director of Valley Bank since 1979 and Chairman of the
Board of Valley Bank since 1992. Mr. Ashley has been President and Chief
Executive Officer of Ashley Capital, Perris, California since 1993; President
and Treasurer of County Lands, Inc., Perris, California since 1993; a director
since 1993 and past President of the Eastern Municipal Water District, Perris,
California; and is a general partner in numerous real estate limited
partnerships located in Perris, California. Mr. Ashley is also a proposed
director of Pacific Community Banking Group.
MS. WILLOW DECKER is a Director of Valley Bank. She has served as a Director
since 1972.
MR. N. DOUGLAS MILLS is President, Chief Executive Officer and a director of
Valley Bank and has served in these capacities since 1992. From 1986 until 1992.
Mr. Mills served as President at Pacific Valley Bank, Modesto, California. Mr.
Mills is a 1964 graduate of California State University, Fullerton, and a 1982
graduate of Pacific Coast Banking School, Seattle, Washington.
MR. JUAN RENTERIA is a Director & Chairman of Audit Committee of Valley
Bank. Mr. Renteria has served Valley Bank as a Director & Chairman of Audit
Committee since 1993. Mr. Renteria also serves as the Owner and President of
J.R. Pipeline Co., Inc., a construction firm. Mr. Renteria also serves as the
Majority Owner and President of Universal Satellite Communications, Inc., a
television communication services company. Mr. Renteria also serves as the Owner
and President of J.P.R. Properties, a property management firm.
MR. JESSE WASHINGTON is a Director of Valley Bank. Mr. Washington has served
as a Director of Valley Bank since 1995. Mr. Washington is also the owner of a
rental property management company.
MR. GEORGE WILSON is a Director of Valley Bank. Mr. Wilson has served twice
as a Director for Valley Bank. Mr. Wilson served in this term as a Director for
Valley Bank since 1991. Mr. Wilson served as Head Office Manager between 1985
and 1987. Mr. Wilson also served as a Director for Valley Bank from 1975 until
1985.
MS. HELGA WOLF is a Director of Valley Bank. Ms. Wolf has served as a
Director of Valley Bank since 1995. Ms. Wolf also serves as the Vice President,
Corporate Secretary, Treasurer and Director of Germania Construction Corp. Ms.
Wolf has held those positions since 1985.
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<PAGE>
MR. EUGENE WOOD is a Director of Valley Bank. Mr. Wood has served as a
Director of Valley Bank since 1993. Mr. Wood is also the Owner and President of
E. H. Wood & Assoc., a consulting firm. Mr. Wood has served E. H. Wood & Assoc.
in that capacity since 1988.
SHAREHOLDINGS OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Except as set forth in the following table, management of Valley Bank does
not know of any person who owns, beneficially or of record, more than 5% of
Valley Bank's outstanding common stock as of March 31, 1999. The following table
also sets forth certain information as of March 31, 1999 concerning the
beneficial ownership of Valley Bank's outstanding common stock by each of the
directors of the bank, each principal shareholder of Valley Bank, and by all of
the executive officers' and directors of the bank as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL
BENEFICIAL OWNER AND ADDRESS(2) OWNERSHIP(4) PERCENT OF CLASS(5)
- ---------------------------------------------------------------------- ---------------------- -------------------
<S> <C> <C>
Marion V. Ashley ..................................................... 102,112(6) 8.64%
Chairman of the Board
Willow I. Decker ..................................................... 102,008(8) 8.63%
Director
Eric Hook(7) ......................................................... 123,355(9) 10.53%
Assistant Vice President And Manager
N. Douglas Mills ..................................................... 238,583(10) 18.61%
President, CEO and Director
Mark Nugent(7) ....................................................... 145,584(11) 12.20%
Senior Vice President & Senior Lending Officer
Kenneth Ray(7) ....................................................... 108,442(12) 9.25%
25907 New Chicago Avenue
Hemet, California 92544
Juan Renteria ........................................................ 11,135(13) 0.94%
Director
Jesse Washington ..................................................... 12,705(14) 1.07%
Director
Dianna Williams(7) ................................................... 139,054(15) 11.70%
Vice President & Chief Financial Officer
George Wilson ........................................................ 140,127(16) 11.86%
Director
Helga Wolf ........................................................... 14,480(17) 1.23%
Director
Eugene Wood .......................................................... 10,584(18) 0.90%
Director
All Directors 546,616(19) 39.26%
And Executive Officers as a Group (10 in Number)....................
</TABLE>
- ------------------------
(1) As used throughout this joint proxy statement/prospectus, the term
"executive officer" means the President/Chief Executive Officer, Senior
Vice President/Senior Lending Officer and Vice President/Chief Financial
Officer.
163
<PAGE>
(2) Unless otherwise noted, the address of all listed shareholders is c/o
Valley Bank, 24010 Sunnymead Boulevard, Moreno Valley, CA 92553.
(3) All directors serve for a term of one year and until their successors are
chosen and have qualified.
(4) Includes shares beneficially owned, directly and indirectly, together with
associates. Also includes shares held as trustee and held by or as
custodian for minor children and shares held as community property under
California law or with sole investment and voting power.
(5) Assumes as outstanding 1,171,906 shares of common stock and the particular
shares of common stock vested as to stock options for each named
shareholder, as footnoted below, which shares are exercisable within 60
days of the record date.
(6) Includes 91,406 shares which Mr. Ashley votes under a revocable proxy from
Charles L. Motte and Ottie Mae Motte (Aunt and Uncle of Mr. Ashley) as
Trustees under a Trust Agreement dated 4-29-75. Also, for purposes of this
tabulation, options with respect to 10,584 shares held by Mr. Ashley
exercisable within 60 days of the record date are deemed to be outstanding
and these shares have been added to the shares of common stock which are
outstanding only for the purpose of determining the percent of class held
by Mr. Ashley.
(7) This shareholder is not a director.
(8) For purposes of this tabulation, options with respect to 10,584 shares held
by Ms. Decker exercisable within 60 days of the record date are deemed to
be outstanding and these shares have been added to the shares of common
stock which are outstanding only for the purpose of determining the percent
of class held by Ms. Decker. Does not include any shares held in an
irrevocable trust established by Ms. Decker of which Ms. Decker is neither
a trustee nor a beneficiary.
(9) Includes 123,252 shares held as a Joint Trustee under the bank's Employee
Stock Ownership Plan.
(10) Includes 123,252 shares held as a Joint Trustee under the bank's Employee
Stock Ownership Plan. Also, for purposes of this tabulation, options with
respect to 110,250 shares held by Mr. Mills exercisable within 60 days of
the record date are deemed to be outstanding and these shares have been
added to the shares of common stock which are outstanding only for the
purpose of determining the percent of class held by Mr. Mills.
(11) Includes 123,252 shares held as a Joint Trustee under the bank's Employee
Stock Ownership Plan. Also, for purposes of this tabulation, options with
respect to 21,274 shares held by Mr. Nugent exercisable within 60 days of
the record date are deemed to be outstanding and these shares have been
added to the shares of common stock which are outstanding only for the
purpose of determining the percent of class held by Mr. Nugent.
(12) Includes 17,103 shares held by Leota Phyllis Ray and Russell James Ray as
Conservators U/W Kenneth Leon Ray.
(13) For purposes of this tabulation, options with respect to 10,584 shares held
by Mr. Renteria exercisable within 60 days of the record date are deemed to
be outstanding
164
<PAGE>
and these shares have been added to the shares of common stock which are
outstanding only for the purpose of determining the percent of class held
by Mr. Renteria.
(14) For purposes of this tabulation, options with respect to 10,080 shares held
by Mr. Washington exercisable within 60 days of the record date are deemed
to be outstanding and these shares have been added to the shares of common
stock which are outstanding only for the purpose of determining the percent
of class held by Mr. Washington.
(15) Includes 123,252 shares held as a Joint Trustee under the bank's Employee
Stock Ownership Plan. Also, for purposes of this tabulation, options with
respect to 15,762 shares held by Ms. Williams exercisable within 60 days of
the record date are deemed to be outstanding and these shares have been
added to the shares of common stock which are outstanding only for the
purpose of determining the percent of class held by Ms. Williams.
(16) Includes 123,252 shares held as a Joint Trustee under the bank's Employee
Stock Ownership Plan. Does not include 65,757 shares which are held by Mr.
Wilson's mother, Diane Sailors, as Trustee under the Diane E. Sailors Trust
under agreement dated April 1990, under which Mr. Wilson is a Successor
Trustee. Also, for purposes of this tabulation, options with respect to
10,584 shares held by Mr. Wilson exercisable within 60 days of the record
date are deemed to be outstanding and these shares have been added to the
shares of common stock which are outstanding only for the purpose of
determining the percent of class held by Mr. Wilson.
(17) For purposes of this tabulation, options with respect to 10,080 shares held
by Ms. Wolf exercisable within 60 days of the record date are deemed to be
outstanding and these shares have been added to the shares of common stock
which are outstanding only for the purpose of determining the percent of
class held by Ms. Wolf.
(18) For purposes of this tabulation, options with respect to 10,384 shares held
by Mr. Wood exercisable within 60 days of the record date are deemed to be
outstanding and these shares have been added to the shares of common stock
which are outstanding only for the purpose of determining the percent of
class held by Mr. Wood.
(19) For purposes of this tabulation, options with respect to 220,366 shares
held by directors and executive officers and exercisable within 60 days
from the record date are deemed to be outstanding and these options have
been added to the shares of common stock which are outstanding only for the
purpose of determining the percent of class held by those persons. Does not
include 123,252 shares held by Eri Hook, Mark Nugent, Dianna Williams or
George Wilson as Joint Trustees under the bank's Employee Stock Ownership
Plan, as these shares are already accounted for in Mr. Mills' total.
165
<PAGE>
THE BOARD OF DIRECTORS AND COMMITTEES
The board of directors currently consists of the same eight individuals
nominated for election as directors at the annual meeting. In 1998, the board of
directors held 12 regular meetings and 11 special meetings. All of Valley Bank's
directors attended at least 75% of all board of directors meetings and meetings
of committees of the board of directors on which they served which were held in
1998.
In addition to attending meetings of the board of directors, certain of the
directors serve on committees of the board of directors. The board of directors
has a personnel committee, a loan committee, and an audit committee.
The loan committee, which in 1998 consisted of directors N. Douglas Mills
(Chair), George Wilson, Eugene Wood and Marion Ashley, reviews all loans,
approves all loans in excess of management lending limits and reviews and makes
recommendations to the board of directors regarding any changes to the Bank's
loan policies. The loan committee met 12 times during 1998.
The Audit Committee, which in 1998 consisted of directors Juan Renteria
(Chair), Marion Ashley, Willow Decker and Helga Wolf, reviews all internal and
external examination reports and recommends to the board of directors regarding
selection of Valley Bank's independent accountants. The audit committee met two
times during 1998, but many of its duties were performed directly by the board
of directors.
The personnel committee, which in 1998 consisted of directors N. Douglas
Mills (Chair), Willow Decker, George Wilson, Eugene Wood and Jesse Washington,
review personnel policies and executive compensation, and makes recommendations
to the board of directors regarding changes to personnel policies. The personnel
committee met one time in 1998.
Valley Bank does not have a nominating committee, but the full board of
directors considers and makes nominations to the board of directors in
accordance with the bylaws of Valley Bank.
At Valley Bank's 1998 annual meeting of shareholders, 79.81% of the Bank's
outstanding shares were present in person and by proxy at such meeting and the
following eight persons were nominated for director as recommended by the board
of directors: Marion V. Ashley, Willow I. Decker, N. Douglas Mills, Juan P.
Renteria, Jesse Washington, George E. Wilson, Helga Wolf and Eugene H. Wood. The
referenced eight nominees were elected to be the directors of Valley Bank.
EXECUTIVE COMPENSATION
No person serving as an executive officer of Valley Bank received aggregate
cash compensation of more than $100,000 during 1998, except for N. Douglas
Mills, Valley Bank's current President and Chief Executive Officer. The
following table sets forth the aggregate
166
<PAGE>
executive compensation for services in all capacities paid or accrued by Valley
Bank for the previous three full fiscal years, ending with December 31, 1998, to
Mr. Mills:
The following table provides a summary of compensation for N. Douglas Mills.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALL OTHER
OTHER ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) ($)
- ------------------------------------------------- --------- ------------- ----------- ----------------- ------------
N. Douglas Mills, ............................... 1998 $ 184,384(1) 13,333 N/A(2) $ 51,156(3)
President and Chief Executive Officer 1997 185,646(4) N/A N/A(2) 53,698(3)
1996 160,150(5) N/A N/A(2) 47,257(3)
</TABLE>
- ------------------------
(1) Includes $12,000 in directors' fees and $10,001 in 401(k) plan contribution
and a 25% match in the Employee Stock Purchase Plan.
(2) No amount is stated in this column for certain personal benefits provided by
the bank, as management has concluded that the aggregate amount of such
compensation did not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus for the reported fiscal year.
(3) These amounts reflect accrued retirement benefits for each year under the
salary continuation agreement for Mr. Mills as described under "Retirement
Plan" below.
(4) Includes $12,250 in directors' fees and $9,444 in 401(k) compensation and a
25% match in the Employee Stock Purchase Plan.
(5) Includes $11,750 in directors' fees and $8,400 in 401(k) compensation and a
25% match in the Employee Stock Purchase Plan.
COMPENSATION OF DIRECTORS
For 1998, each director of Valley Bank, with the exception of the Chairman,
was paid a fixed retainer of $12,000 for the year, which is paid in the amount
of $1,000 per month. No fees were paid for specific attendance at board or
committee meetings. The Chairman received an annual retainer of $13,800 which is
paid in the amount of $1,150 per month. Similar director compensation is
expected in 1999.
The following table lists a summary of compensation for the directors of
Valley Bank.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
1998 ANNUAL COMPENSATION ---------------
--------------------------------------------------- SECURITIES
NAME AND PRINCIPAL POSITION OTHER ANNUAL UNDERLYING ALL OTHER
WITH PARENT SALARY($) BONUS ($) COMPENSATION(1) OPTIONS COMPENSATION ($)
- -------------------------------- --------------- --------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Marion Ashley, Chairman of the
Board......................... -- -- $ 13,800 10,584 --
Willow Decker, Director......... -- -- 12,000 10,584 $ 9,000(2)
Juan Renteria, Director......... -- -- 12,000 10,584 --
Helga Wolf, Director............ -- -- 12,000 10,080 --
George Wilson, Director......... -- -- 12,000 10,584 --
Eugene Wood, Director........... -- -- 12,000 10,584 --
Jesse Washington, Director...... -- -- 12,000 10,080 --
<CAPTION>
ANTICIPATED
NAME AND PRINCIPAL POSITION 1999 ANNUAL
WITH PARENT COMPENSATION(1)
- -------------------------------- ---------------
<S> <C>
Marion Ashley, Chairman of the
Board......................... $ 13,800
Willow Decker, Director......... 12,000
Juan Renteria, Director......... 12,000
Helga Wolf, Director............ 12,000
George Wilson, Director......... 12,000
Eugene Wood, Director........... 12,000
Jesse Washington, Director...... 12,000
</TABLE>
- ------------------------------
(1) Director's fees paid to such director.
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(2) Ms. Decker receives compensation as beneficiary under an employment
compensation agreement dated March 12, 1970 between Valley Bank and her late
husband, Walter Wachtel, a founder of Valley Bank.
OTHER COMPENSATION
Valley Bank has, from time to time, provided certain personal benefits to
certain of its officers including use of bank-owned automobiles, reimbursement
of travel and entertainment expenses, and life insurance, in addition to
bank-wide group insurance coverage. No amount is stated in the summary
compensation table above for any of these benefits, since management has
concluded that the aggregate amount of such compensation did not exceed the
lesser of $50,000 or 10% of the total of annual salary and bonus reported under
the column headed "Executive Compensation."
VALLEY BANK 401(k) PROFIT SHARING PLAN
In 1993, Valley Bank adopted the Valley Bank 401(k) Profit Sharing Plan, a
defined contribution 401(k) plan. Under the Valley Bank 401(k) Profit Sharing
Plan, all employees who have completed one year of service and have attained the
age of 21 are eligible to participate. The term "year of service" is defined to
mean a 12-month period in which the employee works 1,000 hours of service.
Eligible employees have the option to have up to 9.0% of their monthly gross
salary withheld and contributed to the plan. Valley Bank matches 150% of the
first 3% of the employee's contribution and 50% of the next 3% of the employee's
contribution. The plan was established as a means for eligible employees to save
for their retirement. The plan is administered by Valley Bank, which is
permitted under the plan to appoint an advisory committee to assist in the
administration. The advisory committee has the responsibility for making all
discretionary determinations under the plan and for giving distribution
directions to the trustee of the related trust.
STOCK OPTION PLANS
1992 STOCK OPTION PLAN. In 1992, Valley Bank adopted a combined incentive
and nonqualified Stock Option Plan (the "1992 Plan"), with 240,000 shares being
reserved for issuance when the related options would be exercised. Valley Bank's
shareholders approved the 1992 Plan on March 9, 1993. Under the 1992 Plan,
Valley Bank may grant incentive and nonqualified stock options to full-time
salaried officers and employees. The options have an exercise price that is no
less than the fair market value of Valley Bank's common stock as of the date of
the grant. The board of directors, or a stock option committee appointed by the
board of directors, determines the dates upon which options are exercisable and
the dates upon which options expire (not later than ten years after the date of
the grant). The board of directors or the stock option committee selects the
individual participants. The 1992 Plan provides for anti-dilutive adjustments in
the event of a stock split, stock dividend, reorganization, merger,
consolidation, recapitalization or otherwise.
1993 DIRECTOR'S STOCK OPTION PLAN. In 1993, Valley Bank adopted a
nonqualified stock option plan (the "1993 Director's Plan"), with 76,800 shares
being reserved for issuance when the related options would be exercised. Valley
Bank's shareholders approved the 1993 Director's Plan on March 8, 1994. Under
the 1993 Director's Plan, Valley Bank may grant nonqualified stock options to
non-employee members of the board of directors at an exercise price that is no
less than the fair market value of Valley Bank's common stock as of the date of
the
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grant. The board of directors, or a stock option committee appointed by the
board of directors, determines the dates upon which options are exercisable and
the dates upon which options expire (not later than ten years after the date of
the grant). The board of directors or the stock option committee selects the
individual participants. The 1993 Director's Plan provides for anti-dilutive
adjustments in the event of a stock split, stock dividend, reorganization,
merger, consolidation, recapitalization or otherwise.
There were no stock option grants under the 1992 Plan, for the year December
31, 1998. There were no stock option grants under the 1993 Director's Plan, for
the year ending December 31, 1998 for those directors who are not also employees
of Valley.
The following table sets forth the value of unexercised stock options under
the 1992 Plan, as of December 31, 1998, for N. Douglas Mills:
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNEXERCISED IN-THE-MONEY
UNDERLYING IN-THE-MONEY OPTIONS AT
UNEXERCISED OPTION OPTIONS AT FY-END CONSUMMATION OF
AT FY-END (#) ($)(1) ACQUISITION ($)(2)
------------------- ------------------- -------------------
EXERCISABLE/ EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE UNEXERCISABLE
- -------------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
N. Douglas Mills, ................................ 110,250 / 0 $ 260,675 / 0 $ 632,769 / 0
President and Chief Executive Officer
</TABLE>
- ------------------------
(1) Options are "in-the-money" when the fair market value of the underlying
securities exceeds the exercise price of the options.
(2) Value of options is based upon price per share consideration payable at
consummation of the acquisition at $10 plus 1/3 warrant per share with a pro
forma value of $1.00.
The following table sets forth the fiscal year-end value of unexercised
stock options under the 1993 Director's Plan, ending December 31, 1998, for
those directors who are not also employees of Valley:
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNEXERCISED IN-THE-MONEY
UNDERLYING IN-THE-MONEY OPTIONS AT
UNEXERCISED OPTION OPTIONS AT FY-END CONSUMMATION OF
AT FY-END (#) ($)(1) ACQUISITION ($)(2)
------------------- ------------------- -------------------
EXERCISABLE/ EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE UNEXERCISABLE
- -------------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Marion V. Ashley.................................. 10,584 / 0 $ 29,106 / 0 $ 64,827 / 0
Willow I. Decker.................................. 10,584 / 0 $ 29,106 / 0 $ 64,827 / 0
Juan Renteria..................................... 10,584 / 0 $ 29,106 / 0 $ 64,827 / 0
Jesse Washington.................................. 10,080 / 0 $ 40,864 / 0 $ 74,884 / 0
George Wilson..................................... 10,584 / 0 $ 29,106 / 0 $ 64,827 / 0
Helga Wolf........................................ 10,080 / 0 $ 40,864 / 0 $ 74,884 / 0
Eugene Wood....................................... 10,584 / 0 $ 29,106 / 0 $ 64,827 / 0
</TABLE>
- ------------------------
(1) Options are "in-the-money" when the fair market value of the underlying
securities exceeds the exercise price of the options.
(2) Value of options is based upon price per share consideration payable at
consummation of the acquisition at $10 plus 1/3 warrant per share at a pro
forma value of $1.00.
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<PAGE>
EMPLOYMENT AGREEMENTS
Valley Bank entered into an Executive Employment Agreement dated as of
September 26, 1996, as amended October 30, 1997, with Mr. Mills. The employment
agreement is terminable at any time by Valley Bank, without cause, with a
severance payment equal to two years of Mr. Mills' then current salary,
multiplied by a factor of 140%. Under the terms of the employment agreement, in
the event Valley Bank elects to sell, merge, consolidate or transfer controlling
ownership, Mr. Mills would be compensated in an amount equal to three years'
then current salary, multiplied by a factor of 140%. Mr. Mills' base salary for
1998 was $160,000 and it is expected to remain the same in 1999. Under the terms
of the employment contract, Mr. Mills' annual salary may not be less than
$140,000, which amount may be increased at the discretion of the board of
directors to maintain parity with peer industry standards.
In November 1998, Mr. Mills agreed to amend his employment agreement with
Valley Bank effective upon the consummation of the acquisition. Under the
revised employment agreement, Mr. Mills agreed to amend the severance payment
provisions of his employment agreement, as described above, in return for a one
time payment of $393,992 upon consummation of the acquisition. Upon termination
of his revised employment agreement, other than for cause or disability, Mr.
Mills will enter into a consulting agreement under which he is expected to be
paid an annual consulting fee of $55,800, payable monthly over a period of five
years.
Four other officers of Valley Bank (Mark Nugent, Dianna Williams, Marvin
Lentini and Bonnie Parrott) have similar employment agreements at stated minimum
salary levels for five-year terms ending in September, 2001. These employment
agreements also entitle each subject person to cash payments if a merger,
consolidation or sale of Valley Bank takes place, unless the acquiror agrees to
assume and discharge the obligations of Valley Bank under the employment
agreements. In each case, the amount of the payment would equal two years'
salary, multiplied by a factor of 140%. If the employment agreements were not
assumed and honored by Pacific Community Banking Group, the total compensation
due to the officers covered by the agreements would be $868,000. Pacific
Community Banking Group has agreed to honor the employment contracts. Also, the
agreements allow the officers to receive severance pay if their employment is
terminated under some other circumstances, such as termination without cause. If
the officers entitled to those payments were all terminated without cause
following the Valley Bank acquisition, the total compensation due would be
$434,000.
SALARY CONTINUATION AGREEMENT
In 1995, the board of directors of Valley established a salary continuation
agreement for Mr. Mills to provide for certain retirement benefits. This
agreement was funded through the prepayment of two life insurance policies on
the life of Mr. Mills. The insurance policies are intended to provide income to
Valley Bank to fund retirement payments or survivor benefits. Under this
agreement, Mills is entitled to receive a retirement benefit of $70,000 per year
payable to him over 15 years beginning at age 65 or upon his earlier disability,
or to his beneficiary at his death. Valley Bank prepaid for the insurance
policies in the amount of $615,000, with additional initial insurance benefits
of $695,000. The initial death benefit was $1,310,000. In 1998, Valley accrued a
total of $51,156 in compensation expense for the benefit under this agreement.
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<PAGE>
The agreement was amended on October 30, 1997 to provide for certain
benefits upon a change in control of Valley Bank. Under this amendment, in the
event of a transfer of the controlling ownership or sale of Valley Bank, such as
the acquisition, the agreement would terminate and Mr. Mills would be entitled
to payment of the full amount of benefits under the salary continuation
agreement. In November 1998, Mr. Mills agreed to further amend the salary
continuation agreement to provide that notwithstanding the change in control
provisions described above, payments under the salary continuation agreement
shall not accelerate and become due until expiration or termination of Mr.
Mills' agreement will become effective, subject to regulatory approval.
Therefore, as a result of such amendments, consummation of the acquisition will
not trigger payments to Mr. Mills under the salary continuation plan.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1995, Valley adopted an Employee Stock Ownership Plan ("ESOP"). The ESOP
is designed to invest its assets primarily in the common stock of the employer.
The ESOP provides those employees of Valley Bank who are eligible to participate
in the ESOP with an equity interest in Valley Bank and thereby promotes the
employees' interest in the success of Valley Bank. All employees who have
completed one year of service are eligible to participate in the ESOP. The term
"year of service" under the ESOP means twelve consecutive months of employment
in which the employee completes 1,000 hours of service or, if the employee has
not completed 1,000 hours of service at the end of twelve consecutive months of
employment, the end of any plan year during which the employee is credited with
1,000 hours of service. Under the ESOP, an employee's interest in the ESOP will
begin to vest only after the completion of three years of service. However, an
employee's interest is always 100% vested upon the employee's normal retirement
age, as specified in the ESOP.
In 1996, the trustees of the Valley Bank ESOP established two lines of
credit to fund stock purchases by the ESOP, both of which have now been
converted to term loans. As permitted by the ESOP, as of December 31, 1998, the
ESOP had outstanding loans in the amount of $478,000 to fund purchases of Valley
Bank stock. In 1998, Valley contributed $224,000 to the ESOP, $173,000 of which
was compensation expense and $51,000 of which was interest expense. In 1997,
Valley contributed $125,934 to the ESOP, $70,528 of which was compensation
expense and $55,406 of which was interest expense.
EMPLOYEE STOCK PURCHASE PLAN
Valley Bank had a stock purchase plan that was offered to all officers and
employees. The objective of this plan was to provide a convenient means of
purchasing Valley Bank stock through payroll deductions, and to encourage
purchases of stock through matching contributions by Valley Bank. Participation
in the plan was entirely voluntary and was limited to those eligible as set
forth in the plan. The stock purchase plan was available to all full-time
employees, but enrollment was only permitted in January of each year. A
participant was permitted to authorize payroll deductions in any amount in
multiples of $10.00, not to exceed 15% of the prior year's gross salary. Valley
Bank contributed an amount equal to 25% of the total amount of the employee's
payroll deductions applied under the plan. The contribution by Valley Bank was
taxable to the employee as additional compensation. If the officer or employee
terminated employment, any of Valley Bank's contributions not already used to
purchase stock were forfeited by the officer or employee.
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<PAGE>
Funds withheld from an employee's payroll were accumulated during each
quarter. At the end of each quarter, shares of Valley Bank common stock were
purchased on behalf of plan participants through a broker at the then available
market price. In 1998, 2,379 shares of Valley Bank common stock were purchased
under the stock purchase plan. This plan was terminated as of September 30,
1998.
OTHER BENEFIT PLANS
Valley Bank has certain employee benefit plans that serve as incentive
compensation to its officers and employees. Since 1993, Valley Bank has annually
established a Profit Sharing Plan which provides for certain payments to
employees and officers if Valley Bank meets certain net income level targets.
Under this plan for 1998, an employee who is not an officer could earn from .250
to two times the employee's monthly salary, a vice president could earn from
.250 to 3.5 times the vice president's monthly salary, a senior vice president
could earn from .250 to 5 times the senior vice president's monthly salary, and
the Chief Executive Officer could earn from .250 to 6 times his monthly salary,
based on net income return targets ranging from 6% to 20% of January 1, 1998
shareholders' equity. Total disbursements to all employees for 1998 was
$146,000. There is no such plan in place for 1999.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of Valley Bank's directors and executive officers and their immediate
families, as well as the companies with which they are associated, are customers
of Valley Bank or have had banking transactions with Valley Bank in the ordinary
course of Valley Bank's business. Valley Bank expects to have banking
transactions with such persons in the future. In the opinion of the management
of Valley Bank, all loans and commitments to lend included in those transactions
were made in compliance with applicable laws on substantially the same terms,
including interest rates and collateral, as those prevailing for comparable
transactions with other persons of similar creditworthiness and, in the opinion
of management, did not involve more than a normal risk of collectibility or
present other unfavorable features. All loans and extensions of credit made to
Valley Bank's directors and executive officers are current and performing as
agreed upon. No director or executive officer of Valley Bank had indebtedness
during 1998 in excess of 10% of Valley Bank's equity capital accounts.
MARKET PRICE AND DIVIDEND INFORMATION
The common stock of Valley Bank is not currently traded in any established
market except the Electronic Bulletin Board operated by Nasdaq, and Valley Bank
is not aware of any broker that currently makes a market in its common stock, or
regularly furnishes quotes for its common stock, other than Sutro & Company and
Burford Capital. Valley Bank common stock has been traded by local brokers in
the past. Based on information furnished to management of Valley Bank by buyers
and sellers, high and low bid information for Valley Bank common stock during
each quarter of the last two fiscal years and through the interim period ending
February 26, 1999 is listed in the table below. Management of Valley Bank would
not necessarily be aware of all transactions in its Valley Bank's common stock
and, thus, Valley Bank cannot give assurance that the prices listed below show
the highest and
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<PAGE>
lowest prices for all recent sales. Bid and asked prices have been adjusted to
reflect 1997 stock dividend.
<TABLE>
<CAPTION>
KNOWN KNOWN
HIGH BID LOW BID CASH DIVIDEND
FISCAL YEAR QUARTER AND INTERIM PERIOD THROUGH 2/26/99 PER SHARE PER SHARE PER SHARE
- --------------------------------------------------------------------------- ----------- ----------- ---------------
<S> <C> <C> <C>
First Quarter, 1997........................................................ $ 6.00 $ 5.50 --
Second Quarter, 1997....................................................... $ 6.375 $ 5.75 --
Third Quarter, 1997........................................................ $ 6.75 $ 6.375 --
Fourth Quarter, 1997....................................................... $ 7.50 $ 6.875 --
First Quarter, 1998........................................................ $ 8.75 $ 7.50 --
Second Quarter, 1998....................................................... $ 9.125 $ 8.25 --
Third Quarter, 1998........................................................ $ 10.625 $ 7.00 --(1)
Fourth Quarter, 1998....................................................... $ 8.00 $ 6.00 --(2)
First Quarter, 1999 to February 26, 1999................................... $ 8.25 $ 7.50 --
</TABLE>
- ------------------------
(1) On July 30, 1998, Valley Bank announced that under the original Agreement
and Plan of Reorganization with Pacific Community Banking Group, Valley Bank
would be permitted to pay a special cash dividend of $.24 per share to
shareholders of record of Valley Bank common stock as of July 30, 1998,
subject to regulatory approval.
(2) On November 25, 1998, Valley Bank announced that under the terms approved
for in the Restated Agreement, Valley Bank would be permitted to pay a
special cash dividend of $.52 per share to shareholders of record of Valley
Bank common stock as of November 24, 1998, subject to regulatory approval.
The date before the first public announcement of the acquisition was July
29, 1998. The most recent trade preceding the announcement was reported on the
Nasdaq Electronic Bulletin Board as having been for 2,000 shares at a sales
price of $8.375. As of March 31, 1999, there were approximately 248 shareholders
of record of Valley Bank's common stock.
The frequency and amount of dividends to be paid are determined by Valley
Bank's board of directors. In issuing dividends, the board of directors
considers the experience and expectations of Valley Bank, including net income
generated, strategic plans and the level of capital of Valley Bank. The Valley
Bank agreement limits the payment of dividends in the near future. Although the
Valley Bank agreement permits Valley Bank to declare a special cash dividend,
certain regulatory requirements must be satisfied before Valley Bank can pay the
dividend. California Financial Code Section 642 to 643 prohibits a bank from
making a distribution to shareholders, such as a dividend, which exceeds the
lesser of the retained earnings of the bank, or the net income of the bank for
its last three fiscal years, less the amount of any such distributions paid
during such period. However, Valley Bank, as a state-chartered bank, may pay a
dividend with the approval of the Commissioner of Financial Institutions in an
amount not exceeding the greatest of its retained earnings, its net income for
the last fiscal year, or the net income for its current fiscal year. Therefore,
Valley Bank must obtain the approval of the Commissioner before a dividend can
be paid.
If the Commissioner will not approve the special cash dividend, then the
special cash dividend will not be paid. Neither Valley Bank nor Pacific
Community Banking Group can assume that the regulatory approval can be obtained.
For a description of this dividend, please refer to "Special Cash Dividend."
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<PAGE>
FUTURE SHAREHOLDER PROPOSALS
If the Valley Bank acquisition is not completed, any shareholder who intends
to submit a proposal for inclusion in the 2000 annual meeting of Valley Bank
shareholders must submit the proposal to the Valley Bank board of directors, in
care of the secretary of Valley Bank, Dianna Williams, no later than November 1,
1999.
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<PAGE>
SUPERVISION AND REGULATION
GENERAL
Both federal and state law extensively regulate bank holding companies. This
regulation is intended primarily for the protection of depositors and the
deposit insurance fund and not for the benefit of shareholders of Pacific
Community Banking Group. Set forth below is a summary description of the
material laws and regulations which relate to the operations of the banks and
will relate to the operations of Pacific Community Banking Group once its
application to be a bank holding company is approved and the acquisitions are
consummated. The description does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
In recent years, significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by Congress. These
proposals include legislation to revise the Glass-Steagall Act and the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and to expand permissible
activities for banks, principally to facilitate the convergence of commercial
and investment banking. Certain proposals also sought to expand insurance
activities of banks. It is unclear whether any of these proposals, or any form
of them, will be introduced in the next Congress and become law. Consequently,
it is not possible to determine what effect, if any, they may have on Pacific
Community Banking Group and the banks that it will own.
PACIFIC COMMUNITY BANKING GROUP
Pacific Community Banking Group has applied to be a registered bank holding
company, If the application is approved, it will be subject to regulation under
the BHCA. Pacific Community Banking Group will be required to file periodically
with the Federal Reserve Board and such additional information as the Federal
Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may
conduct examinations of Pacific Community Banking Group and its subsidiaries,
which will include the banks.
The Federal Reserve Board may require that Pacific Community Banking Group
terminate an activity or terminate control of or liquidate or divest certain
subsidiaries or affiliates when the Federal Reserve Board believes the activity
or the control of the subsidiary or affiliate constitutes a significant risk to
the financial safety, soundness or stability of any of its banking subsidiaries.
The Federal Reserve Board also has the authority to regulate provisions of
certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances,
Pacific Community Banking Group must file written notice and obtain approval
from the Federal Reserve Board prior to purchasing or redeeming its equity
securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a bank
holding company and its nonbanking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. Further, Pacific Community Banking
Group is required by the Federal Reserve Board to maintain certain levels of
capital. For more detail, please refer to "--Capital Standards."
Pacific Community Banking Group will be required to obtain the prior
approval of the Federal Reserve Board for the acquisition of more than 5% of the
outstanding shares of any
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<PAGE>
class of voting securities or substantially all of the assets of any bank or
bank holding company. Prior approval of the Federal Reserve Board will also
required for the merger or consolidation of Pacific Community Banking Group and
another bank holding company.
Pacific Community Banking Group will be prohibited by the BHCA, 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, Pacific Community
Banking Group, subject to the prior approval of the Federal Reserve Board, may
engage in any, or acquire shares of companies engaged in, activities that are
deemed by the Federal Reserve Board to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
Under Federal Reserve Board 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 or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both.
Pacific Community Banking Group will also be a bank holding company within
the meaning of Section 3700 of the California Financial Code. As such, Pacific
Community Banking Group and its subsidiaries, including The Bank of Hemet and
Valley Bank, will be subject to examination by, and may be required to file
reports with, the California Department of Financial Institutions.
Pacific Community Banking Group has applied to have its securities
registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. As such, Pacific Community Banking Group will be subject
to the information, proxy solicitation, insider trading, and other requirements
and restrictions of the Exchange Act.
THE BANKS
The Bank of Hemet and Valley Bank, as California chartered banks, are
subject to primary supervision, periodic examination, and regulation by the
California Commissioner of Financial Institutions and the FDIC. To a lesser
extent, the banks are also subject to certain regulations promulgated by the
Federal Reserve Board. If, as a result of an examination of the banks, the FDIC
should determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity, or other aspects of the banks'
operations are unsatisfactory or that the bank or its management is violating or
has violated any law or regulation, various remedies are available to the FDIC.
These remedies include the power to enjoin "unsafe or unsound" practices, to
require affirmative action to correct any conditions resulting from any
violation or practice, to issue an administrative order that can be judicially
enforced, to direct an increase in capital, to restrict the growth of either of
the banks, to
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<PAGE>
assess civil monetary penalties, to remove officers and directors and ultimately
to terminate either of the banks deposit insurance, which for a California
chartered bank would result in a revocation of the banks' charter. The
California Commissioner of Financial Institutions has many of the same remedial
powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the banks. State and
federal statutes and regulations relate to many aspects of the banks'
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the banks are required to maintain certain levels of
capital. For more detail, please refer to "--Capital Standards."
DIVIDENDS AND OTHER TRANSFERS OF FUNDS
Dividends from the banks will constitute the principal source of income to
Pacific Community Banking Group. Pacific Community Banking Group is a legal
entity separate and distinct from the bank. The banks are subject to various
statutory and regulatory restrictions on its ability to pay dividends, and will
be subject to restrictions on the payment of dividends to Pacific Community
Banking Group. In addition, the California Department of Financial Institutions
and the Federal Reserve Board have the authority to prohibit the banks from
paying dividends, depending upon the banks' financial condition, if the payment
is deemed to constitute an unsafe or unsound practice.
The FDIC and the California Commissioner of Financial Institution also have
authority to prohibit the banks from engaging in activities that, in their
opinion, constitute unsafe or unsound practices in conducting its business. It
is possible, depending upon the financial condition of the bank in question and
other factors, that the FDIC and the Commissioner could assert that the payment
of dividends or other payments might, under some circumstances, be such an
unsafe or unsound practice. Further, the FDIC and the Federal Reserve Board have
established guidelines with respect to the maintenance of appropriate levels of
capital by banks or bank holding companies under their jurisdiction. Compliance
with the standards set forth in those guidelines and the restrictions that are
or may be imposed under the prompt corrective action provisions of federal law
could limit the amount of dividends which the banks or Pacific Community Banking
Group may pay. An insured depository institution is prohibited from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions if after the transaction the institution would be
undercapitalized. For more detail, please refer to "--Prompt Corrective
Regulatory Action and Other Enforcement Mechanisms" and "--Capital Standards"
for a discussion of these additional restrictions on capital distributions.
The Bank of Hemet and Valley Bank are subject to certain restrictions
imposed by federal law on any extensions of credit to, or the issuance of a
guarantee or letter of credit on behalf of, Pacific Community Banking Group or
other affiliates, the purchase of, or investments in, stock or other securities
of Pacific Community Banking Group, the taking of such securities as collateral
for loans, and the purchase of assets of Pacific Community Banking Group or
other affiliates. Such restrictions prevent Pacific Community Banking Group and
the banks' other affiliates from borrowing from the banks unless the loans are
secured by marketable obligations of designated amounts. Further, such secured
loans and investments by the
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banks to or in Pacific Community Banking Group or to or in any other affiliate
are limited, individually, to 10.0% of each bank's capital and surplus (as
defined by federal regulations), and such secured loans and investments are
limited, in the aggregate, to 20.0% of each bank's capital and surplus (as
defined by federal regulations). California law also imposes certain
restrictions with respect to transactions involving Pacific Community Banking
Group and other controlling persons of the bank. Additional restrictions on
transactions with affiliates may be imposed on the banks under the prompt
corrective action provisions of federal law. For more detail, please refer to
"--Prompt Corrective Action and Other Enforcement Mechanisms."
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 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 commercial loans.
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 must be 3%. 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.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal banking agencies possess broad powers to take corrective and other
supervisory action to resolve the problems of insured depository institutions,
including but not limited to those institutions that fall below one or more
prescribed minimum capital ratios. Each federal banking agency has promulgated
regulations defining the following five categories in which an insured
depository institution will be placed, based on its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. At December 31, 1998, The
Bank of Hemet exceeded the required ratios for classification as "well
capitalized." Valley Bank is deemed for regulatory purposes, however, only
"adequately capitalized" because it was designated a troubled institution for
reasons unrelated to capital levels.
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
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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 a significantly undercapitalized
institution as critically undercapitalized unless its capital ratio actually
warrants such treatment.
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.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (A) internal controls,
information systems and internal audit systems, (B) loan documentation, (C)
credit underwriting, (D) asset growth, (E) earnings, and (F) compensation, fees
and benefits. In addition, the federal banking agencies have also adopted safety
and soundness guidelines with respect to asset quality and earnings standards.
These guidelines provide six standards for establishing and maintaining a system
to identify problem assets and prevent those assets from deteriorating. Under
these standards, an insured depository institution should: (A) conduct periodic
asset quality reviews to identify problem assets, (B) estimate the inherent
losses in problem assets and establish reserves that are sufficient to absorb
estimated losses, (C) compare problem asset totals to capital, (D) take
appropriate corrective action to resolve problem assets, (E) consider the size
and potential risks of material asset concentrations, and (F) provide periodic
asset quality reports with adequate information for management and the board of
directors to assess the level of asset risk. These new guidelines also set forth
standards for evaluating and monitoring earnings and for ensuring that earnings
are sufficient for the maintenance of adequate capital and reserves.
PREMIUMS FOR DEPOSIT INSURANCE
The banks' deposit accounts are insured by the Bank Insurance Fund ("BIF"),
of the FDIC, up to the maximum permitted by law. Insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits, which
as of December 31, 1998, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular institution poses to its deposit
insurance fund. The risk classification is based on an institution's capital
group and supervisory subgroup assignment. Pursuant to the Economic Growth and
Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"), at January 1,
1997, the banks began paying, in addition to their normal deposit insurance
premium as a member of the BIF, an amount equal to approximately 1.3 basis
points per $100 of insured deposits toward the retirement of the Financing
Corporation bonds ("FICO
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Bonds") issued in the 1980s to assist in the recovery of the savings and loan
industry. Members of the Savings Association Insurance Fund ("SAIF"), by
contrast, pay, in addition to their normal deposit insurance premium,
approximately 6.4 basis points. Under the Paperwork Reduction Act, the FDIC is
not permitted to establish SAIF assessment rates that are lower than comparable
BIF assessment rates. Beginning no later than January 1, 2000, the rate paid to
retire the FICO Bonds will be equal for members of the BIF and the SAIF. The
Paperwork Reduction Act also provided for the merging of the BIF and the SAIF by
January 1, 1999 provided there were no financial institutions still chartered as
savings associations at that time. However, as of January 1, 1999, there were
still financial institutions chartered as savings associations. Should the
insurance funds be merged before January 1, 2000, the rate paid by all members
of this new fund to retire the FICO Bonds would be equal.
INTERSTATE BANKING AND BRANCHING
The BHCA permits bank holding companies from any state to acquire banks and
bank holding companies located in any other state, subject to certain
conditions, including certain nationwide- and state-imposed concentration
limits. The banks have the ability, subject to certain restrictions, to acquire
branches by acquisition or merger outside its home state. The establishment of
new interstate branches is also possible in those states with laws that
expressly permit it. Interstate branches are subject to certain laws of the
states in which they are located. Competition may increase further as banks
branch across state lines and enter new markets.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The banks are 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 its local communities, including low- and moderate-income
neighborhoods. A bank may be subject to substantial penalties and corrective
measures for a violation of certain fair lending laws. The federal banking
agencies may take compliance with those laws and CRA obligations into account
when regulating and supervising other activities.
A bank's compliance with its CRA obligations is evaluated based on an
institution's lending service and investment performance. When a bank holding
company applies for approval to acquire a bank or other bank holding company,
the Federal Reserve Board will review the assessment of each subsidiary bank of
the applicant bank holding company, and those records may be the basis for
denying the application. Based on examinations conducted August 24, 1998 for The
Bank of Hemet and March 9, 1998 for Valley Bank, The Bank of Hemet was rated
outstanding and Valley Bank was rated satisfactory in complying with their
respective CRA obligations.
YEAR 2000 COMPLIANCE
The Federal Financial Institutions Examination Council issued an interagency
statement to the chief executive officers of all federally supervised financial
institutions regarding year 2000 project management awareness. It is expected
that unless financial institutions address the technology issues relating to the
coming of the year 2000, there will be major disruptions
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in the operations of financial institutions. The statement provides guidance to
financial institutions, providers of data services, and all examining personnel
of the federal banking agencies regarding the year 2000 problem. The federal
banking agencies intend to conduct year 2000 compliance examinations, and the
failure to implement a year 2000 program may be seen by the federal banking
agencies as an unsafe and unsound banking practice. If a federal banking agency
determines that either of the banks is operating in an unsafe and unsound
manner, that bank may be required to submit a compliance plan. Failure to submit
a compliance plan or to implement an accepted plan may result in enforcement
action being taken, which may include a cease and desist order and fines.
MANAGEMENT OF PACIFIC COMMUNITY BANKING GROUP FOLLOWING REORGANIZATION
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of Pacific Community Banking Group's directors
and executive officers as of February 24, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ----- ----------------------------------------------------------------------
<S> <C> <C>
E. Lynn Caswell(2)................. 53 Chairman and Chief Executive Officer and Chief Financial Officer
Harold R. Williams, Jr............. 52 Proposed Executive Vice President and proposed Chief Financial Officer
and proposed Director
Mitchell J. Allen(1)(2)............ 39 Director
Alfred H. Jannard(2)............... 58 Director
Carlos Saenz(2).................... 55 Director
Henry E. Schielein(1)(2)........... 64 Director
Marion V. Ashley................... 63 Proposed Director
James B. Jaqua..................... 56 Proposed Director
N. Douglas Mills................... 59 Proposed Director
</TABLE>
- ------------------------
(1) Member of the audit committee
(2) Member of the compensation committee
MR. E. LYNN CASWELL, a founder of Pacific Community Banking Group, has
served as Chairman, Chief Executive Officer and Chief Financial Officer since
1997. From 1996 until 1997, Mr. Caswell was Vice-Chairman of Western Bancorp
(formerly Monarch Bancorp), a California bank-holding company. From July 1988
until February 1996, Mr. Caswell was President and Chief Executive Officer of
Monarch Bancorp, and also Chairman of that company. Since January 1997 Mr.
Caswell has been a member of the board of directors of the Federal Reserve Bank
in San Francisco, Chairman of the Public Affairs and Information Committee and a
member of the audit committee. Mr. Caswell has been a state chair of Southern
California for the American Bankers' Association from June 1992 to October 1997,
and has been a congressional legislative liaison for that organization since
October 1992. Mr. Caswell has also been a member of the board of directors of
the California Bankers' Association from May 1990 to May 1998, Mr. Caswell is
also a member of the board of directors of the South Coast Medical Center in
Laguna Beach, California since October 1995. Mr. Caswell received
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a BSBA in marketing and finance from the University of Arkansas and a graduated
from the Graduate School of Banking at McIntosh School of Business of the
University of Virginia in 1979. He did post-graduate work both in 1981 at the
Executive Management School at Stanford University and in 1984 in the Executive
Management Program at the Wharton School of the University of Pennsylvania.
MR. HAROLD R. WILLIAMS, JR. is our proposed Executive Vice President,
proposed Chief Financial Officer and a proposed director. Since February 1996,
Mr. Williams has been the Chief Operating and Financial Officer of The Bank of
Hemet. He has been the Corporate Secretary since 1997. He began his service with
The Bank of Hemet in 1994 as the Senior Vice President and Chief Financial
Officer. Prior to joining The Bank of Hemet, Mr. Williams served for two years
as the Executive Vice President, Chief Financial Officer, Corporate Secretary
and a director of CommerceBank and CommerceBancorp, Newport Beach, California.
CommerceBancorp filed for dissolution under Chapter 7 of the Bankruptcy Code in
1994. Mr. Williams has over 27 years of business experience, including 16 years
in banking. He is a former senior manager with Price Waterhouse & Co., is a
Certified Public Accountant and a member of the American Institute of Public
Accountants and the California Society of Certified Public Accountants. Mr.
Williams graduated in accounting and holds a Masters degree in Business
Administration from Brigham Young University.
MITCHELL J. ALLEN became a director in February 1999 when the board was
expanded in anticipation of the public offering. Mr. Allen is also proposed to
become a director of The Bank of Hemet. Since 1981, Mr. Allen has been Vice
President of Allen Oldsmobile Cadillac, Inc. in Laguna Niguel, California. Mr.
Allen is a graduate of the GM Dealership Academy in 1979. Mr. Allen is a member
of the Tom Wilson Cabinet (Orange County Supervisor) and a director of the
Orange County Marine Institute.
MR. ALFRED H. JANNARD became a director in February 1999 when the board was
expanded in anticipation of the public offering. Mr. Jannard is also proposed to
become a director of The Bank of Hemet and Valley Bank. From 1991 until 1997,
Mr. Jannard was a director of Monarch Bank and Monarch Bancorp in Laguna Niguel,
California. From 1975 until 1995, Mr. Jannard was the owner of Niguel Pharmacy
in Laguna Niguel, California. Mr. Jannard received a doctorate of pharmacy from
the University of Southern California.
MR. CARLOS SAENZ became a director in February 1999 when the board was
expanded in anticipation of the public offering. Mr. Saenz is also proposed to
become a director of The Bank of Hemet and Valley Bank. Since 1993, Mr. Saenz
has served as the President and Chief Executive Officer of Gregg Realty &
Investments, a real estate brokerage firm. Mr. Saenz has also been a commercial
banking officer at Wells Fargo Bank and Southern California First National Bank
in San Diego, California, and Mr. Saenz was a member of the Advisory board of
directors of Landmark Bank, Anaheim, California from 1982 to 1986. Mr. Saenz
received a Bachelor of Science Degree of Finance from San Diego State
University.
MR. HENRY E. SCHIELEIN became a director in February 1999 when the board was
expanded in anticipation of the public offering. Mr. Schielein is also proposed
to become a director of The Bank of Hemet. Mr. Schielein served as a director of
Monarch Bancorp and Monarch Bank from 1988 to 1993, and again from 1994 to 1997.
Since 1994, Mr. Schielein has been President and Chief Operating Officer of The
Balboa Bay Club, a California corporation that operates a private club and
resort facility. From 1993 until 1994, Mr. Schielein was President of the Grand
Waialea Resort in Maui, Hawaii. From October 1986 until May 1993, he was
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Vice President and general manager of the Ritz-Carlton Hotel in Laguna Niguel,
California. Mr. Schielein is a certified hotel administrator.
MR. MARION V. ASHLEY is a proposed director. Mr. Ashley has served as a
director of Valley Bank since 1979 and as the Chairman of the Board of Valley
Bank since 1992. Since June 1973, Mr. Ashley has been President and Chief
Executive Officer of Ashley Capital, a real estate investment and development
company. Mr. Ashley has also served as the President and Treasurer of County
Lands, Inc., a real estate investment company, since June 1978. Since 1992, Mr.
Ashley has served as a director of the Eastern Municipal Water District. Mr.
Ashley is a 1958 graduate of San Diego State University and a licensed Certified
Public Accountant since March 1969. Mr. Ashley served on the Riverside County
Planning Commission from 1973-1981, the last year as chairman. He is currently a
member, and former chairman, of the Local Agency Formation Commission (LAFCO),
having begun his service in 1993.
MR. JAMES B. JAQUA is a proposed director. Since January 1984, Mr. Jaqua has
been President, Chief Executive Officer and a director of The Bank of Hemet. Mr.
Jaqua has over 30 years of banking experience, including six years at Wells
Fargo Bank, and five years at a midwest bank holding company. Mr. Jaqua is a
graduate of Stanford University.
MR. N. DOUGLAS MILLS is a proposed director. Since July 1992, Mr. Mills has
served as President, Chief Executive Officer and a director of Valley Bank. From
1986 until 1992, Mr. Mills served as President at Pacific Valley National Bank,
Modesto, California. Mr. Mills is a 1964 graduate of California State
University, Fullerton, and a 1982 graduate of Pacific Coast Banking School,
Seattle, Washington. Mr. Mills has over 30 years experience in banking.
COMMITTEES OF THE BOARD OF DIRECTORS
In February 1999, the board established an audit committee and a
compensation committee. The audit committee monitors the corporate financial
reporting and internal and external audits of Pacific Community Banking Group.
The audit committee currently consists of Mitchell Allen and Henry Schielein.
The compensation committee makes recommendations regarding Pacific Community
Banking Group's employee stock option plans and makes decisions concerning
salaries and incentive compensation for employees and consultants of Pacific
Community Banking Group. The compensation committee currently consists of E.
Lynn Caswell, Mitchell Allen, Alfred Jannard, Carlos Saenz and Henry Schielein.
DIRECTOR COMPENSATION
Each director will receive annual grants of shares of common stock, equal in
value to $2,000 per month. The value of the shares will be based on the market
price on the last business day of each calendar quarter. Further, directors will
receive cash payments of $250 per meeting for attendance at meetings of
committees of the board and $500 for attendance at each special or unscheduled
board meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between Pacific Community Banking
Group's board of directors or compensation committee and any member of any
company's board of directors or compensation committee, nor has any such
interlocking relationship existed in the past.
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LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Section 317 of the California General Corporation Law ("CGCL") authorizes a
court to award, or a corporation's board of directors to grant, indemnity to
directors, officers and employees in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. Articles
Five and Six of Pacific Community Banking Group's articles of incorporation and
Article III of Pacific Community Banking Group's bylaws provide for
indemnification of its directors, officers, employees and other agents to the
fullest extent permitted by the CGCL. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of Pacific Community Banking Group pursuant to the foregoing
provisions, or otherwise, Pacific Community Banking Group has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of Pacific Community Banking Group
in which indemnification would be required or permitted. Pacific Community
Banking Group is not aware of any threatened litigation or proceeding that could
result in a claim for such indemnification.
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PACIFIC COMMUNITY BANKING GROUP--EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by Pacific Community
Banking Group during fiscal 1998, 1997, and 1996 to (A) each of the individuals
serving as Pacific Community Banking Group's principal executive officer during
fiscal 1998, (B) up to four other most highly compensated executive officers of
Pacific Community Banking Group during fiscal 1998, (C) up to two additional
individuals who would have been among Pacific Community Banking Group's four
most highly compensated executive officers, but for the fact that they were not
serving as executive officers of Pacific Community Banking Group at the end of
fiscal 1998 and (D) The Bank of Hemet's, Valley Bank's and BankLink
Corporation's key executive officers that earned over $100,000 during fiscal
1998 (collectively referred to as the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
--------------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(#) ($)
- ------------------------------------------------- --------- ---------- ---------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
E. Lynn Caswell ................................. 1998 $ 135,000 -- -- --
Chief Executive Officer, Chief Financial 1997 -- -- -- --
Officer and Chairman of the Board 1996 -- -- -- --
James B. Jaqua .................................. 1998 216,288 $ 130,000 -- --
President and Chief Executive Officer of The 1997 204,791 -- 6,000 --
Bank of Hemet 1996 192,708 100,000 -- --
N. Douglas Mills ................................ 1998 184,384 13,333 -- 51,156(1)
President and Chief Executive Officer of Valley 1997 185,646 -- -- 53,698(1)
Bank 1996 160,150 -- -- 47,257(1)
Harold R. Williams, Jr. ......................... 1998 160,907 40,000 -- --
Chief Operating and Financial Officer of The 1997 151,640 35,000 6,000 --
Bank of Hemet 1996 143,325 35,000 -- --
</TABLE>
- ------------------------
(1) Includes life insurance premiums, accruals under a retirement plan and
purchases under an employee stock purchase plan.
OPTION GRANTS IN LAST FISCAL YEAR
The Company did not grant any stock options or deferred stock units during
fiscal year 1998.
EMPLOYEE BENEFIT PLANS
1999 STOCK OPTION PLAN
Subject to regulatory approval, the Pacific Community board of directors and
shareholders adopted the 1999 Stock Option Plan. This plan provides for the
issuance of incentive stock options and non-statutory stock options for a period
up to ten years of up to 1,350,000 shares of the Pacific Community Banking Group
common stock to our directors and full-time salaried officers and employees, and
consultants. The exercise price of options to be issued under the plan must be
at least 100% percent of the fair market value of the common stock on the date
the options are granted. Options granted are not transferable by the optionee
during the
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optionee's lifetime. In the event of termination of employment as a result of
the optionee's disability or in the event of an employee's death during the
exercise period, the option shall remain exercisable for up to one year, but not
beyond the end of the original option term. If an optionee's employment is
terminated, unless termination was by reason of disability or death, the
optionee shall have the right for a three-month period after termination to
exercise that portion of the option which was exercisable immediately prior to
such termination. If an optionee's employment is terminated for cause, except
for options granted to consultants and business advisors, the optionee shall
have the right for a 30-day period after termination, to exercise that portion
of the option which is exercisable immediately prior to such termination. The
options will be proportionately adjusted in the event of certain changes in the
outstanding common stock of Pacific Community Banking Group. The plan will
terminate on February 23, 2009. Pacific Community believes the stock options
serve as effective performance-based incentives and expect to have a number of
stock options equal to 10 to 20% of Pacific Community Banking Group common stock
outstanding at any time.
As of December 31, 1998, Pacific Community Banking Group has not granted any
stock options under the plan. The board of directors intends to grant a ten-year
incentive stock option for the greater of 250,000 shares or 5% of Pacific
Community Banking Group outstanding shares to Mr. Caswell as provided in his
employment contract. The board of directors intends to grant ten-year options to
purchase 25,000 shares of common stock to each of the original four directors.
The board of directors also intends to grant ten-year options to purchase 25,000
shares of common stock to its other employee and to grant ten year options to
purchase 25,000 and 20,000 shares of common stock to each of two consultants.
Further, the employment agreement with Mr. Williams, described under
"--Employment Agreements" below, provides for a grant to him of options to
purchase 50,000 shares of common stock. All of these options will be exercisable
at a price per share equal to the price at which shares are sold in the initial
public offering.
Except for the 1999 Stock Option Plan, Pacific Community Banking Group does
not have any long-term incentive plans.
EMPLOYEE BENEFIT PLANS
Pacific Community Banking Group has a heath insurance plan for its employee.
Pacific Community Banking Group does not have any 401(k) plan or other qualified
retirement plan. Each of The Bank of Hemet and Valley Bank, however, has a
comprehensive program of health, disability and life insurance, as well as a
401(k) plan. During the initial period after the closing of the acquisitions,
each bank will keep its own heath, disability, life insurance and 401(k) plans.
Thereafter, Pacific Community Banking Group may consolidate the banks' plans
into a single plan for the combined group of companies. No decision has been
made as to the terms and form of such a combined plan. No such change will
reduce benefits earned prior to the effective date of the change. Pacific
Community Banking Group is committed to providing a program of benefits to the
employees of each bank that is no less favorable, when considered in its
entirety, than the program of the bank before the acquisition.
For information regarding the employee benefit plans of The Bank of Hemet,
please refer to "Other Relevant Information for The Bank of Hemet Shareholders"
on page 96. For information regarding the employee benefit plans of Valley Bank,
please refer to "Other Relevant Information for Valley Bank Shareholders" on
page .
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Valley Bank also has an employee stock ownership plan (the "ESOP") and,
until recently, had an employee stock purchase plan (the "ESPP"). Neither of
these plans is expected to be continued after the acquisition. During the
initial period after the closing of the acquisitions, the Employee Stock
Ownership Plan will remain in place as a plan of Valley Bank, but further
contributions to that plan will not be made. Thereafter, Pacific Community
Banking Group may consolidate the Employee Stock Ownership Plan with the 401(k)
plan, may amend it into a different type of tax-qualified plan, or may terminate
the ESOP. No such change will reduce benefits earned under the Employee Stock
Ownership Plan prior to the effective date of the change. The ESPP was
terminated effective September 30, 1998 and will not become a plan of Pacific
Community Banking Group.
SEVERANCE PLANS
Pacific Community Banking Group does not have a severance plan. Each of The
Bank of Hemet and Valley Bank, however, has established a severance policy.
Refer to "Other Relevant Information for The Bank of Hemet
Shareholders--Employee Contracts and Severance Agreements" for a description of
The Bank of Hemet's severance policy. Refer to "Other Relevant Information for
Valley Bank Shareholders--Employee Contracts and Severance Agreements" for a
description of Valley Bank's severance policy.
Following the acquisition, the banks will retain their respective severance
policies until and unless changed by Pacific Community Banking Group.
EMPLOYMENT AGREEMENTS
Pacific Community Banking Group has entered into a five year and four month
employment agreement with Mr. Caswell commencing September 1, 1997 at an initial
base salary of $135,000 per annum. Mr. Caswell is entitled to increases based
upon the Consumer Price Index, an annual bonus of not less than 10% of his base
salary which certain profit goals are met and certain benefits including car
allowance, health and life insurance, country club membership and the ability to
participate in any bonus, pension or profit sharing plan that we establish in
the future. Mr. Caswell has waived some of these benefits while Pacific
Community Banking Group is in its period of inception. Mr. Caswell is also
entitled to an income continuation policy in an amount of $60,000 per annum for
a period of 15 years after retirement. Mr. Caswell is also entitled to a
ten-year incentive stock options in an amount equal to the greater of 250,000
shares or 5% of Pacific Community Banking Group's outstanding common stock. Mr.
Caswell will also receive certain benefits if he is terminated before the
expiration of his employment agreement. Among these benefits, if Mr. Caswell is
terminated without cause he has a right to receive the amount of salary,
benefits, options and other allowances remaining on his contract, or two years
of the salary, benefits, options and other allowances provided under the
contract, whichever is greater.
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Under Mr. Caswell's employment agreement, if Pacific Community Banking Group
undergoes a change in control, he will receive the amount of salary, benefits
options and other allowances remaining on the contract, or three years of the
salary, benefits options and other allowances provided under the contract,
whichever is greater. For purposes of triggering this benefit, the employment
agreement defines a change in control as a consolidation, dissolution or
transfer of assets that fundamentally changes the structure of Pacific Community
Banking Group, a change in ownership of 50% or more of Pacific Community Banking
Group's common stock, or a change in ownership of 20% or more of Pacific
Community Banking Group that accompanies an effective change in control of the
corporation.
CONSULTING AND NONCOMPETITION AGREEMENTS
Mr. Jaqua has entered into a consulting agreement with The Bank of Hemet
under which he will serve as chairman of and a strategic business consultant to
BankLink Corporation after the acquisition, and will serve as a director of
Pacific Community Banking Group. He will receive director's fees for his
services and will also receive commissions for some new business of BankLink.
Mr. McDonough has entered into a consulting agreement with The Bank of Hemet
under which he will serve as a business development consultant for two years
after the acquisition and continue to serve as a director for that time, with a
right to receive director's fees and medical benefits. Mr. Jaqua and Mr.
McDonough have also each entered into noncompetition agreements with The Bank of
Hemet. Mr. Jaqua will receive $500 per month for eight months then $12,000 per
month for the next 28 months after the acquisition in exchange for agreeing not
to compete with The Bank of Hemet in Riverside, San Bernardino or Orange
counties for four years. Mr. McDonough will receive $2,500 per month for three
years in exchange for agreeing not to compete with The Bank of Hemet in
Riverside county for four years.
CERTAIN TRANSACTIONS
We expect to have banking transactions in the ordinary course of our
business with our directors, officers and their associates. We intend that these
transactions will be on substantially the same terms as those prevailing at the
same time for comparable transactions with others, not involve more than the
normal risk of collectability or present other unfavorable features.
STOCK OWNERSHIP OF PACIFIC COMMUNITY BANKING GROUP FOLLOWING REORGANIZATION
The following table sets forth certain information with respect to
beneficial ownership of Pacific Community Banking Group's common stock as of
March 31, 1999, and is adjusted to reflect the sale of the shares offered by
Pacific Community Banking Group in the initial public offering of its common
stock. It shows interests of (A) each person (or group of affiliated persons)
who is known by Pacific Community Banking Group to own beneficially more than 5%
of its common stock, (B) each of Pacific Community Banking Group's directors,
(C) each of the Named Executive Officers, and (D) all directors and executive
officers as a group. We have assumed for the purposes of this calculation that
(A) the price to the public of the common stock in the offering will be $15.00
per share and (B) Valley Bank shareholders will in aggregate sell 60% of the
Pacific Community Banking Group common stock they
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receive and retain 40%, and (C) The Bank of Hemet Shareholders will in aggregate
sell 88% of the Pacific Community Banking Group common stock they receive and
retain 12%. Also, we have rounded down in computing the aggregate number of
shares resulting from conversion of preferred stock and the exchange of shares
with Valley Bank shareholders.
<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK OWNED
--------------------------
<S> <C> <C> <C>
NUMBER OF BEFORE THE AFTER THE
NAME OF BENEFICIAL OWNER SHARES(1) OFFERING(1) OFFERING(1)(2)
- -------------------------------------------------------------------------- ----------- ----------- -------------
E. Lynn Caswell, Chairman, Chief Executive Officer and Chief Financial
Officer(3).............................................................. 35,625 * *
Loren Hansen(4)........................................................... 8,333 * *
Rice Brown(5)............................................................. 6,250 * *
James Jaqua, Proposed Director(6)......................................... 64,889(12) 1.64% 1.44%
Alfred H. Jannard, Director(7)............................................ 5,417 * *
N. Douglas Mills, Proposed Director(8).................................... 15,288 * *
Carlos Saenz, Director(9)................................................. 2,500 2 *
Mitchell J. Allen, Director(9)............................................ 2,500 2 *
Henry E. Schielein, Director(10).......................................... 2,083 2 *
Harold R. Williams, Proposed Executive Vice President, Proposed Chief
Financial Officer and Proposed Director................................. 4,488 * *
Marion V. Ashley, Proposed Director(11)................................... 1,569 * *
All Directors and Executive Officers as a group (11 persons).............. 148,942 3.76% 3.30%
</TABLE>
- ------------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person
that are currently exercisable within 60 days of March 31, 1999 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of each other person. Except
as indicated in the footnote to this table and pursuant to applicable
community property laws, each shareholder named in the table has sole voting
power and investment power with respect to the shares set forth opposite
such shareholder's name.
(2) Assumes no exercise of Underwriters' over-allotment option.
(3) Reflects the conversion of 307,500 shares of Series A Preferred Stock into
25,625 shares of common stock.
(4) Reflects the conversion of 100,000 shares of Series A Preferred Stock into
8,333 shares of common stock. Loren Hansen's address is Knecht & Hansen,
1301 Dove Street, Suite 900, Newport Beach, California 92660.
(5) Reflects the conversion of 75,000 shares of Series A Preferred Stock into
6,250 shares of common stock. Rice Brown's address is 27134 Paseo Espada,
Suite 302, San Juan Capistrano, California 92675.
(6) Reflects the conversion, upon the closing of The Bank of Hemet acquisition,
of 157,701 shares of The Bank of Hemet's common stock and 6,000 options to
purchase the same number of shares of The Bank of Hemet's common stock.
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(7) Reflects the conversion of 65,000 shares of Series A Preferred Stock into
5,417 shares of common stock.
(8) Reflects the conversion, upon the closing of Valley Bank acquisition, of
5,081 shares of Valley Bank's common stock and options to purchase 110,250
shares of Valley Bank's common stock, assuming a 60% cash and 40% stock
election. Does not include shares beneficially owned by Mr. Mills in the
Valley Bank Employee Stock Ownership Plan.
(9) Reflects the conversion of 30,000 shares of Series A Preferred Stock into
2,500 shares of common stock.
(10) Reflects the conversion of 25,000 shares of Series A Preferred Stock into
2,083 shares of common stock.
(11) Reflects the conversion, or the closing of the Valley Bank acquisition, of
122 shares of Valley Bank common stock and options to purchase 10,584 shares
of common stock assuming a 60% cash and 40% stock election.
(12) Assumes retention of 12% of shares received upon exchange of shares and
options of The Bank of Hemet.
CAPITAL STOCK AND COMPARISON OF SHAREHOLDER RIGHTS
The following is a summary of the principal differences between the current
rights of shareholders of The Bank of Hemet and Valley Bank and those of Pacific
Community Banking Group shareholders following the acquisition, and a
description of Pacific Community Banking Group's common stock. It is qualified
in its entirety by reference to the California General Corporation Law (the
"CGCL"), the Pacific Community Banking Group articles of incorporation and
bylaws, The Bank of Hemet articles of incorporation and bylaws, and the Valley
Bank articles of incorporation and bylaws. Copies of the Pacific Community
Banking Group articles and bylaws will be sent to holders of shares of The Bank
of Hemet common stock or Valley Bank common stock upon a request made to the
corporate secretary. Please please refer to "Where You Can Find More
Information" on page 200.
COMPARISON OF CURRENT BANK OF HEMET AND VALLEY BANK SHAREHOLDER RIGHTS AND
RIGHTS OF PACIFIC COMMUNITY BANKING GROUP SHAREHOLDERS FOLLOWING THE
ACQUISITION
Shareholders of The Bank of Hemet and Valley Bank who do not sell all of the
Pacific Community Banking Group stock that they receive in the acquisition will
become shareholders of Pacific Community Banking Group. All Shareholders of The
Bank of Hemet and Valley Bank will receive warrants exercisable for Pacific
Community Banking Group in the acquisitions. Shareholders of The Bank of Hemet
and Valley Bank should read this section to learn how their rights as
shareholders of Pacific Community Banking Group may differ from the rights they
previously had.
ORGANIZATION--GOVERNING LAW
Pacific Community Banking Group, The Bank of Hemet and Valley Bank are all
corporations organized under the laws of the State of California. Each of these
corporations is governed by the CGCL, by its articles of incorporation filed
with the California Secretary of State, and by its bylaws.
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AUTHORIZED STOCK
The Bank of Hemet articles of incorporation authorize the issuance of
20,000,000 shares of The Bank of Hemet common stock, without par value, and
10,000,000 shares of The Bank of Hemet preferred stock, without par value. At
The Bank of Hemet record date, 844,278 shares of The Bank of Hemet common stock
were issued and outstanding, and no shares of The Bank of Hemet preferred stock
were outstanding.
Valley Bank's articles of incorporation authorize the issuance of 2,400,000
shares of Valley Bank common stock, $5.00 par value. At the Valley Bank record
date, 1,171,906 shares of Valley Bank common stock were issued and outstanding.
Pacific Community Banking Group's articles of incorporation authorize the
issuance of 100,000,000 shares of no par value common stock and 100,000,000
shares of no par value preferred stock. As of the date of this joint proxy
statement/prospectus, 10,000 shares of Pacific Community Banking Group's common
stock, 1,085,000 shares of Series A preferred stock and 375,000 shares of Series
B preferred stock are issued and outstanding.
BOARD OF DIRECTORS; NUMBER OF DIRECTORS
The Bank of Hemet bylaws currently provide that the number of directors of
The Bank of Hemet shall not be less than five nor more than nine, and that the
number of The Bank of Hemet directors is currently fixed at seven.
The Valley Bank bylaws currently provide that the number of directors of
Valley Bank shall not be less than seven nor more than 13, and that the number
of Valley Bank directors is currently fixed at eight.
Pacific Community Banking Group's articles provide for a range of directors
from a stated minimum to a stated minimum nor more than a stated maximum (which
cannot be greater than two times the stated minimum plus one). The bylaws
currently fix a minimum of five directors and a maximum of nine, with the exact
number currently fixed at five, except that immediately before the completion of
the initial public offering, the range of directors will be between eight and
fifteen. After the acquisitions Pacific Community Banking Group contemplates
adding four seats to the board of directors to accommodate the new members
described in this joint proxy statement/prospectus.
TERM OF DIRECTORS
The articles of incorporation of both The Bank of Hemet and Valley Bank
provide for one year terms for all directors, with annual elections. , Pacific
Community Banking Group will have a staggered board. The board will be divided
into two classes, each of which contain approximately one-half of the whole
number of the members of the board. The members of each class will be elected
for a term of two years, with the terms of office of all members of one class
expiring each year so that approximately one-half of the total number of
directors is elected each year. The presence of a staggered board may make it
more difficult for shareholders to make rapid changes in the management of the
corporation.
ELECTION OF DIRECTORS; NOMINATION OF DIRECTORS; VOTING RIGHTS
Holders of common stock of both The Bank of Hemet and Valley Bank have been
entitled to one vote, in person or by proxy, for each share of common stock held
of record in the shareholder's name, on any matter submitted to the vote of the
shareholders, except that
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in connection with the election of directors, the shares may be voted
cumulatively. Shareholders of both The Bank of Hemet and Valley Bank have had
the right to place a person's name in nomination to serve as director with
advance notice the corporate secretary.
The holders of Pacific Community Banking Group common stock are entitled to
one vote, in person or by proxy, per share on any matter requiring shareholder
action. Pacific Community Banking Group's Articles do not provide for cumulative
voting for any purpose so long as the common stock is listed on Nasdaq.
The Bylaws of Pacific Community Banking Group require a shareholder who
intends to nominate a candidate for election to the board of directors to give
not less than 10 days' advance notice to the Secretary of Pacific Community
Banking Group. The articles of incorporation provide that a shareholder who
desires to raise new business to provide certain information to Pacific
Community Banking Group concerning the nature of the new business, the
shareholder and the shareholder's interest in the business matter. Similarly, a
shareholder wishing to nominate any person for election as a director must
provide Pacific Community Banking Group with certain information concerning the
nominee and the proposing shareholder.
AMENDMENT OF ARTICLES OR BYLAWS
An amendment to the articles of incorporation of either The Bank of Hemet
and Valley Bank must be approved by a majority of the board of directors of a
majority of the shareholders. The bylaws of either may be amended by a majority
of the board of directors, except that the number of directors of The Bank of
Hemet specified in its bylaws may be changed only with the approval of the
shareholders.
Amendments to the Pacific Community Banking Group articles must be approved
by a majority vote of its board of directors and also by a majority of the
outstanding shares of its voting stock, provided, however, that an affirmative
vote of at least 66 2/3% of the outstanding voting stock entitled to vote (after
giving effect to the provision limiting voting rights) is required to amend or
repeal certain provisions of the articles of incorporation, including the
provision limiting voting rights, the provisions relating to approval of certain
business combinations, the number and classification of directors, director and
officer indemnification by Pacific Community Banking Group and amendment of
Pacific Community Banking Group's bylaws and articles of incorporation. The
Pacific Community Banking Group bylaws may be amended by its board of directors,
or by a vote of 66 2/3% of the total votes eligible to be voted at a duly
constituted meeting of shareholders.
SUPERMAJORITY VOTING REQUIREMENTS
For all actions requiring shareholder consent, such as a merger or sale of
the bank or an amendment to the articles of incorporation, The Bank of Hemet
requires approval of simple majority of shareholders only. The Valley Bank
articles require the affirmative vote of two-thirds of the outstanding shares of
Valley Bank to approve a merger or sale of Valley Bank. All other matters
require only a simple majority.
Pacific Community Banking Group's articles of incorporation require the
approval of the holders of at least two-thirds of its common stock to approve
certain "Business Combinations," that involve a "Related Person." A "Related
Person" is any individual, corporation, partnership or other entity (other than
Pacific Community Banking Group or its subsidiaries) which owns beneficially or
controls, directly or indirectly, 10% of more of the outstanding
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shares of voting stock of Pacific Community Banking Group or an affiliate of
such a person or entity. Unless a majority of members of the board of directors
who are not affiliated with the Related Person approve the transaction in
advance, the following "Business Combinations" require a two-thirds vote of
shareholders:
- any merger or consolidation of Pacific Community Banking Group with or
into any Related Person;
- any sale, lease, exchange, mortgage, transfer, or other disposition of 25%
or more of the assets of Pacific Community Banking Group or combined
assets of Pacific Community Banking Group and its subsidiaries to a
Related Person;
- any merger or consolidation of a Related Person with or into Pacific
Community Banking Group or any subsidiary of Pacific Community Banking
Group;
- any sale, lease, exchange, transfer, or other disposition of 25% or more
of the subsidiary of Pacific Community Banking Group to a Related Person;
- the acquisition by Pacific Community Banking Group or a subsidiary of
Pacific Community Banking Group of any securities of a Related Person;
- any reclassification of common stock of Pacific Community Banking Group or
any recapitalization involving the common stock of Pacific Community
Banking Group; or
- any agreement or other arrangement providing for any to the foregoing.
The increased shareholder vote required to approve a business combination
may have the effect of foreclosing mergers and other business combinations which
a majority of shareholders deem desirable and place the power to prevent such a
merger or combination in the hands of a minority of shareholders.
OTHER RIGHTS
Each share of The Bank of Hemet common stock has the same rights, privileges
and preferences as every other share and will share equally in The Bank of
Hemet's net assets upon liquidation or dissolution. The Bank of Hemet common
stock has no conversion or redemption rights or sinking fund provisions. Holders
of The Bank of Hemet common stock do not have preemptive rights to subscribe to
additional stock issued by The Bank of Hemet.
Each share of Valley Bank common stock has the same rights, privileges and
preferences as every other share and will share equally in Valley Bank's net
assets upon liquidation or dissolution. Valley Bank common stock has no
conversion or redemption rights or sinking fund provisions. Holders of Valley
Bank common stock have preemptive rights to subscribe to additional stock issued
by Valley Bank.
The holders of Pacific Community Banking Group common stock will have no
preemptive or other subscription rights and there are no redemption, sinking
fund or conversion privileges applicable thereto. Upon Pacific Community Banking
Group's liquidation, dissolution or winding up, holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities.
Pacific Community Banking Group has granted registration rights under
certain circumstances to the holders of Pacific Community Banking Group common
stock acquired upon conversion of the Series A and Series B preferred stock.
Such registration rights are subject to
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exclusion if the managing underwriter advises Pacific Community Banking Group
that marketing factors require a limitation on the number of shares to be
underwritten.
INDEMNIFICATION
Under the CGCL, a corporation has the power to indemnify present and former
directors, officers, employees and agents against expenses, judgments, fines and
settlements (other than in connection with actions by or in the right of the
corporation) if that person acted in good faith and in a manner the person
reasonably believed to be in the best interests of the corporation and, in the
case of a criminal proceeding, had no reasonable cause to believe the conduct of
the person was unlawful. A corporation also has the power to indemnify, with
certain exceptions, any person who is a party to any action by or in the right
of the corporation, against expenses actually and reasonably incurred by that
person in connection with the defense or settlement of the action if the person
acted in good faith and in a manner the person believed to be in the best
interests of the corporation and its shareholders.
The indemnification authorized by the CGCL is not exclusive, and a
corporation may grant its directors, officers, employees or other agents certain
additional rights to indemnification. The articles and bylaws of The Bank of
Hemet, Valley Bank and Pacific Community Banking Group provide that each shall
indemnify its officers and directors to the fullest extent permitted under
California law.
ANTI-TAKEOVER PROVISIONS
The Pacific Community Banking Group's articles of incorporation contain
certain provisions that may have the effect of discouraging a future takeover
attempt which is not approved by the board of directors but which individual
Pacific Community Banking Group shareholders may deem to be in their best
interest or in which shareholders may receive a substantial premium for their
shares over then current market prices. As a result, Pacific Community Banking
Group shareholders who might desire to participate in such a transaction may not
have an opportunity to do so. These provisions also make it more difficult to
remove an incumbent board of directors and change the management of Pacific
Community Banking Group. Because any provision in the articles or bylaws that
requires more than a majority vote by the Pacific Community Banking Group's
shareholders is effective for a two year period from its effective time, unless
renewed by Pacific Community Banking Group's board of directors and the
shareholders, some of these anti-takeover provisions may expire unless renewed.
The following description of certain of anti-takeover provisions is limited and
should be read in conjunction with the full text of the articles of
incorporation, which is available on request. Please refer to "Where You Can
Find More Information" on page 200. The anti-takeover provisions include the
following:
- CLASSIFIED BOARD. So long as Pacific Community Banking Group's common
stock is listed on the Nasdaq stock market, the board of directors of
Pacific Community Banking Group will be divided into two classes, with
approximately one half of the seats open for election each year. The
classified board is intended to provide for continuity of the Pacific
Community Banking Group board of directors and to make it more difficult
and time consuming for a shareholder group to fully use its voting power
to gain control of the board of directors without consent of the incumbent
board of directors of Pacific Community Banking Group.
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- BOARD AUTHORITY TO ISSUE PREFERRED STOCK. If another company or person
proposes a merger, tender offer or otherwise attempts to gain control of
Pacific Community Banking Group, and the board of directors opposes that
action, they could authorize the issuance to existing common stock holders
or others of preferred stock with rights, preferences and privileges that
impede the potential acquiror from taking control of Pacific Community
Banking Group. The potential acquiror might otherwise have paid a premium
over the market price for Pacific Community Banking Group's common stock.
Thus the ability of the board of directors to deter a takeover by issuing
preferred stock could reduce the price of Pacific Community Banking
Group's common stock.
- SUPER-MAJORITY VOTE FOR CERTAIN CHANGES IN CONTROL. A two-thirds majority
of shareholders must approve mergers, acquisitions and other changes in
control involving a person or company that directly or indirectly owns 10%
or more of Pacific Community Banking Group's capital stock unless the
transaction is approved by the board of directors. That requirement makes
it more difficult for a potential acquiror to get control over Pacific
Community Banking Group by purchasing a block of its stock and exercising
the related voting rights
- ADVANCE NOTICE TO RAISE MATTERS AT SHAREHOLDERS' MEETINGS. A shareholder
may not present a matter for consideration at the meeting of shareholders
without notice to the secretary of the corporation at least 35 days in
advance.
Contractual arrangements that impede changes in control include severance
agreements for our executive officers and commitments to issue options.
Pacific Community Banking Group does not know of any potential mergers,
tender offers or other attempts to gain control at this time.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF PACIFIC COMMUNITY BANKING GROUP'S
ARTICLES OF INCORPORATION. The board of directors of the Pacific Community
Banking Group believes that it is in the best interest of Pacific Community
Banking Group and its shareholders to encourage potential acquirers to negotiate
directly with the board of directors of Pacific Community Banking Group and that
these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also the view of the board of directors that these
provisions should not discourage persons from proposing a merger or other
transaction at a price reflective of the true value of the Pacific Community
Banking Group and which is in the best interest of all shareholder.
Nevertheless, there may be cases where the anti-takeover provisions enacted by
the board of directors discourage an offer at a premium over market price, which
some shareholders would prefer to accept.
CAPITAL STOCK DESCRIPTION
COMMON STOCK. Holders of Pacific Community Banking Group common stock are
entitled to dividends when, as and if declared by Pacific Community Banking
Group board of directors out of funds legally available therefor (and after
satisfaction of the prior rights of holders of outstanding preferred stock, if
any) subject to certain restrictions on payment of dividends imposed by the
California Corporations Code and other applicable regulatory limitations.
PREFERRED STOCK. Before the closing of the initial public offering of
Pacific Community Banking Group's common stock, all outstanding shares of
preferred stock will automatically
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convert into common stock. Pacific Community Banking Group's board of directors
has the authority to issue 100,000 additional shares of preferred stock in one
or more series and to fix the powers, designations, preferences and rights, and
qualifications, limitations or restrictions thereof, without any further vote or
action by Pacific Community Banking Group's shareholders.
If the board of directors issues preferred stock, the rights, preferences
and privileges of the preferred stock could adversely effect the rights of
holders of the common stock of Pacific Community Banking Group. For example:
- Common stock dividends may be restricted until the company pays preferred
stock dividends or makes payments to a sinking fund for the redemption of
preferred stock;
- Preferred stock holders may have voting rights that reduce the voting
power of holders of common stock, or conversion rights that dilute the
interest of common stock holders in the equity of Pacific Community
Banking Group;
- In a liquidation, current holders of common stock may not receive a share
in the assets of Pacific Community Banking Group's until liquidation
preferences granted to the holders of the preferred stock have been
satisfied.
- Dividends payable on any newly issued series of Preferred Stock would
reduce the amount of funds available for the payment of dividends on
common stock.
- Failure to make scheduled dividend or sinking fund payments on preferred
stock could trigger special voting rights, shareholder consent rights or
board representation rights for the holders of preferred stock, whose
interests may be different than the interests of common stock holders.
As discussed under the heading "Anti-Takeover Provisions" above, the power
of the board of directors to issue preferred stock with newly designated rights
preferences and privileges may have an anti-takeover effect.
WARRANTS. Pacific Community Banking Group has agreed to issue ten year
warrants that are exercisable at a price equal to 122% of the offering price to
the shareholders and optionees of The Bank of Hemet and Valley Bank. For details
regarding the terms of these warrants, please refer to the section entitled "The
Bank of Hemet Agreement--Purchase Consideration" on page 53 , or "Valley Bank
Agreement--Purchase Consideration on page 119. Based upon the number of The Bank
of Hemet and Valley Bank shares outstanding, and assuming that the initial
public offering price is $15.00 per share, Pacific Community Banking Group will
issue 1,307,395 warrants exercisable into the same number of shares of common
stock on the completion of the offering and the acquisitions, at an exercise
price of $18.30 per share.
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DIVIDENDS. The ability of Pacific Community Banking Group to pay cash
dividends is limited by the provisions of Section 500 of the CGCL, which
prohibits the payment of dividends unless (A) the retained earnings of the
corporation immediately prior to the distribution exceeds the amount of the
distribution; (B) the assets of the corporation exceed 1 1/4 times its
liabilities; or (C) the current assets of the corporation exceed its current
liabilities, but if the average pre-tax earnings of the corporation before
interest expense for the two years preceding the distribution was less than the
average interest expense of the corporation for those years, the current assets
of the corporation must exceed 1 1/4 times its current liabilities. Because
virtually all of Pacific Community Banking Group's earnings will be from the
banks that it owns, the ability of Pacific Community Banking Group to pay
dividends will further be limited by the provisions of Sections 642 and 643 of
the California Financial Code, which permits distributions from a bank to its
shareholder (A) without approval of the Commissioner of Financial Institutions,
only up to the lesser of the retained earnings of the bank or the net income of
the bank for the last three fiscal years, and (B) with the prior approval of the
Commissioner of Financial Institutions, only up to the greatest of the retained
earnings, the net income for the last fiscal year, or the net income for the
current fiscal year. Pacific Community Banking Group does not expect to pay
dividends for the foreseeable future.
DISSENTERS' RIGHTS OF APPRAISAL
Shareholders of The Bank of Hemet who do not vote to approve The Bank of
Hemet Agreement and shareholders at Valley Bank who do not approve the Valley
Bank agreement may be entitled to certain dissenters' rights of appraisal under
Chapter 13 of the CGCL.
The following discussion is not meant to be a complete statement of the CGCL
relating to dissenters' rights, but a summary of Sections 1300 through 1312 of
the CGCL as they may apply to dissenting shareholders of the banks. This
discussion is qualified in its entirety by reference to those sections of the
CGCL, which we have attached to this joint proxy statement/prospects as APPENDIX
E. Any shareholder of either bank who wishes to exercise statutory dissenters'
rights, or who thinks he or she may wish to preserve the right to do so, should
carefully read sections 1300 through 1312 of the CGCL and this discussion.
FAILURE TO TAKE ANY NECESSARY STEP MAY RESULT IN THE LOSS OF THOSE RIGHTS.
Reference in this section to the "bank," "the acquisition" or "the common
stock" apply to either The Bank of Hemet or Valley Bank, as appropriate.
If the acquisition is completed, shareholders of the bank who elect to
exercise their dissenters' rights and who in a timely fashion take all the
necessary steps to perfect those rights may be entitled to receive the fair
market value of their shares in cash. Under section 1300(a) of the CGCL, fair
market value is determined as of July 29, 1998, the day before the first
announcement of the terms of the acquisition. Fair market value excludes any
appreciation or depreciation that resulted from the proposed acquisition, but is
adjusted for any stock split, reverse stock split, or share dividend that takes
effect after the date of announcement. The average trading price of The Bank of
Hemet common stock on July 29, 1998 was $48.88. The last trading price of Valley
Bank common stock on July 29, 1998 was $8.375. Management of each bank believes
that those prices reflect the fair market value of its common stock at that
time.
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Shares of common stock must satisfy each of the following requirements to
qualify as dissenting shares under the CGCL:
- the shares of common stock must have been outstanding on the record date
for determination of the shares entitled to be voted at the meeting where
shareholders consider the agreement. The record date for The Bank of Hemet
is , 1999. The record date for Valley Bank is
, 1999.
- the shares of common stock must not have been voted, by proxy or in
person, for approval and adoption of the agreement.
- the holder of the shares of common stock must submit the share
certificates for endorsement (as described below).
A HOLDER OF COMMON STOCK WHO VOTES IN FAVOR OF THE APPROVAL AND ADOPTION OF
THE AGREEMENT, OR WHO EXECUTES AND RETURNS A PROXY WITH NO VOTING INSTRUCTIONS
INDICATED, WILL LOSE ANY DISSENTERS' RIGHTS WITH RESPECT TO THOSE SHARES.
If the shareholders approve the acquisition at the meeting, within ten days
of approval, the bank will send each shareholder who did not vote in favor of
the acquisition a "notice of approval." A copy of sections 1300 through 1304 of
the CGCL will accompany the notice of approval. The notice of approval will
state the price determined by the bank to represent the fair market value of any
dissenting shares. The notice of approval will constitute an offer by the bank
to purchase the dissenting shares at that stated price. It will briefly describe
the procedures to be followed by shareholders who wish to exercise their
dissenters' rights.
Within 30 days after the mailing date of the notice of approval,
shareholders who wish to assert dissenters' rights must do the following:
1. The dissenting shareholder must deliver a written demand for payment in cash
of the fair market value of the dissenting shares. The bank must receive the
demand within 30 days of the mailing date of the notice of approval. By law,
the demand must state the number of shares of common stock that the
shareholder held of record and a statement of the dissenting shareholder's
claim of the fair market value of the dissenting shares as of the close of
business on July 29, 1998, the day immediately preceding the announcement of
the proposed acquisition (the statement of fair market value in such demand
by the dissenting shareholder constitutes an offer by the dissenting
shareholder to sell the dissenting shares at that price); and
2. The dissenting shareholder must submit share certificate(s) representing the
dissenting shares to the bank at the bank's principal office. The bank will
stamp or endorse the certificate(s) with a statement that the shares are
dissenting shares or exchange the shareholder's certificates for
certificates of appropriate denomination so stamped or endorsed. If the
price contained in the notice of approval is acceptable to the dissenting
shareholder, the dissenting shareholder may demand the same price. THIS
WOULD CONSTITUTE AN ACCEPTANCE OF THE OFFER BY THE BANK TO PURCHASE THE
DISSENTING SHAREHOLDER'S STOCK AT THE PRICE STATED IN THE NOTICE OF
APPROVAL.
If the bank and a dissenting shareholder agree on the price for the
Dissenting Shares, the bank must by law pay the agreed price (together with
interest at the legal rate on judgments from the date of the agreement between
the bank and the dissenting shareholder) to the dissenting shareholder within 30
days after the agreement or within 30 days after any statutory
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or contractual conditions to the acquisition are satisfied, whichever is later.
However, Chapter 13 of the CGCL places some restrictions on the bank's ability
to repurchase its outstanding shares. Also, the bank may withhold payment until
the dissenting shareholder surrenders the certificates for the Dissenting
Shares.
If the bank and a dissenting shareholder fail to agree on the price for the
dissenting shares or disagree as to whether the dissenting shareholder's shares
are entitled to be classified as dissenting shares, the holder may, within six
months after the notice of approval is mailed, file a complaint in the superior
court of the proper county requesting the court to make such determinations or,
alternatively, may intervene in any pending action brought by any other
dissenting shareholder. Costs of such an action (including compensation of
appraisers) are required to be assessed as the court considers equitable, but
must be assessed against the bank of if the appraised value determined by the
court exceeds the price offered by the bank.
The court action to determine the fair market value of the shares will be
suspended if litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing the acquisition. Also, no
shareholder who has appraisal rights under Chapter 13 of the CGCL will have any
right to attack the validity of the acquisition or to have the acquisition set
aside or rescinded except in an action to test whether the number of shares
required to authorized or approve the acquisition has been legally voted in
favor of the acquisition.
Dissenting shares may lose their status as such, and the holders will lose
any right to demand payment if any of the following takes place:
- the acquisition is abandoned (in which case the bank will pay on demand to
any dissenting shareholder who has initiated proceedings in good faith as
provided under Chapter 13 of the CGCL all necessary expenses and
reasonable attorneys' fees incurred in those proceedings);
- the shares are transferred before being submitted for endorsement or are
surrendered for conversion into shares of another class;
- the dissenting shareholder and the bank do not agree upon the status of
the dissenting shares or on the price of such shares, but the dissenting
shareholder fails to file suit against the bank, or to intervene in a
pending action within six months following the date on which the notice of
approval was mailed to the shareholder; or
- the dissenting shareholder withdraws his or her demand for the purchase of
the dissenting shares with the consent of the bank.
It is a condition to Pacific Community Banking Group's obligation to
consummate the acquisition that the aggregate number of Dissenting Shares not
exceed ten percent of the outstanding stock of the bank. Therefore, if
shareholders holding in total more than 84,427 shares of The Bank of Hemet
common stock, or more than 117,190 shares of Valley Bank common stock (based on
outstanding shares of common stock of each as of the date of this joint proxy
statement/prospectus) exercise dissenters' rights for those shares, the
acquisition will NOT be consummated unless Pacific Community Banking Group
waives this condition. If the acquisition fails to be consummated, all
dissenters' rights would then terminate.
199
<PAGE>
EXPERTS
The financial statements for Pacific Community Banking Group and The Bank of
Hemet included in this joint proxy statement/prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports dated February 26, 1999 and
January 27, 1999, respectively, with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The opinion regarding the deferred tax treatment of amounts deferred under
the business combination plan referred to in this joint proxy
statement/prospectus and elsewhere in the registration statement has been
rendered by Arthur Andersen LLP, independent public accountants, and has been
referred to herein in reliance upon the authority of such firm as experts in
giving said opinion.
The balance sheets of Valley Bank as of December 31, 1998 and 1997 and the
related statements of income, changes in shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1998, and included
in this Prospectus have been audited by McGladrey & Pullen, LLP, independent
certified public accountants.
LEGAL MATTERS
The validity of the Pacific Community Banking Group common stock and
warrants issuable in the acquisitions will be passed upon by Morrison & Foerster
LLP, Irvine, California. Certain legal matters in connection with the
acquisitions will be passed upon for Pacific Community Banking Group by Knecht &
Hansen, Newport Beach, California, counsel to Pacific Community Banking Group.
Mr. Loren Hansen of the firm of Knecht & Hansen has purchased 100,000 shares of
Pacific Community Banking Group's Series A preferred stock. When those shares
are converted upon completion of the acquisition and the offering, he will be
the beneficial owner of 8,333 shares of Pacific Community Banking Group's common
stock. Certain legal matters in connection with the acquisitions will be passed
upon for The Bank of Hemet by Gary Steven Findley & Associates, Anaheim,
California and for Valley Bank by Aldrich & Bonnefin, P.L.C., Irvine,
California.
WHERE YOU CAN FIND MORE INFORMATION
Pacific Community Banking Group will begin to file annual, quarterly and
special reports, proxy statements and other information with the Commission upon
the effective date of the acquisitions. You may read and copy any reports,
statements and other information filed by Pacific Community Banking Group at the
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. You will also be able to obtain the
Commission filings from commercial document retrieval services and at the web
site maintained by the Commission at http://www.sec.gov. Shares of Pacific
Community Banking Group common stock are designated for quotation on the Nasdaq
National Market. Material filed with Nasdaq by Pacific Community Banking Group
can be inspected at the offices of the National Association of Securities
Dealers, Inc., Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
200
<PAGE>
The Bank of Hemet files with the FDIC the annual, quarterly and special
reports, proxy statements and other information required by the Exchange Act.
You may read and copy any reports, statements and other information filed by The
Bank of Hemet at the FDIC's public reference facilities at the Registration,
Disclosure and Operations Unit, Room F-6043, 500 17th Street, N.W., Washington,
D.C. 20429. You may request copies from the FDIC by telephone at 1-202-898-8913
or by fax at 1-202-898-3909.
Pacific Community Banking Group has filed a registration statement on Form
S-4 to register with the Commission the common stock and warrants to be issued
to shareholders of Bank of Hemet and Valley Bank in the acquisitions. This joint
proxy statement/prospectus is a part of that Registration Statement and
constitutes a prospectus of Pacific Community Banking Group in addition to being
an proxy statement for the annual meeting of The Bank of Hemet and for the
annual meeting of Valley Bank. As allowed by the Commission's rules, this joint
proxy statement/prospectus does not contain all of the information you can find
in the registration statement or the documents provided as in the exhibits to
the registration statement.
If you are a shareholder of The Bank of Hemet or Valley Bank, you may have
received some of the documents provided as exhibits to the registration
statement, but you can obtain any of them from the Commission, or without charge
from the appropriate company at the following addresses:
<TABLE>
<CAPTION>
<S> <C> <C>
Pacific Community Banking Group The Bank of Hemet Valley Bank
23332 Mill Creek Drive, Suite 230 3715 Sunnyside Drive 24010 Sunnymead Boulevard
Laguna Hills California 92653 Riverside, California 92506 Moreno Valley, California 92553
Attention: E. Lynn Caswell Attn: Mr. James B. Jaqua Attn: Mr. N. Douglas Mills
Chairman and President and President and
Chief Executive Officer Chief Executive Officer Chief Executive Officer
</TABLE>
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM ANY COMPANY, PLEASE DO SO BY
, 1999 TO RECEIVE THEM BEFORE THE ANNUAL MEETING OF THE BANK OF HEMET OR
THE ANNUAL MEETING OF VALLEY BANK.
201
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
-----------
<S> <C>
Pacific Community Banking Group
Report of Arthur Andersen LLP, Independent Public Accountants......................................... F-2
Balance Sheets--December 31, 1998 and 1997............................................................ F-3
Statements of Operations.............................................................................. F-4
Statements of Shareholders' Equity.................................................................... F-5
Statements of Cash Flow............................................................................... F-6
Notes to Financial Statements......................................................................... F-7
The Bank of Hemet
Report of Arthur Andersen LLP, Independent Public Accountants......................................... F-11
Consolidated Balance Sheets--December 31, 1998 and 1997............................................... F-12
Consolidated Statements of Operations................................................................. F-13
Consolidated Statements of Shareholders' Equity....................................................... F-14
Consolidated Statements of Cash Flow.................................................................. F-15
Notes to Consolidated Financial Statements............................................................ F-16
Valley Bank
Report of McGladrey & Pullen, LLP Independent Auditors................................................ F-34
Balance Sheets--December 31, 1998 and 1997............................................................ F-35
Statements of Income.................................................................................. F-36
Statements of Stockholders' Equity.................................................................... F-37
Statements of Cash Flows.............................................................................. F-38
Notes to Financial Statements......................................................................... F-39
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
PACIFIC COMMUNITY BANKING GROUP:
We have audited the accompanying balance sheets of PACIFIC COMMUNITY BANKING
GROUP (a California corporation) as of December 31, 1998 and 1997, and the
related statements of operations, shareholders' equity and cash flows for the
year ended December 31, 1998, and for the period from inception (October 17,
1997) to December 31, 1997. 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.
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 Pacific Community Banking
Group as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the year ended December 31, 1998 and the period from
inception (October 17, 1997) to December 31, 1997 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
February 26, 1999
F-2
<PAGE>
PACIFIC COMMUNITY BANKING GROUP
BALANCE SHEETS--DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................................................. $ 395,948 $ 170,131
Prepaid expenses..................................................................... 1,333 --
Capitalized acquisition and offering costs........................................... 198,127 26,814
------------ -----------
Total current assets............................................................. 595,408 196,945
------------ -----------
EQUIPMENT & FURNITURE, at cost......................................................... 7,096 --
Less--accumulated depreciation....................................................... 1,458 --
------------ -----------
5,638 --
------------ -----------
$ 601,046 $ 196,945
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 94,429 $ 54,112
Refundable common stock subscriptions................................................ -- 85,000
------------ -----------
Total current liabilities........................................................ 94,429 139,112
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized--100,000,000 shares
Issued and outstanding--no shares.................................................. -- --
Common stock, no par value:
Authorized--100,000,000 shares
Issued and outstanding--10,000 shares.............................................. 2,500 2,500
Common stock subscriptions........................................................... 1,305,000 680,000
Common stock subscriptions receivable................................................ (205,764) (542,990)
Accumulated deficit.................................................................. (595,119) (81,677)
------------ -----------
Total shareholders' equity............................................................. 506,617 57,833
------------ -----------
$ 601,046 $ 196,945
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
PACIFIC COMMUNITY BANKING GROUP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 17,
YEAR ENDED 1997)
DECEMBER 31, TO DECEMBER 31,
1998 1997
------------ ----------------
<S> <C> <C>
REVENUES......................................................................... $ -- $ --
GENERAL AND ADMINISTRATIVE EXPENSES.............................................. 525,568 82,477
------------ -------
Loss from operations........................................................... 525,568 82,477
INTEREST INCOME.................................................................. 11,326 --
------------ -------
Net loss before taxes.......................................................... 514,242 82,477
PROVISION FOR INCOME TAXES....................................................... 800 800
------------ -------
Net loss....................................................................... $ 513,442 $ 81,677
------------ -------
------------ -------
Basic and diluted loss per share................................................. $ 51.34 $ 8.17
------------ -------
------------ -------
Weighted average shares outstanding.............................................. 10,000 10,000
------------ -------
------------ -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
PACIFIC COMMUNITY BANKING GROUP
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
-------------------- COMMON STOCK SUBSCRIPTIONS ACCUMULATED TOTAL
SHARES AMOUNT SUBSCRIPTIONS RECEIVABLE DEFICIT EQUITY
--------- --------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, October 17, 1997,
(inception)........................ -- $ -- $ -- $ -- $ -- $ --
Common stock issuance................ 10,000 2,500 -- -- -- 2,500
Common stock subscriptions........... -- -- 680,000 (542,990) -- 137,010
Net loss............................. -- -- -- -- (81,677) (81,677)
--------- --------- ------------ ------------ ------------ -----------
BALANCE, December 31, 1997........... 10,000 2,500 680,000 (542,990) (81,677) 57,833
Common stock subscriptions........... -- -- 625,000 337,226 -- 962,226
Net loss............................. -- -- -- -- (513,442) (513,442)
--------- --------- ------------ ------------ ------------ -----------
BALANCE, December 31, 1998........... 10,000 $ 2,500 $1,305,000 $ (205,764) $ (595,119) $ 506,617
--------- --------- ------------ ------------ ------------ -----------
--------- --------- ------------ ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PACIFIC COMMUNITY BANKING GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 17,
YEAR ENDED 1997) TO
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................... $ (513,442) $ (81,677)
Adjustments to reconcile net loss to net cash used in operating activities--
Depreciation and amortization.................................................... 1,458 --
Expenses recorded on issuance of stock subscriptions in exchange for services.... 10,000 52,011
Changes in assets and liabilities:
Increase in capitalized acquisition and offering costs......................... (171,313) (26,814)
Increase in prepaid expenses................................................... (1,333) --
Increase in accounts payable................................................... 40,317 54,112
------------ ------------
Net cash used in operating activities........................................ (634,313) (2,368)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and furniture................................................. (7,096) --
------------ ------------
Net cash used in investing activities........................................ (7,096) --
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock, common stock subscriptions, and
refundable common stock subscriptions............................................ 867,226 172,499
------------ ------------
Net cash provided by financing activities.................................... 867,226 172,499
------------ ------------
NET INCREASE IN CASH................................................................. 225,817 170,131
CASH, beginning of year.............................................................. 170,131 --
------------ ------------
CASH, end of year.................................................................... $ 395,948 $ 170,131
------------ ------------
------------ ------------
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON CASH FINANCING ACTIVITIES:
During 1997, common stock subscriptions in the amount of $52,011 were issued to
an investor in exchange for payment of certain expenses.
During 1998, common stock subscriptions in the amount of $10,000 were issued to
a third party in exchange for services.
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
PACIFIC COMMUNITY BANKING GROUP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. COMPANY BACKGROUND
Pacific Community Banking Group (the Company), a California corporation, was
formed on October 17, 1997, for the purpose of acquiring community banking
organizations in the Southern California region. The Company has had no revenues
to date.
2. ACQUISITION AGREEMENTS
During 1998, the Company entered into definitive agreements for the
acquisition of The Bank of Hemet ("Hemet") and Valley Bank ("Valley"), which
were amended subsequently during 1999. The agreements are contingent upon the
completion of an initial public offering ("IPO"). The agreements provide for the
exchange of all of the outstanding stock of Hemet and Valley for common stock
and for warrants to purchase common stock of the Company. The shareholders of
Hemet will receive 3.4 shares of the Company's common stock and one warrant in
exchange for each share held of Hemet common stock. The Valley shareholders will
receive two-thirds of a share of Company common stock for each share held of
Valley common stock. Additionally, the Valley shareholders will receive one
warrant for the purchase of Company common stock for every three shares held of
Valley common stock. The Hemet and Valley warrants will be exercisable at 122
percent of the IPO price, and have a contractual life of ten years. There can be
no assurance that the Company's proposed public offering will be successful and
that these acquisitions will be completed.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of 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.
B. EQUIPMENT AND FURNITURE
The Company provides for depreciation based on the estimated useful lives of
depreciable assets using the straight-line method. Estimated useful lives are as
follows:
<TABLE>
<CAPTION>
Computers and office equipment.................................... 3 years
<S> <C>
Furniture and fixtures............................................ 7 years
</TABLE>
Property additions are stated at acquisition cost. Upon retirement or
disposal of depreciable assets, the cost and related accumulated depreciation
are removed from the accounts and the resulting gain or loss is reflected in
operations.
F-7
<PAGE>
PACIFIC COMMUNITY BANKING GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
C. CAPITALIZED ACQUISITION AND OFFERING COSTS
Certain legal, accounting and underwriting fees incurred in connection with
a proposed acquisition of certain businesses have been capitalized as of
December 31, 1997. During 1998, the Company expensed the balance of these costs.
In addition, the Company has capitalized costs related to its planned IPO.
Should the acquisitions be completed, capitalized acquisition costs will be
included as a component of the net purchase price of the business acquired.
Capitalized offering costs will be recorded as a reduction of the proceeds
received in the IPO or will be expensed should the IPO not be consummated.
Capitalized offering costs are approximately $198,000 as of December 31, 1998.
D. INCOME TAXES
The Company accounts for income taxes using the asset and liability method
as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under the asset and liability method, deferred
income tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the currently enacted tax rates and laws.
E. EARNINGS PER SHARE
The Company accounts for earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." This Statement requires the presentation of both basic and
diluted net income per share for financial statement purposes. Basic net income
per share is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding. Diluted net income per
share includes the effect of potential common shares, including dilutive stock
options using the treasury stock method. For the year ended December 31, 1998
and the period ended December 31, 1997, potential common shares were excluded
from the calculation of diluted net income per share as their impact would be
anti-dilutive.
4. INCOME TAXES
No provision for federal income taxes has been recorded as the Company
incurred net operating losses since inception. At December 31, 1998, the Company
had approximately $595,000 and $297,000 of federal and state net operating loss
carryforwards, respectively, available to offset future taxable income; which
expire through 2017. Under the Tax Reform Act of 1986, the benefits from net
operating losses carried forward may be impaired or limited in certain
circumstances. Events which may cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not limited
to, a cumulative ownership change of more than 50 percent over a three year
period.
Deferred tax assets totaling approximately $238,000 and $33,000 at December
31, 1998 and 1997, respectively, consist primarily of the tax effect of net
operating loss carryforwards. The Company has provided a full valuation
allowance against the deferred tax assets due to
F-8
<PAGE>
PACIFIC COMMUNITY BANKING GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
uncertainty regarding the Company's ability to generate sufficient income in
future periods for such assets to be realized.
5. COMMITMENTS AND CONTINGENCIES
LEASES
The Company occupies its office premises under a noncancelable lease
agreement which expires in June 1999. At December 31, 1998, future minimum lease
commitments are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999............................................................. $ 11,520
Thereafter....................................................... --
---------
Total future minimum lease payments................................ $ 11,520
---------
---------
</TABLE>
Rental expense for the year ended December 31, 1998 and for the period from
inception to December 31, 1997 was approximately $32,000 and $7,000,
respectively.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company entered into a five-year, four-month employment agreement with
its Chief Executive Officer beginning on September 1, 1997. The agreement
provides for an annual base salary that is adjusted for the Consumer Price
Index, normal employee benefits, and an annual bonus at the discretion of the
Board of Directors. The agreement also entitles the officer to 250,000 ten-year
incentive stock options at an exercise price equal to the fair market value of
the Company's common stock at the date of issuance, which would be issued after
the closing of the IPO. Additionally, the agreement contains an income
continuation provision, which will provide for payments of $60,000 per year for
fifteen years, beginning at the employee's retirement date. This provision could
take effect at the successful closing of the Company's first acquisition or
merger. Upon implementation of this provision, the Company will accrue a
liability for the present value of the amounts to ultimately be distributed.
However, the employee has invoked a waiver clause within the agreement, and thus
has elected to defer the implementation of the income continuation provision
until such time as the Company can support such provision.
On July 1, 1998, the Company entered into an agreement with a consultant to
review certain loans being made by banks with which the Company has entered into
definitive purchase agreements (Please refer to Note 2). The agreement, as
amended, calls for the payment of a monthly retainer of $3,500 per month from
July 1, 1998 through May 15, 1999, as well as reimbursement for all
out-of-pocket business expenses. Payments made under this agreement have been
recorded in capitalized acquisition and offering costs in the accompanying
financial statements.
F-9
<PAGE>
PACIFIC COMMUNITY BANKING GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
6. COMMON STOCK SUBSCRIPTIONS
The Company has entered into common stock subscription agreements ("the
Agreements") with various investors who have contributed cash or services to the
Company. The Agreements provide for the conversion of funds invested into shares
of common stock of the Company. The conversion into common stock would be at a
price equal to eighty percent of the IPO price, and the conversion will occur
only under certain conditions, including the successful acquisition of a
financial institution and the closing of an IPO. Under the terms of the
Agreements, the funds invested could only be disbursed by the Company under
certain conditions, which included the signing of a definitive acquisition
agreement with a financial institution. As of December 31, 1997, under the terms
of the Agreements, fifty percent of the invested funds were disbursable. The
remaining fifty percent of invested funds is reflected as a liability in the
accompanying financial statements. As of December 31, 1998, the conditions for
full disbursement of invested funds had been met.
As of the respective balance sheet dates, the total value of Agreements that
have been signed is included in common stock subscriptions in the accompanying
financial statements. The portion of the Agreements that has not been paid is
recorded as a subscription receivable, an offset to the common stock
subscriptions account.
7. SUBSEQUENT EVENTS (UNAUDITED)
During March 1999, the Company amended its common stock subscription
agreements. Funds that have been invested in the Company will be exchanged for
one share of preferred stock for every dollar invested. Each share of preferred
stock will automatically convert into shares of common stock upon the closing of
the IPO. Initial founding investors will receive Series A Preferred Stock for
all contributions, while subsequent investors will receive Series B Preferred
Stock for their contributions. Series A Preferred Stock shall convert to common
stock at a per share price of eighty percent of the IPO price per share. Series
B Preferred Stock shall convert at a per share price of eighty-five percent of
the IPO price per share.
F-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors of The Bank of Hemet:
We have audited the accompanying consolidated balance sheets of THE BANK OF
HEMET (a California corporation) and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Bank of
Hemet and subsidiaries 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.
ARTHUR ANDERSEN LLP
Orange County, California
January 27, 1999
F-11
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS.......................................................... $ 6,496,000 $ 6,521,000
FEDERAL FUNDS SOLD............................................................... 10,500,000 13,000,000
-------------- --------------
Total Cash and Cash Equivalents.............................................. 16,996,000 19,521,000
INVESTMENT SECURITIES HELD TO MATURITY
Market values of $24,884,000 in 1998 and
$24,842,000 in 1997, respectively.......................................... 24,882,000 24,833,000
LOANS AND LEASES................................................................. 207,802,000 192,287,000
ALLOWANCE FOR LOAN AND LEASE LOSSES.............................................. (2,232,000) (2,116,000)
-------------- --------------
Loans and Leases, net........................................................ 205,570,000 190,171,000
PREMISES AND EQUIPMENT, net...................................................... 1,541,000 1,637,000
ACCRUED INTEREST RECEIVABLE...................................................... 1,140,000 1,921,000
OTHER REAL ESTATE OWNED.......................................................... 77,000 779,000
OTHER ASSETS..................................................................... 2,671,000 2,461,000
-------------- --------------
$ 252,877,000 $ 241,323,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Noninterest bearing demand deposits............................................ $ 33,975,000 $ 29,307,000
Savings and interest-bearing demand deposits................................... 67,720,000 59,702,000
Money market deposits.......................................................... 3,669,000 4,251,000
Time deposits of $100,000 or more.............................................. 8,141,000 9,149,000
Time deposits less than $100,000............................................... 116,880,000 116,802,000
-------------- --------------
Total Deposits............................................................... 230,385,000 219,211,000
ACCRUED INTEREST PAYABLE AND OTHER LIABILITIES................................... 1,468,000 1,884,000
-------------- --------------
231,853,000 221,095,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY
Common stock, no par value--Authorized--20,000,000 shares Issued and
outstanding--844,278......................................................... 3,666,000 3,666,000
Retained earnings.............................................................. 17,358,000 16,562,000
-------------- --------------
Total Stockholders' Equity................................................... 21,024,000 20,228,000
-------------- --------------
$ 252,877,000 $ 241,323,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-12
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees............................................. $ 17,102,000 $ 16,795,000 $ 17,202,000
Investment securities............................................. 1,610,000 1,633,000 1,416,000
Federal funds sold................................................ 704,000 563,000 509,000
------------- ------------- -------------
Total Interest Income........................................... 19,416,000 18,991,000 19,127,000
------------- ------------- -------------
INTEREST EXPENSE
Transaction and savings deposits.................................. 2,216,000 2,228,000 2,029,000
Time deposits of $100,000 or more................................. 501,000 489,000 891,000
Time deposits less than $100,000.................................. 6,468,000 6,214,000 5,903,000
Other borrowings.................................................. 0 15,000 0
------------- ------------- -------------
Total Interest Expense.......................................... 9,185,000 8,946,000 8,823,000
------------- ------------- -------------
Net Interest Income............................................. 10,231,000 10,045,000 10,304,000
PROVISION FOR LOAN AND LEASE LOSSES................................. 0 250,000 988,000
------------- ------------- -------------
Net Interest Income after Provision for Loan
and Lease Losses.............................................. 10,231,000 9,795,000 9,316,000
------------- ------------- -------------
NONINTEREST INCOME
Fees and service charges on deposits.............................. 518,000 554,000 588,000
Other charges and fees............................................ 118,000 149,000 205,000
Other income...................................................... 727,000 501,000 455,000
------------- ------------- -------------
Total Noninterest Income........................................ 1,363,000 1,204,000 1,248,000
------------- ------------- -------------
NONINTEREST EXPENSE
Salaries and employee benefits.................................... 3,735,000 3,462,000 3,640,000
Premises and equipment............................................ 1,066,000 987,000 1,008,000
Other real estate owned, net...................................... (101,000) (187,000) 1,237,000
Other expenses.................................................... 2,036,000 1,938,000 2,297,000
------------- ------------- -------------
Total Noninterest Expense....................................... 6,736,000 6,200,000 8,182,000
------------- ------------- -------------
Income before Provision for Income Taxes........................ 4,858,000 4,799,000 2,382,000
PROVISION FOR INCOME TAXES.......................................... 2,035,000 1,997,000 1,009,000
------------- ------------- -------------
Net Income...................................................... $ 2,823,000 $ 2,802,000 $ 1,373,000
------------- ------------- -------------
------------- ------------- -------------
EARNINGS PER SHARE
Basic Earnings Per Share........................................ $ 3.34 $ 3.25 $ 1.53
Diluted Earnings Per Share...................................... $ 3.23 $ 3.15 $ 1.53
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-13
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ RETAINED
SHARES AMOUNT EARNINGS
--------- ------------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1995............................................... 828,398 $ 4,358,000 $ 14,721,000
Exercise of stock options, including tax benefit......................... 59,970 559,000 --
Amendment to preferred stock conversion (Note 9)......................... 6,536 147,000 (147,000)
Common stock cash dividend at $1.00 per share............................ -- -- (882,000)
Supplemental cash dividend at $0.19 per share (Note 9)................... -- -- (26,000)
Net income for the year.................................................. -- -- 1,373,000
--------- ------------- -------------
BALANCE, December 31, 1996............................................... 894,904 5,064,000 15,039,000
Repurchased shares....................................................... (50,626) (1,398,000) --
Common stock cash dividend at $1.50 per share............................ -- -- (1,279,000)
Net income for the year.................................................. -- -- 2,802,000
--------- ------------- -------------
BALANCE, December 31, 1997............................................... 844,278 3,666,000 16,562,000
Common stock cash dividend at $2.40 per share............................ -- -- (2,027,000)
Net income for the year.................................................. -- -- 2,823,000
--------- ------------- -------------
BALANCE, December 31, 1998............................................... 844,278 $ 3,666,000 $ 17,358,000
--------- ------------- -------------
--------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-14
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 2,823,000 $ 2,802,000 $ 1,373,000
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and amortization.................................... 299,000 259,000 287,000
Provision for possible loan and lease losses..................... 0 250,000 988,000
Deferred income tax (benefit).................................... 199,000 513,000 (407,000)
Loss (gain) on sale and write-down of other real estate owned.... (162,000) (310,000) 936,000
Accretion of discount on investments............................. (36,000) (259,000) (182,000)
Decrease (increase) in accrued interest receivable............... 781,000 1,000 (539,000)
Increase in other assets......................................... (409,000) (304,000) (43,000)
Increase (decrease) in accrued interest payable and other
liabilities.................................................... (417,000) (2,000) 435,000
------------- ------------- -------------
Net Cash Provided by Operating Activities...................... 3,078,000 2,950,000 2,848,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities................ 101,130,000 32,000,000 20,000,000
Purchases of investment securities............................... (101,142,000) (31,794,000) (22,037,000)
Net increase in loans and leases................................. (16,125,000) (6,406,000) (3,453,000)
Purchases of premises and equipment.............................. (203,000) (373,000) (162,000)
Proceeds from sales of other real estate owned................... 1,589,000 2,896,000 1,640,000
------------- ------------- -------------
Net Cash Used in Investing Activities.......................... (14,751,000) (3,677,000) (4,012,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, savings, and money market deposits....... 12,104,000 1,699,000 10,676,000
Net increase (decrease) in time deposits......................... (929,000) 5,244,000 (5,834,000)
Stock options exercised including tax benefit.................... 0 0 559,000
Cash dividends paid.............................................. (2,027,000) (1,279,000) (908,000)
Cash paid for Tender Offer, including expenses................... 0 (1,398,000) 0
------------- ------------- -------------
Net Cash Provided by Financing Activities...................... 9,148,000 4,266,000 4,493,000
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. (2,525,000) 3,539,000 3,329,000
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, Beginning of Year......................... 19,521,000 15,982,000 12,653,000
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, End of Year............................... $ 16,996,000 $ 19,521,000 $ 15,982,000
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL INFORMATION
Interest paid.................................................. $ 9,212,000 $ 8,919,000 $ 8,853,000
Income taxes paid.............................................. $ 2,105,000 $ 1,160,000 $ 995,000
Loans to Facilitate Sale of Other Real Estate Owned............ $ 37,000 $ 949,000 $ 398,000
Transfer from Loans to Other Real Estate Owned................. $ 726,000 $ 1,185,000 $ 847,000
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-15
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of The Bank of
Hemet, and its primary wholly owned subsidiary, BankLink Corporation (BankLink)
(collectively referred to as "the Bank"). BankLink is a provider of data
processing services for banks. The Bank operates five branches in communities
located in the Inland Empire area of Southern California. The Bank's primary
source of revenue is providing commercial and industrial income-producing real
estate loans to small and middle-market businesses and individuals. The Bank
offers a full range of commercial banking services. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure 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.
B. INVESTMENT SECURITIES HELD TO MATURITY
Securities are classified as held to maturity and are carried at cost,
decreased by the amortization of premiums and increased by the accretion of
discounts, as applicable. Realized gains or losses recognized on sales of
securities are based upon the adjusted cost and computed on the specific
identification method and are booked in other income or other expense, as
applicable. The Bank's intention is to hold its investment securities to
maturity, and does not anticipate selling any portion of the investment
securities portfolio for liquidity or other purposes.
C. LOANS AND LEASES
Loans and leases are stated at the amount of unpaid principal, reduced by an
allowance for loan and lease losses and deferred net loan origination fees.
Interest on loans is recognized over the terms of the loans and is calculated on
principal amounts outstanding. Loan origination fees, offset by certain direct
loan origination costs, are deferred and recognized over the contractual life of
the loan as a yield adjustment. As unearned revenue, the net unrecognized fees
and costs are reported as reductions of the loan balance.
Accrual of interest on loans and leases is discontinued when management
believes, after considering economic and business conditions, and collection
efforts, that the borrower's financial condition is such that collection of
interest is doubtful. Income is subsequently recognized only to the extent cash
payments are received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments is no longer doubtful, in which
case the credit is returned to accrual status.
F-16
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Bank measures impairment on a loan by loan basis using either the
present value of expected future cash flows discounted at the loan's effective
interest rate, or the fair value of the collateral if the loan is collateral
dependent. The Bank excludes from its impairment calculations smaller balance,
homogeneous loans such as consumer installment loans and lines of credit, and
direct finance leases. In determining whether a loan is impaired or not, the
Bank applies its normal loan review procedures. Loans for which an insignificant
delay, i.e., less than 90 days past due, or an insignificant shortfall in the
amount of payments is anticipated, but the Bank expects to collect all amounts
due, are not considered for impairment.
D. ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated. Management
makes periodic credit reviews of the loan and lease portfolio and considers
current economic conditions, historical loan loss experience, assessments of
problem credits and other factors in determining the adequacy of the allowance.
The allowance is based on estimates and ultimate losses may vary from the
current estimates. These estimates are reviewed periodically and, 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.
E. PREMISES AND EQUIPMENT
The Bank's buildings, furniture, equipment and leasehold improvements are
stated at cost less accumulated depreciation and amortization, which is charged
to expense on a straight-line basis over the estimated useful lives of the
assets or, in the case of leasehold improvements, over the life of the leases,
whichever is shorter. Maintenance and repairs are charged directly to expense as
incurred. Improvements to premises and equipment which extend the useful lives
of the assets are capitalized. Gains and losses resulting from the disposal of
premises and equipment are included in current operations. Rates of depreciation
are based on the following depreciable lives: buildings, 30 years; furniture,
five to seven years; equipment, three to five years; and leasehold improvement,
the shorter of fifteen years or the lease term.
F. CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and Federal funds sold. Generally, Federal
funds are sold for one-day periods.
As more fully described in Note 9, 134,917 shares of Series C Preferred
stock were automatically converted to 20,804 shares of the Bank's common stock
on September 15, 1995 with a stated value of $465,000. In November 1996, an
amendment to the conversion resulted
F-17
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in the issuance of an additional 6,533 in common shares and an increase in the
stated value by $147,000. These are noncash transactions and are not reflected
in the consolidated statement of cash flows. As a result of this amendment, a
supplemental cash dividend and a special cash distribution to all former holders
of Preferred stock in the amount of $26,000 was paid in November 1996.
G. OTHER REAL ESTATE OWNED
Other real estate owned represents real estate acquired by foreclosure or
deed in lieu of foreclosure in satisfaction of commercial and residential real
estate loans and is carried at the lower of the recorded investment in the
property or its fair value, less estimated carrying costs and costs of
disposition. At the time of foreclosure, the value of the underlying loan is
written down to the fair value of the real estate to be acquired by a charge to
the allowance for loan and lease losses, if necessary. Any subsequent
write-downs are charged to noninterest expense. Operating expenses of such
properties, net of related income and gains or losses on their disposition, are
recorded in noninterest expense.
H. INCOME TAXES
The Bank applies an asset and liability approach in accounting for income
taxes payable or refundable at the date of the financial statements as a result
of all events that have been recognized in the financial statements and as
measured by the provisions of enacted tax laws. Additionally, deferred tax
assets are evaluated and a valuation allowance is established if it is "more
likely than not" that all or a portion of the deferred tax asset will not be
realized.
I. EARNINGS PER SHARE
The FASB issued SFAS No. 128, "Earnings per Share" (EPS) effective for both
interim and annual reporting periods ending after December 15, 1997. SFAS No.
128 replaces primary EPS with basic EPS, and fully diluted EPS with diluted EPS.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed in a similar manner as fully diluted
EPS, and reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Bank. All periods presented in the accompanying consolidated financial
statements have been restated to conform with SFAS No. 128. The following is a
reconciliation of the numerators and
F-18
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
denominators used in the calculation of basic EPS and diluted EPS for the years
ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
EARNINGS SHARES EPS
------------ --------- ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED 1998
Net Income...................................................................... $ 2,823,000
BASIC EARNINGS PER SHARE
Income available to Common Stockholders......................................... 2,823,000 844,278 $ 3.34
---------
---------
EFFECT OF DILUTIVE SECURITIES
Stock Options................................................................... 30,373
---------
DILUTED EARNINGS PER SHARE
Income available to Common Stockholders and assumed conversions................. $ 2,823,000 874,651 $ 3.23
------------ --------- ---------
------------ --------- ---------
FOR THE YEAR ENDED 1997
Net Income...................................................................... $ 2,802,000
BASIC EARNINGS PER SHARE
Income available to Common Stockholders......................................... 2,802,000 863,262 $ 3.25
---------
---------
EFFECT OF DILUTIVE SECURITIES
Stock Options................................................................... 26,458
---------
DILUTED EARNINGS PER SHARE
Income available to Common Stockholders and assumed conversions................. $ 2,802,000 889,720 $ 3.15
------------ --------- ---------
------------ --------- ---------
FOR THE YEAR ENDED 1996
Net Income...................................................................... $ 1,373,000
Less: Preferred stock cash dividend............................................. (26,000)
------------
BASIC EARNINGS PER SHARE
Income available to Common Stockholders......................................... 1,347,000 881,705 $ 1.53
---------
---------
EFFECT OF DILUTIVE SECURITIES
Stock Options................................................................... 12,118
Preferred Stock................................................................. 26,000
------------ ---------
DILUTED EARNINGS PER SHARE
Income available to Common Stockholders and assumed conversions................. $ 1,373,000 893,823 $ 1.53
------------ --------- ---------
------------ --------- ---------
</TABLE>
In May 1997, the Bank concluded a Tender Offer which resulted in the
repurchase of 50,626 shares of common stock at the offering price of $27.00 per
share. The decrease to common stock was $1,367,000 plus offering costs of
$31,000.
F-19
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. POSTRETIREMENT BENEFITS AND STOCK OPTIONS
The Bank has a salary continuation plan for certain key management
personnel. The plan provides for payments for fifteen years commencing within 60
days upon reaching age 65, or death. The Bank measures the obligations to
provide these future postretirement benefits over the estimated remaining years
of benefit. Salary continuation expense was $39,000, $29,000, and $31,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. The Bank is
committed to pay $1,875,000 over the pay out periods of the plan.
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits either adoption of the new standard's principles
for recording the estimated value of stock-based compensation over the
applicable vesting period, or permits continued application of existing
accounting standards, with disclosure of any unrecorded cost under the new
standard and the related effect on earnings per share. The Bank adopted SFAS No.
123 in 1996, and elected to adopt the disclosure provisions of the new standard
only. As the Bank issued no stock-based compensation in 1996, adoption of this
standard had no effect on the Bank's financial position or disclosures for the
year ended December 31, 1996. During 1997, the Bank granted stock options as
more fully described in Note 7. No stock-based compensation was issued in 1998.
The Bank established a 401(k) plan effective August 1, 1997. Employees who
have completed one year of service and meet certain other requirements are
eligible for enrollment. Employees may contribute a percentage of their salary
pursuant to IRS regulatory maximums, and under the plan, the Bank matches 40% of
the first 5% of salary contributed using forfeitures and cash. Participants vest
immediately in their own contributions with 100% vesting in Bank's contributions
occurring after five years of credited service. The Bank's expense for
contributions to this plan was $42,000 and $7,000 during 1998 and 1997,
respectively.
K. NEW ACCOUNTING PRONOUNCEMENTS AND RECLASSIFICATIONS
In June 1997, the FASB issued SFAS Nos. 130 and 131, "Reporting
Comprehensive Income" and "Disclosures about Segments of an Enterprise and
Related Information." The Bank adopted SFAS Nos. 130 and 131 in 1998. As none of
the Bank's accounts would create differences between reported net income and
comprehensive income as defined by SFAS No. 130, adoption of this new standard
has no impact on the Bank's results of operations or disclosures. Management
does not believe that the adoption of SFAS No. 131 has a material impact on the
Bank's current disclosure of its one operating segment of banking as described
in Note 1.A.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
new standard is effective for 2000 and is not expected to have a material impact
on the Bank's financial statements.
F-20
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Certain reclassifications of prior years financial data have been made to
conform to the current reporting practices of the Bank.
2. INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and fair value of investment securities held to maturity
are as follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. government agencies................................... $ 24,882,000 $ 6,000 $ (4,000) $ 24,884,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
DECEMBER 31, 1997
U.S. government agencies................................... $ 24,833,000 $ 10,000 $ (1,000) $ 24,842,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
Investment securities with a book value of $10,000,000 and $7,000,000 at
December 31, 1998 and 1997, respectively, were pledged to secure public deposits
and for other purposes as required or permitted by law. The estimated fair
values of pledged securities were $10,003,000 and $7,001,000 at December 31,
1998 and 1997, respectively.
The amortized cost and fair values of investment securities held to maturity
at December 31, 1998, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 18,000,000 $ 18,005,000
Due after one year through five years.......................... 6,000,000 5,997,000
Due after five years through ten years......................... -- --
Due after 10 years............................................. 882,000 882,000
------------- -------------
Total...................................................... $ 24,882,000 $ 24,884,000
------------- -------------
------------- -------------
</TABLE>
U.S. government agency securities of $882,000 at December 31, 1998 represent
preferred stock of the Federal Home Loan Bank (FHLB), which has no maturity
date.
3. LOANS AND LEASES, NET
The Bank's loans, commitments, and standby letters of credit have been
granted to customers primarily in the Inland Empire area of Southern California.
Prevailing economic conditions, including real estate values and other factors
may affect certain borrowers' ability to repay loans. Although management
believes the level of allowance for loan and lease losses is adequate to absorb
losses inherent in the loan portfolio, declines in the local economy and/or
F-21
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. LOANS AND LEASES, NET (CONTINUED)
increases in the interest rate charged on adjustable rate loans may result in
increasing loan and other real estate owned losses that cannot be reasonably
estimated at December 31, 1998. The most significant category of collateral is
real estate, principally commercial and industrial income-producing properties.
At December 31, 1998, the Bank's loan portfolio included approximately
$27,635,000 of fixed rate loans. The loan and lease portfolio consisted of the
following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Commercial................................................... $ 10,016,000 $ 10,033,000
Real Estate.................................................. 197,189,000 181,524,000
Installment.................................................. 1,002,000 1,065,000
Lease finance receivables.................................... -- --
All other loans (including overdrafts)....................... 391,000 411,000
-------------- --------------
208,598,000 193,033,000
Deferred loan origination fees, net.......................... (796,000) (746,000)
-------------- --------------
207,802,000 192,287,000
Allowance for loan and lease losses.......................... (2,232,000) (2,116,000)
-------------- --------------
Total Loans and Leases, net.............................. $ 205,570,000 $ 190,171,000
-------------- --------------
-------------- --------------
</TABLE>
Non-accruing loans totaled approximately $1,578,000 and $2,902,000 at
December 31, 1998 and 1997, respectively. Interest income that would have been
recognized on non-accrual loans if they had performed in accordance with the
terms of the loans was approximately $277,000, $391,000 and $302,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998
and 1997, respectively, the Bank had an insignificant amount of loans past due
90 days or more in interest or principal and still accruing interest.
At December 31, 1998 and 1997, loans that were considered impaired totaled
$3,312,000 and $4,708,000, respectively, all of which had a related allowance
for loan and lease loss aggregating $287,000 and $402,000, respectively.
Impaired loans amounting to $1,578,000 and $2,902,000 were on a non-accruing
basis at December 31, 1998 and 1997, respectively. Substantially all of the
impaired loans were collateral dependent and were measured using the fair value
of the collateral. For the years ended December 31, 1998, 1997 and 1996, the
Bank recognized interest income on these impaired loans of $115,000, $390,000
and $159,000, respectively. The average outstanding principal balance of
impaired loans was $4,010,000, $4,770,000 and $4,585,000 during 1998, 1997 and
1996, respectively.
From time to time, the Bank has originated first and second mortgages for
resale on the secondary market to Federal Home Loan Mortgage Corporation
(FHLMC), and Federal National Mortgage Association (FNMA). Any gains or losses
on the sales of these loans are recognized at the time of sale. The Bank retains
servicing rights to these loans. Servicing arrangements provide for the Bank to
maintain all records related to the servicing agreement,
F-22
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. LOANS AND LEASES, NET (CONTINUED)
to assume responsibility for billing mortgagors, to collect periodic mortgage
payments, and to perform various other activities necessary to the mortgage
servicing function. The Bank receives as compensation a servicing fee based on
the principal balance of the outstanding loans. Servicing fee income amounted to
approximately $57,000 during 1998, $92,000 during 1997, and $108,000 during
1996. The total unpaid principal balance of the mortgage servicing portfolio
amounted to approximately $18,333,000 and $23,617,000 at December 31, 1998 and
1997, respectively.
The Bank has pledged certain qualifying residential loans amounting to $0
and $5,794,000 at December 31, 1998 and 1997, respectively, to secure public
deposits, as required by state law.
The activity in the allowance for loan and lease losses is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at Beginning of Year........................ $ 2,116,000 $ 2,241,000 $ 2,135,000
Recoveries on loans previously charged off.......... 298,000 76,000 20,000
Loans charged off................................... (182,000) (451,000) (902,000)
Provision charged to operating expense.............. -- 250,000 988,000
------------ ------------ ------------
Balance at End of Year.............................. $ 2,232,000 $ 2,116,000 $ 2,241,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
As part of its normal banking activities, the Bank has extended credit to
certain directors and officers and the companies with which they are associated
(related parties). All related party loans were current as to principal and
interest as of December 31, 1998 and 1997. In management's opinion, these loans
were made in the ordinary course of business at prevailing rates and terms.
Total commitments for such loans amounted to $2,585,000 and $3,330,000 at
December 31, 1998 and 1997, of which $237,000 and $425,000 were undisbursed,
respectively. There were no new commitments on such loans, and expired loan
commitments amounted to $160,000. Advances on existing commitments were $28,000
in 1998, with repayments of $585,000.
F-23
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
4. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land.............................................................. $ 211,000 $ 211,000
Buildings......................................................... 985,000 983,000
Furniture and equipment........................................... 1,499,000 1,319,000
Leasehold improvements............................................ 355,000 343,000
------------ ------------
3,050,000 2,856,000
Less: Accumulated depreciation and amortization................... (1,509,000) (1,219,000)
------------ ------------
Total......................................................... $ 1,541,000 $ 1,637,000
------------ ------------
------------ ------------
</TABLE>
The amount of depreciation and amortization included in operating expense
was $299,000, $259,000, and $287,000 for the years ended December 31, 1998,
1997, and 1996, respectively.
The Bank occupies its office premises under separate long-term,
noncancellable leases which expire in various years through 2004. All leases are
accounted for as operating leases. At December 31, 1998, future minimum lease
commitments and future minimum sublease rental income under all noncancellable
leases are as follows:
<TABLE>
<CAPTION>
LEASE
COMMITMENTS
-------------
<S> <C>
1999........................................................................... $ 355,000
2000........................................................................... 354,000
2001........................................................................... 312,000
2002........................................................................... 203,000
2003........................................................................... 95,000
Succeeding Years............................................................... 5,000
-------------
Total........................................................................ $ 1,324,000
-------------
-------------
</TABLE>
F-24
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
5. INCOME TAXES
The current and deferred amounts of the provisions for (benefit from) income
taxes for the years ended December 31, 1998, 1997, and 1996 consisted of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal........................................... $ 1,320,000 $ 1,106,000 $ 1,059,000
State............................................. 516,000 378,000 357,000
------------ ------------ ------------
Total........................................... 1,836,000 1,484,000 1,416,000
------------ ------------ ------------
Deferred:
Federal........................................... 197,000 353,000 (311,000)
State............................................. 2,000 160,000 (96,000)
------------ ------------ ------------
Total........................................... 199,000 513,000 (407,000)
------------ ------------ ------------
$ 2,035,000 $ 1,997,000 $ 1,009,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Deferred taxes arise from temporary differences between income reported for
financial reporting purposes and that reported for federal and state income tax
purposes. The tax effects of the principal temporary differences resulting in
deferred taxes were:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Expenses reported on a different basis for tax
purposes.............................................. $ 231,000 $ 443,000 $ (342,000)
Depreciation computed differently on tax returns than
for financial statements.............................. (16,000) (3,000) (18,000)
Deferred compensation................................... (16,000) (12,000) (13,000)
Provision for loan and lease losses deducted in tax
return over (under) amount charged for financial
statement purposes.................................... 0 85,000 (34,000)
---------- ---------- -----------
$ 199,000 $ 513,000 $ (407,000)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-25
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
5. INCOME TAXES (CONTINUED)
Total tax expense differed from the amount computed using the federal
statutory rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Tax expense at federal statutory
rate................................. $ 1,652,000 34.0% $ 1,632,000 34.0% $ 810,000 34.0%
State income tax, net of federal tax
benefit.............................. 342,000 7.0 355,000 7.4 172,000 7.2
Tax exempt interest.................... 0 0.0 (1,000) (0.0) (4,000) (0.2)
Other.................................. 41,000 0.9 11,000 0.2 31,000 1.4
------------ --- ------------ --- ------------ ---
Total................................ $ 2,035,000 41.9% $ 1,997,000 41.6% $ 1,009,000 42.4%
------------ --- ------------ --- ------------ ---
------------ --- ------------ --- ------------ ---
</TABLE>
At December 31, 1998 and 1997, the components of the net deferred tax asset
which is included in other assets on the accompanying consolidated balance
sheets were as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ------------
<S> <C> <C>
Allowance for loan and lease losses................................. $ 590,000 $ 590,000
Deferred compensation............................................... 245,000 229,000
Other real estate owned............................................. 0 13,000
State income tax.................................................... 175,000 128,000
Depreciation........................................................ 53,000 37,000
Other............................................................... (157,000) 108,000
---------- ------------
Total............................................................. $ 906,000 $ 1,105,000
---------- ------------
---------- ------------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
In order to meet the financing needs of its customers in the normal course
of business, the Bank is a party to financial instruments with off-balance sheet
risk. These financial instruments include commitments to extend credit and
standby letters of credit. Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The Bank does not
enter into any interest rate swaps or caps, or forward or future contracts.
The nature of the off-balance sheet risk inherent in these instruments is
the possibility of accounting losses resulting from (1) the failure of another
party to perform according to the
F-26
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
terms of a contract that would cause a draw on a standby letter of credit, or
(2) changes in market rates of interest for those few commitments and
undisbursed loans which have fixed rates of interest. To minimize this risk, the
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The decision as to
whether collateral should be required is based on the circumstances of each
specific commitment or conditional obligation.
To varying degrees, these instruments involve elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheets. The Bank's exposure to credit loss in the event of
non-performance by the other party to the financial instruments for commitments
to extend credit and standby letters of credit is represented by the contractual
amount of those instruments. At December 31, 1998, the Bank had commitments to
extend credit of approximately $9,752,000 and obligations under standby letters
of credit of approximately $1,116,000. Management does not believe there will be
any material losses as a result of these letters of credit and loan commitments.
At December 31, 1998, the Bank has available a borrowing line of credit with
the FHLB in the amount of $14,163,000 using previously approved residential and
commercial real estate mortgage loans totaling $21,253,000 to secure the line of
credit. There was no utilization of this line of credit during 1998.
The Bank has available reverse repurchase lines of credit with two
broker/dealers aggregating $30,000,000 at December 31, 1998. These lines are
subject to normal terms for such arrangements. There was no utilization of these
lines during 1998. At December 31, 1998, investment securities with a market
value of approximately $14,000,000 were available for these reverse repurchase
lines of credit.
The Bank is required to maintain reserve balances with the Federal Reserve
Bank. The amounts of these reserve balances at December 31, 1998 and 1997 were
$692,000 and $721,000, respectively.
In April 1997, litigation relating to the acquisition of Inland Savings and
Loan (Inland) was filed against the Bank and certain of its directors alleging
improper adjustments to the value of the Bank's Preferred stock (see Note 9).
The named plaintiffs have sued on behalf of a class consisting of former owners
of the Bank's Preferred stock. The action alleges breach of contract and breach
of fiduciary duty and seeks compensatory damages in excess of $2 million
together with punitive damages. The Bank contends that these allegations are
without merit, and intends to vigorously defend against these claims. Any
potential losses to the Bank as a result of this action are not reasonably
estimable, and accordingly no reserve for loss has been established in the
accompanying consolidated financial statements. Any losses which might be
suffered by the Bank related to this proceeding could impact the Bank's future
profitability.
F-27
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition, the Bank is a defendant in various legal proceedings resulting
from normal banking business. In the opinion of management and the Bank's legal
counsel, the disposition of such litigation will not have a material effect on
the Bank's consolidated financial condition or results of operations.
7. STOCK OPTION PLAN
In January 1987, the former Hemet Bancorp established a stock option plan
(the 1987 Plan) which was assumed by the Bank that provides for the granting of
incentive and nonqualified stock options to certain full-time salaried officers
and management level employees. Additionally, in June 1994, the Bank established
a second stock option plan (the 1994 Plan) which authorized the issuance of
75,000 shares, of which 31,000 shares were granted in 1994 and 21,000 shares
were granted in 1997 to various officers of the Bank. As of December 31, 1998,
there were no shares of common stock granted under the 1987 Plan. At December
31, 1998, 27,000 shares of common stock were reserved for grant under the 1994
Plan which includes 4,000 shares forfeited during 1996. The stock options are
exercisable at a price equal to market value on the date of grant. Options
expire not more than ten years after the date of grant. Options are exercisable
at 20% of the options outstanding per year. Transactions for the three years
ended December 31, 1998, are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
----------- ---------------
<S> <C> <C>
Balance, December 31, 1995..................................... 89,938 $ 9.00
Options exercised (1987 Plan)................................ (58,938) $ 7.51
Options exercised (1994 Plan)................................ (1,032) $ 12.00
Options forfeited (1994 Plan)................................ (4,000) $ 12.00
Options granted.............................................. --
-----------
Balance, December 31, 1996..................................... 25,968 $ 12.00
Options exercised............................................ --
Options granted (1994 Plan).................................. 21,000 $ 22.50
-----------
Balance, December 31, 1997..................................... 46,968 $ 16.69
Options exercised............................................ --
Options granted (1994 Plan).................................. --
-----------
Balance, December 31, 1998..................................... 46,968 $ 16.69
-----------
-----------
Exercisable at December 31, 1998............................... 24,968 $ 13.77
</TABLE>
The Bank accounts for options according to Accounting Principles Board
Opinion No. 25, under which no compensation cost is recognized. The Bank's pro
forma net income and diluted earnings per share assuming the Bank recorded
compensation cost in 1998 and 1997 for the options granted in 1997 in accordance
with SFAS No. 123 would not have a material effect on the Bank's consolidated
results of operations. Pro forma disclosures are not
F-28
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
7. STOCK OPTION PLAN (CONTINUED)
presented for 1996 because there were no options granted during that year.
Because the method of accounting required under SFAS No. 123 is not applicable
for options granted prior to January 1, 1996, the pro forma impact of
compensation costs on net income and diluted earnings per share as presented
above may not be representative of the impact which could be realized in future
years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997: risk-free interest rate of 6.25%, dividend
yield of 6%, expected life of 5 years, and expected volatility of 25%.
8. OTHER EXPENSES
The following is a breakdown of other expenses for the years ended December
31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Data processing and other outside services.......... $ 326,000 $ 363,000 $ 357,000
Deposit insurance assessments....................... 84,000 87,000 191,000
Special SAIF assessment............................. -- -- 402,000
Professional fees................................... 418,000 383,000 318,000
Office supplies, postage and telephone.............. 488,000 435,000 433,000
Other............................................... 720,000 670,000 596,000
------------ ------------ ------------
Total............................................. $ 2,036,000 $ 1,938,000 $ 2,297,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
9. BUSINESS COMBINATIONS
On October 16, 1992, the Bank acquired Inland Savings and Loan Association
and subsidiaries in a business combination accounted for as a purchase under
Accounting Principles Board Opinion No. 16. Inland Savings and Loan was
primarily engaged in banking services. The shareholders of Inland Savings and
Loan received .31474 shares of the Bank's Series 'C' Preferred stock (the
Preferred stock) and .31474 shares of the Bank's common stock, for each share of
Inland Savings and Loan stock. The Preferred stock had cumulative dividends of
5% per annum of the stock's stated value, payable semi-annually on the 15th of
March and September each year. The stated value of the Preferred stock
represented the original book value of the stock, less certain charges against
that value, as defined and provided for in the purchase agreement and as
detailed below. Charges against the stated value of the Preferred stock
subsequent to 1992 represented period costs that were charged to operations as
incurred and that were subsequently charged against the stated value of
Preferred stock through an equity transfer from Preferred stock to retained
earnings.
Voting rights for the Preferred stock equaled 1/10 of a share of the Bank's
common stock. The Preferred stock was automatically converted to the Bank's
common stock on September 15, 1995 using a ratio of the Preferred stock's stated
value to the Bank's adjusted net
F-29
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
9. BUSINESS COMBINATIONS (CONTINUED)
book value, as defined in the purchase agreement. The number of shares of common
stock delivered upon the automatic conversion of Preferred stock was equal to
.1542 shares of common stock for each share of Preferred stock for a total of
20,804 shares of common stock. In November 1996, an amendment to the conversion
resulted in the issuance of an additional 6,533 in common shares, an increase in
the stated value by $147,000 (principally related to the reversal of tax
assessments), and a revised exchange ratio of .2027 shares of common stock for
each share of Preferred stock. See Note 6 for a discussion of litigation
regarding adjustments to the value of the Preferred stock.
As a result of the mark-to-market analysis of the Inland Savings and Loan
purchase, various asset and liability accounts were adjusted to appropriate
market values. The significant valuations were in the areas of loans, other real
estate owned, Bank premises, time deposits, other borrowings, and a core deposit
intangible. Amortization of each of the mark-to-market valuation accounts is
taken over their expected useful lives, as estimated in the original mark to
market analysis. The Bank periodically reviews the estimated useful lives of the
mark-to-market assets and liabilities and makes adjustments as necessary.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates of financial instruments for both assets and
liabilities are made at a discrete point in time based on relevant market
information and information about the financial instruments. Because no active
market exists for a significant portion of the Bank's financial instruments,
fair value estimates are based on judgments regarding current economic
conditions, risk characteristics of various financial instruments, prepayment
assumptions, future expected loss experience and other such factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
The Bank intends to hold the majority of its assets and liabilities to their
stated maturities. Thus, management does not believe that the bulk sale concepts
applied to certain problem loans for purposes of measuring the impact of credit
risk on fair values of said assets is reasonable to the operations of the Bank
and does not fairly present the values realizable over the long term on assets
that will be retained by the Bank. Therefore, the Bank does not intend to
realize any significant differences between carrying value and fair value
through sale or other disposition. No attempt should be made to adjust
stockholders' equity to reflect the following fair value disclosures as
management believes them to be inconsistent with the philosophies and operations
of the Bank.
In addition, the fair value estimates are based on existing on-and
off-balance sheet financial instruments without attempting to estimate the value
of existing and anticipated future customer relationships and the value of
assets and liabilities that are not considered financial
F-30
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
instruments. Significant assets and liabilities that are not considered
financial assets or liabilities include the branch network, deferred tax assets,
other real estate owned, and premises and equipment.
The following methods and assumptions were used to estimate the fair value
of financial instruments.
INVESTMENT SECURITIES
For U.S. government agency securities, fair values are based on market
prices. For other investment securities, 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.
LOANS
The fair value for loans with variable interest rates is the carrying
amount. The fair value of fixed rate loans is derived by calculating the
discounted value of future cash flows expected to be received by the various
homogeneous categories of loans. All loans have been adjusted to reflect changes
in credit risk.
DEPOSITS
The fair value of demand deposits, savings deposits, and money market
deposits are defined as the amounts payable on demand at year end. The fair
value of fixed maturity certificates of deposit is estimated based on the
discounted value of the future cash flows expected to be paid on the deposits.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the parties involved. For fixed
rate loan commitments, fair value also considers the difference between current
levels of interest rates and committed rates. The fair value of these unrecorded
financial instruments is not material to the Bank's financial position or fair
value disclosures at December 31, 1998 and 1997 (see Note 6).
F-31
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- --------------
<S> <C> <C>
DECEMBER 31, 1998
Financial Assets
Cash and cash equivalents.................................. $ 16,996,000 $ 16,996,000
Investment securities...................................... 24,882,000 24,884,000
Loans and leases, net...................................... 205,570,000 207,369,000
Financial Liabilities
Deposits................................................... 230,385,000 231,000,000
DECEMBER 31, 1997
Financial Assets
Cash and cash equivalents.................................. $ 19,521,000 $ 19,521,000
Investment securities...................................... 24,833,000 24,842,000
Loans and leases, net...................................... 190,171,000 190,176,000
Financial Liabilities
Deposits................................................... 219,211,000 219,283,000
</TABLE>
11. REGULATORY MATTERS
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank is required to maintain certain minimum capital
levels in relation to Bank assets. Under regulations, banks are categorized as
critically undercapitalized, significantly undercapitalized, undercapitalized,
adequately capitalized and well capitalized. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. According to regulatory
guidelines, the Bank is considered well capitalized as measured using a leverage
ratio, as well as based on risk-weighting assets.
F-32
<PAGE>
THE BANK OF HEMET AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
11. REGULATORY MATTERS (CONTINUED)
A comparison of the Bank's actual regulatory capital with minimum
requirements for adequately capitalized and well capitalized banks, as defined
by regulation, is shown below.
<TABLE>
<CAPTION>
TO BE ADEQUATELY TO BE WELL CAPITALIZED
ACTUAL CAPITALIZED
------------------------ -------------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- --------- ------------- ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Tier 1 Risk-Based Capital (To Risk Weighted
Assets)................................... $ 21,024,000 9.99% $ 8,413,000 4.0% $ 12,621,000 6.0%
Total Risk-Based Capital (To Risk Weighted
Assets)................................... $ 23,257,000 11.06% $ 16,827,000 8.0% $ 21,036,000 10.0%
Tier 1 Capital (To Average Assets).......... $ 21,024,000 8.31% $ 10,115,000 4.0% $ 12,645,000 5.0%
AS OF DECEMBER 31, 1997
Tier 1 Risk-Based Capital (To Risk Weighted
Assets)................................... $ 20,228,000 10.43% $ 7,753,000 4.0% $ 11,630,000 6.0%
Total Risk-Based Capital (To Risk Weighted
Assets)................................... $ 22,344,000 11.53% $ 15,507,000 8.0% $ 19,384,000 10.0%
Tier 1 Capital (To Average Assets).......... $ 20,228,000 8.53% $ 9,486,000 4.0% $ 11,858,000 5.0%
</TABLE>
12. SUBSEQUENT EVENT (UNAUDITED)
On January 5, 1999, the Bank announced the signing of a revised definitive
agreement with Pacific Community Banking Group ("PCBG") for the acquisition by
PCBG of the Bank. The agreement provides for total consideration of $51.00 per
share, as well as one PCBG warrant per share, upon consummation of the
acquisition. The warrant will allow the holder to purchase one share of PCBG
common stock during a ten-year period at an exercise price 22% above the initial
public offering price of PCBG common stock. The price to be paid to each of the
Bank's shareholders may be increased in accordance with a formula related to the
aggregate net proceeds to be received by PCBG in the underwritten initial public
offering. The consummation of the acquisition is subject to certain conditions
including continuation of the Bank's operating results, regulatory and
shareholder approval and certain other conditions. The acquisition is also
subject to the successful completion of an underwritten initial public offering
by PCBG whereby the proceeds of such offering will be used to make the cash
payment to selling shareholders of the Bank and to purchase the outstanding
shares of Valley Bank in Moreno Valley, California. The values allocated to the
assets and liabilities of the Bank could be different than those included in
these consolidated financial statements.
F-33
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Valley Bank
Moreno Valley, California
We have audited the accompanying balance sheets of Valley Bank as of
December 31, 1998 and 1997, and the related statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Valley Bank as of December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
McGLADREY & PULLEN, LLP
San Bernardino, California
January 15, 1999
F-34
<PAGE>
VALLEY BANK
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks............................................................ $ 6,485,000 $ 5,487,000
Federal funds sold................................................................. 13,780,000 4,800,000
Held-to-maturity securities, fair value of 1998 $15,642,000; 1997 $13,920,000 (Note
2)............................................................................... 15,585,000 13,856,000
Loans, net of allowance for loan losses of 1998 $1,118,000; 1997 $1,058,000 (Notes
3, 4 and 10)..................................................................... 41,437,000 44,202,000
Loans held for sale (Note 3)....................................................... 594,000 --
Bank premises and equipment, net (Note 5).......................................... 2,158,000 2,160,000
Other real estate owned............................................................ 1,749,000 1,711,000
Accrued interest receivable........................................................ 611,000 561,000
Cash surrender value of life insurance (Note 9).................................... 712,000 661,000
Deferred tax assets (Note 7)....................................................... 730,000 642,000
Other assets....................................................................... 868,000 486,000
------------- -------------
TOTAL ASSETS................................................................. $ 84,709,000 $ 74,566,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Notes 2 and 6):
Noninterest-bearing demand..................................................... $ 20,061,000 $ 17,517,000
Interest bearing:
Demand....................................................................... 27,618,000 23,964,000
Savings...................................................................... 11,610,000 11,268,000
Other time................................................................... 16,450,000 13,490,000
------------- -------------
TOTAL DEPOSITS............................................................... 75,739,000 66,239,000
Accrued interest payable and other liabilities (Note 9).......................... 238,000 456,000
ESOP bank notes payable (Note 9)................................................. 478,000 579,000
------------- -------------
TOTAL LIABILITIES............................................................ 76,455,000 67,274,000
------------- -------------
Commitments and Contingencies (Notes 8 and 9)
Stockholders' Equity (Notes 9, 11 and 12)
Common stock, $5 par value; 2,400,000 shares authorized; issued and outstanding
1,171,906 shares............................................................... 5,860,000 5,860,000
Surplus.......................................................................... 142,000 77,000
Retained earnings................................................................ 2,684,000 1,895,000
------------- -------------
8,686,000 7,832,000
Less unearned ESOP shares 1998 87,794; 1997 109,410.............................. 432,000 540,000
------------- -------------
TOTAL STOCKHOLDERS' EQUITY................................................... 8,254,000 7,292,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $ 84,709,000 $ 74,566,000
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
F-35
<PAGE>
VALLEY BANK
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest income on:
Loans................................................................. $ 4,959,000 $ 4,784,000 $ 4,266,000
Securities, taxable................................................... 724,000 764,000 703,000
Securities, nontaxable................................................ 54,000 76,000 100,000
Federal funds sold.................................................... 444,000 354,000 269,000
------------ ------------ ------------
TOTAL INTEREST INCOME............................................... 6,181,000 5,978,000 5,338,000
------------ ------------ ------------
Interest expense on:
Deposits.............................................................. 1,387,000 1,227,000 1,109,000
Other borrowings...................................................... 51,000 55,000 10,000
------------ ------------ ------------
1,438,000 1,282,000 1,119,000
------------ ------------ ------------
Net interest income before provision for loan losses................ 4,743,000 4,696,000 4,219,000
Provision for loan losses (Note 4)...................................... 200,000 980,000 360,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES................. 4,543,000 3,716,000 3,859,000
------------ ------------ ------------
Other income:
Service charges and other fees........................................ 1,714,000 1,858,000 1,657,000
Gain on sale of loans................................................. 1,057,000 772,000 375,000
Other................................................................. 144,000 89,000 103,000
------------ ------------ ------------
2,915,000 2,719,000 2,135,000
------------ ------------ ------------
Other expenses:
Salaries, wages and employee benefits (Note 9)........................ 3,272,000 3,019,000 2,639,000
Furniture and equipment............................................... 441,000 426,000 452,000
Occupancy and expenses (Note 8)....................................... 480,000 476,000 451,000
Other real estate..................................................... 41,000 294,000 401,000
Legal and professional services....................................... 892,000 558,000 560,000
Telephone and postage................................................. 214,000 199,000 183,000
Office supplies....................................................... 114,000 139,000 164,000
Other................................................................. 631,000 526,000 361,000
------------ ------------ ------------
6,085,000 5,637,000 5,211,000
------------ ------------ ------------
Income before income taxes.......................................... 1,373,000 798,000 783,000
Income tax expense (Note 7)............................................. 584,000 242,000 329,000
------------ ------------ ------------
NET INCOME.......................................................... $ 789,000 $ 556,000 $ 454,000
------------ ------------ ------------
------------ ------------ ------------
Basic earnings per share................................................ $ 0.73 $ 0.53 $ 0.41
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings per share.............................................. $ 0.65 $ 0.51 $ 0.41
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Notes to Financial Statements
F-36
<PAGE>
VALLEY BANK
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK UNEARNED
------------------------ RETAINED ESOP SHARES
SHARES PAR VALUE SURPLUS EARNINGS (NOTE 9) TOTAL
---------- ------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995....... 1,108,701 $ 5,544,000 $ -- $ 1,218,000 $ -- $ 6,762,000
Net income..................... -- -- -- 454,000 -- 454,000
Issuance of ESOP notes
payable...................... -- -- -- -- (327,000) (327,000)
ESOP shares committed to be
released..................... -- -- 3,000 -- 10,000 13,000
---------- ------------ ---------- ------------ ----------- ------------
Balance, December 31, 1996....... 1,108,701 5,544,000 3,000 1,672,000 (317,000) 6,902,000
Net income..................... -- -- -- 556,000 -- 556,000
Stock dividend declared........ 55,333 277,000 55,000 (332,000) -- --
Cash paid in lieu of fractional
shares....................... -- -- -- (1,000) -- (1,000)
Issuance of ESOP notes
payable...................... -- -- -- -- (278,000) (278,000)
ESOP shares committed to be
released..................... -- -- 16,000 -- 55,000 71,000
Stock options exercised........ 7,872 39,000 3,000 -- -- 42,000
---------- ------------ ---------- ------------ ----------- ------------
Balance, December 31, 1997....... 1,171,906 5,860,000 77,000 1,895,000 (540,000) 7,292,000
Net income..................... -- -- -- 789,000 -- 789,000
ESOP shares committed to be
released..................... -- -- 65,000 -- 108,000 173,000
---------- ------------ ---------- ------------ ----------- ------------
Balance, December 31, 1998....... 1,171,906 $ 5,860,000 $ 142,000 $ 2,684,000 $ (432,000) $ 8,254,000
---------- ------------ ---------- ------------ ----------- ------------
---------- ------------ ---------- ------------ ----------- ------------
</TABLE>
See Notes to Financial Statements.
F-37
<PAGE>
VALLEY BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income.............................................................. $ 789,000 $ 556,000 $ 454,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 320,000 325,000 378,000
Provision for loan losses............................................. 200,000 980,000 360,000
Net amortization and accretion of bond premiums and discounts......... (38,000) 6,000 125,000
Amortization of deferred gain on SBA loan sales....................... (127,000) (69,000) (47,000)
Write-down of other real estate owned................................. 58,000 64,000 119,000
Change in deferred taxes.............................................. (88,000) (346,000) (143,000)
ESOP shares committed to be released.................................. 173,000 71,000 13,000
Proceeds from sale of loans held for sale............................. 14,626,000 12,059,000 7,725,000
Origination/transfer of loans held for sale........................... (13,851,000) (10,111,000) (7,532,000)
Loss on sale of bank premises and equipment........................... 26,000 -- --
(Gain) on sale of loans held for sale................................. (1,057,000) (772,000) (375,000)
(Gain) loss on sale of other real estate owned........................ 8,000 (2,000) 244,000
(Increase) in interest receivable and other assets.................... (510,000) (327,000) (193,000)
Increase (decrease) in accrued interest and other liabilities......... (218,000) (98,000) 328,000
----------- ----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................... 311,000 2,336,000 1,456,000
----------- ----------- ----------
Cash Flows from Investing Activities
Purchase of securities held to maturity................................. (14,000,000) (6,500,000) (5,500,000)
Proceeds from maturities of securities held to maturity................. 12,309,000 5,566,000 7,550,000
Change in loans made to customers, net.................................. 1,748,000 (4,971,000) (695,000)
Purchase of residential lot loans....................................... -- -- (6,988,000)
Net (increase) decrease in federal funds sold........................... (8,980,000) 524,000 (222,000)
Proceeds from sale of bank premises and equipment....................... 5,000 -- 56,000
Proceeds from sale of other real estate owned........................... 555,000 277,000 156,000
Purchases of bank premises and equipment................................ (349,000) (249,000) (249,000)
----------- ----------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES............................. (8,712,000) (5,353,000) (5,892,000)
----------- ----------- ----------
Cash Flows from Financing Activities
Net increase in deposits................................................ 9,500,000 2,953,000 4,285,000
Dividends paid.......................................................... -- (1,000) --
Exercise of stock options............................................... -- 42,000 --
Principal payments on ESOP bank note payable............................ (101,000) (26,000) --
----------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................... 9,399,000 2,968,000 4,285,000
----------- ----------- ----------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS...................... 998,000 (49,000) (151,000)
Cash and Due from Banks
Beginning............................................................... 5,487,000 5,536,000 5,687,000
----------- ----------- ----------
Ending.................................................................. $ 6,485,000 $ 5,487,000 $5,536,000
----------- ----------- ----------
----------- ----------- ----------
Supplemental disclosures of cash flow information:
Cash payments for:
Interest.............................................................. $ 1,382,000 $ 1,222,000 $1,104,000
----------- ----------- ----------
----------- ----------- ----------
Income taxes paid..................................................... $ 1,037,000 $ 416,000 $ 323,000
----------- ----------- ----------
----------- ----------- ----------
Supplemental schedule of noncash investing and financing activities:
Issuance of ESOP notes payable to purchase Bank stock................... $ -- $ 278,000 $ 327,000
----------- ----------- ----------
----------- ----------- ----------
Other real estate acquired in settlement of loans....................... $ 710,000 $ 906,000 $ 108,000
----------- ----------- ----------
----------- ----------- ----------
Loans acquired in exchange for other real estate owned.................. $ 50,000 $ -- $1,000,000
----------- ----------- ----------
----------- ----------- ----------
Stock dividend declared................................................. $ -- $ 332,000 $ --
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See Notes to Financial Statements
F-38
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BANKING ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF OPERATIONS
Valley Bank (the Bank) provides a full range of banking services to its
commercial and consumer customers through seven branches located in the Inland
Empire and the low desert areas of Southern California and a lending office
located in Portland, Oregon.
The Bank grants commercial, residential and consumer loans to customers,
substantially all of whom are middle-market businesses or residents. The Bank's
business is concentrated in the Inland Empire, the low desert area of Southern
California and Portland, Oregon. The loan portfolio includes significant credit
exposure to the real estate industry (commercial and residential) of these
areas. As of December 31, 1998, real estate-related loans accounted for
approximately 69% of total loans. Substantially all of these loans are secured
by first liens with an initial loan-to-value ratio of generally not more than
70%. Less than 10% of commercial loans are unsecured. The loans are expected to
be repaid from cash flows or proceeds from the sale of selected assets of the
borrowers. The Bank's policy requires that collateral be obtained on
substantially all loans. Such collateral is primarily first trust deeds on
property.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND DUE FROM BANKS
For purposes of reporting cash flows, cash and due from banks includes cash
on hand and amounts due from banks. Cash flows from loans originated by the
Bank, deposits and federal funds sold are reported net.
The Bank maintains amounts due from banks which, at times, may exceed
federally insured limits. The Bank has not experienced any losses in such
accounts.
The Bank is required to maintain reserve balances in cash or on deposit with
Federal Reserve Banks. The total of those reserve balances was approximately
$1,351,000 and $1,197,000 as of December 31, 1998 and 1997, respectively.
SECURITIES HELD TO MATURITY
Securities classified as held to maturity are those debt securities the Bank
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of premiums and
accretion of discount, computed by the interest method over their contractual
lives.
F-39
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BANKING ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
The sale of a security within three months of its maturity date or after at
least 85% of the principal outstanding has been collected is considered a
maturity for purposes of classification and disclosure.
LOANS
Loans are stated at the amount of unpaid principal, reduced by unearned fees
and an allowance for loan losses.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb estimated losses on existing loans that may become uncollectible,
based on evaluation of the collectibility of loans and prior loan loss
experience. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans and current economic conditions that
may affect the borrower's ability to pay.
While management uses the best information available to make its evaluation,
future adjustments to the allowance may be necessary if there are significant
changes in economic or other conditions. In addition, the Federal Deposit
Insurance Corporation (FDIC) and California Department of Financial
Institutions, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses and may require the Bank to make
additions to the allowance based on their judgment about information available
to them at the time of their examinations.
A loan is impaired when it is probable the creditor will be unable to
collect all contractual principal and interest payments due in accordance with
the terms of the loan agreement. Impaired loans are measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
The amount of impairment, if any, and any subsequent changes are included in the
allowance for loan losses.
INTEREST AND FEES ON LOANS
Interest on loans is recognized over the terms of the loans and is
calculated using the simple-interest method on principal amounts outstanding.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
the accrual of interest is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
F-40
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BANKING ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amount amortized as an adjustment of the related
loan's yield. The Bank is generally amortizing these amounts over the
contractual life.
SALE OF LOANS
The Bank sells the guaranteed and unguaranteed portion of Small Business
Administration (SBA) loans in the secondary market to provide funds for
additional lending and to generate servicing income. Under such agreements, the
Bank continues to service the loans and the buyer receives the principal
collected together with interest. Loans held for sale are valued at the lower of
cost or market value.
The Bank has issued various representations and warranties associated with
the sale of loans. These representations and warranties may require the Bank to
repurchase loans for a period of 90 days after the date of sale as defined per
the applicable sales agreement. The Bank experienced no losses during the years
ended December 31, 1998 and 1996 regarding these representations and warranties.
Reference should be made to Note 8 for losses incurred in 1997.
The Bank serviced approximately $28,594,000 and $22,425,000 of loans for SBA
as of December 31, 1998 and 1997, respectively, which are not included in the
accompanying balance sheets (see Note 8).
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed principally by the straight-line
method over the estimated useful lives of the assets. Improvements to leased
property are amortized over the lesser of the term of the lease or life of the
improvements.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) represents properties acquired through
foreclosure or other proceedings. OREO is held for sale and is recorded at the
lower of the carrying amounts of the related loans or the estimated fair value
of the properties less estimated costs of disposal. Any write-down to estimated
fair value less cost to sell at the time of transfer to OREO is charged to the
allowance for loan losses. Property is evaluated regularly by management and
reduction of the carrying amounts to estimated fair value less estimated costs
to dispose are recorded as necessary. Revenue and expense from the operations of
OREO and changes in the valuation allowance are included in expenses.
F-41
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BANKING ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when management determines that it
is more likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the Bank's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates presented herein are not necessarily indicative of the amounts
the Bank could have realized in a sales transaction at December 31, 1998 or
1997. The estimated fair value amounts for 1998 and 1997 have been measured as
of year end, and have not been reevaluated or updated for purposes of these
financial statements subsequent to that date. As such, the estimated fair values
of these financial instruments subsequent to the reporting date may be different
than the amounts reported at year end.
The information in Note 13 should not be interpreted as an estimate of the
fair value of the entire Bank since a fair value calculation is only required
for a limited portion of the Bank's assets.
Due to the wide range of valuation techniques and the degree of subjectivity
used in making the estimate, comparisons between the Bank's disclosures and
those of other banks may not be meaningful.
The following methods and assumptions were used by the Bank in estimating
the fair value of its financial instruments:
CASH
The carrying amounts reported in the balance sheets for cash and due
from banks and federal funds sold approximate their fair value.
SECURITIES
Fair value for securities held to maturity is based on quoted market
prices.
F-42
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BANKING ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LOANS
For variable rate loans that reprice frequently and that have
experienced no significant change in credit risk, fair value is based on
carrying value. At December 31, 1998 and 1997, variable rate loans comprised
approximately 90% and 86%, respectively, of the loan portfolio. Fair value
for all other loans is estimated based on discounted cash flows, using
interest rates currently being offered for loans with similar terms to
borrowers with similar credit quality. Prepayments prior to the repricing
date are not expected to be significant. Loans are expected to be held to
maturity and any unrealized gains or losses are not expected to be realized.
LOANS HELD FOR SALE
Fair value is based on quoted market prices of similar loans sold on the
secondary market.
OFF-BALANCE-SHEET INSTRUMENTS
Fair value for off-balance-sheet instruments (guarantees, letters of
credit and lending commitments) is based on quoted fees currently charged to
enter into similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standing.
DEPOSIT LIABILITIES
Fair value disclosed for demand deposits equals their carrying amounts,
which represent the amount payable on demand. The carrying amounts for
variable rate money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair value for fixed rate
certificates of deposit is estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregate expected monthly maturities on time
deposits. Early withdrawal of fixed rate certificates of deposit are not
expected to be significant.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The fair value of both accrued interest receivable and payable
approximates their carrying amounts.
ESOP BANK NOTES PAYABLE
The fair value of the ESOP bank notes payable approximates their
carrying amounts.
F-43
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BANKING ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
OTHER OFF-BALANCE-SHEET INSTRUMENTS
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commercial letters of credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they are
funded.
EARNINGS PER SHARE
Components used in computing earnings per share (EPS) for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------- ----------------------------------- ----------------------
INCOME SHARES PER- INCOME SHARES PER- INCOME SHARES
(NUMER- (DENOMI- SHARE (NUMER- (DENOMI- SHARE (NUMER- (DENOMI-
ATOR) NATOR) AMOUNT ATOR) NATOR) AMOUNT ATOR) NATOR)
--------- ----------- ----------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to common
stockholders................ $ 789,000 1,084,112 $ 0.73 $ 556,000 1,055,293 $ 0.53 $ 454,000 1,094,211
EFFECT OF DILUTIVE SECURITIES
Options....................... -- 129,740 -- 42,151 -- 23,543
--------- ----------- ----- --------- ----------- ----- --------- -----------
DILUTED EPS
Income available to common
stockholders + assumed
conversions................. $ 789,000 1,213,852 $ 0.65 $ 556,000 1,097,444 $ 0.51 $ 454,000 1,117,754
--------- ----------- ----- --------- ----------- ----- --------- -----------
--------- ----------- ----- --------- ----------- ----- --------- -----------
<CAPTION>
PER-
SHARE
AMOUNT
-----------
<S> <C>
BASIC EPS
Income available to common
stockholders................ $ 0.41
EFFECT OF DILUTIVE SECURITIES
Options.......................
-----
DILUTED EPS
Income available to common
stockholders + assumed
conversions................. $ 0.41
-----
-----
</TABLE>
The average number of common shares outstanding excludes 87,794, 109,410 and
69,823 shares owned by the Employee Stock Ownership Plan (ESOP) that have not
been committed to be released as of December 31, 1998, 1997 and 1996,
respectively. See Note 9 for further information regarding the shares owned by
the ESOP.
CURRENT ACCOUNTING DEVELOPMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
new standard is effective for the year 2000 and is not expected to have a
material impact on the financial statements of the Bank.
RECLASSIFICATIONS
Certain amounts in the prior year's financial statements and related
footnote disclosures were reclassified to conform to the current year
presentation, with no effect on net income or stockholders' equity.
F-44
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SECURITIES
Carrying amounts and fair value of securities being held to maturity as of
December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of other U.S.
government corporations and agencies..................... $ 15,004,000 $ 39,000 $ (1,000) $ 15,042,000
Municipal obligations...................................... 581,000 19,000 -- 600,000
------------- ----------- ----------- -------------
$ 15,585,000 $ 58,000 $ (1,000) $ 15,642,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of other U.S.
government corporations and agencies..................... $ 11,957,000 $ 39,000 $ (4,000) $ 11,992,000
Mortgage-backed securities................................. 781,000 1,000 -- 782,000
Municipal obligations...................................... 1,118,000 37,000 (9,000) 1,146,000
------------- ----------- ----------- -------------
$ 13,856,000 $ 77,000 $ (13,000) $ 13,920,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
The amortized cost and fair value of investment securities as of December
31, 1998 by contractual maturities are shown below.
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 11,149,000 $ 11,170,000
Due after one year through five years.......................... 4,436,000 4,472,000
------------- -------------
$ 15,585,000 $ 15,642,000
------------- -------------
------------- -------------
</TABLE>
Securities being held to maturity with carrying amounts of $6,585,000 and
$8,070,000 at December 31, 1998 and 1997, respectively, were pledged as
collateral on public deposits, repurchase agreements and for other purposes as
required or permitted by law.
F-45
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. LOANS
The composition of the Bank's loan portfolio as of December 31 is as
follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Real estate loans:
Construction................................................. $ 6,733,000 $ 6,873,000
Residential.................................................. 4,848,000 7,116,000
Unimproved residential lots.................................. 4,898,000 6,369,000
Commercial................................................... 13,910,000 14,535,000
------------- -------------
30,389,000 34,893,000
Commercial and industrial loans................................ 2,653,000 1,746,000
Government guaranteed loans.................................... 9,173,000 8,377,000
Loans to individuals........................................... 504,000 435,000
------------- -------------
42,719,000 45,451,000
Deduct:
Unearned net loan fees and discounts......................... 164,000 191,000
Allowance for loan losses.................................... 1,118,000 1,058,000
------------- -------------
$ 41,437,000 $ 44,202,000
------------- -------------
------------- -------------
</TABLE>
IMPAIRED LOANS
Information about impaired loans as of and for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Impaired loans for which there is a related allowance for loan
losses.......................................................... $ 3,934,000 $ 1,763,000
------------ ------------
------------ ------------
Related allowance for loan losses................................. $ 502,000 $ 317,000
------------ ------------
------------ ------------
Average balance (based on month-end balances)..................... $ 2,644,000 $ 1,447,000
------------ ------------
------------ ------------
Interest income recognized........................................ $ -- $ --
------------ ------------
------------ ------------
</TABLE>
The Bank is not committed to lend additional funds to debtors whose loans
have been modified due to an impairment.
The Bank had nonaccrual loans of $4,752,000 and $3,227,000 as of December
31, 1998 and 1997, respectively. Interest income that would have been earned on
such nonaccrual loans, had such loans performed according to their loan terms,
would have been $424,000, $147,000 and $307,000 in 1998, 1997 and 1996,
respectively. Management estimates that certain nonaccrual loans, which are not
classified as impaired, will ultimately be collected in full in accordance with
the original terms.
F-46
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. LOANS (CONTINUED)
LOANS HELD FOR SALE
Information about loans held for sale as of and for the years ended December
31 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Balance, beginning............................................ $ -- $ 670,000
Loans transferred from loan portfolio....................... 13,851,000 10,111,000
Loans sold.................................................. (13,257,000) (10,781,000)
-------------- --------------
Balance, ending............................................... $ 594,000 $ --
-------------- --------------
-------------- --------------
</TABLE>
There were no outstanding commitments to sell loans at December 31, 1997.
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Balance, beginning................................... $ 1,058,000 $ 756,000 $ 497,000
Provision charged to operating expense............. 200,000 980,000 360,000
Recoveries of amounts charged off.................. 272,000 81,000 20,000
Amounts charged off................................ (412,000) (759,000) (121,000)
------------ ------------ -----------
Balance, ending...................................... $ 1,118,000 $ 1,058,000 $ 756,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
NOTE 5. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and the total accumulated
depreciation and amortization as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land.............................................................. $ 579,000 $ 579,000
Buildings and leasehold improvements.............................. 2,259,000 2,309,000
Equipment and furnishings......................................... 2,322,000 2,611,000
Construction in progress.......................................... 31,000 52,000
------------ ------------
5,191,000 5,551,000
Less accumulated depreciation and amortization.................... 3,033,000 3,391,000
------------ ------------
$ 2,158,000 $ 2,160,000
------------ ------------
------------ ------------
</TABLE>
NOTE 6. DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was approximately $2,443,000 and $2,103,000 in 1998
and 1997, respectively. Substantially all certificates of deposit mature in the
year ending December 31, 1999.
F-47
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES
The cumulative tax effects of temporary differences as of December 31 are
shown in the following table:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Credit loss allowance............................................... $ 189,000 $ 149,000
Deferred loan fees.................................................. 73,000 86,000
Other real estate owned............................................. 26,000 29,000
Nonaccrual interest................................................. 44,000 26,000
Gain recognized on sale of loans.................................... 409,000 380,000
Other............................................................... 30,000 --
---------- ----------
Total deferred tax assets......................................... 771,000 670,000
---------- ----------
Deferred tax liabilities:
Property and equipment.............................................. 41,000 17,000
Other............................................................... -- 11,000
---------- ----------
Total deferred tax liabilities.................................... 41,000 28,000
---------- ----------
Net deferred tax asset............................................ $ 730,000 $ 642,000
---------- ----------
---------- ----------
</TABLE>
At December 31, 1998, no valuation reserve was considered necessary as
management believes it is more likely than not that the deferred tax assets will
be realized due to taxes paid in prior years or future operations.
The provision for income taxes charged to operations for the years ended
December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Current tax expense.................................... $ 672,000 $ 588,000 $ 472,000
Deferred tax (benefit)................................. (88,000) (346,000) (143,000)
---------- ----------- -----------
$ 584,000 $ 242,000 $ 329,000
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
December 31 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense......................... $ 481,000 $ 279,000 $ 274,000
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit........ 98,000 58,000 55,000
Change in valuation allowance......................... -- (134,000) --
Other................................................. 5,000 39,000 --
---------- ----------- ----------
$ 584,000 $ 242,000 $ 329,000
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
F-48
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. COMMITMENTS AND CONTINGENCIES
CONTINGENCIES
In the normal course of business, the Bank is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the financial
statements.
In the normal course of business, the Bank makes loans which are partially
guaranteed by
third parties, primarily the SBA. These guarantees are conditional upon
satisfactory underwriting and loan monitoring standards which are agreed upon in
advance by both parties. During the year ended December 31, 1997, the Bank
experienced a loss of approximately $380,000 on a loan on which the SBA did not
honor its guarantee due to unsatisfactory underwriting standards. The Bank's
existing loan portfolio contains approximately $28,594,000 of loans serviced for
others, of which $26,794,000 are guaranteed by the governmental agencies, and
excluded from the accompanying balance sheet. The Bank's management believes it
is generally in compliance with the required underwriting and loan monitoring
standards.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. They involve, to varying degrees, elements of credit risk in
excess of amounts recognized on the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other parties to the financial instruments for these commitments is represented
by the contractual amounts of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
A summary of the contract amount of the Bank's exposure to off-balance-sheet
risk as of December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Commitments to extend credit, including unsecured loan commitments
of 1998 $368,000; 1997 $167,000................................. $ 2,582,000 $ 6,664,000
Standby letters of credit......................................... 178,000 212,000
------------ ------------
$ 2,760,000 $ 6,876,000
------------ ------------
------------ ------------
</TABLE>
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. If deemed necessary upon extension of
credit, the amount of collateral obtained is based on management's credit
evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing commercial
properties.
F-49
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
STANDBY LETTERS OF CREDIT
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Bank deems necessary.
At December 31, 1998, approximately 17% of the standby letters of credit were
collateralized.
INTEREST RATE RISK
The Bank assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. Management attempts to
match maturities of assets and liabilities to the extent believed necessary to
minimize interest rate risk. However, borrowers with fixed rate obligations are
more likely to prepay in a falling rate environment and less likely to prepay in
a rising rate environment. Conversely, depositors who are receiving fixed rates
are more likely to withdraw funds before maturity in a rising rate environment
and less likely to do so in a falling rate environment. Management monitors
rates and maturities of assets and liabilities and attempts to minimize interest
rate risk by adjusting terms of new loans and deposits and by investing in
securities with terms that mitigate the Bank's overall interest rate risk.
LEASE COMMITMENTS
The Bank leases the facilities for two of its branch offices and its Data
Processing Center under noncancelable operating lease agreements expiring
through the year 2000. The leases contain renewal options of various five- and
ten-year terms with various rental increases based on the Consumer Price Index.
In addition, the Bank has the option to purchase the Perris branch property at
certain agreed-upon terms. The leases require the Bank to pay property taxes,
utilities, insurance and normal maintenance on the premises. The following is a
schedule of future minimum rental payments under this lease:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
- ----------------------------------------------------------------------------------- ---------
<S> <C>
1999............................................................................... $ 53,000
2000............................................................................... 6,000
---------
$ 59,000
---------
---------
</TABLE>
Total rent expense under these leases for the years ended December 31, 1998,
1997 and 1996 was $101,000, $99,000 and $80,000, respectively.
F-50
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT RISK
CONCENTRATION BY GEOGRAPHIC LOCATION: The Bank makes commercial,
residential and consumer loans to customers primarily in the Inland Empire,
the low desert areas of Southern California and in Portland, Oregon. In
addition, the Bank has a concentration of residential lot loans located in
Fort Mojave, Arizona.
A substantial portion of the Bank's customers' abilities to honor their
contracts is dependent on the business economy in the Inland Empire, low
desert areas of Southern California, its surrounding areas, Portland,
Oregon, and Fort Mojave, Arizona.
CONCENTRATION BY INDUSTRY: The loan portfolio has a concentration of
loans related to real estate, primarily loans for commercial and residential
operations. These concentrations are reflected in Note 3 to these financial
statements.
NOTE 9. EMPLOYEE BENEFIT PLANS
EMPLOYEE BONUS PLAN
The Bank has an employee bonus plan for all employees. Employee bonuses are
based on a percentage of beginning equity ranging from 6% to 20% depending upon
the level of the Bank's profitability for the year. Total disbursements to
employees were $146,000, $54,000 and $29,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
PROFIT SHARING/SALARY DEFERRAL PLAN
The Bank has a salary deferral 401(k) plan for all employees who have
completed one year and 1,000 hours of service. Annual contributions are limited
to the maximum deductible percentage of covered employee compensation. The Bank
contributes matching funds at its option which amounted to $99,000, $71,000 and
$76,000 in 1998, 1997 and 1996, respectively.
STOCK PURCHASE PLAN
The Bank offered a stock purchase plan to eligible officers and employees,
which was terminated in 1998. The plan provided for a voluntary payroll
deduction on the part of the eligible officer or employee up to 15% of their
gross salary. The amount of funds set aside was used to purchase Bank stock as
it became available on the open market. The Bank has agreed to supplement up to
25% of the payroll deduction by a contribution to this plan. Contributions for
this plan amounted to $5,000, $6,000 and $5,000 in 1998, 1997 and 1996,
respectively.
SALARY CONTINUATION PLAN
In April 1995, the Board of Directors authorized the Bank to enter an
agreement with the Bank's president to provide for annual cash payments to the
officer for a period not to exceed 15 years, beginning at his normal retirement
age (age 65). In the event of death prior
F-51
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. EMPLOYEE BENEFIT PLANS (CONTINUED)
to normal retirement age, annual cash payments would be made to beneficiaries
for a period of ten years following the date of death. The present value of the
Bank's liability under this agreement was approximately $160,000 and $109,000 at
December 31, 1998 and 1997, respectively. The Bank purchased life insurance
policies in 1995 which are intended to ultimately fund all costs of this
agreement. The cash surrender value related to these insurance policies was
approximately $712,000 and $661,000 at December 31, 1998 and 1997, respectively.
CONTINGENCY CONTRACTS
Certain officers of the Bank have contingency contracts which provide for
benefits upon termination or in the event the Bank experiences a merger,
acquisition or other act.
EMPLOYEE STOCK OWNERSHIP PLAN
The Bank sponsors a leveraged ESOP covering substantially all employees.
Contributions to the ESOP are at the discretion of the Board of Directors. The
Bank makes annual contributions to the ESOP equal to the ESOP's debt service
less dividends received by the ESOP, if any. The ESOP shares initially were
pledged as collateral for the debt. As the debt is repaid, shares are released
from collateral and allocated to active employees, based on the proportion of
debt service paid in the year. The debt of the ESOP is recorded as debt and the
shares pledged as collateral are deducted from stockholders' equity as unearned
ESOP shares in the accompanying balance sheets.
The notes payable referred to in the preceding paragraph require annual
principal payments plus interest at rates ranging from 1% to 1.25% over the
reference rate (7.75% at December 31, 1998). Future principal payments are due
as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1999.............................................................................. $ 118,000
2000.............................................................................. 120,000
2001.............................................................................. 122,000
2002.............................................................................. 93,000
2003.............................................................................. 25,000
----------
$ 478,000
----------
----------
</TABLE>
The ESOP did not purchase any shares of the Bank's common stock for the year
ended of December 31, 1998 and purchased a total of 118,214 shares of the Bank's
common stock through December 31, 1997. The ESOP financed a portion of the
purchase price by issuing notes payable which are guaranteed by the Bank.
As shares are released from collateral, the Bank reports compensation
expense equal to management's estimate of the fair value price of the shares,
and the shares become outstanding for EPS computations. ESOP compensation
expense was $173,000, $71,000 and $13,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
F-52
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. EMPLOYEE BENEFIT PLANS (CONTINUED)
In the event a terminated ESOP participant desires to sell his or her shares
of the Bank's stock, the Bank may be required to purchase the shares from the
participant at their fair market value.
Shares of the Bank held by the ESOP at December 31 are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Allocated shares..................................................... 13,842 2,280
Shares released for allocation....................................... 21,616 11,562
Unreleased (unearned) shares......................................... 87,794 109,410
--------- ---------
123,252 123,252
--------- ---------
--------- ---------
</TABLE>
At December 31, 1998, based on management's estimate, the fair value of the
shares allocated and released for allocation amounted to $284,000 and the fair
value of the unreleased shares amounted to $702,000.
NOTE 10. RELATED PARTY TRANSACTIONS
Stockholders of the Bank, and officers and directors, including their
families and companies of which they are principal owners, are considered to be
related parties. These related parties were loan customers of, and had other
transactions with, the Bank in the ordinary course of business. In management's
opinion, these loans and transactions were on the same terms as those for
comparable loans and transactions with nonrelated parties.
Total loans to related parties were approximately $65,000 at December 31,
1998. None of these loans are past due, nonaccrual or restructured to provide a
reduction or deferral of interest or principal because of deterioration in the
financial position of borrower. There were no loans to a related party which
were considered classified loans at December 31, 1998. There were no related
party loans at December 31, 1997.
NOTE 11. RESTRICTIONS ON RETAINED EARNINGS AND REGULATORY MATTERS
In October 1998, the Bank's Board of Directors adopted a resolution with
certain compliance criteria of the California Department of Financial
Institutions and the FDIC which replaced the resolution dated June 1996. The
Bank's Board of Directors' resolution requires the Bank to perform the
following:
- Develop, approve and submit a formal written testing plan to the FDIC by
January 10, 1999 in full compliance with the Interagency Guidance of
Testing for Year 2000 Readiness.
- Complete testing of its mission-critical systems by March 31, 1999.
F-53
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. RESTRICTIONS ON RETAINED EARNINGS AND REGULATORY MATTERS (CONTINUED)
- Maintain qualified senior management and notify the FDIC when they propose
to add an individual to the Board of Directors or to the senior management
of the Bank.
- Provide quarterly progress reports to the FDIC.
In addition, the Bank fulfilled or complied with the following resolutions as of
December 31, 1998:
- Corrected all data processing deficiencies identified in the April 1, 1998
Report of Examination of Information Systems.
- Revised, adopted and implemented written lending and collection policies
to provide effective guidance and control over the Bank's lending
function.
- Established asset quality improvement plans and goals for the reduction of
each classified loan and parcel of OREO over $50,000.
- Revised, adopted and implemented a plan to improve earnings, including a
formal budget for 1999
- Adopt procedures to ensure future compliance with all applicable laws and
regulations.
- Maintain Tier I capital of at least 8.0% of the Bank's adjusted total
assets.
The Bank 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve qualitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
As of December 31, 1998, the most recent notification from the FDIC
categorized the Bank as adequately capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table below. There are no conditions or events since
that notification that management believes have changed the Bank's category.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
F-54
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. RESTRICTIONS ON RETAINED EARNINGS AND REGULATORY MATTERS (CONTINUED)
At December 31, 1998 and 1997, the Bank's actual capital amounts and ratios
are presented in the following table:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to $8,927,000 16.7% Greater than $4,270,000 8.0% Greater than $5,338,000 10.0%
risk-weighted assets)..... or equal to or equal to
Tier I capital (to 8,254,000 15.5 Greater than 2,135,000 4.0 Greater than 3,203,000 6.0
risk-weighted assets)..... or equal to or equal to
Tier I capital (to average 8,254,000 10.2 Greater than 3,250,000 4.0 Greater than 4,062,000 5.0
assets)................... or equal to or equal to
As of December 31, 1997:
Total capital (to 7,981,000 14.5 Greater than 4,383,000 8.0 Greater than 5,479,000 10.0
risk-weighted assets)..... or equal to or equal to
Tier I capital (to 7,292,000 13.5 Greater than 2,164,000 4.0 Greater than 3,264,000 6.0
risk-weighted assets)..... or equal to or equal to
Tier I capital (to average 7,292,000 9.8 Greater than 2,977,000 4.0 Greater than 3,721,000 5.0
assets)................... or equal to or equal to
</TABLE>
NOTE 12. STOCK OPTION PLANS
EMPLOYEES' INCENTIVE STOCK OPTION PLAN
The Bank maintains a compensatory incentive stock option plan in which
options to purchase shares of the Bank's common stock are granted at the Board
of Directors' discretion to certain management and other key personnel. The plan
was originally established for a maximum of 240,000 shares (264,600 after stock
dividends) of the Bank's common stock. Additional shares were authorized and
granted as a result of stock dividends in subsequent years. All options expire
ten years from date of grant and vest over a five-year period with 20% in each
year. Upon certain change of control events, these options will become fully
vested. Other pertinent information relating to the plan follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.................. 189,834 $ 5.49 161,750 $ 5.40 141,750 $ 5.63
Granted....................................... -- -- 20,000 6.25 20,000 3.75
5% stock dividend............................. -- -- 8,084 5.40 -- --
----------- ----------- -----------
Outstanding, end of year........................ 189,834 5.49 189,834 5.49 161,750 5.40
----------- ----------- -----------
----------- ----------- -----------
Exercisable, end of year........................ 143,595 5.62 123,270 5.71 85,050 5.83
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-55
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. STOCK OPTION PLANS (CONTINUED)
Additional option information for the year ended December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE CONTRACTUAL AVERAGE
PRICE RANGE OUTSTANDING PRICE LIFE IN YEARS EXERCISABLE PRICE
- -------------------------------- ----------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$3.75-$5.375.................... 81,634 $ 4.75 6.1 51,395 $ 4.91
$6.00-$6.25..................... 108,200 6.05 4.7 92,200 6.01
----------- -----------
189,834 $ 5.49 5.3 143,595 $ 5.62
----------- -----------
----------- -----------
</TABLE>
DIRECTORS' STOCK OPTION PLAN
In March 1994, the Bank's stockholders approved the 1993 Directors' Option
Plan. This is a compensatory incentive stock option plan in which options to
purchase shares of the Bank's common stock are granted at the discretion of the
Board of Directors or a committee appointed by the Board of Directors. The Bank
originally reserved 76,800 shares (84,672 after stock dividends) of common stock
for issuance under this plan. Additional shares were authorized and granted as a
result of stock dividends in subsequent years. All options expire ten years from
date of grant and vest over a five-year period with 20% in each year. Upon
certain change of control events, these options will become fully vested.
Other pertinent information relating to the plan follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.................. 75,792 $ 4.94 79,680 $ 4.98 70,080 $ 5.38
Granted....................................... -- -- -- 19,200 3.75
Terminated and canceled....................... (2,712) 5.38 -- (9,600) 5.38
5% stock dividend............................. -- -- 3,984 4.98 -- --
Options exercised............................. -- -- (7,872) 5.38 -- --
----------- ----------- -----------
Outstanding, end of year........................ 73,080 4.93 75,792 4.94 79,680 $ 4.98
----------- ----------- -----------
----------- ----------- -----------
Exercisable, end of year........................ 57,816 5.15 51,072 4.93 35,136 $ 5.38
----------- ----------- -----------
----------- ----------- -----------
As of December 31, 1998
Price of outstanding options...................................................................... $3.75-$5.37
Weighted average remaining contractual life of outstanding options................................ 6.0 years
</TABLE>
The Bank applies Accounting Principles Board Opinion 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized. The Bank has
elected not to adopt FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. Had compensation cost for the Bank's stock option plan been
determined based on the fair value at the grant dates for awards under this plan
consistent with the method of Statement No. 123, the Bank's net income and net
income per common share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income
As reported............................................ $ 789,000 $ 556,000 $ 454,000
Pro forma.............................................. 768,000 532,000 437,000
Basic earnings per share
As reported............................................ 0.73 0.53 0.41
Pro forma.............................................. 0.71 0.50 0.40
Diluted earnings per share
As reported............................................ 0.65 0.51 0.41
Pro forma.............................................. 0.63 0.48 0.39
</TABLE>
The pro forma compensation cost was recognized for the fair value of the
stock options granted, which was estimated using the minimum-value method,
including a risk-free interest rate of 5.69% and 5.59% for 1997 and 1996,
respectively, an estimated life of the options of ten years and no dividend rate
or volatility on the stock. The weighted average fair value of these stock
options granted in 1997 and 1996 was $2.67 and $1.58, respectively. There were
no stock options granted in 1998.
F-56
<PAGE>
VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Bank's financial instruments is as follows at December
31:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and federal funds sold... $ 20,265,000 $ 20,265,000 $ 10,287,000 $ 10,287,000
Securities.................... 15,585,000 15,642,000 13,856,000 13,920,000
Loans and loans held for sale,
net......................... 42,031,000 42,843,000 44,202,000 44,902,000
Accrued interest receivable... 611,000 611,000 561,000 561,000
Financial liabilities:
Deposits...................... 75,739,000 75,698,000 66,239,000 66,209,000
Interest payable.............. 47,000 47,000 42,000 42,000
ESOP bank note payable........ 478,000 478,000 579,000 579,000
</TABLE>
FAIR VALUE OF COMMITMENTS
The estimated fair value of fee income on letters of credit at December 31,
1998 and 1997 is insignificant. Loan commitments on which the committed interest
rate is less than the current market rate are also insignificant at December 31,
1998 and 1997.
NOTE 14. POTENTIAL SALE OF THE BANK
The management of the Bank has entered into a definitive agreement to sell
100% of the common stock of the Bank to a bank holding company in 1999. The
potential sale is pending regulatory and shareholder approval. The sale, if
completed, is expected to close in May 1999.
F-57
<PAGE>
APPENDIX A
FIRST RESTATEMENT OF
AGREEMENT AND PLAN OF REORGANIZATION
DATED JANUARY 5, 1999
BETWEEN
THE BANK OF HEMET
AND
PACIFIC COMMUNITY BANKING GROUP
(AS AMENDED FEBRUARY , 1999 AND MARCH , 1999)
<PAGE>
FIRST RESTATEMENT OF
AGREEMENT AND PLAN OF REORGANIZATION
THIS FIRST RESTATEMENT OF AGREEMENT AND PLAN OF REORGANIZATION (hereinafter
referred to as the "Agreement") is made and entered into as of January 5, 1999,
[as amended March 24, 1999 and April 2, 1999] by and between THE BANK OF HEMET
(the "Bank"), a California banking corporation, and PACIFIC COMMUNITY BANKING
GROUP (the "Company"), a California corporation.
R E C I T A L S
A. The Bank is a California banking corporation duly organized and existing
under the laws of the State of California with its principal office in the City
of Hemet, County of Riverside, State of California. The Company is a proposed
bank holding company duly organized and existing under the laws of the State of
California with its principal office in the City of Laguna Hills, County of
Orange, State of California;
B. The parties desire to provide for the acquisition by the Company of all
of the outstanding shares of the common stock, no par value of the Bank ("Bank
Stock") pursuant to the Merger (as defined below), subject to the terms and
conditions specified herein, as follows:
(a) The Company will establish PCBG Merger Corporation (as defined
below) as a wholly-owned subsidiary; and
(b) The Bank and PCBG Merger Corporation will enter into an Agreement of
Merger (as defined below) providing for the merger of PCBG Merger
Corporation and the Bank under the state charter of the Bank;
C. At the Effective Time (hereinafter defined below) of the Merger, all of
the issued and outstanding shares of Bank Stock, except for shares of Bank Stock
held by Dissenting Shareholders (as hereinafter defined below), shall be
converted into and exchanged for a combination of shares of Company Stock and
Warrants exercisable into shares of Company Stock, all upon the terms and
subject to the conditions hereinafter set forth;
D. As a condition and inducement to the Company's willingness to enter into
this Agreement, the Bank and the Company are entering into, immediately after
the execution and delivery hereof, a Warrant Purchase Agreement (the "Warrant
Agreement") dated as of the date hereof and attached hereto as EXHIBIT "C",
pursuant to which the Bank shall grant to the Company an option to purchase
shares of the common stock, no par value, of the Bank representing 19.9% of Bank
stock to be outstanding after giving pro forma effect to the issuance of such
shares at a price of $46.50 per Bank Stock;
E. The Merger requires certain shareholder and regulatory approvals and may
be effected only after the necessary approvals have been obtained;
F. The parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger; and
G. Subject to any specific provisions of this Agreement, it is the intent of
the parties that the Company by reason of this Agreement shall not (until
consummation of the Merger) control, and shall not be deemed to control the Bank
or any of its subsidiaries, directly or indirectly, and shall not exercise or be
deemed to exercise, directly or indirectly, a controlling influence over the
management or policies of the Bank or any of its subsidiaries;
H. The Company and the Bank desire that this First Restatement of the
Agreement and Plan of Reorganization now govern the rights and obligations of
the Parties in place of that certain Agreement and Plan of Reorganization dated
July 30, 1998;
I. For federal income tax purposes, it is intended that the Merger shall
qualify as a "reorganization" within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"), and the Bank, the Company and
PCBG Merger Corporation will each be "a party to a reorganization," within the
meaning of Section 368(b) of the Code, with respect to the Merger.
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Accordingly, to consummate the transactions set forth above and in
consideration of the mutual covenants, agreements, representations and
warranties contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. Capitalized terms used in this Agreement shall have the
meanings set forth below unless the context otherwise requires:
"Affiliate" means any Person (as defined below) that directly, or through
one or more intermediaries controls, or is controlled by, or is under common
control with, the Person specified.
"Aggregate Option Price" shall have the meaning given such term in Section
2.8.
"Aggregate Purchase Consideration" shall have the meaning given such term in
Section 2.4.
"Agreement of Merger" shall mean the Agreement of Merger to be entered into
by and between PCBG Merger Corporation and the Bank substantially in the form of
EXHIBIT "A" hereto, but subject to any changes that may be necessary to conform
to any requirements of any Governmental Entity having authority over the Merger.
"Alternative Transaction" shall have the meaning given such term in Section
6.5.
"Audited Bank Financial Statements" shall have the meaning given such term
in Section 4.4.
"BHC Act" shall mean the Bank Holding Company Act of 1956, as amended.
"Bank" shall mean The Bank of Hemet.
"Bank Corporate Governance Changes" shall have the meaning given such term
in Section 2.1 (d).
"Bank Dissenting Shares" means shares of Bank Stock held by "Dissenting
shareholders" within the meaning of Chapter 13 of the CGCL.
"Bank Employment Agreements" shall mean any employment agreement, severance
agreement, "golden parachute" agreement or any other agreement which provides
for payments to employees of the Bank upon termination of employment, including
termination after a change in control.
"Bank Filings" shall have the meaning given such term in Section 4.18.
"Bank Options" shall mean options to purchase Bank Stock (as defined below)
pursuant to the Bank Stock Option Plan (as defined below).
"Bank Perfected Dissenting Shares" means Dissenting Shares which the holders
thereof have not withdrawn or caused to lose their status as Bank Dissenting
Shares.
"Bank Representatives" shall have the meaning given such term in Section
7.3.
"Bank Shareholder" shall mean any holder of Bank Stock or an option to
purchase Bank Stock immediately prior to the Merger.
"Bank Stock" shall mean the meaning given such term in Recital B.
"Bank Stock Option Plan" shall mean The Bank of Hemet 1994 Stock Option
Plan.
"Baxter" shall mean Baxter, Fentriss and Company, who shall serve as the
financial advisor to the Bank.
"Benefit Arrangement" means any plan or arrangement maintained or
contributed to by a Party, including an "employee benefit plan" within the
meaning of ERISA (as defined below), (but exclusive of base salary and base
wages) which provides for any form of current or deferred compensation, bonus,
stock option, profit sharing, benefit, retirement, incentive, group health or
insurance, welfare or similar plan or arrangement for the benefit of any
employee or class of employee, whether active or retired, of a Party.
"Business Day" shall mean any day other than a Saturday, Sunday or day on
which commercial banks in California are authorized or required to be closed.
"Caswell" shall mean Mr. E. Lynn Caswell, Chairman of the Board and Chief
Executive Officer of the Company.
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"CERCLA" shall have the meaning given such term in the definition of
Environmental Law.
"CFC" means the California Financial Code.
"CGCL" means the California General Corporations Law.
"Charter Documents" shall mean, with respect to any business organization,
any certificate or articles of incorporation or association, any bylaws, any
partnership agreement and any other similar documents that regulate the basic
organization of the business organization and its internal relations.
"Classified Credit" shall have the meaning given such term in Section 6.6.
"Closing" shall mean the consummation of the transactions contemplated by
this Agreement on the Closing Date (as defined below) at the law offices of
Knecht & Hansen, 1301 Dove Street, Suite 900, Newport Beach, California 92660,
or at such other place as the Parties (as defined below) may agree upon.
"Closing Date" shall mean, unless the Parties (as defined below) agree on
another date, the first Friday or as soon as possible following the
Determination Date, and in no case more than 30 days following the receipt of
the approvals and consents and expiration of the waiting periods specified in
Section 9.1 have occurred and/or have been obtained, the receipt of the
necessary cash capital by the Company in order to complete the transaction as
contemplated by this Agreement, and satisfaction of the remaining conditions to
the transaction as contemplated by this Agreement.
"Code" shall mean the United States Internal Revenue Code of 1986, as
amended, and all regulations thereunder.
"Commissioner" shall mean the California Commissioner of Financial
Institutions.
"Company" shall mean Pacific Community Banking Group, a California
corporation.
"Company Corporate Governance Changes" shall have the meaning given such
term in Section 2.1(e).
"Company Filings" shall have the meaning given such term in Section 5.13.
"Company Representatives" shall have the meaning given such term in Section
6.3.
"Company Stock Option Plan" shall mean the proposed Pacific Community
Banking Group 1998 Stock Option Plan.
"Company Financial Statements" shall have the meaning given such term in
Section 5.4.
"Company Stock" shall mean the common stock, no par value, of the Company.
"Confidential Information" shall mean all information exchanged heretofore
or hereafter between the Company, its affiliates and agents, on the one hand,
and the Bank, its affiliates and agents, on the other hand, which is information
related to the business, financial position or operations of the Person
responsible for furnishing the information or an Affiliate of such Person (such
information to include, by way of example only and not of limitation, client
lists, pricing information, company manuals, internal memoranda, strategic
plans, budgets, forecasts, projections, computer models, marketing plans, files
relating to loans originated by such Person, loans and loan participation
purchased by such Person from others, investments, deposits, leases, contracts,
employment records, minutes of board meetings (and committees thereof) and
stockholder meetings, legal proceedings, reports of examination by any
Governmental Entity, and such other records or documents such Person may supply
to the other Party pursuant to the terms of this Agreement or as contemplated
hereby). Notwithstanding the foregoing, "Confidential Information" shall not
include any information that (i) at the time of disclosure or thereafter is
generally available to and known by the public (other than as a result of an
improper disclosure directly or indirectly by the Company or the Bank, as the
case may be, or any of their officers, directors, employees or other
representatives), (ii) was available to the recipients on a non-confidential
basis from a source other than from the Persons responsible for furnishing the
information, provided that such source learned the information independently and
is not and was not bound by a confidentiality agreement with respect to the
information, or (iii) has been independently acquired or developed by the
recipients without violating any obligations under this Agreement.
"Consents" shall mean every consent, approval, absence of disapproval,
waiver or authorization from, or notice to, or registration or filing with, any
Person (as defined below).
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"CRA" shall mean the Community Reinvestment Act.
"Deposit" shall mean any deposit as defined in Section 3(l) of the Federal
Deposit Insurance Act, as amended, to the date of this Agreement (12 USC Section
1813(l)).
"Determination Date" shall mean the last day of the month preceding the
Closing Date.
"Directors' Agreement" shall mean an agreement, substantially in the form of
EXHIBIT "B" hereto, pursuant to which each signatory shall agree to vote or
cause to be voted all shares of Bank Stock with respect to which such Person has
voting power on the date hereof or hereafter acquires to approve the Agreement
and the transactions contemplated hereby and all requisite matters related
thereto.
"DPC Property" shall mean voting securities, other personal property and
real property acquired by foreclosure or otherwise, in the ordinary course of
collecting a debt previously contracted in good faith, retained with the object
of sale for a period not longer than one year, or any applicable statutory
holding period, and recorded in the holder's business records as such.
"Effective Day" shall mean the day on which the Effective Time occurs.
"Effective Time" shall mean the date and time of the filing of the Agreement
of Merger with the Secretary of State (as defined below).
"Employee Plan" shall have the meaning given such term in Section 4.11(c).
"Encumbrance" shall mean any option, pledge, security interest, lien,
mechanic's lien, charge, encumbrance or restriction (whether on voting,
disposition or otherwise), whether imposed by agreement, understanding, law or
otherwise.
"Environmental Law" shall mean any federal, state, provincial or local
statute, law, ordinance, rule, regulation, order, consent, decree, judicial or
administrative decision or directive of the United States or other jurisdiction
whether now existing or as hereinafter promulgated, issued or enacted relating
to: (A) pollution or protection of the environment, including natural resources;
(B) exposure of persons, including employees, to Hazardous Substances (as
defined below) or other products, materials or chemicals; (C) protection of the
public health or welfare from the effects of products, by-products, wastes,
emissions, discharges or releases of chemical or other substances from
industrial or commercial activities; or (D) regulation of the manufacture, use
or introduction into commerce of substances, including, without limitation,
their manufacture, formulation, packaging, labeling, distribution,
transportation, handling, storage and disposal. For the purposes of this
definition the term "Environmental Law" shall include, without limiting the
foregoing, the following statutes, as amended from time to time: (1) the Clean
Air Act, as amended, 42 U.S.C. Section7401 ET SEQ.; (2) the Federal Water
Pollution Control Act, as amended, 33 U.S.C. Section1251 ET SEQ.; (3) the
Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C.
Section6901 ET SEQ., (4) the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (including the Superfund Amendments and
Reauthorization Act of 1986), 42 U.S.C. Section9601 ET SEQ. ("CERCLA"); (5) the
Toxic Substances Control Act, as amended, 15 U.S.C. Section2601 ET SEQ.; (6) the
Occupational Safety and Health Act, as amended, 29 U.S.C. Section65; (7) the
Emergency Planning and Community Right-To-Know Act of 1986, 42 U.S.C.
Section11001 ET SEQ.; (8) the Mine Safety and Health Act of 1977, as amended, 30
U.S.C. Section801 ET SEQ.; (9) the Safe Drinking Water Act, 42 U.S.C.
Section300f ET SEQ.; (10) the Federal Water Pollution Control Act, as amended
(33 U.S.C. 1251, ET SEQ.; and (11) all comparable state and local laws, laws of
other jurisdictions or orders and regulations including, but not limited to, the
Carpenter-Presley-Tanner Hazardous Substance Account Act, Cal. Health & Safety
Code Section25300 ET SEQ., the Porter-Cologne Water Quality Control Action,
25140, 25501(j) and (k); 255501.1.25281 and 25250.1 of the California Health and
Safety Code and/or Article I or Title 22 of the California Code of Regulations,
Division 4, Chapter 30 (the "State Acts"); laws of other jurisdictions or orders
and regulations; or the presence of which causes or threatens to cause a
nuisance, trespass or other common law tort upon real property or adjacent
properties or poses or threatens to pose a hazard to the health or safety of
persons or without limitation, which contains gasoline, diesel fuel or other
petroleum hydrocarbons; polychlorinated biphenyls (PCB's), asbestos or urea
formaldehyde foam insulation.
"Equity Securities" shall mean the capital stock of Bank or any options,
rights, warrants or other rights to subscribe for or purchase, or any plans,
contracts or commitments that are exercisable in, such capital stock or that
provide for the issuance of, or grant the right to acquire, or are convertible
into, or exchangeable for, such capital stock.
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"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and all regulations thereunder.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and all rules and regulations thereunder.
"Exchange Agent" shall mean U. S. Stock Transfer Corporation, or, subject to
the reasonable approval of the Bank, any other financial institution or company
appointed by the Company to effect the exchange contemplated by Section 2.5.
"Executive Officer" shall mean a natural person who participates or has the
authority to participate (other than in the capacity of a director) in major
policy making functions, whether or not such person has a title or is serving
with salary or other compensation.
"Expenses" shall have the meaning given such term in Section 13.1.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"FRB" shall mean the Board of Governors of the Federal Reserve System.
"GAAP" shall mean Generally Accepted Accounting Principles, consistently
applied from period to period, applicable to banks and bank holding companies,
as appropriate, for the period in question.
"Governmental Entity" shall mean any court or tribunal in any jurisdiction
or any United States federal, state, municipal, domestic, foreign or other
administrative agency, department, commission, board, bureau or other regulatory
or governmental authority or instrumentality.
"Hazardous Substances" shall mean (1) any "hazardous waste" as defined by
CERCLA and the State Acts, as such acts are in effect on the date hereof, and
any and all regulations promulgated thereunder; (2) any "hazardous substance" as
such term is defined by CERCLA; (3) any "regulated substance" as defined by the
State Acts; (4) asbestos requiring abatement, removal or encapsulation pursuant
to the requirements of any Governmental Entity; (5) polychlorinated biphenyls;
(6) petroleum products; (7) "hazardous chemicals" or "extremely hazardous
substances" in quantities sufficient to require reporting, registration,
notification and/or optional treatment or handling under the Emergency Planning
and Community Right to Know Act of 1986; (8) any "hazardous chemical" in levels
that would result in exposure greater than is allowed by permissible exposure
limits established pursuant to the Occupational Safety and Health Act of 1970;
(9) any substance that requires reporting, registration, notification, removal,
abatement and/or special treatment, storage, handling or disposal, under Section
6, 7 and 8 of the Toxic Substance Control Act (15 U.S.C. Section 2601); (10) any
toxic or hazardous chemical described in 29 C.F.R. 1910.1000-1047 in levels that
would result in exposure greater than those allowed by the permissible exposure
limits pursuant to such regulations; and (11) any (A) "hazardous waste", (B)
"solid waste" capable of causing a "release or threatened release" that present
an "imminent and substantial endangerment" to the public health and safety of
the environment, (C) "solid waste" that is capable of causing a "hazardous
substance incident" (D) "solid waste" with respect to which special requirements
are imposed by any applicable Governmental Entity upon the generation and
transportation thereof as such terms are defined and used within the meaning of
the State Acts, or (E) any "pollutant" or "toxic pollutant" as such term is
defined in the Federal Clean Water Act, 33 U.S.C. Section 1251-1376, as amended,
by Public Law 100-4, February 4, 1987, and the regulations promulgated
thereunder, including 40 C.F.R. Sections 122.1 and 122.26.
"Managing Underwriter" shall mean Sutro (as defined below).
"Managing Underwriters" shall mean the Managing Underwriter and such other
firm or firms as the Company and the Managing Underwriter shall agree.
"Material Adverse Change" shall have the meaning given such term in Sections
4.17 and 5.9.
"Material Contract" shall have the meaning given such term in Section 4.12.
"Merger" shall mean the merger of the PCBG Merger Corporation with and into
the Bank.
"Offering" shall mean a public offering underwritten by the Underwriters (as
defined below), as determined by the Company in its sole discretion, of a
certain number of shares of Company Stock as determined by the Company in its
sole discretion, of shares of the Company held by shareholders of the Bank and
Valley Bank and newly issued shares, at a gross offering price of not less than
$15.00 per share, as described in Section 7.14.
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"Offering Price" shall mean the gross offering price per share of Company
Stock in the Offering.
"OREO" shall have the meaning given such term in Section 6.2(xx).
"Party" shall mean either the Company or the Bank and "Parties" shall mean
both the Company and Bank.
"Per Share Consideration" shall have the meaning given such term in Section
2.4.
"Permit" shall mean any United States federal, foreign, state, local or
other license, permit, franchise, certificate of authority, order or approval
necessary or appropriate under any applicable Rule (as defined below).
"Person" shall mean any natural person, corporation, trust, association,
unincorporated body, partnership, joint venture, Governmental Entity,
statutorily or regulatory sanctioned unit or any other person or organization.
"Proxy Statement" shall have the meaning given such term in Section 6.8.
"RAP" shall mean regulatory accounting principles, if any, applicable to a
particular person.
"Real Property" shall have the meaning given such term in subsection (a) of
Section 4.6.
"Representatives" shall have the meaning given such term in subsection (a)
of Section 6.3.
"Rule" shall mean any statute or law or any judgment, decree, injunction,
order, regulation or rule of any Governmental Entity, including, without
limitation, those relating to disclosure, usury, equal credit opportunity, equal
employment, fair credit reporting and anticompetitive activities.
"S-1" means the registration statement on Form S-1 to be filed with the SEC
relating to the registration under the Securities Act of the shares of Company
Stock held by shareholders of the Bank and Valley Bank to be sold, and shares of
Company Stock to be issued, in the Offering.
"S-4" means the registration statement on Form S-4, and such amendments
thereto, that is filed with the SEC to register the Warrants to be issued in the
Merger under the Securities Act and to clear use of the Proxy Statement in
connection with the Company Shareholders' Meeting and the Bank Shareholders'
Meeting pursuant to the regulations promulgated under the Exchange Act.
"SEC" means the Securities and Exchange Commission.
"SEC Reports" shall mean all reports filed by a Party hereto pursuant to the
Exchange Act with the SEC or the FDIC.
"Secretary of State" shall mean the Secretary of State of the State of
California.
"Section 1300" shall mean Section 1300 ET SEQ. of the California
Corporations Code.
"Securities Act" shall mean the Securities Act of 1933, as amended, and all
rules and regulations thereunder.
"Selling Shareholder" shall mean any Bank shareholder or holder of a Bank
stock option who elects to sell his or her shares of Bank Stock or to exchange
his or her options and sell the Company Stock received in exchange therefor in
the Offering.
"State Acts" shall have the meaning given such term in the definition of
"Environmental Law."
"Surviving Bank" shall mean the bank surviving the Merger.
"Surviving Bank Stock" shall mean the common stock, no par value, of the
Surviving Bank.
"Sutro" shall mean Sutro & Company who may also act as a financial advisor
to the Company and as an underwriter in the Offering.
"Tax Filings" shall have the meaning given such term in Section 4.8.
"Third Party Consent" shall have the meaning given such term in Sections
6.17 and 7.8.
"To the knowledge" and "to the best knowledge" shall have the meanings given
such terms in Section 15.15.
"Unaudited Bank Financial Statements" shall have the meaning given such term
in Section 4.4.
"Understanding" shall have the meaning given such term in Section 4.11(m) or
4.12.
"Undesignated Shares" shall have the meaning given such term in Section
2.10.
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"Underwriter" shall mean a group of broker/dealers that include the Managing
Underwriters as assembled by the Managing Underwriter with the consent of the
Company.
"Warrant" shall mean a warrant issuable by the Company at the Closing
exercisable into one (1) share of the Company for each share of Bank Stock
exchanged for a ten year period from the Closing Date with an exercise price
equal to 122% of the Offering Price.
"Warrant Agreement" shall mean the warrant agreement attached hereto as
Exhibit "D."
ARTICLE II
THE MERGER AND RELATED MATTERS
2.1 THE MERGER. The Company agrees that it will use its best efforts, with
all necessary cooperation of the Bank, to perfect the organization of PCBG
Merger Corporation in accordance with the CGCL prior to the Closing Date. The
directors and officers of PCBG Merger Corporation, and the Articles of
Incorporation and Bylaws of PCBG Merger Corporation, shall be determined by the
Company. Subject to the provisions of this Agreement, the Parties agree to
request that the approval of the Merger to be issued by the Commissioner, the
FDIC, the FRB and any other necessary regulatory agency on or prior to the
Closing Date shall provide that the Merger shall become effective (the
"Effective Time") as of the Closing Date. The Bank shall cause its officers to
execute the Agreement of Merger, as well as all other necessary documents, in
order to effect the Merger in accordance with the terms hereof as requested by
the Company. At the Effective Time of the Merger, the following transactions
will occur simultaneously:
(a) MERGER OF THE BANK AND PCBG MERGER CORPORATION. The Bank and PCBG
Merger Corporation shall be merged under the certificate of authority of the
Bank, with the Bank being the Surviving Bank pursuant to the provisions of, and
with the effect provided in, the CGCL and the CFC, and shall continue its
corporate existence under the laws of the State of California. The name of the
Surviving Bank shall be "The Bank of Hemet." Upon the consummation of the
Merger, the separate corporate existence of PCBG Merger Corporation shall cease.
(b) EFFECT ON BANK STOCK. Subject to Section 2.3, each share of Bank Stock
issued and outstanding immediately prior to the Effective Time of the Merger
shall, on and at the Effective Time of the Merger, pursuant to the Agreement of
Merger and without any further action on the part of the Bank or the holders of
Bank Stock, be automatically cancelled and cease to be an issued and outstanding
share of Bank Stock, and shall be exchanged for and converted into the right to
receive the Per Share Consideration.
Holders of Bank Stock shall have a right to sell in the Offering all the
shares of Company Stock received in exchange for Bank Stock as they so elect, as
provided in Section 2.10, provided that if more than 88% or less than 75% of the
shares of Company Stock received by the Bank Shareholders (including, for this
purpose, holders of Bank stock options, as provided in Section 2.8) is elected
to be sold in the Offering, the shares sold in the Offering by each Selling
Shareholder shall be adjusted. If more than 88% of the shares of Company Stock
received by the Bank Shareholders (including, for this purpose, holders of Bank
stock options, as provided in Section 2.8) is elected to be sold in the
Offering, the shares sold in the Offering by each Selling Shareholders shall be
decreased ratably in proportion to the number of shares requested to be sold, so
that the total number of shares retained (i.e., not sold in the Offering) by the
Bank Shareholders in the aggregate is equal to at least 12% of the Company Stock
received by the Bank Shareholders. If less than 75% of the shares of Company
Stock received by the Bank Shareholders (including, for this purpose, holders of
Bank stocks options, as provided in Section 2.8) is elected to be sold in the
Offering, the shares sold in the Offering by each Selling Shareholder so
electing shall be increased ratably in proportion to the number of shares
requested to be sold, so that the total number of shares retained (i.e., not
sold in the Offering) by the Bank Shareholders in the aggregate is equal to no
more than 25% of the Company Stock received by the Bank Shareholders. If, after
such proration, the number of shares to be retained by all Bank Shareholders in
the aggregate remains more than 25%, then each of the Directors hereby agrees to
decrease the number of shares retained by them, ratably in proportion to their
total shareholdings, to the extent necessary to aggregate retention of 25%. The
Selling Shareholder shall receive, for each share of Company Stock sold in the
Offering, the price at which shares are sold in the Offering, without reduction
for expenses or commissions of the Offering, it being understood that the
Company shall bear such expenses and commissions.
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(c) EFFECT ON PCBG MERGER CORPORATION STOCK. Each share of PCBG Merger
Corporation Stock issued and outstanding immediately prior to the Effective Time
of the Merger shall, on and at the Effective Time of the Merger, pursuant to the
Agreement of Merger and without any further action on the part of the Bank or
the holder of the PCBG Merger Corporation Stock be converted into, and shall for
all purposes be deemed to represent, one share of Surviving Bank Stock, and one
certificate representing one share of the Surviving Bank Stock will be issued to
the Company.
(d) BANK CORPORATE GOVERNANCE CHANGES. The Charter Document of the Bank as
in effect immediately prior to the Effective Time shall continue in effect after
the Merger until thereafter amended in accordance with applicable law and the
operations of the Bank shall continue in effect after the Merger; except that
the Bank shall have taken prior to the Effective Time all necessary steps so
that at the Effective Time (i) James B. Jaqua, President, Chief Executive
Officer and a director of the Bank, shall have tendered his resignation from his
positions at the Bank, in form and substance satisfactory to the Company,
without incurring any liability on the part of any Party; the Bank and the
Company will honor Mr. Jaqua's Executive Salary Continuation Agreement dated
March 22, 1995; Mr. Jaqua will continue as Chairman of Banklink for a one (1)
year period, with no management authority and no additional compensation,
subject to possible annual reappointment as Chairman of Banklink in the sole
discretion of the Company; the Company intends to appoint Mr. Jaqua as the
Bank's representative on the Company's Board of Directors as described in
Section 2.1(e), and any such Bank representation on the Company's Board of
Directors shall be for a minimum three (3) year period; and the Company in its
sole discretion may extend such time period. Mr. Jaqua's appointments as
Chairman of Banklink and as a director of the Company shall be annual
appointments to be made by the Company in its sole discretion; and Mr. Jaqua and
the Company will enter into a noncompetition agreement and a consulting
agreement, the forms of which are attached hereto as part of Exhibit 2.1(d)(1);
(ii) Caswell shall have been appointed Chairman of the Board and Chief Executive
Officer of the Bank; (iii) John J. McDonough, Chairman of the Board of the Bank,
shall resign as Chairman of the Board of the Bank but shall remain a member of
the Board of Directors of the Bank unless and until a successor is chosen by the
Company, the Bank shall honor Mr. McDonough's Executive Salary Continuation
Agreement dated August 17, 1981; and the Company and Mr. McDonough will enter
into a noncompetition agreement and a consulting agreement, the forms of which
are attached hereto as part of Exhibit 2.1(d)(2), (iv) except for the persons
set forth on Exhibit 2.1(d), which Exhibit shall be delivered by the Company to
the Bank within sixty (60) days of the date of the Agreement, each of the
directors of the Bank shall have tendered his resignation as a director of the
Bank, in form and substance satisfactory to the Company, without incurring any
liability on the part of any Party; (v) the number of authorized directors, and
the specific members of the Board of Directors, of the Bank shall be changed as
determined in the sole discretion of the Company; and (vi) the Company shall
name additional directors in its sole discretion who shall be duly elected and
appointed to the Board of Directors of the Bank (or if any such persons is
unable to serve, such other person designated by the Company) and shall serve
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified (clauses (i)-(vi) being hereinafter
collectively referred to as the "Bank Corporate Governance Changes.").
(e) COMPANY CORPORATE GOVERNANCE CHANGES. The Charter Documents of the
Company as in effect immediately prior to the Effective Time shall continue in
effect after the Merger until thereafter amended in accordance with applicable
law and the members of the Board of Directors and the Executive Officers of the
Company immediately prior to the Merger shall continue in their respective
positions after the Merger and be the Board of Directors and the Executive
Officers of the Company, except that the Company shall have taken prior to the
Effective Time all necessary steps so that, (i) two (2) individuals from the
Board of Directors or executive staff of the Bank, which are intended to be Mr.
Jaqua and Mr. Harold Williams, shall be appointed to the Board of Directors of
the Company, shall be renominated by the Board of Directors for election at the
Company's yearly annual meetings for a minimum of (3) three years; (ii) two (2)
individuals from the Board of Directors of Valley Bank shall be appointed to the
Board of Directors of the Company; and (iii) the individuals elected to fill
such four (4) directorships shall be annual appointments as selected in the sole
discretion of the Company; (clauses (i)-(iii) being hereinafter collectively
referred to as the "Company Corporate Governance Changes").
2.2 EFFECT OF THE MERGER. At the Effective Time of the Merger, the
corporate existence of PCBG Merger Corporation and the Bank shall be merged into
and continued in the Surviving Bank, and the Surviving Bank shall be deemed the
same corporation as each corporation participating in the Merger. All rights,
franchises, and interests of PCBG Merger Corporation and Bank in and to every
type of property (real, personal and mixed) and choses in action shall be
transferred to and vested in the Surviving Bank by virtue of the Merger without
any deed
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or other transfer and the Surviving Bank shall hold and enjoy all rights of
property, franchises and interests, in the same manner and to the same extent as
such rights, franchises and interests were held or enjoyed by any one of the
consolidating corporations at the Effective Time of the Merger.
2.3 DISSENTING SHAREHOLDERS. (a) Any Bank Perfected Dissenting Shares
shall not be converted into the right to receive the Per Share Consideration,
but the holders thereof shall be entitled only to such rights as are granted
them by Section 1300. Each dissenting shareholder who is entitled to payment for
his shares of Bank Stock under Section 1300 shall receive such payment in an
amount as determined pursuant to Section 1300.
(b) If any shareholder of the Bank shall fail to perfect, or shall
effectively withdraw or lose, his or her rights under Section 1300, the Bank
Dissenting Shares of such holder shall be treated for purposes of this Article
II as any other shares of outstanding Bank Stock. If any holder of Bank Stock
shall fail to perfect, or shall effectively withdraw or lose, his or her right
to appraisal of and payment for his or her Bank Dissenting Shares under Section
1300, each share of Bank Dissenting Shares shall be converted into the right to
receive the Per Share Consideration.
2.4 THE AGGREGATE PURCHASE CONSIDERATION AND PER SHARE CONSIDERATION. The
Aggregate Purchase Consideration shall be equal to the sum of (i) the product of
844,278 and the Per Share Consideration and (ii) the Aggregate Option Price. The
Per Share Consideration shall be equal to 3.4 shares of Company Stock for each
share of Bank Stock, plus one (1) Warrant.
2.5 DELIVERY OF CONSIDERATION. At the Closing, the Company will deliver to
the Exchange Agent an amount of Company Stock and Warrants equal to the
Aggregate Purchase Consideration, plus any cash payment for a fractional share
of Company Stock. In the case of shares of Company Stock to be sold in the
Offering, as provided in Section 2.1(b), the Exchange Agent shall deliver such
shares to, or pursuant to the direction of, the Underwriters. In the case of all
other shares of Company Stock, and the cash and Warrants, the Exchange Agent
shall deliver the same to the Selling Shareholders, provided that share
certificates formerly evidencing Bank Stock (duly executed and in proper form
for transfer, or a lost certificate affidavit acceptable to the Company) shall
have been delivered to the Exchange Agent in accordance with this Section 2.5,
Section 2.10 and an agreement to be entered into between the Company and the
Exchange Agent.
2.6 NAME OF SURVIVING BANK. The name of the Surviving Bank shall be "The
Bank of Hemet," unless the Company proposes to change such name following the
Closing Date, and the Board of Directors of the Bank agrees to support such name
change.
2.7 (Reserved)
2.8 STOCK OPTIONS. Immediately prior to the Effective Time of the Merger,
all stock options will be fully vested and each holder of a Bank Option will be
given the opportunity to, in whole or in part, cancel such option and receive
Company Stock equal to the number of shares of Bank Stock covered by such option
multiplied by the number obtained by subtracting the exercise price of such
option from the Per Share Consideration in effect on the Closing Date (i.e.,
shares subject to option times ($51.00 minus exercise price of option), all
divided by $15.00) (the total of sum of such payments for all Bank Options so
cancelled shall be defined as the "Aggregate Option Price"). Holders of Bank
Options who elect to cancel their options in exchange for Company Stock (and
Warrants, as provided in the next sentence) will have their Bank Options
cancelled immediately prior to the Effective Time. For each 3.4 shares of
Company Stock paid by the Company in exchange for options on Bank Stock as
provided in the previous two sentences, each holder of a bank option will also
receive one (1) Warrant. Such payment may be made either by the Bank, the
Company or a combination of both as determined in the sole discretion of the
Company. Each such option holder shall be afforded an election to have the
shares so received in the Offering, upon substantially identical terms as the
Selling Shareholders, and subject to proration together with and on the same
terms as the Selling Shareholders. All remaining Bank Options which are entitled
to participate in the Aggregate Option Price but the holder of a Bank Option
elects not to participate in the Aggregate Option Price shall be cancelled
immediately prior to the Effective Time of the Merger.
2.9 DIRECTORS' AGREEMENTS. The Directors' Agreements previously entered
into by each of the Directors of the Bank continue to be in full force and
effect, and shall apply to the Agreement as amended pursuant to this Second
Amendment. By signing [the] Second Amendment [to this Agreement], each of the
Directors of the Bank so agrees.
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2.10 (a) TRANSMITTAL LETTER. On or about the mailing date of the Joint
Proxy Statement/Prospectus, the Company, the Bank or the Company's Exchange
Agent shall mail appropriate transmittal materials to the stockholders of Bank
Stock, in form acceptable to the Company. The transmittal materials shall
include documentation by which stockholders may indicate their election
regarding the sale of shares in the Offering, subject to the possible adjustment
as provided in Section 2.1(b), and shall provide that sale in the Offering will
be contingent on the completion of the Offering. The transmittal letter shall
also contain a power of attorney authorizing an authorized representative of the
Company to exchange the Bank's shares for Company shares, and then immediately
deliver the Company shares to the Underwriter for sale in the Offering. The
transmittal letter shall also require a signature guarantee, from a bank or
brokerage with medallion capability. The holder of Bank Stock shall be
instructed to send to the Company, or to the entity designated by the Company
(which may be the Bank or the Exchange Agent), the holder's Bank Stock
certificates with the properly completed letter of transmittal. The transmittal
letter shall contain an election box and other appropriate and customary
transmittal materials (which shall specify that delivery shall be effected, and
risk of loss and title to the certificates theretofore representing shares of
Bank Stock shall pass, only upon proper delivery of such certificates to the
Exchange Agent in such form as Company requires). The transmittal materials
shall identify the Election Deadline established by the Company, which shall not
be less than 30 days from the date of mailing of such transmittal letter to the
holder (or such shorter time as the Bank may approve), and shall state that any
share of Bank Stock (other than Dissenting Common Stock) with respect to which
the holder (or the Beneficial Owner, as the case may be) shall not have
submitted an effective, properly completed letter of transmittal together with
the Bank Stock certificates (or customary affidavits and indemnification
regarding the loss or destruction of such certificates or the guaranteed
delivery of such certificates) prior to the Election Deadline shall be deemed to
be "Undesignated Shares" hereunder, and shall not sell Company Stock in the
Offering. The Bank shall provide to the Exchange Agent all information
reasonably necessary for it to perform its obligations as specified herein.
(b) PROPER AND TIMELY ELECTION. Any Election shall have been properly made
and effective only if the Company or its designee shall have actually received a
properly completed letter of transmittal by the date and time established by the
Company and specified in the transmittal materials, as such date and time may be
extended by the Company in its discretion (the "Election Deadline"). A letter of
transmittal shall be deemed properly completed only if an Election is indicated
for each share of Bank Stock covered by such letter of transmittal and if
accompanied by one or more certificates (or customary affidavits and
indemnification regarding the loss or destruction of such certificates or the
guaranteed delivery of such certificates) representing all shares of Bank Stock
owned by the holder of Bank Stock, together with duly executed transmittal
materials included in or required by the letter of transmittal. Any Election may
be revoked or changed by the person submitting a revised, properly completed
letter of transmittal at or prior to the Election Deadline. In the event a
letter of transmittal is revoked prior to the Election Deadline, the shares of
Bank Stock represented by such Election shall automatically become Undesignated
Shares unless and until a new Election is properly made with respect to such
shares on or before the Election Deadline, and the Company shall cause the
certificates representing such shares of Bank Stock to be promptly returned
without charge to the person submitting the revoked Election upon written
request to that effect from the holder who submitted such Election Form. Subject
to the terms of this Agreement and of the Election, the Company or the Exchange
Agent shall have reasonable discretion to determine whether any election,
revocation or change has been properly or timely made and to disregard
immaterial defects in the letter of transmittal, and any decisions of the
Company and Bank required by the Exchange Agent and made in good faith in
determining such matters shall be binding and conclusive. Neither the Company
nor the Exchange Agent shall be liable for the failure to notify any person of
any defect in an Election or the letter of transmittal, provided that the
Company uses its reasonable best efforts promptly to notify (or to cause the
Exchange Agent promptly to notify) any holder of Bank Stock of any defect in an
Election or the Letter of Transmittal.
(c) If the aggregate number of shares of Bank Stock as to which Elections to
sell shall have effectively been submitted would, absent proration, result in
the sale in the Offering of more or less shares than are permitted pursuant to
Section 2.1(b), then the sales in the Offering shall be increased or reduced pro
rata as provided in Section 2.1(b) in order to ensure that the shares sold by
Selling Shareholders in the Offering do not exceed or are not less than the
amounts provided in Section 2.1(b).
(d) CALCULATIONS. The calculations required by this Section 2.10 shall be
prepared by the Company prior to the Effective Time and shall be set forth in a
certificate executed by the Chief Financial Officer or Chief Executive Officer
of the Company and furnished to the Bank at least two Business Days prior to the
Closing Date showing the manner of calculation in reasonable detail. Any cash
payment shall be rounded to the nearest cent.
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(e) NO FRACTIONAL SHARES OR WARRANTS. Notwithstanding any other provisions
of this Agreement, each holder of shares of Bank Stock exchanged pursuant to the
Merger who would otherwise have been entitled to receive a fraction of a share
of Company Stock (after taking into account all certificates delivered by such
holder) shall receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional part of a share of Company Stock multiplied by $15.00.
Notwithstanding any other provision of this Agreement, no fractional warrants
shall be issued, and no cash or other consideration shall be paid in lieu of
fractional warrants. No holder will be entitled to dividends, voting rights or
any other rights as a shareholder in respect of any fractional share of Company
Stock.
ARTICLE III
THE CLOSING
3.1 CLOSING DATE. Consummation of the transactions contemplated by this
Agreement shall take place at the office of the Bank, 3715 Sunnyside Drive,
Riverside, California, or such other location as may be agreed upon by the
parties, on the Closing Date. The Effective Time shall occur following the last
to occur of (i) the receipt of all approvals and consents specified in this
Agreement and the expiration of the applicable waiting periods specified in
Article IX, and (ii) satisfaction of the conditions precedent set forth in
Articles IX, X and XI or written waiver of such conditions as provided herein
(the "Closing Date", "Effective Time of the Merger" or "Effective Time").
3.2 EXECUTION OF AGREEMENT OF MERGER. Prior to the Closing Date, and as
soon as practicable after the organization of PCBG Merger Corporation, the
Agreement of Merger (as amended, if necessary, to conform to any requirements of
any Governmental Entity having authority over the Merger) shall be executed by
Bank and PCBG Merger Corporation. On the Closing Date, the Merger shall become
effective in accordance with the approvals granted by the Commissioner, the FDIC
and the FRB, and the Agreement of Merger, together with all requisite
certificates, shall be duly filed with the California Secretary of State.
3.3 DOCUMENTS TO BE DELIVERED. At the Closing the Parties shall deliver,
or cause to be delivered, such documents or certificates as may be necessary in
the reasonable opinion of counsel for any of the parties, to effectuate the
transactions called for in this Agreement. If, at any time after the Effective
Time of the Merger, the Company or its successors or assigns shall determine
that any further conveyance, assignment or other documents or any further action
is necessary or desirable to further effectuate the transactions set forth
herein or contemplated hereby, the officers and directors of the Parties hereto
shall execute and deliver, or cause to be executed and delivered, all such
documents as may be reasonably required to effectuate such transactions.
3.4 EXCHANGE PROCEDURES.
(a) EXCHANGE AGENT. Prior to the Effective Time, the Company shall deposit
with the Exchange Agent shares of Company Stock and Warrants to be issued to
selling shareholders of the Bank, such shares being the number of shares of
Company Stock equal to the Aggregate Purchase Consideration issuable in the
Merger. The Exchange Agent shall deliver or cause to be delivered to the
Underwriter those of such shares to be sold in the Offering. Upon completion of
the Offering, the Underwriter will deposit with the Exchange Agent the gross
proceeds of the sale of shares by selling shareholders in the Offering. The
Exchange Agent shall distribute to each selling shareholder the cash proceeds,
shares of Company Stock and Warrants to which such selling shareholder is
entitled, provided that the selling shareholder shall have delivered the
requisite letter of transmittal and Bank share certificates (or customary
affidavits and indemnification regarding the loss or destruction of such
certificates or the guaranteed delivery of such certificates). The Exchange
Agent shall not be entitled to vote or exercise any rights of ownership with
respect to Company Stock held by it from time to time hereunder, except that it
shall receive and hold all dividends or other distributions paid or distributed
with respect to such shares for the account of the persons entitled thereto.
(b) EXCHANGE OF CERTIFICATES. Each holder of a certificate formerly
representing Bank Stock (other than Dissenting Common Stock) who surrenders or
has surrendered such certificate (or customary affidavits and indemnification
regarding the loss or destruction of such certificate), together with duly
executed transmittal materials required by Section 2.10, to the Exchange Agent
shall, upon acceptance thereof, be entitled to the Per Share Consideration of a
certificate representing Company Stock or the proceeds of the sale of such stock
in the Offering and Warrants into which the shares of Bank Stock shall have been
converted pursuant hereto, as well as cash in lieu of any fractional shares of
Company Stock to which such holder would otherwise be entitled. The Exchange
Agent shall accept such Bank certificate upon compliance with such reasonable
and customary terms and conditions as the Exchange Agent may impose to effect an
orderly exchange thereof in accordance with normal
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practices. Until surrendered as contemplated by this Section 3.4, each
certificate representing Bank Stock shall be deemed from and after the Effective
Time to evidence only the right to receive the Per Share Consideration Company
Stock and a Warrant, as the case may be, upon such surrender. The Company shall
not be obligated to deliver the consideration to which any former holder of Bank
Stock is entitled as a result of the Merger until such holder surrenders his
certificate or certificates representing shares of Bank Stock for exchange as
provided in this Article III. If any certificate for shares of Company Stock, or
any check representing declared but unpaid dividends, is to be issued in a name
other than that in which a certificate surrendered for exchange is issued, the
certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and the person requesting such exchange shall affix any
requisite stock transfer tax stamps to the certificate surrendered or provide
funds for their purchase or establish to the satisfaction of the Exchange Agent
that such taxes are not payable.
(c) PAYMENT TO HOLDERS OF A BANK OPTION. Each holder of a Bank Option who
presents a demand for cancellation and payment of such Bank Option as provided
in Section 2.8 of the Agreement to the Exchange Agent prior to the Closing
shall, upon acceptance thereof, be entitled to the per share equivalent of the
Aggregate Option Price. Upon receipt of the Aggregate Purchase Consideration and
as soon as reasonably possible after the Closing, the Exchange Agent shall
deliver to each former holder of a Bank Option the consideration due each such
holder under Section 2.8 of the Agreement, in the form of shares of Company
Stock and Warrants as provided therein, or in the form of cash, if the shares
received in exchange for the cancellation of the Bank Option were submitted for
sale in the Offering as provided in Section 7.14(b). The Exchange Agent shall be
entitled to rely upon the records of the Bank and the information provided in
such demand for cancellation documentation provided by any such holder of a Bank
Option, as verified by the Company as to the method and means of payment and
disposition of such consideration.
(d) AFFILIATES. Certificates surrendered for exchange by any person
constituting an "affiliate" of Bank for purposes of Rule 144(a) under the
Securities Act shall not be exchanged for certificates representing whole shares
of Company Stock until the Company has received a written agreement from such
person as provided in Section 6.25.
3.5 VOTING AND DIVIDENDS. Former shareholders of record of Bank shall not
be entitled to vote after the Effective Time at any meeting of Company
shareholders the number of whole shares of Company Stock into which their
respective shares of Bank Stock are converted, until such holders have exchanged
their certificates representing Bank Stock for certificates representing Company
Stock in accordance with the provisions of this Agreement. Until surrendered for
exchange in accordance with the provisions of Sections 2.10 and 3.4 of this
Agreement, each certificate theretofore representing shares of Bank Stock (other
than shares to be canceled pursuant to Section 2.1 of this Agreement) shall from
and after the Effective Time represent for all purposes only the right to
receive the Per Share Consideration consisting of shares of Company Stock and a
Warrant, and cash in lieu of fractional shares, as set forth in this Agreement.
No dividends or other distributions declared or made after the Effective Time
with respect to Company Stock with a record date after the Effective Time shall
be paid to the holder of any unsurrendered certificate of Bank Stock with
respect to the shares of Company Stock represented thereby, until the holder of
such certificate of Common Stock shall surrender such certificate. Subject to
the effect of applicable laws, following surrender of any such certificates of
Bank Stock for which shares of Company Stock are to be issued, there shall be
paid to the holder of the certificates, without interest, (i) the amount of any
cash payable with respect to a fractional share of Company Stock to which such
holder is entitled pursuant to Section 2.1 and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of Company Stock, and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Company Stock."
3.6 NO LIABILITY. Neither the Company, the Bank nor the Exchange Agent
shall be liable to any holder of shares of Bank Stock for any shares of Company
Stock (or dividends or distributions with respect thereto) or cash delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
3.7 WITHHOLDING RIGHTS. The Company or the Exchange Agent shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Company Stock such amounts
as the Company or the Exchange Agent is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of state,
local or foreign tax law. To the extent that amounts are so withheld by the
Company or the Exchange Agent, such withheld amounts shall be treated for all
purposes of this
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Agreement as having been paid to the holder of the shares of Bank Stock in
respect of which such deduction and withholding was made by the Company or the
Exchange Agent.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BANK
The Bank represents and warrants to the Company as follows:
4.1 ORGANIZATION AND GOOD STANDING. The Bank is a California banking
corporation duly organized and validly existing in good standing under the laws
of the State of California and it has the corporate power and authority to carry
on its business as presently conducted, and is authorized to transact business
as a bank. The Bank is a not a member of the Federal Reserve System and its
deposits are insured by the FDIC in the manner and to the extent provided by
law. The Bank has all requisite corporate power and authority to own, lease and
operate its properties and assets and to carry on its business as presently
conducted. The nature of its operations and the business transacted by it as of
the date hereof make licensing and qualification in any other state or
jurisdiction unnecessary. The Bank has delivered to the Company true and correct
copies of its Articles of Incorporation and Bylaws, as amended and in effect as
of the date hereof.
4.2 CAPITALIZATION. The authorized capital stock of Bank consists of
20,000,000 shares of Common Stock, no par value, of which 844,278 shares are
outstanding on the date hereof, all validly issued, fully paid and
nonassessable, and 10,000,000 shares of Preferred Stock, none of which are
outstanding. Except for stock options covering 46,968 shares of Bank Stock
granted pursuant to the Bank Stock Option Plan and the Warrant Agreement, no
unissued shares of Bank Stock or any other securities of the Bank are subject to
any warrants, options, rights or commitments of any character, kind or nature
and the Bank is not obligated to issue or repurchase any shares of Bank Stock or
any other security to or from any person except in accordance with the terms of
the Bank Stock Option Plan and Agreements pursuant thereto, and true and correct
copies, as amended and in effect as of the date hereof have been delivered to
the Company. Exhibit 4.2 sets forth the name of each holder of a Bank Option,
the number of shares of Bank Stock covered by each such holder's option, the
date of grant of each such holder's option, the exercise price per share, the
vesting schedule for each such holder's option, and the expiration date of each
such holder's option.
4.3 SUBSIDIARIES. Except as indicated in Exhibit 4.3, the Bank does not
own, directly or indirectly (except as pledgee pursuant to loans which are not
in default), any equity position or other voting interest in any corporation,
partnership, joint venture or other entity.
4.4 FINANCIAL STATEMENTS. The Bank has delivered to the Company copies of
the audited Consolidated Balance Sheets of the Bank as of December 31, 1997 and
1996; Consolidated Statements of Operations, Stockholders' Equity and Cash Flows
for each of the years ended December 31, 1997, 1996 and 1995, and the related
notes and related opinions thereon of Arthur Andersen LLP, certified public
accountants, with respect to such financial statements (the "Audited Bank
Financial Statements"). The Bank has delivered to the Company copies of the
unaudited Consolidated Balance Sheet of the Bank as of September 30, 1998;
Consolidated Statement of Operations, Stockholders' Equity and Cash Flows for
the nine month period ended September 30, 1998, and the related notes thereon
(the "Unaudited Bank Financial Statements"). The Bank has furnished the Company
with true and correct copies of each management letter or other letter delivered
to the Bank by Arthur Andersen LLP in connection with the Audited Bank Financial
Statements or relating to any review of the internal controls of the Bank by
Arthur Andersen LLP since January 1, 1996. The Audited Bank Financial Statements
and the Unaudited Bank Financial Statements: (i) present fairly the financial
condition and results of operations of the Bank as of and for the dates or
periods covered thereby in accordance with GAAP and RAP consistently applied
throughout the periods involved; (ii) are based on the books and records of the
Bank; (iii) contain and reflect reserves for all material accrued liabilities
and for all reasonably anticipated losses, and set forth adequate reserves for
loan losses and other contingencies to the extent required by GAAP and RAP; and
(iv) none of the Audited Bank Financial Statements or Unaudited Bank Financial
Statements contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements contained therein not
misleading under GAAP or RAP. The books and records of the Bank have been, and
are being, maintained in all material respects in accordance with GAAP and RAP
and other applicable legal and accounting requirements and reflect only actual
transactions.
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4.5 BOOKS AND RECORDS.
(a) The minute books of the Bank which have been made available to the
Company contain (i) true, accurate and complete records of all meetings and
actions taken by the Board of Directors, Board committees and shareholders of
the Bank, and (ii) true and complete copies of its Charter Documents.
(b) The Bank has records which accurately and validly reflect, in all
material respects, its transactions and accounting controls sufficient to insure
that such transactions are (i) in all material respects, executed in accordance
with management's general or specific authorization, and (ii) recorded in
conformity with GAAP or RAP; such records, to the extent they contain important
information pertaining to the Bank which is not easily and readily available
elsewhere, have been duplicated, and such duplicates are stored safely and
securely pursuant to procedures and techniques reasonably adequate for companies
of the size of the Bank and in the businesses in which the Bank is engaged; and
the data processing equipment and software used by the Bank in the operation of
its businesses (including any disaster recovery facility) to generate and
retrieve such records are reasonably adequate for companies of the size of the
Bank and in the businesses in which the Bank is engaged.
4.6 PROPERTY AND ASSETS (a) Exhibit 4.6(a) sets forth a general
description (including the character of the ownership of the Bank) of all real
property of the Bank, including fees, leaseholds and all other interest in real
property (including real property that is DPC Property) ("Real Property").
Except as set forth on Exhibit 4.6(a), (i) the Bank has good and marketable
title, free and clear of any encumbrance, lien or charge of any kind or nature
(except liens for taxes not yet due) to all of the property, real, mixed or
intangible, reflected on the Audited Bank Financial Statements, except as
reflected therein or in the notes thereto (except property sold or transferred
or Encumbrances incurred in the ordinary course of business since the date
thereof except (a) Encumbrances in the aggregate which do not materially detract
from the value, interfere with the use, or restrict the sale, transfer or
disposition, of such properties and assets or otherwise materially and adversely
affect the Bank; (b) any lien for taxes not yet due; and (c) any Encumbrances
arising under the document that created the interest in the Real Property (other
than Encumbrances arising as a result of any breach or default of the Bank);
(ii) all leasehold interests for Real Property and any material personal
property used by the Bank in its business are held pursuant to lease agreements
which are valid and enforceable, except as the enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
other laws of general application relating to or affecting enforcement of
creditors rights and the application of equitable principles in any action,
legal or equitable in accordance with their terms; (iii) all such properties
comply in all material respects with all applicable private agreements, zoning
requirements and other governmental laws and regulations relating thereto and
there are no condemnation proceedings pending or, to the knowledge of the Bank,
threatened with respect to such properties; (iv) the Bank has valid title or
other ownership rights under licenses to all material intangible personal or
intellectual property used by the Bank in its business, free and clear of any
claim, defense or right of any other person or entity which is material to such
property, subject only to rights of the licensors pursuant to applicable license
agreements, which rights do not materially adversely interfere with the use of
such property; and (v) all material insurable properties owned or held by the
Bank are adequately insured in such amounts and against such risks as is
customary with banks of similar size. The Bank has furnished the Company with
true and correct copies of all leases included on Exhibit 4.6(a) delivered as of
the date of the Agreement.
(b) CONDITION OF PROPERTIES. All tangible properties of the Bank that are
material to the business, financial condition, or results of operations of the
Bank are in a good state of maintenance and repair, except for ordinary wear and
tear, and are adequate for the conduct of the business of the Bank as presently
conducted, and comply with all applicable Rules related thereto. Except as set
forth in Exhibit 4.6(a), (i) the execution of this Agreement, the performance of
the obligations of the Bank hereunder and the consummation of the transactions
contemplated herein, including the Merger, does not conflict with and will not
result in a breach or default under any lease, agreement or contract described
in Exhibit 4.6(a), or give any other party thereto a right to terminate or
modify any term thereof; (ii) the Bank has no obligation to improve any Real
Property; (iii) each lease and agreement under which the Bank is a lessor is in
full force and effect and is a valid and legally binding obligation of the Bank,
and, to the best knowledge of the Bank, each other party thereto; and (iv) the
Bank, and to the best knowledge of the Bank, each other party to any such lease
or agreement have performed in all material respects all the obligations
required to be performed by them to date under such lease or agreement and are
not in default in any material respect under any such lease or agreement and
there is no pending or, to the best knowledge of the Bank, threatened
proceeding, or proceeding which the Bank has reason to believe may be
threatened, with respect to such property or any such lease.
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4.7 LITIGATION PROCEEDINGS AND AGREEMENTS WITH GOVERNMENTAL ENTITIES.
(a) The Bank is not engaged as a defendant in any legal or other proceedings
before any court, administrative agency or other Governmental Entity except as
is shown on Exhibit 4.7. Except as set forth on Exhibit 4.7, the Bank is not
aware of any "threatened or pending litigation" (within the meaning of Paragraph
5 of the American Bar Association Statement of Policy Regarding Lawyers'
Responses to Auditors' Requests for Information adopted December 8, 1975)
against the Bank. The Bank is not subject to any agreement, order, writ,
injunction or decree of any federal, state or local court, out of a proceeding
involving the Bank or any of its business or properties except as described in
Exhibit 4.7. The Bank has not been served with notice of, nor, to best of Bank's
knowledge is it currently under investigation with respect to, any violation of
federal, state or local law or administrative regulation. Except as set forth on
Exhibit 4.7, there is no (i) outstanding judgment, order, writ, injunction or
decree, stipulation or award of any Governmental Entity or by arbitration,
against, or to the knowledge of the Bank, affecting the Bank or its assets or
business that (a) has had or may have a material adverse effect on the assets,
liabilities, business, financial condition or results of operations of the Bank,
(b) requires any payment by, or excuses a material obligation of a third party
to make any payment to, the Bank, or (c) has the effect of prohibiting any
business practice of, or the acquisition, retention or disposition of property
by, the Bank; or (ii) legal, administrative, arbitration, investigatory or other
proceeding pending or, to the best knowledge of the Bank that has been
threatened, or which the Bank has reason to believe may be threatened, against
or affecting any director, officer, employee, agent or representative of the
Bank, in connection with which any such person has or may have rights to be
indemnified by the Bank.
(b) Except as set forth in Exhibit 4.7, the Bank is not a party to, or
otherwise subject to, any agreement or memorandum of understanding with or order
of any Governmental Entity charged with the supervision or regulation of banks
or engaged in the insurance of bank deposits, that restricts the conduct of its
business, or in any manner relates to its capital adequacy, its credit or
investment policies or its management.
4.8 TAXES AND ASSESSMENTS. The Bank has timely filed all federal income
and state franchise tax returns and all tax reports or returns which it is
required to file with applicable federal, state, county or local authorities and
agencies except (a) where the failure to make any such filing would not have any
materially adverse effect on the business, financial condition or results of
operations of the Bank taken as a whole, and (b) where the required filing date
has been lawfully extended, and the Bank has paid all taxes provided for and to
be due in such returns and reports ("Tax Filings"). Except as set forth in
Exhibit 4.8, the Bank's Tax Filings have not been examined by a Governmental
Entity in the past five (5) years. As of December 31, 1997, to the extent
required by GAAP, the Bank had paid, or set up adequate accruals for the payment
of, all taxes, penalties and assessments for which it was liable as of such
date, whether or not disputed, with respect to any and all United Sates federal,
foreign, state, local, environmental (including under any Environmental Law) and
other taxes for the periods covered by the financial statements of the Bank and
for all prior and subsequent periods. Except as set forth in Exhibit 4.8 the
Bank has no knowledge of any deficiency proposed to be assessed against it. The
Bank has paid all assessments made by the FDIC and the Commissioner required to
be paid prior the date hereof. There is currently no federal or state income tax
audit or investigation in process or to the best knowledge of the Bank any other
pending investigation by any authorized body of the taxes paid or to be paid by
the Bank, and the Bank has not been informed that any such audit or
investigation is proposed.
4.9 COMPLIANCE WITH LAWS AND REGULATIONS.
(a) Except as set forth in Exhibit 4.9, the Bank is not in default under or
in breach of any law, ordinance, rule, regulation, order, judgment or decree
applicable to it promulgated by any Governmental Entity having authority over
it, where such default or breach would have a material adverse effect on its
financial condition, results of operations, or business.
(b) The Bank has conducted in all material respects its businesses in
accordance with all applicable federal, foreign, state and local laws,
regulations and orders, including without limitation disclosure, usury, equal
credit opportunity, equal employment, fair credit reporting, antitrust,
licensing and other laws, regulations and orders, and the forms, procedures and
practices used by the Bank are in compliance with such laws, regulations, and
orders, except for such violations or noncompliance as will not have a material
adverse effect on the financial condition, results of operations, or business of
the Bank.
4.10 PERFORMANCE OF OBLIGATIONS. Except as set forth in Exhibit 4.10, the
Bank has performed in all respects all of the obligations required to be
performed by it to date and is not in default under or in breach of any term or
provision of any covenant, contract, lease, indenture or any other agreement to
which the Bank is a party or is subject or is otherwise bound, and no event has
occurred which, with the giving of notice or the passage of time or
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both, would constitute such default or breach, where such default or breach
would have a material adverse effect on the financial condition, results of
operations, or business of the Bank, except for loans of the Bank in default on
the date of this Agreement. No party with whom the Bank has an agreement which
is material to the financial condition, results of operations or business of the
Bank is in default thereunder.
4.11 EMPLOYEES.
(a) Except as set forth in Exhibit 4.11(a), there are no understandings for
the employment of any officer or employee of the Bank which are not terminable
by the Bank without liability on not more than 30 days' notice. Except as set
forth in Exhibit 4.11(a), the Bank is not a party to an oral or written
consultant agreement not terminable upon 60 days' or less notice or involving
the payment of more than $10,000 per annum. Except as set forth in Exhibit
4.11(a), there are no material controversies pending or threatened between the
Bank and any of its employees. Except as disclosed in the Audited Bank Financial
Statements, the Unaudited Bank Financial Statement or in Exhibit 4.11(a), all
material sums due for employee compensation and benefits have been duly and
adequately paid or provided, and all deferred compensation obligations are fully
funded. The Bank is not a party to any collective bargaining agreement with
respect to any of its employees or any labor organization to which its employees
or any of them belong. Except as set forth in Exhibit 4.11(a), no director,
officer or employee of the Bank is entitled to receive any payment of any amount
under any employment agreement, severance plan or other benefit plan as a result
of the consummation of any transaction contemplated by this Agreement.
(b) Except as disclosed in Exhibit 4.11(b), (i) the Bank is and has been in
material compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
including, without limitation, any such laws respecting employment
discrimination and occupational safety and health requirements, and in any
unfair labor practice; (ii) there is no material unfair labor practice complaint
against the Bank pending or, to the knowledge of the Bank, threatened before the
National Labor Relations Board; (iii) there is no labor dispute, strike,
slowdown or stoppage actually pending or, to the knowledge of the Bank,
threatened against or directly affecting the Bank; and (iv) the Bank has not
experienced any material work stoppage or other material labor difficulty during
the past five years, except in each case which would not result in a Material
Adverse Change.
(c) Except as disclosed in Exhibit 4.11(c), the Bank does not maintain,
contribute to or participate in or have any material liability under any
employee benefit plans, as defined in ERISA, or any nonqualified employee
benefit plans or deferred compensation, bonus, stock or incentive plans, or
other employee benefit or fringe benefit programs for the benefit of former or
current employees of the Bank (the "Employee Plans"). To the best knowledge of
the Bank, no present or former employee of the Bank has been charged with
breaching nor has breached a fiduciary duty under any of the Employee Plans. The
Bank does not participate in, nor has it in the past five years participated in,
nor has it any present or future obligation or liability under, any
multiemployer plan (as defined at Section 3(37) of ERISA). Except as may be
separately disclosed in Exhibit 4.11(c), the Bank does not maintain, contribute
to, or participate in, any plan that provides health, major medical, disability
or life insurance benefits to former employees of the Bank.
(d) Exhibit 4.11 (d) sets forth and describes all Employee Plans in which
the Bank participates, or by which it is bound, including, without limitation;
(i) any profit sharing, deferred compensation, bonus, stock option, stock
purchase, pension, retainer, consulting, retirement, welfare or incentive plan
or agreement whether legally binding or not; (ii) any plan providing for "fringe
benefits" to its employees, including but not limited to vacation, sick leave,
medical, hospitalization, life insurance and other insurance plans, and related
benefits; (iii) any written employment agreement and any other employment
agreement not terminable at will; or (iv) any other "employee benefit plan"
(within the meaning of Section 3(3) of ERISA) (collectively, the "Employee
Plans"). Except as set forth in Exhibit 4.11(d), (i) there are no negotiations,
demands or proposals that are pending or threatened that concern matters now
covered, or that would be covered, by any employment agreements or Employee Plan
other than amendments to plans qualified under Section 401 of the Code that are
required by the Tax Reform Act of 1986 and later legislation; (ii) the Bank is
in compliance with the material reporting and disclosure requirements of Part 1
of Subtitle IB of ERISA and the corresponding provisions of the Code to the
extent applicable to all such Employee Plans; (iii) the Bank has substantially
performed all of its obligations under all such Employee Plans and employment
agreements required to be performed heretofore; and (iv) there are no actions,
suits or claims (other than routine claims for benefits) pending or, to the best
knowledge of the Bank, threatened against any such Employee Plans and employment
agreements or the assets of such plans, and to the best knowledge of the Bank,
no facts exist which could give rise to any actions, suits or claims (other than
routine claims for benefits) against such plans or the assets of such plans.
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(E) THE "EMPLOYEE PLANS" (WITHIN THE MEANING OF SECTION 3(2) OF ERISA)
DESCRIBED ON EXHIBIT 4.11(D) HAVE BEEN DULY AUTHORIZED BY THE BOARD OF DIRECTORS
OF THE BANK. EXCEPT AS SET FORTH IN EXHIBIT 4.11(D), EACH SUCH PLAN AND
ASSOCIATED TRUST INTENDED TO BE QUALIFIED UNDER SECTION 401(A) AND TO BE EXEMPT
FROM TAX UNDER SECTION 501(A) OF THE CODE, RESPECTIVELY, HAS EITHER RECEIVED A
FAVORABLE DETERMINATION LETTER FROM THE INTERNAL REVENUE SERVICE (THE "IRS"),
HAS APPLIED FOR SUCH A DETERMINATION LETTER OR WILL APPLY FOR SUCH A
DETERMINATION LETTER BEFORE THE EXPIRATION OF THE REMEDIAL AMENDMENT PERIOD SET
FORTH IN SECTION 401(B) OF THE CODE, AS THE IRS MAY EXTEND SUCH PERIOD, AND TO
THE BEST KNOWLEDGE OF THE BANK, NO EVENT HAS OCCURRED THAT WILL OR COULD GIVE
RISE TO DISQUALIFICATION OF ANY SUCH PLAN WHICH IS INTENDED TO BE QUALIFIED
UNDER SECTION 401(A) OF THE CODE OR LOSS OF THE EXEMPTION FROM TAX OF ANY SUCH
TRUST WHICH IS INTENDED TO BE EXEMPT FROM TAX UNDER SECTION 501(A) OF THE CODE.
NO EVENT HAS OCCURRED THAT WILL OR COULD SUBJECT ANY SUCH PLANS TO TAX UNDER
SECTION 511 OF THE CODE. NONE OF SUCH PLANS HAS ENGAGED IN A MERGER OR
CONSOLIDATION WITH ANY OTHER PLAN OR TRANSFERRED ASSETS OR LIABILITIES FROM ANY
OTHER PLAN. TO THE BEST OF THE BANK'S KNOWLEDGE, NO PROHIBITED TRANSACTION
(WITHIN THE MEANING OF SECTION 409 OR 502(I) OF ERISA OR SECTION 4975 OF THE
CODE) OR PARTY-IN-INTEREST TRANSACTION (WITHIN THE MEANING OF SECTION 406 OF
ERISA) HAS OCCURRED WITH RESPECT TO ANY OF SUCH PLANS WHICH COULD SUBJECT THE
BANK TO AN EXCISE TAX OR PENALTY. TO THE BEST KNOWLEDGE OF THE BANK, NO EMPLOYEE
OF THE BANK HAS ENGAGED IN ANY TRANSACTIONS WHICH COULD SUBJECT THE BANK TO
INDEMNIFY SUCH PERSON AGAINST LIABILITY. ALL COSTS OF PLANS HAVE BEEN PROVIDED
FOR ON THE BASIS OF CONSISTENT METHODS IN ACCORDANCE WITH SOUND ACTUARIAL
ASSUMPTIONS AND PRACTICES. NO EMPLOYEE PLAN HAS INCURRED ANY "ACCUMULATED
FUNDING DEFICIENCY" (AS DEFINED IN SECTION 302(2) OF ERISA), WHETHER OR NOT
WAIVED, TAKING INTO ACCOUNT CONTRIBUTIONS MADE WITHIN THE PERIOD DESCRIBED IN
SECTION 412(C)(10) OF THE CODE; NOR ARE THERE ANY UNFUNDED AMOUNTS UNDER ANY
EMPLOYEE PLAN WHICH IS REQUIRED TO BE FUNDED UNDER PART 3 OF SUBTITLE IB OF
ERISA AND SECTION 412 OF THE CODE); NOR HAS THE BANK FAILED TO MAKE ANY
CONTRIBUTIONS OR PAY ANY AMOUNT DUE AND OWING AS REQUIRED BY LAW OR THE TERMS OF
ANY EMPLOYEE PLAN OR EMPLOYMENT AGREEMENT. SUBJECT TO AMENDMENTS THAT ARE
REQUIRED BY THE TAX REFORM ACT OF 1986 AND LATER LEGISLATION, SINCE THE LAST
VALUATION DATE FOR EACH EMPLOYEE PLAN, THERE HAS BEEN NO AMENDMENT OR CHANGE TO
SUCH PLAN THAT WOULD INCREASE THE AMOUNT OF BENEFITS THEREUNDER.
(F) THE BANK DOES NOT SPONSOR OR PARTICIPATE IN, OR HAS NOT SPONSORED OR
PARTICIPATED IN, ANY EMPLOYEE BENEFIT PENSION PLAN TO WHICH SECTION 4021 OF
ERISA APPLIES THAT WOULD CREATE A LIABILITY UNDER TITLE IV OF ERISA.
(G) THE BANK DOES NOT SPONSOR OR PARTICIPATE IN, OR HAS NOT SPONSORED OR
PARTICIPATED IN, ANY EMPLOYEE PLAN THAT IS A "MULTI-EMPLOYER PLAN" (WITHIN THE
MEANING OF SECTION 3(37) OF ERISA) THAT WOULD SUBJECT SUCH PERSON TO ANY
LIABILITY WITH RESPECT TO ANY SUCH PLAN.
(H) ALL GROUP HEALTH PLANS OF THE BANK (INCLUDING ANY PLANS OF AFFILIATES OF
THE BANK THAT MUST BE TAKEN INTO ACCOUNT UNDER SECTION 162(I) OR (K) OF THE CODE
AS IN EFFECT IMMEDIATELY PRIOR TO THE TECHNICAL AND MISCELLANEOUS REVENUE ACT OF
1988 AND SECTION 4980B OF THE CODE) HAVE BEEN OPERATED IN COMPLIANCE WITH THE
GROUP HEALTH PLAN CONTINUATION COVERAGE REQUIREMENTS OF SECTION 4980B OF THE
CODE TO THE EXTENT SUCH REQUIREMENTS ARE APPLICABLE.
(I) THERE HAVE BEEN NO ACTS OR OMISSIONS BY THE BANK THAT HAVE GIVEN RISE TO
OR MAY GIVE RISE TO FINES, PENALTIES, TAXES, OR RELATED CHARGES UNDER SECTIONS
502(C) OR (I) OR 4071 OF ERISA OR CHAPTER 43 OF THE CODE WHICH COULD BE IMPOSED
ON THE BANK.
(J) EXCEPT AS DESCRIBED IN SECTION 4.11(J), THE BANK DOES NOT MAINTAIN ANY
EMPLOYEE PLAN OR EMPLOYMENT AGREEMENT PURSUANT TO WHICH ANY EMPLOYEE PLAN OR
OTHER PAYMENT WILL BE REQUIRED TO BE MADE BY THE BANK OR PURSUANT TO WHICH ANY
OTHER BENEFIT WILL ACCRUE OR VEST IN ANY DIRECTOR, OFFICER OR EMPLOYEE THE BANK,
IN EITHER CASE AS A RESULT OF THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
BY THE AGREEMENT.
(K) NO "REPORTABLE EVENT," AS DEFINED IN ERISA, HAS OCCURRED WITH RESPECT TO
ANY OF THE EMPLOYEE PLANS.
(L) ALL AMENDMENTS REQUIRED TO BRING EACH OF THE EMPLOYEE BENEFIT PLANS INTO
CONFORMITY WITH ALL OF THE PROVISIONS OF ERISA AND THE CODE AND ALL OTHER
APPLICABLE LAWS, RULES AND REGULATIONS HAVE BEEN MADE, OR WILL BE MADE BEFORE
THE EXPIRATION OF THE REMEDIAL AMENDMENT PERIOD SET FORTH UNDER SECTION 401(B)
OF THE CODE, AS SUCH PERIOD MAY BE EXTENDED BY THE IRS.
(M) EXHIBIT 4.11(M) SETS FORTH THE NAME OF EACH DIRECTOR, OFFICER, EMPLOYEE,
AGENT OR REPRESENTATIVE OF THE BANK AND EVERY OTHER PERSON ENTITLED TO RECEIVE
ANY BENEFIT OR ANY PAYMENT OF ANY AMOUNT UNDER ANY EXISTING EMPLOYMENT
AGREEMENT, SEVERANCE PLAN OR OTHER BENEFIT PLAN OR UNDERSTANDING AS A RESULT OF
THE CONSUMMATION OF ANY TRANSACTION CONTEMPLATED IN THIS AGREEMENT, AND WITH
RESPECT TO EACH SUCH PERSON, THE NATURE OF SUCH BENEFIT OR THE AMOUNT OF SUCH
PAYMENT, THE EVENT TRIGGERING THE BENEFIT OR PAYMENT, AND THE DATE OF, AND
PARTIES TO, SUCH EMPLOYMENT AGREEMENT, SEVERANCE OR OTHER BENEFIT PLAN OR
UNDERSTANDING. THE BANK HAS FURNISHED THE COMPANY WITH TRUE AND CORRECT COPIES
OF ALL DOCUMENTS WITH RESPECT TO THE PLANS AND AGREEMENTS REFERRED TO IN EXHIBIT
4.11(D) DELIVERED AS OF THE DATE OF THE
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AGREEMENT, INCLUDING ALL AMENDMENTS AND SUPPLEMENTS THERETO, AND ALL RELATED
SUMMARY PLAN DESCRIPTIONS. FOR EACH OF THE EMPLOYEE PENSION BENEFIT PLANS OF THE
BANK REFERRED TO IN EXHIBIT 4.11(D) DELIVERED AS OF THE DATE OF THE AGREEMENT,
THE BANK HAS FURNISHED THE COMPANY WITH TRUE AND CORRECT COPIES OF (I) THE FORM
5500 WHICH WAS FILED IN EACH OF THE THREE MOST RECENT PLAN YEARS, INCLUDING
WITHOUT LIMITATION, ALL SCHEDULES THERETO AND ALL FINANCIAL STATEMENTS WITH
ATTACHED OPINIONS OF INDEPENDENT ACCOUNTANTS TO THE EXTENT REQUIRED; (II) THE
MOST RECENT DETERMINATION LETTER FROM THE IRS; (III) THE STATEMENT OF ASSETS AND
LIABILITIES AS OF THE MOST RECENT VALUATION DATE; AND (IV) THE STATEMENT OF
CHANGES IN FUND BALANCE AND IN FINANCIAL POSITION OR THE STATEMENT OF CHANGES IN
NET ASSETS AVAILABLE FOR BENEFITS UNDER EACH OF SAID PLANS FOR THE MOST RECENTLY
ENDED PLAN YEAR. THE DOCUMENTS REFERRED TO IN SUBDIVISIONS (III) AND (IV) FAIRLY
PRESENT THE FINANCIAL CONDITION OF EACH OF SAID PLANS AS OF AND AT SUCH DATES
AND THE RESULTS OF OPERATIONS OF EACH OF SAID PLANS, ALL IN ACCORDANCE WITH GAAP
OR ON THE CASH METHOD OF ACCOUNTING APPLIED ON A CONSISTENT BASIS.
4.12 CONTRACTS AND AGREEMENTS. Except as listed in Exhibit 4.12, the Bank
is not a party to any oral or written agreement, commitment, or obligation
(hereinafter referred to as an "Understanding" or "Material Contract") which
individually, or with all other similar Understandings relating to the same or
similar subject matter, falls within any of the following classifications:
(i) any Understanding dealing with advertising, brokerage, licensing,
dealership, representative or agency relationship;
(ii) any Understanding with any labor or collective bargaining
organization or association;
(iii) any mortgage, pledge, conditional sales contract, security
agreement, or any other similar Understanding with respect to any real or
personal property in an amount in excess of $25,000, under which the Bank is
a debtor or to which any of its property is subject;
(iv) any profit sharing, group insurance, bonus, deferred compensation,
stock option, severance pay, pension, retirement, or any other similar
Understanding which might provide benefits to the employees, officers or
directors of the Bank;
(v) any Understanding for the future purchase of materials, supplies,
services, merchandise or equipment, the price of which exceeds $20,000 and
which will not be terminable without liability as to future purchases as of
the Effective Time; it being understood that materials, supplies, service,
merchandise or equipment shall not be deemed to include loans, repurchase or
reverse repurchase agreements, securities or other financial transactions
incurred by the Bank in the ordinary course of its banking business;
(vi) any Understanding for the sale of any of its assets, or for the
grant of any right to purchase any of its assets, properties or rights, or
which requires the consent of any third party to the transfer and assignment
of any of its assets, properties or rights; it being understood that the
foregoing shall not be deemed to include any Understanding for the sale of
mortgage loans, repurchase or reverse repurchase agreements, securities or
other financial transactions incurred by the Bank in the ordinary course of
its banking business;
(vii) any guarantee, subordination or other similar or related types of
Understanding except where the Bank is a beneficiary;
(viii) any Understanding for the borrowing of any money by the Bank (other
than time savings or demand deposits) or for a line of credit to it;
(ix) any Understanding for any one capital expenditure or series of
related capital expenditures in excess of $25,000 individually or $100,000
in the aggregate;
(x) any real property lease, whether as lessor or lessee; or any
personal property lease, whether as lessor or lessee, involving payments in
excess of $1000 per month;
(xi) any Understanding to make or participate in a loan (not yet fully
disbursed or funded) to any borrower or related group of borrowers, which
undisbursed or unfunded amount would exceed $500,000 unsecured or secured;
(xii) any Understanding of any kind (other than contracts relating to
demand or time deposits or otherwise made in the ordinary course of
business) with any director or officer of the Bank or with any member of the
immediate family of any such director of officer or with any partnership,
corporation, associate or entity of which any such person is an Affiliate;
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(xiii) any Understanding for insurance other than as described in Section
4.13 below; or
(xiv) any Understanding, the purpose or effect of which could encompass
(a) merging with any person or bank or bank holding company other than with
the Company (b) the selling of any of its assets (except in the ordinary
course of business) or stock to any person, (c) recommending to any of its
shareholders that their Bank Stock be sold to any person or bank other than
the Company, or causing any other person to make such recommendations or
acquiescing in any such recommendations made by any other person, or (d) in
any other way transferring, directly or indirectly, control of the Bank.
Except as stated in Exhibit 4.12, true and correct copies of all documents
relating to the foregoing Understandings have been delivered by the Bank prior
to the date hereof.
As used in this Section 4.12, "immediate family" of a person shall mean his
or her spouse, parents, children, and siblings.
4.13 INSURANCE. The Bank has and at all times within three years of the
date of this Agreement has had, in full force and effect policies of insurance
and bonds (including without limitation Bankers' blanket bond, fidelity
coverage, director and officer liability, fire, third party liability, use and
occupancy) with respect to its assets and business and against such casualties
and contingencies and of such amounts, types and forms which are customary in
the banking industry and are adequate or appropriate to cover its assets and
businesses as set forth in Exhibit 4.13. Set forth in Exhibit 4.13 is a schedule
of all policies of insurance (other than title or credit insurance) carried and
owned by the Bank, showing the name of the insurance or bonding company, a
summary of the coverage, the amounts, the deductible features, the annual
premiums and the expiration dates. If any such policy or bond is changed,
terminated or modified following the date of this Agreement, such termination,
change or modification shall be promptly disclosed to the Company in writing.
The Bank is not in default under any such policy of insurance or bond such that
it could be canceled, and all material claims thereunder have been filed in a
timely fashion. The Bank has filed claims with or given notice of claim to its
insurers or bonding companies with respect to all material matters and
occurrences for which it believes it has coverage.
4.14 BROKERS. Except as indicated in Exhibit 4.14, no agent, broker,
investment banker, person or firm acting on behalf or under authority of the
Bank (except for any payments for fairness opinions as required in Section 10.9)
is or will be entitled to any broker's or finder's fee or any other commission
or similar fee directly or indirectly in connection with any of the transactions
contemplated by this Agreement.
4.15 AUTHORIZATION. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of the Bank. Assuming due and proper execution and
delivery of this Agreement by the Company, this Agreement constitutes a legal,
valid and binding agreement of the Bank in accordance with its respective terms,
except as the enforceability hereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or other laws of general application
relating to or affecting enforcement of creditors rights and the application of
equitable principles in any action, legal or equitable, and by Section 8(b) 6(D)
of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(b)(6)(D). Subject
to obtaining the requisite approval of this Agreement by the shareholders of the
Bank, the Bank has full corporate power and authority to perform its obligations
under this Agreement and the transactions contemplated hereby.
4.16 NO CONFLICTS; DEFAULTS. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, and compliance by the Bank with any provision hereof and
thereof will not (a) conflict with or result in a breach of, or default or loss
of any benefit under, any provision of its Charter Documents or, except as set
forth in Exhibit 4.16 any material agreement, instrument or obligation to which
it is a party or by which the property of the Bank is bound or give any other
party to any such agreement, instrument or obligation the right to terminate or
modify any term thereof; (b) except for the prior approval of the FRB,
Commissioner, any other required Governmental Entity and as set forth in Exhibit
4.16, require any Consents; or (c) result in the creation or imposition of any
Encumbrance on any of the properties or assets of the Bank; or (d) violate the
Charter Documents or any Rules to which the Bank is subject.
4.17 MATERIAL ADVERSE CHANGES. Except as specifically required, permitted
or effected by this Agreement, and except as set forth on Exhibit 4.17, since
December 31, 1997 there has not been, occurred or arisen any of the
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following (whether or not in the ordinary course of business unless otherwise
indicated) ("Material Adverse Changes"):
(a) Any materially adverse change in any of the assets, liabilities,
permits, methods of accounting or accounting practice, or manner of conducting
business, of the Bank or any other event or development that has had or may
reasonably be expected to have a material adverse effect on the assets,
liabilities, Permits, business, financial condition, or results of operations of
the Bank or which should be disclosed in order to make the Audited Bank
Financial Statements not misleading;
(b) Any damage, destruction or other casualty loss (whether or not covered
by insurance) that has had or may reasonably be expected to have a material
adverse effect on the assets, liabilities, business, financial condition, or
results of operations of the Bank or that may involve a loss of more than
$20,000 in excess of applicable insurance coverage;
(c) Any amendment, modification or termination of any existing, or entry
into any new Material Contract or Permit that has had or may reasonably be
expected to have a material adverse effect on the assets, liabilities, business,
financial condition, or results of operations of the Bank;
(d) Any disposition by the Bank of an asset the lack of which has had or may
reasonably be expected to have a material adverse effect on the business,
financial condition, or results of operations of the Bank;
(e) Any direct or indirect redemption, purchase or other acquisition by the
Bank of any Equity Securities or any declaration, setting aside or payment of
any dividend or other distribution on or in respect of Bank Stock whether
consisting of money, other personal property, real property or other things of
value;
(f) Any changes by the Bank in accounting principles or methods or tax
methods, except as required or permitted by, the Financial Accounting Standards
Board or by any Governmental Entity having jurisdiction over the Bank;
(g) A reduction in the Bank's CAMELS rating;
(h) A reduction in the Bank's CRA rating to less than satisfactory;
(i) A reduction in shareholders' equity to less than 100% of the Bank's
shareholders' equity at December 31, 1998 as reduced for any cash dividends paid
in 1999 or as authorized by Section 6.2(vii) and as determined in accordance
with GAAP or RAP; and/or a reduction in the Bank's 1999 net income to less than
85% of the Bank's 1999 projected net income, as agreed between the Bank and
Company;
(j) Any event of which the Bank obtains knowledge which may materially and
adversely affect the business, financial condition, results of operations or
prospects of the Bank; or
(k) Any event, development or circumstance that, to the best knowledge of
the Bank, will or, with the passage of time or the giving of notice or both, is
reasonably expected to result in the loss to the Bank of the services of any
Executive Officers of the Bank.
4.18 REPORTS AND FILINGS. Since January 1, 1995, the Bank has filed all
reports, returns, registrations and statements (such reports and filings
referred to as "Bank Filings"), together with any amendments required to be made
with respect thereto, that were required to be filed with (a) the FDIC, (b) the
Commissioner and (c) any other applicable Governmental Entity, including taxing
authorities, except where the failure to file such reports, returns,
registrations and statements has not had and is not reasonably expected to have
a material adverse effect on the business, financial condition, or results of
operations of the Bank. No administrative actions have been taken or orders
issued in connection with such Bank Filings. As of their respective dates, each
of such Bank Filings complied in all material respects with all Rules enforced
or promulgated by the Governmental Entity with which it was filed (or was
amended so as to be so promptly following discovery of any such noncompliance).
Any financial statement contained in any of such Bank Filings that was intended
to present the financial position of Bank fairly and was prepared in accordance
with GAAP or RAP consistently applied, except as stated therein, during the
periods involved. The Bank has made available to the Company true and correct
copies of all Bank Filings filed by the Bank since January 1, 1995.
4.19 INFORMATION REGARDING LOANS. The Bank has provided the Company access
to all of the information in its possession concerning its loans, and such
information was true and correct in all material respects as of the date
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access was provided. Except as may be disclosed in Exhibit 4.19, (i) all loans
and discounts shown on the Audited Bank Financial Statements at December 31,
1997 or which were entered into after December 31, 1997, but before the Closing
Date, were and will be made in all material respects for good, valuable and
adequate consideration in the ordinary course of the business of the Bank, in
accordance in all material respects with the Bank's lending practices, and are
not subject to any material known defenses, setoffs or counterclaims, including
without limitation any such as are afforded by usury or truth in lending laws,
except as may be provided by bankruptcy, insolvency, reorganization, moratorium
or other laws of general application relating to or enforcement of creditor
rights and the application of equitable principles in any action, legal or
equitable; (ii) the notes or other evidences of indebtedness evidencing such
loans and all forms of pledges, mortgages and other collateral documents and
security agreements constituting the Bank's loan portfolio, taken as a whole,
are and will be, in all material respects, enforceable except as the
enforceability hereof and thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or other laws of general application
relating to or affecting enforcement of creditors rights and the application of
equitable principles; and (iii) the Bank has complied in all material respects,
and will prior to the Closing Date comply with all laws and regulations relating
to such loans, or to the extent there has not been such compliance, such failure
to comply will not materially interfere with the collection of any such loan.
All loans and loan commitments extended by the Bank and any extensions, renewals
or continuations of such loans and loan commitments that are on the Bank's books
were made in accordance with customary lending standards of the Bank in the
ordinary course of business. Such loans are evidenced by documentation based
upon customary and ordinary past practices of the Bank. Prior to the date
hereof, the Bank has provided the Company with a schedule which sets forth a
description (a) by type and classification, if any, of each loan, lease or other
extension of credit and commitment to extend credit; (b) by type and
classification, if any, of all loans, leases, other extensions of credit and
commitments to extend credit that have been classified by any Governmental
Entity or auditors (external or internal) as "Watch List," "Substandard,"
"Doubtful," "Loss" or any comparable classification; and (c) all consumer loans
as to which any payment of principal, interest or other amount is 90 days or
more past due.
(b) As of (i) the date of this Agreement, (ii) the Determination Date and
(iii) the Closing Date, the allowance for loan and lease losses for the Bank is
adequate and in accordance with GAAP and RAP.
4.20 COMPLIANCE WITH CRA. To the best knowledge of the Bank, the Bank's
compliance under the CRA should not constitute grounds for either the denial by
any Governmental Entity of any application to consummate the transactions
contemplated by this Agreement or the imposition of a materially burdensome
condition in connection with the approval of any such application.
4.21 CERTAIN INTERESTS. Except as described in Exhibit 4.12(xii), Exhibit
4.21 sets forth a description of each instance in which an executive officer or
director of the Bank (a) has any material interest in any property, real or
personal, tangible or intangible, used by or in connection with the business of
the Bank; (b) is indebted to the Bank except for normal business expense
advances; or (c) is a creditor (other than as a Deposit holder) of the Bank
except for amounts due under normal salary and related benefits or reimbursement
of ordinary business expenses. Except as set forth in Exhibit 4.21, all such
arrangements are arm's length transactions pursuant to normal commercial terms
and conditions.
4.22 BRANCHES. Exhibit 4.22 hereto sets forth the common name and location
of each office of the Bank, an indication of whether such office is a branch,
service center, or other place of business, whether such premises are owned or
leased, the basic terms of such leases, the common name and location of each
approved but unopened office, and a description of each application for
additional offices of the Bank, and the status of each such application. The
Bank has received appropriate and effective permits and governmental authority
where any Permit, approval or notice was required by law or regulation prior to
the establishment and operation of each such office now in operation. Except for
the offices described on Exhibit 4.22, the Bank does not operate or conduct
business out of any other location and the Bank does not have any current
application for, and the Bank has not received permission to open, any other
branch or to operate out of any other location.
4.23 UNDISCLOSED LIABILITY. The Bank has no liabilities or obligations,
either accrued or contingent, which are in excess of Twenty Thousand Dollars
($20,000) individually or in the aggregate, which have not been:
(i) reflected or disclosed in the Audited Bank Financial Statements or
Unaudited Bank Financial Statements;
(ii) incurred subsequent to December 31, 1997, in the ordinary course of
business; or
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(iii) disclosed on Exhibit 4.23 or any other exhibit to this Agreement.
To the best of the Bank's knowledge and the knowledge of their executive
officers and directors, after due investigation, there is no basis for the
assertion against the Bank of any liability, obligation or claim that is likely
to result in or cause any material adverse change in the business or financial
condition of the Bank, taken as a whole, which is not fairly reflected in the
Audited Bank Financial Statements, the Unaudited Bank Financial Statements or
otherwise disclosed on Exhibit 4.23 hereto.
4.24 ACCURACY OF INFORMATION FURNISHED. Except as to any statements or
information which shall include projections or forecasts, none of the statements
or information made or contained in any of the covenants, representations or
warranties of the Bank set forth in this Agreement or in any of the schedules,
exhibits, lists, certificates or other documents furnished herewith taken as a
whole contains any untrue statement of a material fact required to be stated
herein or therein or necessary to make the statements or information contained
herein or therein, in light of the circumstances in which they were made, not
misleading. As to any such information or statements which include projections
or forecast, such information or statements are based upon assumptions believed
by the Bank to be reasonable.
4.25 ENVIRONMENTAL LAWS. Except as may be disclosed in Exhibit 4.25, to
the best of the Bank's knowledge (and without conducting any site investigation
or other analysis for the purpose of making this representation), neither the
conduct nor operation of the Bank nor any condition of any Real Property
presently or previously owned, leased or operated by the Bank violates or
violated Environmental Laws in any respect material to the business of Bank
taken as a whole and no condition or event has occurred with respect to the Bank
or any Real Property that, with notice or the passage of time, or both, would
constitute a violation material to the business of the Bank taken as a whole of
Environmental Laws or obligate (or potentially obligate) the Bank to remedy,
stabilize, neutralize or otherwise alter the environmental condition of any such
Real Property where the aggregate cost of such actions would be material to the
Bank taken as a whole. Except as may be disclosed in Exhibit 4.25, the Bank has
not received any notice from any person or entity that the Bank or the operation
or condition of any Real Property ever owned, leased or operated by the Bank is
or was in violation of any Environmental Laws or that the Bank is responsible
(or potentially responsible) for remedying, or the cleanup of, any pollutants,
contaminants, or hazardous or toxic wastes, substances or materials at, on or
beneath any such Real Property.
4.26 COMMISSIONER AND FDIC EXAMINATIONS. (a) The Commissioner has
completed an examination of the Bank as of November 30, 1996, and (i) the
Commissioner believes the Bank's allowance for loan losses is adequate and the
Commissioner required no material adjustments, and (ii) the Bank's CAMELS rating
did not adversely change and the Bank's financial condition is deemed by the
Commissioner to be satisfactory.
(b) The FDIC has completed an examination of the Bank as of December 31,
1997, and (i) the FDIC believes the Bank's allowance for loan losses is adequate
and the FDIC required no material adjustments, and (ii) the Bank's CAMELS rating
did not adversely change and the Bank's financial condition is deemed by the
FDIC to be satisfactory.
(c) The FDIC has completed an examination of the Bank and Banklink
Corporation, the Bank's data processing subsidiary, for compliance with Year
2000 safety and soundness issues as of February 3, 1998, and the FDIC has rated
the Bank and Banklink Corporation at least satisfactory regarding the Bank's and
Banklink Corporation's progress in addressing Year 2000 Safety and Soundness
Progress Standards established by the FDIC. Further, Banklink Corporation has
also been rated satisfactory regarding its progress in addressing Year 2000
Safety and Soundness issues.
4.27 INSIDER LOANS; OTHER TRANSACTIONS. The Bank has previously provided
the Company with a listing, current as of November 30, 1998, of all extensions
of credit made to the Bank and each of its Executive Officers and directors and
their related interests (all as defined under Federal Reserve Board Regulation
"O"), all of which have been made in compliance with Regulation O, which listing
is true, correct and complete in all material respects. The Bank does not owe
any amount to, nor does it have any contract or lease with or commitment to, any
of the present Executive Officers or directors of the Bank (other than for
compensation for current services not yet due and payable, and reimbursement of
expenses arising in the ordinary course of business).
4.28 DERIVATIVE TRANSACTIONS. The Bank is not a party to a transaction in
or involving forwards, futures, options on futures, swaps or other derivative
instruments.
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4.29 TRUST ADMINISTRATION. The Bank presently does not exercise trust
powers, including, but not limited to, trust administration, and has not
exercised such trust powers for a period of at least 3 years prior to the date
hereof. The term "trusts" as used in this Section 4.29 includes (i) any and all
common law or other trusts between an individual, corporation or other entities
and the Bank, as trustee or co-trustee, including, without limitation, pension
or other qualified or nonqualified employee benefit plans, compensation,
testamentary, intervivos, and charitable trust indentures; (ii) any and all
decedents' estates where the Bank is serving or has served as a co-executor or
sole executor, personal representative or administrator, administrator de bonis
non, administrator de bonis non with will annexed, or in any similar fiduciary
capacity; (iii) any and all guardianships, conservatorships or similar positions
where the Bank is serving or has served as a co-grantor or a sole grantor or a
conservator or a co-conservator of the estate, or any similar fiduciary
capacity; and (iv) any and all agency and/or custodial accounts and/or similar
arrangements, including plan administrator for employee benefit accounts, under
which the Bank is serving or has served as an agent or custodian for the owner
or other party establishing the account with or without investment authority.
4.30 STATEMENTS TRUE AND CORRECT. None of the information supplied or to
be supplied by the Bank for inclusion in the S-1, the S-4 or the Proxy
Statement, or incorporated by reference therein, or any other document to be
filed with any Governmental Entity in connection with the transactions
contemplated hereby will, in the case of the S-1, the S-4 and the Proxy
Statement, when it is first mailed to the shareholders of the Bank, contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in light of the circumstances
under which such statements are made, not misleading or, in the case of the S-1
and the S-4, when it becomes effective, be false or misleading with respect to
any material fact, or omit to state any material fact necessary in order to make
the statements therein not misleading, or, in the case of the S-1, the S-4 and
Proxy Statement or any amendment thereof or supplement thereto, at the time of
the meeting of shareholders of the Bank, be false or misleading with respect to
any material fact or omit to state any material fact necessary to correct any
statement or remedy any omission in any earlier communication with respect to
the solicitation of any proxy of the Bank shareholders' meeting.
4.31 ACCURATE DISCLOSURE. The Bank agrees that through the Effective Time
of the Merger, each of its reports, and other filings required to be filed with
any applicable Governmental Entity will comply in all material respects with all
of the applicable statutes, Rules and regulations enforced or promulgated by the
Governmental Entity with which it will be filed and none will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any such report, or other filing that is intended to
present the financial position of the Bank will fairly present the financial
position of the Bank and will be prepared in accordance with GAAP or RAP
consistently applied during the periods involved. Notwithstanding anything to
the contrary set forth in this Section 4.31, the Bank makes no representation or
warranty with respect to any information supplied by the Company.
4.32 YEAR 2000. The Bank and Banklink Corporation have formed a Year 2000
management committee to identify potential problems associated with the Year
2000 issues and to develop resolutions to any problems. The Bank and Banklink
Corporation are making satisfactory progress for compliance with Year 2000
safety and soundness issues in order to ensure that the Bank's and Banklink
Corporation's existing computer systems are Year 2000 compliant.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Bank as follows:
5.1 ORGANIZATION AND GOOD STANDING. The Company is a California
corporation duly organized and validly existing in good standing under the laws
of the State of California, is proposed to be registered with the FRB to become
a bank holding company and it has the corporate power and authority to carry on
its business as presently conducted. The Company has all requisite corporate
power and authority to own, lease and operate its properties and assets and to
carry on its business as presently conducted. The nature of its operations and
the business transacted by it as of the date hereof make licensing and
qualification in any other state or jurisdiction unnecessary. The Company has
delivered to the Bank true and correct copies of its Articles of Incorporation
and Bylaws, as amended and in effect as of the date hereof.
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5.2 CAPITALIZATION. The authorized capital stock of the Company consists
of 100,000,000 shares of Common Stock, no par value, of which 10,000 shares are
outstanding on the date hereof, all validly issued, fully paid and
nonassessable, and 100,000,000 shares of Preferred Stock, of which not more than
2 million shares have been issued or are to be issued before the Closing Date.
Except as provided in Exhibit 5.2, no unissued shares of Company Stock or any
other securities of the Company are subject to any warrants, options, rights or
commitments of any character, kind or nature and the Company is not obligated to
issue or repurchase any shares of Company Stock or any other security to or from
any person except in accordance with the terms of the proposed Company Stock
Option Plan and Agreements pursuant thereto. Exhibit 5.2 sets forth the name of
each holder of a Company stock option, the number of shares of Company Stock
covered by each such holder's option, the date of grant of each such holder's
option, the exercise price per share, the vesting schedule for each such
holder's option and the expiration date of each such holder's option.
5.3 SUBSIDIARIES. Except for PCBG Merger Corporation, which the Company
intends to own prior to the Closing Date, the Company does not own, directly or
indirectly (except as pledgee pursuant to loans which are not in default), any
equity position or other voting interest in any corporation, partnership, joint
venture or other entity.
5.4 FINANCIAL STATEMENTS. The Company has delivered to the Bank copies of
the unaudited Statements of Financial Condition of the Company as of December
31, 1997 (the "Company Financial Statements"). The Company Financial Statements:
(i) present fairly the financial condition and results of operations of the
Company as of and for the dates or periods covered thereby in accordance with
GAAP consistently applied throughout the periods involved; (ii) are based on the
books and records of the Company; (iii) contain and reflect reserves for all
material accrued liabilities and for all reasonably anticipated losses, and set
forth adequate reserves loan losses and other contingencies to the extent
required by GAAP; and (iv) none of the Company Financial Statements contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein not misleading under GAAP. The
books and records of the Company have been, and are being, maintained in all
material respects in accordance with GAAP and other applicable legal and
accounting requirements and reflect any actual transactions. Since the Company
was recently incorporated, there are no audited financial statements of the
Company for December 31, 1997 or previous years.
5.5 LITIGATION PROCEEDINGS AND AGREEMENTS WITH GOVERNMENTAL ENTITIES.
(a) The Company is not engaged as a defendant in any legal or other
proceedings before any court, administrative agency or other Governmental Entity
except as is shown on Exhibit 5.5. Except as set forth on Exhibit 5.5, the
Company is not aware of any "threatened or pending litigation" (within the
meaning of Paragraph 5 of the American Bar Association Statement of Policy
Regarding Lawyers' Responses to Auditors' Requests for Information adopted
December 8, 1975) against the Company. The Company is not subject to any
agreement, order, writ, injunction or decree of any federal, state or local
court, out of a proceeding involving the Company or any of its business or
properties except as described in Exhibit 5.5. The Company has not been served
with notice of, nor, to best of the Company's knowledge is it currently under
investigation with respect to, any violation of federal, state or local law or
administrative regulation. Except as set forth on Exhibit 5.5, there is no (i)
outstanding judgment, order, writ, injunction or decree, stipulation or award of
any Governmental Entity or by arbitration, against, or to the knowledge of the
Company, affecting the Company or its assets or business that (a) has had or may
have a material adverse effect on the assets, liabilities, business, financial
condition or results of operations of the Company, (b) requires any payment by,
or excuses a material obligation of a third party to make any payment to, the
Company, or (c) has the effect of prohibiting any business practice of, or the
acquisition, retention or disposition of property by, the Company; or (ii)
legal, administrative, arbitration, investigatory or other proceeding pending
or, to the best knowledge of the Company that has been threatened, or which the
Company has reason to believe may be threatened, against or affecting any
director, officer, employee, agent or representative of the Company, in
connection with which any such person has or may have rights to be indemnified
by the Company.
(b) Except as set forth in Exhibit 5.5, the Company is not a party to, or
otherwise subject to, any agreement or memorandum of understanding with or order
of any Governmental Entity charged with the supervision or regulation of bank
holding companies or banks or engaged in the insurance of bank deposits, that
restricts the conduct of its business, or in any manner relates to its capital
adequacy, its credit or investment policies or its management.
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5.6 PERFORMANCE OF OBLIGATIONS. Except as set forth in Exhibit 5.6, the
Company has performed in all respects all of obligations required to be
performed by it to date and is not in default under or in breach of any term or
provision of any covenant, contract, lease, indenture or any other agreement to
which the Company is a party or is subject or is otherwise bound, and no event
has occurred which, with the giving of notice or the passage of time or both,
would constitute such default or breach, where such default or breach would have
a material adverse effect on the financial condition, results of operations, or
business of the Company. No party with whom the Company has an agreement which
is material to the financial condition, results of operations or business of the
Company is in default thereunder.
5.7 BROKERS. Except as indicated in Exhibit 5.7, no agent, broker,
investment banker, person or firm acting on behalf or under authority of the
Company (except for any payments for fairness opinions as required in Section
11.14) is or will be entitled to any broker's or finder's fee or any other
commission or similar fee directly or indirectly in connection with any of the
transactions contemplated by this Agreement.
5.8 INSURANCE. The Company has in full force and effect policies of
insurance and bonds with respect to its assets and business and against such
casualties and contingencies and of such amounts, types and forms which in the
judgment of the Company are adequate or appropriate to cover its assets and
businesses as set forth in Exhibit 5.8. Set forth in Exhibit 5.8 is a schedule
of all policies of insurance (other than title or credit insurance) carried and
owned by the Company, showing the name of the insurance or bonding company, a
summary of the coverage, the amounts, the deductible features, the annual
premiums and the expiration dates. If any such policy or bond is changed,
terminated or modified following the date of this Agreement, such termination,
change or modification shall be promptly disclosed to the Bank in writing. The
Company is not in default under any such policy of insurance or bond such that
it could be canceled, and all material claims thereunder have been filed in a
timely fashion. The Company has filed claims with or given notice of claim to
its insurers or bonding companies with respect to all material matters and
occurrences for which it believes it has coverage.
5.9 MATERIAL ADVERSE CHANGES. Except as specifically required, permitted
or effected by this Agreement, and except as set forth on Exhibit 5.9 since
inception there has not been, occurred or arisen any of the following (whether
or not in the ordinary course of business unless otherwise indicated)("Material
Adverse Changes"):
(a) Any materially adverse change in any of the assets, liabilities,
permits, methods of accounting or accounting practice, or manner of conducting
business, of the Company or any other event or development that has had or may
reasonably be expected to have a material adverse effect on the assets,
liabilities, Permits, business, financial condition, or results of operations of
the Company or which should be disclosed in order to make the Company Financial
Statements not misleading.
(b) Any damage, destruction or other casualty loss (whether or not covered
by insurance) that has had or may reasonably be expected to have a material
adverse effect on the assets, liabilities, business, financial condition, or
results of operations of the Company or that may involve a loss of more than
$10,000 in excess of applicable insurance coverage;
(c) Any amendment, modification or termination of any existing, or entry
into any new, Material Contract or Permit that has had or may reasonably be
expected to have a material adverse effect on the assets, liabilities, business,
financial condition, or results of operations of the Company;
(d) Any disposition by the Company of an asset the lack of which has had or
may reasonably be expected to have a material adverse effect on the business,
financial condition, or results of operations of the Company; or
(e) Any direct or indirect redemption, purchase or other acquisition by the
Company of any Equity Securities or any declaration, setting aside or payment of
any dividend or other distribution on or in respect of the Company Stock whether
consisting of money, other personal property, real property or other things of
value.
5.10 COMPLIANCE WITH LAWS AND REGULATIONS.
(a) Except as set forth in Exhibit 5.10, the Company is not in default under
or in breach of any law, ordinance, rule, regulation, order, judgment or decree
applicable to it promulgated by any Governmental Entity having authority over
it, where such default or breach would have a material adverse effect on its
financial condition, results of operations, or business.
(b) To the best of its knowledge, the Company has conducted in all material
respects its businesses in accordance with all applicable federal, foreign,
state and local laws, regulations and orders, including without
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limitation disclosure, usury, equal credit opportunity, equal employment, fair
credit reporting, antitrust, licensing and other laws, regulations and orders,
and the forms, procedures and practices used by the Company are in compliance
with such laws, regulations, and orders, except for such violations or
noncompliance as will not have a material adverse effect on the financial
condition, results of operations, or business of the Company.
5.11 AUTHORIZATION. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of the Company. Assuming due and proper execution and
delivery of this Agreement by the Bank, this Agreement constitutes a legal,
valid and binding agreement of the Company in accordance with its respective
terms, except as the enforceability hereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other laws of general
application relating to or affecting enforcement of creditors rights and the
application of equitable principles in any action, legal or equitable. Subject
to obtaining requisite approval of this Agreement by the shareholders of the
Company, if required, the Company has full corporate power and authority to
perform its obligations under this Agreement and the transactions contemplated
hereby.
5.12 NO CONFLICTS; DEFAULTS. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, and compliance by the Company with any provision hereof
will not (a) conflict with or result in a breach of, or default or loss of any
benefit under, any provision of its Charter Documents or, except as set forth in
Exhibit 5.12 any material agreement, instrument or obligation to which it is a
party or by which the property of the Company is bound or give any other party
to any such agreement, instrument or obligation the right to terminate or modify
any term thereof; (b) except for the prior approval of the FRB, the Commissioner
and any other required Governmental Entity, and as set forth in Exhibit 5.12,
require any Consents; (c) result in the creation or imposition of any
Encumbrance on any of the properties or assets or the Company; or (d) violate
the Charter Documents or any Rules to which the Company is subject.
5.13 REPORTS AND FILINGS. Since inception, the Company has filed all
reports, returns, registrations and statements (such reports and filings
referred to as "the Company Filings"), together with any amendments required to
be made with respect thereto, that were required to be filed with (a) the FRB,
(b) the Commissioner and (c) any other applicable Governmental Entity, including
taxing authorities, except where the failure to file such reports, returns,
registrations and statements has not had and is not reasonably expected to have
a material adverse effect on the business, financial condition, or results of
operations of the Company. No administrative actions have been taken or orders
issued in connection with the Company Filings. As of their respective dates,
each of the Company Filings complied in all material respects with all Rules
enforced or promulgated by the Governmental Entity with which it was filed (or
was amended so as to be so promptly following discovery of any such
noncompliance). Any financial statement contained in any of the Company Filings
that was intended to present the financial position of the Company fairly and
was prepared in accordance with GAAP or RAP consistently applied, except as
stated therein, during the periods involved.
5.14 (reserved)
5.15 UNDISCLOSED LIABILITY. The Company has no liabilities or obligations,
either accrued or contingent, which are in excess of Ten Thousand Dollars
($10,000) individually or in the aggregate, which have not been:
(i) reflected or disclosed in the Company Financial Statements;
(ii) incurred since inception, in the ordinary course of business; or
(iii) disclosed on Exhibit 5.15 or any other exhibit to this Agreement.
To the best of the Company's knowledge and the knowledge of its officers and
directors, after due investigation, there is no basis for the assertion against
the Company of any liability, obligation or claim that is likely to result in or
cause any material adverse change in the business or financial condition of the
Company, taken as a whole, which is not fairly reflected in the Company
Financial Statements, or otherwise disclosed on Exhibit 5.15 hereto.
5.16 ACCURACY OF INFORMATION FURNISHED. Except as to any statements or
information which shall include projections or forecasts, none of the statements
or information made or contained in any of the covenants, representations or
warranties of the Company set forth in this Agreement or in any of the
schedules, exhibits, lists, certificates or other documents furnished herewith
taken as a whole contains any untrue statement of a material
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fact required to be stated herein or therein or necessary to make the statements
or information contained herein or therein, in light of the circumstances in
which they were made, not misleading. As to any such information or statements
which include projections or forecast, such information or statements are based
upon assumptions believed by the Company to be reasonable.
5.17 AUTHORITY OF PCBG MERGER CORPORATION. The execution and delivery by
PCBG Merger Corporation of the Agreement of Merger and, subject to the requisite
approval of the shareholder of PCBG Merger Corporation, the consummation of the
transactions completed thereby will be duly and validly authorized by all
necessary corporate action on the part of PCBG Merger Corporation, and the
Agreement of Merger will be, upon execution by the parties thereto, a valid and
binding obligation of PCBG Merger Corporation, enforceable in accordance with
its terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting the rights of creditors
generally, by general equitable principles. Except as set forth in Exhibit 5.17,
neither the execution and delivery by PCBG Merger Corporation of the Agreement
of Merger, nor the consummation of the transaction contemplated therein, nor
compliance by PCBG Merger Corporation with any of the provisions thereof will
(a) conflict with or result in a breach of any provision of its Charter
Documents; (b) except for approval by the shareholder of PCBG Merger Corporation
and the prior approval of the Commissioner or the FRB, require any Consents; (c)
result in the creation or imposition of any Encumbrance on any of the properties
or assets of PCBG Merger Corporation; or (d) subject to obtaining the Consents
referred to in subsection (b) of this Section 5.17, and the expiration of any
waiting period, violate any Rules to which PCBG Merger Corporation is subject.
5.18 CAPITAL OF COMPANY, OFFERING AND COMMITMENTS. The Company intends to
use its best efforts to conduct the Offering in order to permit stockholders of
the Bank and Valley Bank, to sell shares of Company Stock and to provide capital
for expenses, growth and operations of the Company. As of the date of this
Agreement, the Company and Sutro have entered into the Engagement Agreement, a
copy of which has been provided to the Bank and which has not been terminated or
materially altered, except that the Company can change its relationship with
Sutro, or increase or decrease the number of underwriters or co-mangers of the
Offering, in the Company's sole discretion. The Company shall not impose any
cost or expense of the Offering, including Underwriter costs and expenses, on
any selling shareholder.
5.19 REGULATORY APPROVALS. To the best knowledge of the Company, except as
described in Section 5.19 of this Agreement, the Company has no reason to
believe that it would not receive all required approvals from any Governmental
Entity of any application to consummate the transactions contemplated by this
Agreement without the imposition of a materially burdensome condition in
connection with the approval of any such application.
5.20 STATEMENTS TRUE AND CORRECT. None of the information supplied or to
be supplied by the Company for inclusion in the S-1, the S-4 or the Proxy
Statement, or incorporated by reference therein, or any other document to be
filed with any Governmental Entity in connection with the transactions
contemplated hereby will, in the case of the S-1, S-4 and the Proxy Statement
(or incorporated by reference therein), contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which such
statements are made, not misleading, or, in the case of the S-1 and the S-4,
when it becomes effective, be false or misleading with respect to any material
fact, or omit to state any material fact necessary in order to make the
statements therein not misleading.
5.21 ACCURATE DISCLOSURE. The Company agrees that through the Effective
Time of the Merger, each of its reports, and other filings required to be filed
with any applicable Governmental Entity will comply in all material respects
with all of the applicable statutes, Rules and regulations enforced or
promulgated by the Governmental Entity with which it will be filed and none will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they will be made, not misleading. Any
financial statement contained in any such report, or other filing that is
intended to present the financial position of the Company will fairly present
the financial position of the Company and will be prepared in accordance with
GAAP or RAP consistently applied during the periods involved. Notwithstanding
anything to the contrary set forth in this Section 5.21, the Company makes no
representation or warranty with respect to any information supplied by the Bank.
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5.22 OTHER TRANSACTIONS. The Company has informed the Bank of all other
acquisition transactions that the Company is contemplating or reviewing as of
the date of this Agreement.
5.23 DUE DILIGENCE. The Company and its representatives have had the
opportunity to conduct a due diligence of the Bank, and such due diligence has
been shared with the Managing Underwriter. As of December 15, 1998, the Company
and its agents have completed a primary review of the financial condition of the
Bank, and to the best knowledge of the Company and its agents, no item
concerning the financial condition of the Bank has come to the attention of the
Company or its agents that would preclude the consummation of the Merger as
described herein.
ARTICLE VI
COVENANTS OF THE BANK
The Bank covenants and agrees with the Company as follows:
6.1 BEST EFFORTS. The Bank shall use its best efforts to bring about the
satisfaction of the conditions specified in Articles IX and XI hereof.
6.2 CONDUCT OF BUSINESS. Unless the Company shall give its prior consent,
which consent will not be unreasonably withheld, or unless otherwise indicated,
until the Effective Time, the Bank will:
(i) conduct its affairs and business in the usual and ordinary course,
generally consistent with past practice, and in accordance with safe and
sound practices;
(ii) refrain from (a) creating, incurring, or suffering to exist, any
encumbrance or restriction of any kind against or in respect of any property
or right of the Bank except for such which are not material in amount or
nature to the financial condition or results of operations of the Bank,
except for a pledge or security interest given in connection with the
acceptance of government or public deposits; it being understood that the
foregoing shall not be deemed to preclude loans, repurchase or reverse
repurchase agreements, securities or other financial transactions incurred
in the ordinary course of the Bank's banking business, and (b) borrowing or
agreeing to borrow any amount of funds except in the ordinary course of
business, or directly or indirectly guaranteeing or agreeing to guarantee
any obligations of others except for such which are not material in amount
or nature to the financial condition or results of operations of the Bank;
(iii) refrain from making or becoming a party to any Material Contract or
material commitment, or renewing, extending, amending or modifying any such
contract or commitment except for loan and deposit transactions, in the
usual and ordinary course of business, consistent with past practice; and
refrain from making any loan or other extension of credit, or entering into
any commitment to make any loan or other extension of credit, to any Bank
director, executive officer or employee or 5% or more shareholder, except in
accordance with existing practice or policy; and refrain from extending any
lease;
(iv) refrain from making any capital expenditures or commitments to do
so, except for ordinary repairs and replacements, exceeding $50,000 for any
one item or $200,000 for all items in the aggregate;
(v) refrain from paying or agreeing to pay any bonus, extra
compensation, pension or severance pay, under any pension plan or otherwise,
or increasing the rate of compensation paid by the Bank at June 30, 1998, to
any officer, director, agent, consultant, or employee (except for raises and
bonuses consistent with past practices accrued and paid prior to the
Determination Date and except as contemplated by this Agreement), and any
such amounts shall be accrued or paid in accordance with GAAP prior to the
Determination Date; or agreeing to enter into any employment agreements or
hire any officer level staff where such agreements or arrangements cannot be
terminated without any liability upon not more than 90 days notice; or
agreeing to hire any president of Banklink;
(vi) maintain its assets and properties in good condition and repair
(ordinary wear and tear excepted) and refrain from selling or otherwise
disposing of any of its assets or properties, except in the usual and
ordinary course, consistent with prior customary practice, and in accordance
with safe and sound practices, and maintain the Bank's present branch
operations unless changed by mutual agreement;
(vii) refrain from declaring or paying any dividend on or making any
other distribution upon, or purchasing or redeeming, any shares of the Bank
Stock;
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(viii) refrain from (a) issuing or selling or obligating itself to issue
or sell any shares of the Bank Stock or any other securities or any
warrants, rights or options to acquire Bank Stock or other securities,
except for the exercise of the Warrant Agreement, (b) effecting a
reclassification, recapitalization, split-up, exchange of shares,
readjustment or other similar change in or to any capital stock or otherwise
reorganize or recapitalize;
(ix) refrain from directly or indirectly redeeming, purchasing or
otherwise acquiring any Bank Stock or stock of any corporation or any
interest in any business enterprise except as it relates to a foreclosure in
the usual and ordinary course of its business;
(x) refrain from amending its Charter Documents except to the extent as
may be required or contemplated by this Agreement;
(xi) use its best efforts to preserve its business organization intact
and to retain its present officers and employees in a manner consistent with
the Bank's other obligations under this Agreement;
(xii) use its best efforts to preserve the goodwill of its depositors,
customers and those having business relations with it, refrain from
materially changing the make-up of the Bank's deposit structure, refrain
from amending, modifying, terminating or failing to renew or preserve its
business organization, material rights, franchises, Permits, and refrain
from taking any action which would jeopardize the continuance of the
goodwill of its customers where such action would have a material adverse
effect, taken as a whole, on the financial condition, or results of
operations of the Bank in a manner consistent with the Bank's other
obligations under this Agreement;
(xiii) use its best efforts to maintain insurance and bond coverage at
least equal to that now in effect on all its properties and all properties
for which it is responsible and on its business operations, and carry the
same coverage for public liability, personal injury and property damage that
is now in effect, except if such insurance and coverage (a) is not available
except at extraordinary rates, or (b) is not available except under
materially different terms which are inconsistent with those in effect as of
the date of this Agreement, and following the receipt of the consent of the
Company, renew the Bank's directors and officers liability insurance policy;
(xiv) meet its material contractual obligations and not become in default
in any material respect on any thereof;
(xv) duly observe and conform to lawful requirements applicable to its
business in all material respects;
(xvi) duly and timely file all reports and returns required to be filed
with any federal, state or local Governmental Entity unless any extensions
have been duly granted by such authorities;
(xvii) refrain from commencing any proceeding to merge, consolidate or
liquidate or dissolve (except as contemplated by this Agreement) or
obligating itself to do so;
(xviii) maintain its books of account and records in the regular manner
substantially in accordance with all applicable statutory and regulatory
requirements applied on a consistent basis;
(xix) except for instituting actions against borrowers of the Bank to
collect loans in default, refrain from instituting, settling, or agreeing to
any material claim, action or proceeding before any court or Governmental
Entity unless not instituting, settling or agreeing to any material claim,
action or proceeding would result in a Material Adverse Change to the Bank;
(xx) refrain from making its credit underwriting policies, standards or
practices applicable to all loans relating to the making of loans and other
extensions of credit, or commitments to make loans and other extensions of
credit, less stringent than those in effect on the date hereof. The Bank
shall not grant or commit to grant, without receiving the Company's Consent,
(i) any loan or other extension of credit, including renewals, to an
existing customer of the Bank, if such loan or other extension of credit,
together with all other credit then outstanding to the same Person and all
Affiliates of such Person, would exceed $1,000,000, irrespective of any
plans or intentions to sell or participate all or a portion of such loans,
on an unsecured basis or $1,500,000 secured by a lien on real estate, cash
or readily marketable collateral, as that term is used in section 1220 ET
SEQ. of the CFC, (ii) any participation loans purchased or sold, or (iii)
any renewals or other extensions of credit to any borrower whose loans or
other extensions of credit have been classified by any Governmental Entity.
In addition, Bank shall not take any property into Other Real Estate Owned
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("OREO"), or sell any OREO property, not in the ordinary course of the
Bank's business or not in accordance with the Bank's policy concerning OREO
without receiving the Company's Consent. Consent shall be deemed granted if
within three Business Days of written notice received by the Company's
designee, notice of objection in writing is not received by Bank;
(xxi) refrain from making special or extraordinary material payments to
any Person other than as contemplated and as disclosed in this Agreement as
of the date hereof;
(xxii) except for transactions in accordance with safe and sound banking
practices, refrain from making any material investments, by purchase of
stock or securities, contributions to capital, property transfers, purchases
of any property or assets or otherwise, in any other individual, corporation
or other entity;
(xxiii) advise the Company promptly in writing of any Material Adverse
Change known to the Bank in the capital structure, financial condition,
results of operations or of any event or condition which with the passage of
time is reasonably likely to result in a Material Adverse Change to the
Bank, or of any other materially adverse change known to the Bank respecting
the business and operations of the Bank, or in the event the Bank determines
that the Merger will not be consummated because of any inability to meet the
conditions to the performance of the Company set forth in Article XI or of
any matter which would make the representations and warranties set forth in
Article IV hereof not true and correct in any material respect at the
Closing;
(xxiv) promptly advise the Company in writing of any event or any other
transaction within the Bank's knowledge whereby any person or related group
of persons acquires, directly or indirectly, record or beneficial ownership
(as defined in Rule 13d3 promulgated by the Exchange Act or control of 5% or
more of the outstanding shares of Bank Stock prior to the record date fixed
for the Bank shareholders' meeting or any adjourned meeting thereof to
approve the transactions contemplated herein;
(xxv) charge-off all loans, receivables and other assets, or portions
thereof, deemed uncollectible in accordance with GAAP or RAP, applicable law
or regulation, or classified as "loss" or as directed by any Governmental
Entity; and maintain the allowance for loan losses of the Bank at a level
which in the reasonable opinion of the Bank's management is adequate to
provide for all known and estimated credit losses on loans and leases
outstanding and other inherent risks in the Bank's loan portfolio, but in no
case less than the level which in the reasonable opinion of the Bank's
management is adequate to provide for all known and reasonably expected
losses on assets outstanding in accordance with GAAP and RAP;
(xxvi) furnish to the Company, as soon as practicable, and in any event
within ten (10) days after it is prepared (except for the reports submitted
to the Board of Directors of the Bank, as described in clause (i) below,
which shall be furnished to the Company within ten (10) days after the
Bank's Board of Directors has reviewed the report), (i) a copy of any report
submitted to the Board of Directors of the Bank and access to the working
papers related thereto and copies of other operating or financial reports
prepared for management of any of their businesses and access to the working
papers thereto, provided, however, that the Bank need not furnish the
Company communications of the Bank's legal counsel regarding the Bank's
rights against and obligations to the Company or its Affiliates under this
Agreement, (ii) to the extent permitted by law, copies of all reports,
renewals, filings, certificates, statements and other documents filed with
or received from the FDIC and/or the Commissioner or any other Governmental
Entity, (iii) monthly unaudited statements of condition and statements of
operations for the Bank, and quarterly unaudited statements of condition and
statements of operations for the Bank and statements of changes in
stockholders' equity for the Bank, in each case prepared in a manner
consistent with past practice, and (iv) such other reports as the Company
may reasonably request relating to the Bank. Each of the financial
statements delivered pursuant to this Section 6.2(xxvi), except as stated
therein, shall be prepared in accordance with the Bank's normal practices;
(xxvii) consistent with the standards set forth in this subsection 6.2
(xxvii), the Bank agrees that through the Effective Time of the Merger, as
of their respective dates, (i) each of the Bank Filings will be true and
complete in all material respects; and (ii) each of the Bank Filings will
comply in all material respects with all of the statutes, rules and
regulations enforced or promulgated by the Governmental Entity with which it
will be filed and none will contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they will be made, not misleading. Any financial statement contained in any
of such Bank Filings that is intended to present the financial position of
the Bank will be prepared in accordance with GAAP or RAP consistently
applied, except as stated therein, during the periods involved;
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(xxviii) maintain reserves for contingent liabilities in accordance with
GAAP and RAP;
(xxix) promptly notify the Company of the filing of any material
litigation, governmental or regulatory action, or similar proceeding or
notice of any claims against the Bank or any of its assets;
(xxx) Except for the Donohoe litigation previously described or those
matters described in Exhibit 4.11(b), conduct good faith settlement
negotiations, and, with the written consent of the Company, settle when
deemed prudent by the Parties, of all existing or threatened litigation as
specified in Exhibits 4.7, or for any new litigation filed or threatened
from the date hereof to the Closing Date;
(xxxi) except in the ordinary course of business, refrain from canceling
or accelerating any material indebtedness owing to the Bank or any claims
which the Bank may possess or waive any material rights of substantial
value;
(xxxii) refrain from selling or otherwise disposing of any Real Property or
any material amount of any tangible or intangible personal property other
than properties acquired in foreclosure or otherwise in the ordinary
collection of indebtedness to the Bank;
(xxxiii) refrain from foreclosing upon or otherwise taking title to or
possession or control of any real property without first obtaining a phase
one environmental report thereon which indicates that the property is free
of pollutants, contaminants or hazardous or toxic waste materials; provided,
however, that the Bank shall not be required to obtain such a report with
respect to single family, non-agricultural residential property of one acre
or less to be foreclosed upon unless it has reason to believe that such
property might contain any such waste materials or otherwise might be
contaminated;
(xxxiv) refrain from committing any act or failing to do any act which will
cause a breach of any agreement, contract or commitment and which will have
a material adverse effect on the Bank's business, financial condition, or
results of operations; and
(xxxv) duly observe and conform, and Banklink Corporation shall duly
observe and conform, to all compliance requirements for Year 2000 safety and
soundness issues.
For purposes of this Section 6.2, the Company shall be deemed to have given
its consent to any action which is contrary to any specified covenant set forth
in this Section if, within five (5) Business Days, or three (3) Business Days
for loans, after actual receipt by the Company of written notice from the Bank
of the Bank's intention to act contrary to any of the specified covenants set
forth in this Section, the Company shall not have delivered to the Bank written
objection to any such action.
6.3 ACCESS TO INFORMATION. (a) As long as the transaction contemplated
herein has not been terminated, the Bank will afford the Company, its
representatives, counsel, accountants, agents and employees including the
underwriter selected to assist in the issuance of the common stock contemplated
in Section 9.1(iii) and its counsel (collectively "Company Representatives"),
access during normal business hours to all of its business, operations,
properties, personnel books, files and records and will do everything reasonably
necessary to enable the Company and the Company Representatives to make a
complete examination of the financial statements, books, records, loans and
leases, operating reports, audit reports, contracts and documents, and all other
information with respect to assets and properties of the Bank and the condition
thereof, and to update such examination at such intervals as the Company shall
deem appropriate. Such access shall include reasonable access by the Company and
the Company Representatives to auditors' work papers with respect to the
business and properties of the Bank, other than (i) books, records and documents
covered by the attorney-client privilege, or which are attorneys' work product,
and (ii) books, records and documents that the Bank is legally obligated to keep
confidential. Such examination shall be conducted in cooperation with the
officers of the Bank and in such a manner as to minimize, to the extent possible
consistent with the conducting of a comprehensive examination, any disruption
of, or interference with, the normal business operations of the Bank. No such
examination, however, shall constitute a waiver or relinquishment on the part of
the Company to rely upon the representations and warranties made by the Bank
herein or pursuant hereto; provided, that the Company shall disclose any fact or
circumstance it may discover which it believes renders any representation or
warranty made by the Bank hereunder incorrect in any respect. The Company will
hold in strict confidence all documents and information concerning the Bank so
obtained (except to the extent that such documents or information are a matter
of public record or require disclosure in the Proxy Statement or as may be
necessary for the accomplishment of the purposes of such examination) and, if
the
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transactions contemplated herein are not consummated, such confidence shall be
maintained and all such documents including all copies shall be returned to the
Bank.
(b) As long as the transaction contemplated hereunder has not been
terminated, (i) one Company Representative, selected by the Company in its sole
discretion, shall be invited by the Bank to attend all regular and special Board
of Directors' meetings of the Bank from the date hereof until the Effective Time
of the Merger and (ii) one representative of Sutro shall be invited by the Bank
to attend all regular and special Board of Director meetings of the Bank from
the date hereof until the Effective Time of the Merger for the purpose of
discussing the condition of the market for the Offering. The Bank shall inform
the Company of such Board of Director meeting at least five (5) days in advance
of such meeting; provided, however, that the attendance of such Company
Representative shall not be permitted at any meeting, or portion thereof, for
the sole purpose of discussing the transactions contemplated by this Agreement
on the obligations of the Bank under this Agreement.
6.4 FINANCIAL STATEMENTS. In the event the following have not been
previously delivered prior to the date hereof, within three (3) days of receipt
from Arthur Andersen LLP, the Bank will deliver to the Company a copy of the
audited Statements of Financial Condition of the Bank as of December 31, 1998;
Statements of Earnings, Stockholders' Equity and Cash Flows for the year ended
December 31, 1998, the related notes and related opinions thereon of Arthur
Andersen LLP, with respect to such financial statements (the "1998 Audited Bank
Financial Statements"). The Bank will furnish to the Company with a true and
correct copy of the management letter or other letter delivered to the Bank by
Arthur Andersen LLP in connection with the 1998 Audited Bank Financial
Statements relating to any review of the internal controls of the Bank by Arthur
Andersen LLP. The 1998 Audited Bank Financial Statements will: (i) present
fairly the financial condition and results of operations of the Bank as of and
for the dates or periods covered thereby in accordance with generally accepted
accounting principles consistently applied throughout the periods involved; (ii)
be based on the books and records of the Bank; (iii) contain and reflect
reserves for all material accrued liabilities and for all reasonably anticipated
losses, and set forth adequate reserves for loan losses and other contingencies,
to the extent required by GAAP; and (iv) none of the 1998 Audited Bank Financial
Statements will contain any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements contained therein not
misleading under GAAP.
6.5 NO SOLICITATION.
(a) The Bank shall not, and will cause each of its officers, directors,
employees, agents, legal and financial advisors and Affiliates not to, directly
or indirectly, make, solicit, encourage, initiate or, except as permitted in
this Section 6.5, enter into any agreement or agreement in principle, or
announce any intention to do any of the foregoing, concerning the acquisition of
the Bank, or substantially all of the Bank's business and properties or a
majority of Bank Stock or debt securities, whether by purchase, merger (other
than by the Company), purchase of assets, tender offer or otherwise (an
"Alternative Transaction").
(b) The Bank shall not, and will cause each of its officers, directors,
legal and financial advisors, agents and Affiliates not to, directly or
indirectly, participate in any negotiations or discussions regarding, or furnish
any information with respect to, or otherwise cooperate in any way in connection
with, or assist or participate in, facilitate or encourage, any effort or
attempt to effect or seek to effect, any Alternative Transaction with or
involving any Person other than the Company, unless the Bank shall have received
an unsolicited written offer from a Person other than the Company to effect an
Alternative Transaction and the Board of Directors of the Bank is advised in
writing by outside legal counsel that in the exercise of the fiduciary
obligations of the Bank's Board of Directors such information should be provided
to or such discussions or negotiations undertaken with the Person submitting
such unsolicited written offer.
(c) The Bank will promptly communicate to the Company the receipt of any
proposal with respect to any Alternative Transaction, and will keep the Company
informed as to the status of any such proposal; PROVIDED, HOWEVER,that the Bank
shall not be required to disclose any matters which, in the written opinion of
outside legal counsel, may not be disclosed in the exercise of the fiduciary
obligations of the Bank's Board of Directors.
6.6 CERTAIN LOANS AND OTHER EXTENSIONS OF CREDIT. The Bank will promptly
inform the Company of the amounts and categories of any loans, leases or other
extensions of credit that have been criticized special mention or classified by
any bank regulatory authority or deemed by the Bank to require special attention
pursuant to its internal policies (collectively "Classified Credits"). In
addition, the Bank will furnish to the Company, as soon as practicable, and in
any event within seven days after receipt by the Bank's Board of Directors,
schedules including
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the following: (a) Classified Credits; (b) nonaccrual credits; (c) accrual
exception credits that are delinquent 90 or more days and have not been placed
on nonaccrual status; (d) participating loans and leases, stating, with respect
to each, whether it is purchased or sold, the loan or lease type, and the
originating unit; (e) loans or leases (including any commitments) by the Bank to
any director, officer or shareholder holding 5% or more of the capital stock of
such party; (f) letters of credit; (g) loans or leases charged-off during the
previous month; (h) loans or leases written down during the previous month; and
(i) OREO or assets owned, stating with respect to each its type.
6.7 BREACHES. The Bank shall, in event it becomes aware of the impending
or threatened occurrence of any event or condition which would cause or
constitute a breach (or would have caused or constituted a breach had such event
occurred or been known prior to the date hereof) of any of its representations
or agreements contained or referred to herein, give prompt written notice
thereof to the Company and, without limiting the Company's rights under
paragraph 14.1(a)(ii), the Bank shall use its best efforts to prevent or
promptly remedy the same.
6.8 SHAREHOLDER APPROVAL. As soon as practicable, the Company and the Bank
shall prepare the S-4 and the proxy statement ("Proxy Statement") and take all
action necessary in accordance with applicable Rules and its Charter Documents
to submit the Agreement and the transactions contemplated hereby to its
shareholders for approval by June 21, 1999, or as otherwise reasonably directed
by the Company. In connection with such submission, subject to its fiduciary
obligations specified in Section 6.5(b) the Bank's Board of Directors shall
recommend shareholder approval of all the matters referred to in this Section
6.8 and the Bank shall use its best efforts to obtain such shareholder approval.
6.9 COMPLIANCE WITH RULES. The Bank shall comply with the requirements of
all applicable Rules, the noncompliance with which would materially and
adversely affect the assets, liabilities, business, financial condition, results
of operations or prospects of the Bank.
6.10 TERMINATION OF THE BANK STOCK OPTION PLAN AND AGREEMENTS. The Bank
will take all steps necessary to cause the Bank Stock Option Plan to be
terminated as of or prior to the Effective Time of the Merger, will grant no
additional options under said plan prior to the Effective Time of the Merger,
and the Bank will not permit any options to be exercised as of or prior to the
Effective Time of the Merger.
6.11 OFFICERS AND EMPLOYEES. Following the Closing Date, the Company and
the Bank will agree to consolidate and/or reduce certain back office and
administrative functions, and other overhead, of the Bank in order to reduce
Bank expense. Other than officers with employment contracts, the Bank will use
its best efforts to cause each officer and employee of the Bank to indicate in
writing to the Company that such officers and employees will agree to the Bank's
employment policies, procedures and handbook, acknowledge his or her at-will
employment status while employed by the Bank, and acknowledge his or her salary
or compensation and title while employed by the Bank, in the form similar to
that attached as EXHIBIT 6.11(A). The Company also will honor all Bank
Employment Agreements specified in EXHIBIT 4.11(A). The Bank will cancel by the
Closing Date the keyman life insurance policy and the disability insurance
policy for Mr. Jaqua.
6.12 TERMINATION OF CONTRACTS AND ACCRUAL OF LIABILITIES. Upon
determination by the Company, the Bank shall obtain the termination of any
contracts, commitments or Understanding as defined in Section 4.12(v), and pay
or accrue as of the Closing Date for any termination fees, for the future
purchase of materials, supplies, services, merchandise or equipment, the price
of which exceeds $20,000. The Bank shall also cancel the consulting contract
with Mr. Cockrum effective as of the Closing Date. Before the Determination
Date, the Bank shall have paid, or set-up adequate accruals for the payment of,
all expenses, including, but not limited to, professional fees as outlined in
Section 11.18, and expenses as outlined in Section 13.1, but only to the extent
that such fees and expenses shall be chargeable to the after tax net income of
the Bank up to the Determination Date in accordance with GAAP.
6.13 EXECUTION OF AGREEMENT OF MERGER. As soon as possible after
organization of PCBG Merger Corporation, subject to receipt of any and all
necessary approvals and Permits by any Governmental Entity and approval by the
Bank's shareholders, the Bank shall execute the Agreement of Merger and any and
all related documents.
6.14 ACCOUNTANTS. Promptly upon request of the Company, the Bank will ask
its accountants to permit the Company or the Company Representatives to review
and examine the work papers relating to the Audited Bank Financial Statements
for the years ended December 31, 1995, 1996, 1997 and 1998, and the Bank will
permit such accountants to discuss with the Company any matter relating to the
audits of the Bank. In addition, the Bank will
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make available to the Company copies of each management letter or other letter
delivered to the Bank by its accountants in connection with such financial
statements or relating to any review by its accountants of the internal controls
of the Bank since January 1, 1995, unless previously provided to the Company and
the Bank has instructed its accountants to make available for inspection by the
Company or the Company Representatives all reports and working papers produced
or developed by its accountants in connection with their examination of such
financial statements, as well as all such reports and working papers for any
periods for which any tax of the party has not been finally determined or barred
by applicable statutes of limitation.
6.15 CORPORATE ACTION. The Bank shall take or cause to be taken all
necessary corporate action required to carry out the transactions contemplated
in this Agreement.
6.16 REGULATORY APPROVALS. Promptly following execution of this Agreement,
the parties hereto shall prepare, submit and file, or cause to be prepared,
submitted and filed, all applications for approvals and consents as may be
required of any of them, respectively, by applicable law and regulations with
respect to the transactions contemplated by this Agreement, including without
limitation any and all applications required to be filed with the Commissioner,
the FRB, the FDIC and such other Governmental Entity as the Company or the Bank
may reasonably believe necessary. Each party shall cooperate with the other in
the preparation of all of such applications and will furnish promptly upon
request all documents, information, financial statements or other materials as
may be required in order to complete such applications. Each party shall afford
the other a reasonable opportunity to review all such applications (except
confidential portions thereof) and all amendments and supplements thereto before
filing. The Company and the Bank each covenant and agree that any and all
information furnished by it to the other for inclusion in such applications will
not contain any untrue statement of a material fact and will not omit to state
any material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
6.17 NECESSARY CONSENTS. In addition to the regulatory approvals referred
to in Section 6.16, the parties hereto shall each apply for and diligently seek
to obtain all other third party consents or approvals which may be necessary for
the consummation of the Merger, including, without limitation, the written
consent of any lessors of real and personal property which property cannot be
assigned without the written consent of the other such lessors ("Third Party
Consent").
6.18 FURTHER ASSURANCES. The parties agree that from time to time, whether
prior to, at or after the Effective Time of the Merger, they will execute and
deliver such further instruments of conveyance and transfer and take such other
action as may reasonably be expected to consummate the transactions contemplated
hereby. The Company and the Bank each agrees to take such further action as may
reasonably be requested by the other in order to consummate the transactions
contemplated by this Agreement and that are not inconsistent with the other
provisions hereof, including compliance with all of the terms of Article II.
6.19 BANK EMPLOYEE BENEFITS. Upon the mutual agreement of the Bank and the
Company, the Bank shall cause all Employee Plans of the Bank to be terminated
except as otherwise provided by applicable labor laws as of the Effective Time
of the Merger.
6.20 ENVIRONMENTAL REPORTS. Except for the Banklink leases, the 1600
Florida Avenue lease, and foreclosed OREO, and except as otherwise agreed to in
writing by the Company, the Bank shall provide to the Company, as soon as
reasonably practical, but not later than 45 days after the date hereof, a report
of a phase one environmental investigation on all Real Property owned, leased or
operated by Bank as of the date hereof (other than space in retail and similar
establishments leased by the Bank for automatic teller machines) and within ten
days after the acquisition or lease of any Real Property acquired or leased by
the Bank after the date hereof (other than space in retail and similar
establishments leased or operated by the Bank for automatic teller machines),
except as otherwise provided in Section 6.2(xxxiii). If required by the phase
one investigation in the Company's reasonable opinion, the Bank shall provide to
the Company a report of a phase two investigation on the Real Property or Real
Properties requiring such additional study. The Company shall have 15 business
days from the receipt of any such phase two investigation report to notify the
Bank of any objection to the contents of such report. If the cost of taking all
remedial and corrective actions and measures (i) required by applicable law, or
(ii) recommended or suggested by such report or reports or prudent in light of
serious life, health or safety concerns, in the aggregate, is in excess of the
sum of Three Hundred Thousand Dollars ($300,000) as reasonably estimated by an
environmental expert retained for such purpose by the Company and reasonably
acceptable to the Bank, or if the cost of such actions and measures cannot be so
reasonably estimated by such expert to be, in the aggregate, $300,000 or less
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with any reasonable degree of certainty, the Company shall have the right to
terminate the Agreement pursuant to Article IV, Section 14.1(e) hereof, for a
period of 10 business days following receipt of such estimate or indication that
the cost of such actions and measures.
6.21 NO CONFLICTS; DEFAULTS. The execution, delivery and performance of
the Agreement of Merger and the consummation of the transactions contemplated
therein, and compliance by the Bank with any provision thereof will not (a)
conflict with or result in a breach of, or default or loss of any benefit under,
any provision of its Charter Documents or, except as set forth in Exhibit 6.21
any material agreement, instrument or obligation to which the Surviving Bank
will become a party or by which the property of the Surviving Bank will become
bound or give any other party to any such agreement, instrument or obligation
the right to terminate or modify any term thereof; (b) except for the prior
approval of the FRB, the FDIC and the Commissioner and as set forth in Exhibit
6.21, require any Consents; (c) result in the creation or imposition of any
Encumbrance on any of the properties or assets of the Surviving Bank; or (d)
violate the Charter Documents or any Rules to which the Surviving Bank is
subject.
6.22 THE OFFERING. The Bank will assist the Company in connection with the
preparation of the offering materials for the issuance of the Company Stock
contemplated by this Agreement, and such assistance will include, but not
necessarily be limited to, the preparation or provision, as appropriate, of
information concerning the business, properties and personnel of the Bank needed
in connection with the issuance of the Company Stock and the closing of the
Offering, as well as any and all comfort letters from Arthur Andersen LLP, and
any and all necessary opinions from Gary Steven Findley & Associates, with
respect to the Offering as specified by the Underwriters. Such information to be
supplied by the Bank will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not intentionally misleading.
6.23 S-4, PROXY STATEMENT AND THE OFFERING. The Company and the Bank will
prepare the S-4 and the Proxy Statement, and the Bank will assist the Company in
connection with preparation of the S-1, contemplated by this Agreement, and such
preparation and assistance will include, but not necessarily be limited to, the
preparation or provision, as appropriate, of information concerning the
business, properties and personnel of the Bank needed in connection with the
issuance of the Company Stock, the S-4 and the Proxy Statement and the closing
of the Merger. Such information to be prepared by the Bank including any and all
information furnished by the Bank for inclusion in all applications and
statements filed with the appropriate regulatory authorities for approval of, or
consent to, the Merger will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
6.24 PUBLICITY. The initial press release announcing this Agreement shall
be a joint press release and thereafter the Company and the Bank shall consult
with each other in issuing any press releases or otherwise making public
statements with respect to the transactions contemplated hereby and in making
any filings with any Governmental Entity or with any national securities
exchange with respect thereto. If any party hereto, on the advice of counsel,
determines that a disclosure is required by law, it may make such disclosure
without the consent of the other parties, but only after affording the other
party a reasonable opportunity to review and comment upon the disclosure. The
parties hereby agree that all public statements after the initial press release
announcing this Agreement referring to the Bank shall be made by Mr. James B.
Jaqua, and all public statements made after the initial press release announcing
this Agreement referring to the Company shall be made by Mr. E. Lynn Caswell,
and both parties agree that all public statements shall be made by mutual
agreement with consultation with the Managing Underwriter.
6.25 AFFILIATES AND FIVE PERCENT SHAREHOLDER AGREEMENTS. Within thirty
(30) days of the execution of this Agreement, (a) the Bank shall deliver to the
Company a letter identifying all persons who are then "affiliates" of the Bank
for purposes of Rule 145 under the Securities Act and (b) the Bank shall advise
the persons identified in such letter of the resale restrictions imposed by
applicable securities laws and shall use reasonable efforts to obtain from each
person identified in such letter a written agreement substantially in the form
attached hereto as Exhibit 6.25. The Bank shall use reasonable efforts to obtain
from any person who becomes an affiliate of the Bank after the Bank's delivery
of the letter referred to above, and on or prior to the date of the Bank's
Shareholders' Meeting to approve this Agreement, a written agreement
substantially in the form attached as Exhibit 6.25 hereto as soon as practicable
after obtaining such status. At least 10 Business Days prior to the filing of
the S-4, the Bank shall use its best efforts to cause each person or group of
persons who holds more than five percent
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(5%) of Bank Stock (regardless of whether such person is an "affiliate" under
Rule 145) to deliver to the Company's accountants and Knecht & Hansen, a letter
stating that such shareholder(s) has no present plan or intention to dispose of
Bank Stock and committing that such shareholder(s) will not dispose of Bank
Stock in a manner to cause a violation of the "continuity of shareholder
interest" requirements of Treasury Regulation 1.368-1.
ARTICLE VII
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Bank as follows:
7.1 BEST EFFORTS. The Company shall use its best efforts to bring about
the satisfaction of the conditions specified in Articles IX and X hereof.
7.2 CONDUCT OF BUSINESS. Unless the Bank shall give its prior consent,
which consent will not be unreasonably withheld, or unless otherwise indicated,
until the Effective Time, the Company will:
(i) conduct its affairs and business in the usual and ordinary course,
generally consistent with past practice, and in accordance with safe and
sound practices;
(ii) refrain from amending its Charter Documents except to the extent as
may be required or contemplated by this Agreement, and except as the Company
proposes to amend its articles of incorporation and bylaws as attached to
this Agreement as EXHIBIT 7.2(II);
(iii) use its best efforts to preserve its business organization intact
and to retain its present officers and employees in a manner consistent with
the Company's other obligations under this Agreement;
(iv) use its best efforts to preserve the goodwill of those having
business relations with the Company, refrain from amending, modifying,
terminating or failing to renew or preserve its business organization,
material rights, franchises, Permits, and refrain from taking any action
which would jeopardize the continuance of the goodwill of its customers
where such action would have, taken as a whole, a material adverse effect on
the financial condition, or results of operations of the Company in a manner
consistent with the Company's other obligations under this Agreement;
(v) duly and timely file all reports and returns required to be filed
with any federal, state or local Governmental Entity unless any extensions
have been duly granted by such authorities;
(vi) maintain its books of account and records in the regular manner
substantially in accordance with all applicable statutory and regulatory
requirements applied on a consistent basis;
(vii) advise the Bank promptly in writing of any material adverse change
known to the Company in the capital structure, financial condition, results
of operations, or of any event or condition which with the passage of time
is reasonably likely to result in a material adverse change in the capital
structure, financial condition or results of operations of the Company, or
in the event the Company determines that the Merger will not be consummated
because of any inability to meet the conditions to the performance of the
Bank set forth in Article X or of any matter which would make the
representations and warranties set forth in Article V hereof not true and
correct in any material respect at the Closing;
(viii) the Company agrees that through the Effective Time of the Merger,
as of their respective dates, (i) each of the Company Filings will be true
and complete in all material respects; and (ii) each of the filings with any
regulatory agency will comply in all material respects with all of the
statutes, rules and regulations enforced or promulgated by the Governmental
Entity with which it will be filed and none will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any of such Company Filings that is intended to
present the financial position of the entities or entity to which it relates
will fairly present the financial position of such entities or entity and
will be prepared in accordance with GAAP or RAP consistently applied, except
as stated therein, during the periods involved;
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For purposes of this Section 7.2, the Bank shall be deemed to have given its
consent to any action which is contrary to any specified covenant set forth in
this Section if, within five (5) Business Days, after actual receipt by the Bank
of written notice from the Company of the Company's intention to act contrary to
any of the specified covenants set forth in this Section, the Bank shall not
have delivered to the Company written objection to any such action.
7.3 ACCESS TO INFORMATION. The Company will afford the Bank, its
representatives, counsel, accountants, agents and employees (collectively "Bank
Representatives"), access during normal business hours to all of its business,
operations, properties, books, files and records and will do everything
reasonably necessary to enable the Bank and the Bank Representatives to make a
complete examination of the financial statements, books, records, loans and
leases, operating reports, audit reports, contracts and documents, and all other
information with respect to assets and properties of the Company and the
condition thereof, and to update such examination at such intervals as the Bank
shall deem appropriate. Such access shall include reasonable access by the Bank
and the Bank Representatives to auditors' work papers with respect to the
business and properties of the Company, other than (i) books, records and
documents covered by the attorney-client privilege, or which are attorneys' work
product, and (ii) books, records and documents that the Company is legally
obligated to keep confidential. Such examination shall be conducted in
cooperation with the officers of the Company and in such a manner as to
minimize, to the extent possible consistent with the conducting of a
comprehensive examination, any disruption of, or interference with, the normal
business operations of the Company. No such examination, however, shall
constitute a waiver or relinquishment on the part of the Bank to rely upon the
representations and warranties made by the Company herein or pursuant hereto;
provided, that the Bank shall disclose any fact or circumstance it may discover
which it believes renders any representation or warranty made by the Company
hereunder incorrect in any respect. The Bank will hold in strict confidence all
documents and information concerning the Company so obtained (except to the
extent that such documents or information are a matter of public record or
require disclosure in the Proxy Statement or as may be necessary for the
accomplishment of the purposes of such examination) and, if the transactions
contemplated herein are not consummated, such confidence shall be maintained and
all such documents including all copies shall be returned to the Company.
7.4 BREACHES. The Company shall, in event it becomes aware of the
impending or threatened occurrence of any event or condition which would cause
or constitute a breach (or would have caused or constituted a breach had such
event occurred or been known prior to the date hereof) of any of its
representations or agreements contained or referred to herein, given prompt
written notice thereof to the Bank and, without limiting the Bank's rights under
paragraph 14.1(a)(ii), the Company shall use its best efforts to prevent or
promptly remedy the same.
7.5 COMPLIANCE WITH RULES. The Company shall comply with the requirements
of all applicable Rules, the noncompliance with which would materially and
adversely affect the assets, liabilities, business, financial condition, or
results of operations of the Company taken as a whole. The Company shall also
comply with all securities statutes, rules and regulations, whether federal or
state, in connection with the Offering. Except for information supplied by the
Bank pursuant to Section 6.22, the information contained in the Offering
disclosure documents shall not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
7.6 CORPORATE ACTION. The Company shall take or cause to be taken all
necessary corporate action required to carry out the transactions contemplated
in this Agreement and the Agreement of Merger, including without limitation, all
necessary action required to organize and fund PCBG Merger Corporation.
7.7 REGULATORY APPROVALS. Promptly following execution of this Agreement,
the parties hereto shall prepare, submit and file, or cause to be prepared,
submitted and filed, all applications for approvals and consents as may be
required of any of them, respectively, by applicable law and regulations with
respect to the transactions contemplated by this Agreement, including without
limitation any and all applications required to be filed with the Commissioner,
the FRB, the FDIC and such other Governmental Entity as the Company or the Bank
may reasonably believe necessary. Each party shall cooperate with the other in
the preparation of all of such applications and will furnish promptly upon
request all documents, information, financial statements or other materials as
may be required in order to complete such applications. Each party shall afford
the other a reasonable opportunity to review all such applications (except
confidential portions thereof) and all amendments and supplements thereto before
filing. The Company and the Bank each covenant and agree that any and all
information furnished by it to the other for inclusion in such applications will
not contain any untrue statement of a material fact and will not
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omit to state any material fact required to be stated therein or necessary to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading.
7.8 NECESSARY CONSENTS. In addition to the regulatory approvals referred
to in Section 7.7, the parties hereto shall each apply for and diligently seek
to obtain all other third party consents or approvals which may be necessary for
the consummation of the Merger, including, without limitation, the written
consent of any lessors of real and personal property which property cannot be
assigned without the written consent of the other such lessors ("Third Party
Consent").
7.9 FURTHER ASSURANCES. The parties agree that from time to time, whether
prior to, at or after the Effective Time of the Merger, they will execute and
deliver such further instruments of conveyance and transfer and take such other
action as may reasonably be expected to consummate the transactions contemplated
hereby. The Company and the Bank each agree to take such further action as may
reasonably be requested by the other in order to consummate the transactions
contemplated by this Agreement and that are not inconsistent with the other
provisions hereof, including compliance with the terms of Article II.
7.10 (reserved).
7.11 (reserved).
7.12 INDEMNIFICATION AND INSURANCE.
(a) The Company will cause the Bank to maintain in effect policies of
directors' and officers' liability insurance (with such coverage, terms and
conditions as are no less advantageous than the insurance presently maintained
by the Bank with respect to the officers and directors) with respect to all
matters arising from facts or events which occurred before the Effective Time of
the Merger, and for a three (3) year period thereafter, for which the Bank would
have had an obligation to indemnify its directors and officers.
(b) If the Company or any of its successors or assigns (i) shall consolidate
with or merge into any other corporation or entity and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) shall transfer all or substantially all of its properties and assets to any
individual, corporation or other entity, then and in each such case, the Company
shall take no action to impair the rights provided in this Section 7.12.
7.13 EXECUTION OF AGREEMENT OF MERGER. As soon as practicable after the
organization of PCBG Merger Corporation, the Company as the sole shareholder of
PCBG Merger Corporation, shall approve the Merger and shall cause PCBG Merger
Corporation to execute the Agreement of Merger.
7.14 THE OFFERING.
(a) The Company intends to conduct the Offering in order to permit
stockholders of the Bank and Valley Bank, to sell shares of Company Stock and to
provide capital for expenses, growth and operations of the Company. All
shareholders of the Bank will be given the opportunity to sell shares of the
Company (whether in exchange for Bank Stock or Bank Options) in the Offering,
subject to proration as provided in Section 2.1(b). Shares of Company Stock sold
by the selling shareholders will not incur any cost and expenses of the
Offering, and that pursuant to the terms of this Section 7.14, the amount of
cash from the Offering to be received by a Selling Shareholder will not be less
than $15.00 per share.
(b) All holders of Bank Options who exchange their options for shares
Company Stock and elect to sell the shares of Company Stock so received may do
so without having to first exercise such options. Such option holders wishing to
sell shares of Company Stock underlying their options to be received in exchange
for the Bank Options may do so by depositing with the Exchange Agent the options
with respect to the shares of Bank Stock to be exchanged prior to the Offering,
together with appropriate Letters of Transmittal properly completed and
executed. At the time of the Merger, the Bank Options will be deemed exchanged
for the number of shares of Company Stock and Warrants as provided in Section
2.8, and, upon completion of the Offering, the Exchange Agent will distribute to
each former option holder (a) the proceeds of sale of those of such shares that
are sold in the Offering, and (b) the shares and cash to which the former option
holder is entitled.
(c) All Directors and officers of the Company and the Surviving Bank have
undertaken in writing with the Underwriters not to sell any Warrants or shares
of Company Stock held by them for a period of six months following the
completion of the Offering unless specifically granted permission to do so by
the Underwriters, such
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undertaking is in full force and effect. It is understood that the Underwriters
will (a) reduce the period from six months to ninety (90) days, and (b) exclude
from the effect of these undertakings those shares sold in the Offering.
(d) Simultaneously with, and upon the condition of, the consummation of the
acquisition of the Bank, the Company through the Underwriters intends to
consummate the Offering at a gross public offering price of at least $15.00 per
share. If the Offering cannot be consummated at a gross public offering price of
at least $15.00 per share, the Company will not be obligated to proceed with the
Offering and the acquisition of the Bank and Valley Bank.
7.15 AUTHORIZATION. The execution and delivery of the Agreement of Merger
and the consummation of the transactions contemplated thereby will have been
duly authorized by the Board of Directors of PCBG Merger Corporation. The
Agreement of Merger will constitute a legal, valid and binding agreement of PCBG
Merger Corporation in accordance with its respective terms, except as the
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other laws of general application relating to or
affecting enforcement of creditors rights and the application of equitable
principles in any action, legal or equitable. PCBG Merger Corporation will have
full corporate power and authority to perform its obligations under the
Agreement of Merger and the transactions contemplated thereby.
7.16 NO CONFLICTS; DEFAULTS. The execution, delivery and performance of
the Agreement of Merger and the consummation of the transactions contemplated
therein, and compliance by PCBG Merger Corporation with any provision thereof
will not (a) conflict with or result in a breach of, or default or loss of any
benefit under, any provision of its Charter Documents or, except as set forth in
Exhibit 7.16 any material agreement, instrument or obligation to which PCBG
Merger Corporation will become a party or by which the property of PCBG Merger
Corporation will become bound or give any other party to any such agreement,
instrument or obligation the right to terminate or modify any term thereof; (b)
except for the prior approval of the FRB, the FDIC and the Commissioner and as
set forth in Exhibit 7.16, require any Consents; (c) result in the creation or
imposition of any Encumbrance on any of the properties or assets of PCBG Merger
Corporation; or (d) violate the Charter Documents or any Rules to which PCBG
Merger Corporation is subject.
7.17 ACCURACY OF INFORMATION FURNISHED. Except as to any statements or
information which shall include projections or forecasts, none of the statements
or information made or contained in any of the covenants, representations or
warranties of the Company set forth in this Agreement or in any of the
schedules, exhibits, lists, certificates or other documents furnished herewith
contains any untrue statement of a material fact required to be stated herein or
therein or necessary to make the statements or information contained herein or
therein, in light of the circumstances in which they were made, not misleading.
As to any such information or statements which include projections or forecast,
such information or statements are based upon assumptions believed by the
Company to be reasonable. The Company shall further amend or supplement the
schedules as of the Closing Date if necessary to reflect any additional changes
in the status of the Company.
7.18 1999 STOCK OPTION PLAN. Prior to or following the completion of the
transactions contemplated herein, the Company will use its best efforts to
establish the Company's 1999 Stock Option Plan for the benefit of directors,
officers and key employees of the Company and the Bank.
7.19 FURTHER ASSURANCES. The Company knows of no reason that the
transaction would not consummate. Without the prior approval of the Bank, the
Company will not enter into any further agreements to acquire another financial
institution that would materially and adversely affect the transaction or the
timing contemplated by this Agreement.
ARTICLE VIII
FURTHER COVENANTS OF THE COMPANY AND THE BANK
The parties covenant and agree as follows:
8.1 S-4, PROXY STATEMENT AND REGISTRATION STATEMENT FOR THE OFFERING.
(a) As promptly as practicable, the Company and the Bank shall use their
best efforts to prepare and file the S-4, in which the Proxy Statement will be
included as a prospectus, and the S-1 with the SEC and any other Governmental
Entity. The Bank agrees to provide the information necessary for inclusion in
the S-4, the Proxy
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Statement and the S-1. The Company will use its best efforts to have the S-4 and
the Proxy Statement declared effective under the Securities Act as promptly as
practicable after it is filed and to satisfy the requirements of the SEC and any
other Governmental Entity.
(b) After the date of the filing of the S-4 and the S-1 with the SEC and any
other Governmental Entity, each of the Parties agrees to promptly notify the
other of and to correct any information furnished by such party that shall have
become false or misleading in any material respect and to cooperate with the
other to take all steps necessary to file with the SEC and any other
Governmental Entity and have declared effective or cleared by the SEC and any
other Governmental Entity any amendment or supplement to the S-1 and the S-4 so
as to correct such information and to cause the S-4 and the S-1 as so corrected
to be disseminated to the shareholders of the Company and the Bank to the extent
required by applicable Rules. All documents that the Company files with the SEC
or any other Governmental Entity in connection with this Agreement will comply
as to form in all material respects with the provisions of applicable Rules.
(c) The Company shall take all required action with appropriate Governmental
Entities under state securities or blue sky laws in connection with the issuance
of Company Stock pursuant to this Agreement.
(d) The Bank and the Company, through their Board of Directors, will
recommend that its shareholders approve the transactions contemplated hereby,
and both parties will use their best efforts to obtain the affirmative votes of
the holders of the largest possible percentage of its outstanding Common Stock,
so long as it is consistent with its fiduciary obligation to do so.
8.2 FEDERAL SECURITIES LAWS. In obtaining the consent of its shareholders
of the matters described in Section 8.1 hereof, the Company, the Bank and their
respective officers, directors and controlling shareholders will, in all
respects, comply with the Rules and regulations of the SEC and any other
Governmental Entity promulgated under the Exchange Act applicable to commercial
banks which are reporting companies, other applicable provisions of the United
States Code, the Rules and regulations of the SEC and the securities laws of all
states in which shareholders of the parties reside as applicable.
Without in any way limiting the generality of the foregoing, the Company and
the Bank agrees that the Notice of Meeting, Proxy Statement submitted in
connection therewith, form of Proxy and other solicitation materials that will
be used in soliciting the aforesaid shareholder approvals and authorizations and
the S-1:
(i) will be filed with, and not be used before the same are cleared for
use by, the SEC, other Governmental Entities having jurisdiction over the
Company and the Bank, and this transaction, and the securities
administrators of all states in which their respective shareholders reside
as applicable;
(ii) will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading, except that neither party warrants
the accuracy or completeness of any information contained therein which is
furnished to it by the other relating to the business, assets, properties,
financial condition or management of the other or any corporation or person
affiliated or contractually obligated to become affiliated therewith,
whether by merger, acquisition of assets or otherwise;
(iii) the Company and the Bank will use their best efforts to obtain
clearance by all appropriate Governmental Entities for the use of its Notice
of Meeting, Proxy Statement, form of Proxy and other solicitation materials.
Each party will consult and cooperate with the other in the preparation of
all such proxy solicitation materials for the Bank Shareholders' Meeting and
the Company's Shareholders Meeting, and the Bank and the Company agree not
to transmit any proxy materials without the prior consent of the other party
and its counsel; and
(iv) the Company and the Bank shall each covenant and agree and each pay
their own expenses in connection with the preparation and filing, including
attorney fees, of the Notice of Meeting, Proxy Statement, form of Proxy and
other solicitation materials.
8.3 MAILING OF PROXY STATEMENT. The Bank and the Company each covenant and
agree that they will use their best efforts and shall cooperate with each other
in the preparation, filing and mailing of the Proxy Statement as soon as is
reasonably practicable and is permitted under applicable law; it being the
intention of the Bank to include its December 31, 1998 financial statements and
information, and any necessary quarterly financial statements and information,
in the financial disclosures contained in the Proxy Statement.
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8.4 MATERIALS TO BE FURNISHED PRIOR TO MAILING DATES. On or prior to the
mailing date of the Proxy Statement ("Bank Mailing Date"), the Bank (a) shall
use its best efforts to cause an appropriate firm that shall be selected by the
Bank in its discretion, subject to the reasonable approval of the Company, to
deliver to the Company a copy of any letter to the Board of Directors of Bank,
dated as of a date not more than five days prior to such mailing date, in form
and substance satisfactory to the Company to the effect set forth in Section
10.9 hereof, (b) shall have received a letter by a date not more than five days
prior to the Bank Mailing Date, to the effect that the consideration to be
received by the shareholders of the Bank in the Merger is fair from a financial
point of view, and (c) shall have received a letter by a date not more than five
days prior to the Bank Mailing Date, of the valuation of dissenters rights
shares as described in Section 1300.
8.5 REGULATORY APPROVALS. The Bank and the Company each agree to use their
best efforts to provide promptly such information and reasonable assistance as
may be requested by the other party to this Agreement and to take promptly such
other actions as shall be necessary or appropriate in order to consummate the
transactions contemplated hereby. Without limiting the foregoing, the Bank and
the Company will each (a) prepare, submit and file, or cause to be prepared,
submitted and filed, all applications for all authorizations, consents, orders
and approvals of federal, state, local and other Governmental Entities and
officials necessary under applicable law for the performance of its obligations
pursuant to this Agreement and the consummation of the transactions contemplated
hereby, (b) use their best efforts to obtain all such authorizations, consents,
orders and approvals as expeditiously as possible in accordance with the terms
of this Agreement, and (c) cooperate fully with each other in promptly seeking
to obtain such authorizations, consents, orders and approvals, including without
limitation, in each case, the approval of the FRB, the FDIC and the
Commissioner. The Bank and the Company each agree to promptly provide the other
with copies of all applications referred to in clause (a) above and copies of
all written communications, letters, reports or other documents delivered to or
received from any Governmental Entity, and copies of all memoranda relating to
discussions with such Governmental Entity, if any, with respect to the Merger,
except that the Company and the Bank shall not be required to provide the other
with any of the foregoing documents submitted or received on a confidential
basis or which incorporate confidential information relating to other financial
institutions. The Parties agree that through the Effective Time of the Merger,
each of its reports, registration statements and other filings required to be
filed with any applicable Governmental Entity will comply in all material
respects with the applicable statutes, rules and regulations enforced or
promulgated by the Governmental Entity with which it will be filed and none will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Any
financial statement contained in any such report, registration statement or
other filing that is intended to represent the financial position of the Party
to which it relates will fairly present the financial position of such Party and
will be prepared in accordance with GAAP or RAP consistently applied during the
periods involved.
8.6 CORPORATE GOVERNANCE.
(a) Prior to the Effective Time, the Bank shall take all necessary steps to
effect the Bank Corporate Governance Changes at the Effective Time.
(b) Prior to the Effective Time, the Company shall take all necessary steps
to effect the Company Corporate Governance Changes at the Effective Time.
8.7 NASDAQ. The Company's Stock will be listed on the Nasdaq National
Market System at the Effective Time of the Merger.
ARTICLE IX
CONDITIONS PRECEDENT TO THE CONTEMPLATED TRANSACTIONS
The obligations of the Parties to consummate the transactions as provided
for herein are subject to the fulfillment, at or prior to the Effective Time, of
the following conditions:
9.1 PERMITS AND APPROVALS. Appropriate permits or approvals from the
Commissioner, the FRB, the FDIC and/or any other Governmental Entities which are
necessary to carry out the transactions contemplated in this Agreement, shall
have been received, the United States Department of Justice shall not have taken
any adverse
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action within the period allowed under 12 U.S.C. Section 1828(c)(6), and all
other statutory or regulatory requirements for the valid completion of the
transactions contemplated hereby shall have been satisfied. Said permits and
approvals shall include, but shall not be limited to, the following:
(i) prior written approval from the Commissioner pursuant to the CFC,
the FDIC pursuant to 12 U.S.C. Section 1828(c)(2) and the FRB pursuant to
the Federal Reserve Act and the BHC Act;
(ii) to the extent required by applicable Rule, all Consents of any
Governmental Entity, including, without limitation, those of the FRB, the
FDIC and the Commissioner, shall have been obtained, granted or waived for
organization of PCBG Merger Corporation and the Merger, and all applicable
waiting periods under all rules shall have expired; and
(iii) all approvals, orders and/or permits necessary for the Offering and
any other necessary regulatory approvals and the issuance of approvals or
assurances from the Commissioner, the FRB, the FDIC, the SEC, any blue sky
authority and any other necessary Governmental Entity having authority over
the Merger that the approval of the Merger will be forthcoming that are
satisfactory to the Company, that would allow the Company to commence the
marketing of the Offering by the Company to complete the Merger as described
in this Agreement.
9.2 ABSENCE OF LITIGATION. On the Closing Date and at the Effective Time:
(i) there shall be no action pending before any court of competent jurisdiction
in which any injunction is sought by any Governmental Entity against the
transactions contemplated hereby; and (ii) there shall be in effect no order,
writ, injunction or decree of any court or Governmental Entity prohibiting the
consummation of any of the transactions contemplated hereby.
9.3 SHAREHOLDER APPROVAL. The Agreement, the Merger, and the other
transactions contemplated hereby, shall have been approved by the holders of at
least a majority of the issued and outstanding shares of Bank Stock entitled to
vote and the requisite approval of the Company as the sole shareholder of PCBG
Merger Corporation as soon as practicable. Any and all other action required by
the shareholders of the Bank or the Company to authorize or effect the
transactions called for herein shall have been duly and validly taken.
9.4 STOCK OFFERING. An election to sell shares in the Offering shall have
been made, and proper documentation submitted, with respect to not less than 75%
of the shares of Company Stock received by holders of Bank Stock. The Company
shall have entered into a firm commitment underwriting agreement for the
Offering, and all conditions to the consummation of the Offering, other than the
completion of the mergers of PCBG Merger Corporation with the Bank and of
Interim Valley Bank with Valley Bank, shall have been satisfied or waived.
9.5 S-1, S-4 AND PROXY STATEMENT. The S-4, Proxy Statement and the S-1
shall have been declared effective by the SEC or the FDIC, as appropriate, and
shall not be the subject of any stop order or proceeding seeking or threatening
a stop order. The Company shall have received all state securities or "Blue Sky"
permits and other authorization necessary to issue the Company Stock in the
Offering and the S-4 in order to consummate the Merger.
9.6 NASDAQ. The Company's Common Stock issued in the Offering will be
listed on the Nasdaq National Market System at the Effective Time.
9.7 SEVERANCE POLICY. The Bank and the Company shall continue the Bank's
present severance policy.
9.8 TAX OPINION. The Company shall have received from its accountants an
opinion for the benefit of the holders of Bank Stock reasonably satisfactory to
the Company and the Bank to the effect that the Merger shall not result in the
recognition of gain or loss for federal income tax purposes to the Company or
the Bank, the issuance of Company Stock or Warrants shall not result in the
recognition of gain or loss by the holders of Bank Stock who receive Company
Stock and Warrants in connection with the Merger, and shall state that the
holding period for Company Stock, for purposes of capital gains taxation, shall
include the period during which Bank Stock was held. This opinion shall be dated
prior to the date the Proxy Statement is first mailed to the shareholders of the
Company and the Bank and such opinions shall not have been withdrawn or modified
in any respect.
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ARTICLE X
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE BANK
All of the obligations of the Bank to consummate the transactions
contemplated herein shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions, or their waiver by resolution of the
Board of Directors of the Bank:
10.1 LEGAL OPINION. The Bank shall have received the opinion of Knecht &
Hansen, acting as counsel for the Company, dated as of the Closing Date, in
substantially the form of EXHIBIT 10.1.
10.2 CERTIFICATE OF NO DEFAULT. All covenants, terms and conditions of
this Agreement to be complied with and performed by the Company at or before the
Closing Date shall have been complied with and performed in all material
respects and the representations and warranties of the Company contained in
Article V hereof shall have been true and correct in all material respects as of
the Effective Time, with the same effect as though such representations and
warranties had been made on and as of the Effective Time, except as otherwise
specified in, or permitted or contemplated by, this Agreement. The Company shall
have delivered to the Bank, a certificate dated the Closing Date, signed by the
President, certifying the fulfillment of this condition.
10.3 CLOSING DOCUMENTS. The Company shall have delivered to the Bank all
items required by the Bank pursuant to Section 3.3, all of which documents shall
be properly executed and, if required by the Bank, acknowledged before a notary.
10.4 EFFECTIVE S-4 AND PROXY STATEMENT. The S-4 and the Proxy Statement
shall have been approved or otherwise become effective and no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by any Governmental Entity at the
Closing Date.
10.5 REGULATORY APPROVALS AND RELATED CONDITIONS. Any and all governmental
and regulatory approvals and Consents referred to in Article IX and any other
section of this Agreement shall have been granted without the imposition of
conditions, or with conditions subject to the approval of the Company and the
Bank, that are or would have become applicable to the Company or the Surviving
Bank, and that the Company reasonably and in good faith concludes would
materially adversely affect the financial condition or operations of the Company
or the Surviving Bank, or otherwise would be materially burdensome; provided,
however, that conditions or requirements which are imposed on purchasers or
acquired institutions by Governmental Entities in comparable transactions shall
not be deemed to be a basis for excuse of performance under this Agreement. All
actions necessary to authorize the execution, delivery and performance of the
Agreement by the Company and consummation of the Merger by the Company and PCBG
Merger Corporation shall have been duly and validly taken by the Board of
Directors of the Company and the PCBG Merger Corporation.
10.6 THIRD PARTY CONSENTS. The Company shall have obtained all consents of
other parties to the Company's material mortgages, notes, leases, franchises,
agreements, licenses and permits as may be necessary to permit the transactions
contemplated herein to be consummated, without default, acceleration, breach or
loss of rights or benefits thereunder.
10.7 ABSENCE OF CERTAIN CHANGES. As of the Closing Date there shall not
exist any of the following:
(i) any change(s) in the financial condition or results of operation of
the Company since inception which individually is or in the aggregate are
materially adverse to the Company; or
(ii) any damage, destruction, loss or event materially and adversely
affecting the properties, business or prospects of the Company on a
consolidated basis.
10.8 VALIDITY OF TRANSACTIONS. The validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to the Bank
hereunder, shall be subject to the approval, to be reasonably exercised, of
counsel for the Bank.
10.9 FAIRNESS OPINION. Prior to solicitation of shareholder approval, the
Bank shall have received an opinion pursuant to Section 8.4 confirming the
fairness of the terms of the Merger from a financial perspective, and such
opinion shall not have been withdrawn prior to the mailing date of the Proxy
Statement.
10.10 NASDAQ LISTING. The Company will have the shares of Company Stock
issuable pursuant to this transaction duly authorized for listing, subject to
notice of issuance, on the Nasdaq National Market System.
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ARTICLE XI
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF THE COMPANY
All of the obligations of the Company to consummate the transactions
contemplated herein shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions, or their waiver by resolution of the
Board of Directors of the Company, as appropriate:
11.1 LEGAL OPINION. The Company shall have received the opinion of Gary
Steven Findley & Associates acting as counsel for the Bank, dated as of the
Closing Date, in substantially the form of EXHIBIT 11.1.
11.2 CERTIFICATE OF NO DEFAULT. All covenants, terms and conditions of
this Agreement to be complied with and performed by the Bank at or before the
Closing Date shall have been complied with and performed in all material
respects and the representations and warranties of the Bank contained in Article
IV hereof shall have been true and correct in all material respects as of the
Effective Time, with the same effect as though such representations and
warranties had been made on and as of the Effective Time, except as otherwise
specified in, or permitted or contemplated by, this Agreement. The Bank shall
have delivered to the Company a certificate, dated the Closing Date, signed by
the President of the Bank, certifying the fulfillment of this condition.
11.3 CLOSING DOCUMENTS. The Bank shall have delivered to the Company all
items required by the Company pursuant to Section 3.3, all of which documents
shall be properly executed and, if required by the Company, acknowledged before
a notary.
11.4 EFFECTIVE S-1, S-4 AND PROXY STATEMENT. The S-1, the S-4 and the
Proxy Statement shall have become effective and no stop order suspending the
effectiveness thereof shall be in effect and no proceedings therefor shall be
pending or threatened by the SEC, FDIC, the Commissioner, the FRB or any blue
sky authority at the Closing Date.
11.5 BANK DISSENTING SHAREHOLDERS AGAINST MERGER. The Bank's shareholders
voting against the Merger or the Bank's shareholders giving notice in writing to
the Bank at or before the Bank's meeting that such shareholder dissents from the
Merger, on a combined basis, shall hold not more than ten percent (10%) of the
outstanding shares of the Bank.
11.6 REGULATORY APPROVALS AND RELATED CONDITIONS. Any and all governmental
and regulatory approvals and Consents referred to in Article IX and any other
section of this Agreement shall have been granted without the imposition of
conditions, or with conditions subject to the approval of the Company, that are
or would have become applicable to the Company or the Surviving Bank and that
the Company reasonably and in good faith concludes would materially adversely
affect the financial condition or operations of the Company or the Surviving
Bank, or otherwise would be materially burdensome; provided, however, that
conditions or requirements which are imposed on purchasers or acquired
institutions by Governmental Entities in comparable transactions shall not be
deemed to be a basis for excuse of performance under this Agreement.
11.7 THIRD PARTY CONSENTS. The Company shall have obtained all consents of
other parties to the Company's material mortgages, notes, leases, franchises,
agreements, licenses and permits as may be necessary to permit the transactions
contemplated herein to be consummated, without default, acceleration, breach or
loss of rights or benefits thereunder.
11.8 ABSENCE OF CERTAIN CHANGES. As of the Closing Date, there shall not
exist any of the following: (i) any change(s) in the consolidated financial
condition, or results of operation of the Bank since December 31, 1997, which
individually is or in the aggregate are materially adverse to the Bank; (ii) any
damage, destruction, loss or event materially and adversely affecting the
properties, business or prospects of the Bank; or (iii) any material adverse
change in the deposit structure of the Bank from the date of this Agreement to
the Closing Date.
11.9 BANK STOCK OPTION PLAN; AND OFFICERS AND EMPLOYEES. The Bank shall
have caused the Bank Stock Option Plan to be terminated as of or prior to the
Effective Time of the Merger and shall have obtained the consents or agreements
specified in, and otherwise shall have complied with the terms of, Section 6.10.
Pursuant to California Law and its employment policies and practices, the Bank
shall have complied with Section 6.11 of this Agreement as of the Effective Time
of the Merger.
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11.10 DIRECTOR AGREEMENTS. Pursuant to Section 2.9, concurrently with the
execution of this Agreement, each director of the Bank shall enter into separate
agreements with the Company in the form attached hereto as EXHIBIT "B".
11.11 TERMINATION OF CONTRACTS. As determined by the Company under Section
6.12, the Bank shall have obtained the terminations of any contracts,
commitments or Understandings as defined in Section 4.12(v), and paid or accrued
as of the Closing Date for any termination fees for the future purchases of
materials, supplies, services, merchandise or equipment, the price of which
exceeds $20,000.
11.12 VALIDITY OF TRANSACTIONS. The validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to the Company
hereunder, shall be subject to the approval, to be reasonably exercised, of
counsel for the Company.
11.13 EMPLOYEE BENEFIT PLANS. Upon the mutual agreement of the Company and
the Bank regarding whether any Employee Plan should be terminated, the Company
shall have received satisfactory evidence that the Bank has caused such Employee
Plan to be terminated, except as otherwise provided by applicable labor laws, as
of the effective Time of the Merger, and that all benefits payable under such
plans, programs and arrangements have been paid or accrued as of the Closing
Date.
11.14 FAIRNESS OPINION. Prior to commencement of the marketing of the
Offering described in Sections 9.1(iii) and 9.4, the Company in its discretion
may receive an opinion concerning the fairness of the terms of the Merger to the
shareholders of the Company from a financial point of view.
11.15 STOCK OFFERING. The Bank shall have provided such information as
deemed necessary by the Company in connection with the sale of stock including
but not limited to, certificates of its officers and directors attesting to,
among other things, the truthfulness and correctness of the representations
contained in this Agreement, opinions of legal counsel and comfort letters from
the Bank's accountants.
11.16 S-4, PROXY STATEMENT AND REGULATORY APPLICATIONS. The Bank shall
have provided such information as deemed necessary by the Company in connection
with the S-4 and the Proxy Statement and any other regulatory applications
including but not limited to, certificates of its officers and directors
attesting to, among other things, the truthfulness and correctness of the
representations contained in this Agreement, opinions of legal counsel and
comfort letters from the Bank's accountants.
11.17 BLUE SKY MATTERS. The issuance of the Company Stock in the Offering
and the S-4 shall have been qualified or registered with the appropriate
Governmental Entity under state securities or Blue Sky laws, and such
qualification or registrations are in effect on the Closing Date.
11.18 PROFESSIONAL FEES. The Bank's costs and expenses for professional
expenses in connection with the transaction contemplated by this Agreement,
including investment banking, accounting, attorney and any related costs and
expenses, shall not exceed the amount that would be reasonable and customary for
a transaction as described in this Agreement. Investment banking fees are as set
forth in Exhibit 4.14. The accounting and attorney fees, and related costs and
expenses thereto, of the Bank shall not exceed $200,000 in the aggregate. The
Company agrees that it will promptly reimburse the Bank at the close or
termination for the first $75,000 of legal and attorney fees and expenses
incurred by the Bank since November 15, 1998 directly related to this
transaction with the Company, and the Bank shall pay for any additional
accounting and attorney fees and expenses incurred by the Bank thereafter. The
Company also consents to the Bank paying at the close up to $25,000 to William
Cockrum for his investment banking services to the Bank related to this
transaction with the Company.
11.19 YEAR 2000. The Bank shall certify that the Bank and Banklink
Corporation are making satisfactory progress toward compliance with Year 2000
safety and soundness issues with respect to their own computer systems.
ARTICLE XII
DISSENTING SHAREHOLDERS OF BANK
Any shareholder of the Bank who lawfully dissents shall be entitled to
receive cash for the fair market value of his or her shares determined in
accordance with Section 1300.
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ARTICLE XIII
EXPENSES
13.1 EXPENSES. All fees and out-of-pocket costs incurred in connection
with the transactions contemplated by this Agreement, including but not limited
to legal, accounting, investment banking fees and cost reimbursements, fees and
cost of consultants, costs of proxy statements and shareholder action on the
Merger, shall be paid by the party incurring such costs.
ARTICLE XIV
TERMINATION
14.1 TERMINATION OF THIS AGREEMENT.
(a) Notwithstanding that this Agreement and the Agreement of Merger may have
already been approved by shareholders of one or both of constituent corporations
to the transactions contemplated by this Agreement, this Agreement may be
terminated prior to the Effective Time of the Merger:
(i) by mutual agreement of the parties, in writing;
(ii) by (A) the Company immediately upon the expiration of 30 days from
the date that the Company has given notice to the Bank of a material breach
or default by the Bank in the performance of any covenant, agreement,
representation, warranty, duty or obligation hereunder or (B) the Bank
immediately upon the expiration of 30 days from the date that the Bank has
given notice to the Company of a breach or default by the Company in the
performance of any covenant, agreement, representation, warranty, duty or
obligation hereunder, except for Sections 5.18 and 7.14; and
(iii) by the Company or the Bank if any Governmental Entity denies or
refuses to grant the approvals, consents or authorizations required to be
obtained, or if any Governmental Entity approves the transaction covered and
contemplated by this Agreement upon conditions not reasonably acceptable to
the Company, in order to consummate the transactions covered and
contemplated by this Agreement. If any regulatory application filed pursuant
to this Agreement hereof should be finally denied or disapproved by the
respective Governmental Entity, then this Agreement thereupon shall be
deemed terminated and canceled; provided, however, that a request for
additional information or undertaking by the Company, as a condition for
approval, shall not be deemed to be a denial or disapproval so long as the
Company diligently provides the requested information or undertaking. In the
event an application is denied pending an appeal, petition for review, or
similar such act on the part of the Company (hereinafter referred to as the
"appeal") then the application will be deemed denied unless the Company
prepares and timely files such appeal and continues the appellate process
for purposes of obtaining the necessary approval.
(iv) by the Company or the Bank if (A) the Board of Directors of the
Bank approves a transaction (or the Bank executes a letter of intent or
other agreement) pursuant to which any person or entity or related group of
persons or entities acquires, directly or indirectly, record or beneficial
ownership (as defined in Rule 13d3 promulgated by the SEC pursuant to the
Exchange Act) or control of 10% or more of the outstanding shares of Bank
Stock or other securities of the Bank; (B) any person or entity or related
group of persons or entities seeks to acquire 10% or more of the outstanding
shares of Bank Stock by tender offer or otherwise, and the Board of
Directors of the Bank does not advise the Bank's shareholders that the
Bank's Board of Directors does not support such tender offer or acquisition
and that it supports the Merger; (C) if the Bank violates its covenant
pursuant to Section 6.2 (xxiii) and (xxiv); (D) the Merger does not receive
the requisite approval of the Bank's shareholders; or (E) any Person or
entity commences an Alternative Transaction pursuant to the terms of Section
6.5;
(v) by the Company or the Bank immediately upon the expiration of 15
days from the date that the Bank or the Company has given notice to the
Company of a default by the Company in the performance of Sections 5.18 and
7.14;
(vi) by the Company or the Bank by June 28, 1999, unless regulatory
approvals and/or completion of the Offering is relatively imminent and is
expected to be completed in the near future, in which case the date in this
subsection shall be automatically extended for up to an additional 30 days.
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(b) Notwithstanding that this Agreement and the Agreement of Merger may have
already been approved by shareholders of one or both of the constituent
corporations to the Merger, this Agreement shall be terminated prior to the
Effective Time of the Merger if any conditions specified in Articles IX, X or XI
have not been satisfied or waived in writing by the party authorized to waive
such conditions unless mutually extended by the parties hereto.
(c) Regulatory Enforcement Matters. In the event that Bank or the Company or
any of their respective subsidiaries shall, after the date of this Agreement,
become a party or subject to any new or amended written agreement, memorandum of
understanding, cease and desist order, imposition of civil money penalties or
other regulatory enforcement action or proceeding with any federal or state
agency charged with the supervision or regulation of banks or bank holding
companies which is material to the Bank or the Company and their respective
subsidiaries taken as a whole, then either the Company or the Bank may terminate
this Agreement.
(d) (reserved)
(e) Notwithstanding anything to the contrary contained herein:
(i) If this Agreement is terminated by the Bank before the Closing Date
pursuant to Sections 14.1(a)(ii)(B), (not including Sections 5.18 or 7.14)
hereof, the Company shall pay to the Bank, as reasonable and full liquidated
damages and reasonable compensation for the loss sustained thereby and not
as a penalty or forfeiture, the expenses incurred by the Bank in connection
with the transactions contemplated by this Agreement, including, but not
limited to, those costs and expenses outlined in Section 11.18, plus 50% of
such expenses, up to a maximum of $500,000, within ten (10) Business Days of
such termination;
(ii) If this Agreement is terminated by the Company before the Closing
Date pursuant to Sections 14.1(a)(ii)(A) hereof, the Bank shall pay to the
Company, as reasonable and full liquidated damages and reasonable
compensation for the loss sustained thereby, and not as a penalty or
forfeiture, the expenses incurred by the Company in connection with the
transactions contemplated by this Agreement, plus 50% of such expenses, up
to a maximum of $500,000 within ten (10) Business Days of such termination;
and
(iii) If this Agreement is terminated by the Company before the Closing
pursuant to Section 14.1(a)(iv) hereof, and the Warrant is not exercised by
the Company, the Bank will pay to the Company, as reasonable and full
liquidated damages and reasonable compensation for the loss sustained
thereby, and not as a penalty or forfeiture, the expenses incurred by the
Company in connection with the transaction contemplated by this Agreement,
plus 50% of such expenses, within ten (10) Business Days of such
termination.
(iv) If this Agreement is terminated by the Company before the Closing
as a result of a default by the Company in the performance of Sections 5.18
and 7.14, no costs, expenses, fees or other liability or damages will be
accrued or incurred by the Company or any of its representatives or agents.
ARTICLE XV
GENERAL PROVISIONS
15.1 CONFIDENTIALITY. All Confidential Information disclosed heretofore or
hereafter by either Party to this Agreement to the other Party to this Agreement
shall be kept confidential by such other Party and shall not be used by such
other Party otherwise than as herein contemplated, except to the extent that (a)
it is necessary or appropriate to disclose to the Bank or the Company or as may
otherwise be required by Rule (any disclosure of Confidential Information to a
Governmental Entity shall be accompanied by a request that such Governmental
Entity preserve the confidentiality of such Confidential Information); or (b) to
the extent such duty as to confidentiality is waived by the other Party. Such
obligation as to confidentiality and nonuse shall survive the termination of
this Agreement pursuant to Article XIV. In the event of such termination and on
request of the other Party, such Party shall use all reasonable efforts to (y)
return to the other Party all documents (and reproductions thereof) received
from such other Party that contain Confidential Information (and, in the case of
reproductions, all such reproductions made by the receiving Party); and (z)
destroy the originals and all copies of any analyses, computations, studies or
other documents prepared for the internal use of such Party that include
Confidential Information, unless otherwise advised by counsel in connection with
any controversy under the Agreement.
15.2 PUBLICITY. The Parties shall coordinate all publicity relating to the
transactions contemplated by this Agreement, and no Party shall issue any press
release, publicity statement, shareholder communication or other
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public notice relating to this Agreement or any of the transactions contemplated
hereby without obtaining the prior consent of the other Party except to the
extent that independent legal counsel to the Party, as the case may be, shall
deliver a written opinion to the Party that a particular action is required by
applicable Rules. The Parties hereby agree that all public statements after the
initial press release announcing this Agreement referring to the Bank shall be
made by Mr. James B. Jaqua, and all public statements made after the initial
press release announcing this Agreement referring to the Company shall be made
by Mr. E. Lynn Caswell, and both Parties agree that all public statements shall
be made by mutual agreement.
15.3 INDEMNIFICATION.
(a) The Bank agrees to defend, indemnify and hold harmless the Company, its
officers and directors, attorneys, accountants and each person who controls the
Company within the meaning of the Securities Act from and against any costs,
damages, liabilities and expenses of any nature, insofar as any such costs,
damages, liabilities and expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Proxy Statement, the Company's Offering disclosure documents or any amendments
or supplements thereto, or arise out of or are based solely upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading based upon
information with respect to the Bank furnished to the Company by or on behalf of
the Bank specifically for use therein; provided, however, that the Bank shall
not be liable in any such case to the extent that any such cost, damage,
liability or expense arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in the Proxy
Statement, the Company's Offering disclosure documents or amendments or
supplements thereto, in reliance upon and in conformity with information with
respect to the Company furnished to the Bank by or on behalf of the Company
specifically for use therein.
(b) The Company agrees to defend indemnify and hold harmless the Bank, its
officers and directors, attorneys, accountants and each person who controls the
Bank within the meaning of the Securities Act from and against any costs,
damages, liabilities and expenses of any nature, insofar as any such costs,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Proxy Statement, the Company's Offering disclosure documents or any amendments
or supplements thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make statements therein not misleading based solely upon
information with respect to the Company and its subsidiaries furnished to the
Bank by or on behalf of the Company and its subsidiaries specifically for use
therein; provided, however, that the Company shall not be liable in any such
case to the extent that any such cost, damage, liability or expense arises out
of or is based upon any untrue statement or alleged untrue statement or omission
or alleged omission made in the Proxy Statement, the Company's Offering
disclosure documents or amendments or supplements thereto, in reliance upon and
in conformity with information with respect to the Bank furnished to the Company
by or on behalf of the Bank specifically for use therein.
(c) Promptly after receipt by the Party to be indemnified pursuant to this
section ("Indemnified Party") of notice of (i) any claim or (ii) the
commencement of any action or proceeding, Indemnified Party will give the other
Party "(Indemnifying Party") written notice of such claim or the commencement of
such action or proceeding. Indemnifying Party shall have the right, at its
option, to compromise or defend, by its own counsel, any such matter involving
Indemnified Party's asserted liability, at the expense of the Indemnifying
Party. In the event that Indemnifying Party shall undertake to compromise or
defend any such asserted liability, it shall promptly notify Indemnified Party
of its intention to do so, and Indemnified Party agrees to cooperate fully with
Indemnifying Party and its counsel in the compromise of, or defense against, any
such asserted liability. In any event, Indemnifying Party shall have the right
to participate in the defense of such asserted liability. In any event
Indemnifying Party shall have the right to participate in the defense of such
asserted liability.
15.4 NOTICES. All notices, demands or other communications hereunder shall
be in writing and be made by (a) hand delivery; (b) overnight mail; (c) United
States mail, first class, certified or registered, postage prepaid; or (d)
facsimile transmission, and shall be deemed to have been duly given (i) on the
date of service if delivered by hand or facsimile transmission (provided that
telecopied notices are also mailed by United States mail, first class, certified
or registered, postage prepaid); (ii) on the next day if delivered by overnight
mail or delivery service; or
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(iii) 72 hours after mailing if mailed by United States mail, first class,
certified or registered, postage prepaid, and properly addressed as follows:
(a) If to the Bank:
James B. Jaqua, President and Chief Executive Officer
The Bank of Hemet
3715 Sunnyside Drive
Riverside, California 92506
Telecopier No.: (909) 784-5791
With a copy to:
Gary S. Findley, Esq.
Gary Steven Findley & Associates
1470 North Hundley Street
Anaheim, California 92806
Telecopier No.: (714) 630-7910
(b) If to the Company:
Mr. E. Lynn Caswell, Chairman and CEO
Pacific Community Banking Group
23332 Mill Creek Drive, Suite 230
Laguna Hills, California 92653
Telecopier No.: (949) 458-2086
With a copy to:
Loren P. Hansen, Esquire
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, California 92660
Telecopier No.: (949) 851-1732
The persons or addresses to which mailings or deliveries shall be made may
change from time to time by notice given pursuant to the provisions of this
Section 15.4.
15.5 SUCCESSORS AND ASSIGNS. Subject to Section 7.12 and 15.3, all terms
and provisions of this Agreement shall be binding upon and inure to the benefit
of the Parties hereto and their respective transferees, successors and assigns;
provided, however, that, except as otherwise contemplated herein, this Agreement
and all rights, privileges, duties and obligations of the Parties hereto may not
be assigned or delegated by any party hereto without the prior written consent
of the other Party to this Agreement and any purported assignment in violation
of this Section 15.5 shall be null and void.
15.6 THIRD PARTY BENEFICIARIES. Except as provided in Section 7.12, each
party hereto intends that this Agreement shall not benefit, or create any right
or cause of action in or on behalf of, any Person other than the Parties hereto.
15.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
15.8 GOVERNING LAW. This Agreement is made and entered into in the State
of California and the laws of the State of California shall govern the validity
and interpretation hereof and the performance of the parties hereto of their
respective duties and obligations hereunder.
15.9 CAPTIONS. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement.
15.10 WAIVER AND MODIFICATION. No waiver of any term, provision or
condition of this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be or construed as a further or continuing
A-49
<PAGE>
waiver of any such term, provision or condition of this Agreement. This
Agreement and the Agreement of Merger, when executed and delivered, may be
modified or amended by action of the Board of Directors of the Company and the
Bank without action by their respective shareholders to the extent permitted by
law. This Agreement may be modified or amended only by an instrument of equal
formality signed by the Parties of their duly authorized agents.
15.11 ATTORNEYS' FEES. In the event either of the Parties to this
Agreement brings an action or suit against the other Party by reason of any
breach of any covenant, agreement, representation, warranty or other provision
hereof, or any breach of any duty or obligation created hereunder by such other
Party, the prevailing Party, as determined by the court or other body having
jurisdiction, shall be entitled to have and recover of and from the losing
Party, as determined by the court or other body have jurisdiction, all
reasonable costs and expenses incurred or sustained by such prevailing Party in
connection with such suit or action, including, without limitation, legal fees
and court costs (whether or not taxable as such).
15.12 ENTIRE AGREEMENT. The making, execution and delivery of this
Agreement by the Parties hereto have not been induced by any representations,
statements, warranties or agreements other than those herein expressed. This
Agreement embodies the entire understanding of the Parties and there are no
further or other agreements or understandings, written or oral, in effect
between the Parties relating to the subject matter hereof, unless expressly
referred to by reference herein.
15.13 SEVERABILITY. Whenever possible, each provision of this Agreement
and every related document shall be interpreted in such manner as to be valid
under applicable law. However, if any provision of any of the foregoing shall be
invalid or prohibited under said applicable law, it shall be construed,
interpreted and limited to effectuate its purpose to the maximum legally
permissible extent. If it cannot be so construed and interpreted so as to be
valid under such law, such provision shall be ineffective to the extent of such
invalidity or prohibition without invalidating the remainder of such provision
or the remaining provisions of this Agreement, and this Agreement shall be
construed to the maximum extent possible to carry out its terms without such
invalid or unenforceable provision or portion thereof.
15.14 EFFECT OF DISCLOSURE. Any list, statement, document, writing or
other information set forth in, referenced to or attached to any schedule or
exhibit delivered pursuant to any provision of this Agreement shall be deemed to
constitute disclosure for purposes of any other schedule or exhibit required to
be delivered pursuant to any other provision of this Agreement.
15.15 KNOWLEDGE. Whenever any statement herein or in any schedule,
exhibit, certificate or other documents delivered to any Party pursuant to this
Agreement is made "to the knowledge" or "to the best knowledge" of any Party or
other person, such Party or other person, who shall be an officer of a Party,
shall make such statement only after conducting an investigation which such
person determines in good faith to be reasonable under the circumstances of the
subject matter thereof, and each such statement shall constitute a
representation that such investigation has been conducted.
15.16 TERMINATION OF REPRESENTATION, WARRANTIES AND COVENANTS. The
representations, warranties and covenants of each Party contained herein or in
any certificate or other writing delivered by such Party pursuant hereto or in
connection herewith shall not survive the Merger other than those provided for
in Sections 7.12, 13.1, 14.1(e), 15.1, 15.3, and 15.11 which shall survive a
termination.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement on
the day and year first above written.
<TABLE>
<S> <C> <C>
PACIFIC COMMUNITY BANKING GROUP
By: /s/ E. LYNN CASWELL
------------------------------------------
E. Lynn Caswell,
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER
THE BANK OF HEMET
By: /s/ JOHN J. MCDONOUGH
------------------------------------------
John J. McDonough
CHAIRMAN OF THE BOARD
By: /s/ JAMES JAQUA
------------------------------------------
James Jaqua,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ JOHN B. BRUDIN
------------------------------------------
John B. Brudin,
DIRECTOR
By: /s/ JACK E. GOSCH
------------------------------------------
Jack E. Gosch,
DIRECTOR
By: /s/ E. KENNETH HYATT
------------------------------------------
E. Kenneth Hyatt,
DIRECTOR
By: /s/ JOSEPH D. PEHL
------------------------------------------
Joseph D. Pehl,
DIRECTOR
By: /s/ CLAYTON A. RECORD, JR.
------------------------------------------
Clayton A. Record, Jr.,
DIRECTOR
</TABLE>
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<PAGE>
APPENDIX B
FIRST RESTATEMENT OF
AGREEMENT AND PLAN OF REORGANIZATION
THIS FIRST RESTATEMENT OF AGREEMENT AND PLAN OF REORGANIZATION (hereinafter
referred to as the "Agreement") is made and entered into as of January 5, 1999,
[as amended March 4, 1999 and April 12, 1999] by and between VALLEY BANK (the
"Bank"), a California banking corporation, and PACIFIC COMMUNITY BANKING GROUP
(the "Company"), a California corporation.
R E C I T A L S
A. The Bank is a California banking corporation duly organized and existing
under the laws of the State of California with its principal office in the City
of Moreno Valley, County of Riverside, State of California. The Company is a
proposed bank holding company duly organized and existing under the laws of the
State of California with its principal office in the City of Laguna Hills,
County of Orange, State of California;
B. The parties desire to provide for the acquisition by the Company of all
of the outstanding shares of the common stock, $5.00 par value of the Bank
("Bank Stock") pursuant to the Merger (as defined below), subject to the terms
and conditions specified herein, as follows:
(a) The Company will establish Interim Bank (as defined below) as a
wholly-owned subsidiary; and
(b) The Bank and Interim Bank will enter into an Agreement of Merger (as
defined below) providing for the merger of Interim Bank and Bank under the
state charter of the Interim Bank;
C. At the Effective Time (hereinafter defined below) of the Merger, all of
the issued and outstanding shares of Bank Stock, except for shares of Bank Stock
held by Dissenting Shareholders (as hereinafter defined below), shall be
converted into and exchanged for a combination of shares of Company Stock and
Warrants exercisable into shares of Company Stock, all upon the terms and
subject to the conditions hereinafter set forth;
D. The Merger requires certain shareholder and regulatory approvals and may
be effected only after the necessary approvals have been obtained;
E. For federal income tax purposes, it is intended that the Merger shall
qualify as a "reorganization" within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code") and the Bank, the Company and
Interim Valley Bank will each be "a party to a reorganization," within the
meaning of Section 368(b) of the Code, with respect to the Merger;
F. The parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger; and
G. Subject to any specific provisions of this Agreement, it is the intent of
the parties that the Company by reason of this Agreement shall not (until
consummation of the Merger) control, and shall not be deemed to control the Bank
or any of its subsidiaries, directly or indirectly, and shall not exercise or be
deemed to exercise, directly or indirectly, a controlling influence over the
management or policies of the Bank or any of its subsidiaries.
H. The Company and the Bank desire that this First Restatement of the
Agreement and Plan of Reorganization now govern the rights and obligations of
the Parties in place of that certain Agreement and Plan of Reorganization dated
July 30, 1998.
Accordingly, to consummate the transactions set forth above and in
consideration of the mutual covenants, agreements, representations and
warranties contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. Capitalized terms used in this Agreement shall have the
meanings set forth below unless the context otherwise requires:
"Affiliate" means any Person (as defined below) that directly, or through
one or more intermediaries controls, or is controlled by, or is under common
control with, the Person specified.
"Aggregate Option Price" shall have the meaning given such term in Section
2.8.
"Aggregate Purchase Consideration" shall have the meaning given such term in
Section 2.4.
<PAGE>
"Agreement of Merger" shall mean the Agreement of Merger to be entered into
by and between Interim Bank (as defined below) and the Bank substantially in the
form of EXHIBIT "A" hereto, but subject to any changes that may be necessary to
conform to any requirements of any Governmental Entity having authority over the
Merger.
"Alternative Transaction" shall have the meaning given such term in Section
6.5.
"Audited Bank Financial Statements" shall have the meaning given such term
in Section 4.4.
"BHC Act" shall mean the Bank Holding Company Act of 1956, as amended.
"Bank" shall mean Valley Bank.
"Bank Corporate Governance Changes" shall have the meaning given such term
in Section 2.1 (d).
"Bank Dissenting Shares" means shares of Bank Stock held by "Dissenting
Shareholders" within the meaning of Chapter 13 of the CGCL.
"Bank Employment Agreements" shall mean any employment agreement, severance
agreement, "golden parachute" agreement or any other agreement which provides
for payments to employees of the Bank upon termination of employment, including
termination after a change in control.
"Bank Filings" shall have the meaning given such term in Section 4.18.
"Bank Incentive Compensation Plan" shall mean the Valley Bank Employee Stock
Ownership Plan, the Valley Bank 401(k) Plan and the Valley Bank Profit Sharing
Plan.
"Bank Options" shall mean options to purchase Bank Stock (as defined below)
pursuant to the Bank Stock Option Plan (as defined below).
"Bank Perfected Dissenting Shares" means Dissenting Shares which the holders
thereof have not withdrawn or caused to lose their status as Bank Dissenting
Shares.
"Bank Representatives" shall have the meaning given such term in Section
7.3.
"Bank Shareholder" shall mean any holder of Bank Stock or an option to
purchase Bank Stock immediately prior to the Merger.
"Bank Stock" shall mean the meaning given such term in Recital B.
"Bank Stock Option Plan" shall mean Valley Bank 1992 Stock Option Plan, and
the Valley Bank 1993 Directors Stock Option Plan.
"Baxter" shall mean Baxter, Fentriss and Company, who shall serve as the
financial advisor to the Bank.
"Benefit Arrangement" means any plan or arrangement maintained or
contributed to by a Party, including an "employee benefit plan" within the
meaning of ERISA (as defined below), (but exclusive of base salary and base
wages) which provides for any form of current or deferred compensation, bonus,
stock option, profit sharing, benefit, retirement, incentive, stock purchase
plan, group health or insurance, welfare or similar plan or arrangement for the
benefit of any employee or class of employee, whether active or retired, of a
Party.
"Business Day" shall mean any day other than a Saturday, Sunday or day on
which commercial banks in California are authorized or required to be closed.
"Caswell" shall mean Mr. E. Lynn Caswell, Chairman of the Board and Chief
Executive Officer of the Company.
"CERCLA" shall have the meaning given such term in the definition of
Environmental Law.
"CFC" means the California Financial Code.
"CGCL" means the California General Corporations Law.
"Charter Documents" shall mean, with respect to any business organization,
any certificate or articles of incorporation or association, any bylaws, any
partnership agreement and any other similar documents that regulate the basic
organization of the business organization and its internal relations.
"Classified Credit" shall have the meaning given such term in Section 6.6.
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"Closing" shall mean the consummation of the transactions contemplated by
this Agreement on the Closing Date (as defined below) at the law offices of
Knecht & Hansen, 1301 Dove Street, Suite 900, Newport Beach, California 92660,
or at such other place as the Parties (as defined below) may agree upon.
"Closing Date" shall mean, unless the Parties (as defined below) agree on
another date, the first Friday or as soon as possible following the
Determination Date, and in no case more than 30 days following the receipt of
the approvals and consents and expiration of the waiting periods specified in
Section 9.1 have occurred and/or have been obtained, the receipt of the
necessary cash capital by the Company in order to complete the transaction as
contemplated by this Agreement, satisfaction of the remaining conditions to the
transaction as contemplated by this Agreement, and no less than four (4)
business days after the occurrence of the Election Deadline, or at such other
time as may be determined in good faith by the Parties in order to assure an
orderly transition process.
"Code" shall mean the United States Internal Revenue Code of 1986, as
amended, and all regulations thereunder.
"Commissioner" shall mean the California Commissioner of Financial
Institutions.
"Company" shall mean Pacific Community Banking Group, a California
corporation.
"Company Corporate Governance Changes" shall have the meaning given such
term in Section 2.1(e).
"Company Filings" shall have the meaning given such term in Section 5.16.
"Company Representatives" shall have the meaning given such term in Section
6.3.
"Company Stock Option Plan" shall mean the proposed Pacific Community
Banking Group 1998 Stock Option Plan.
"Company Financial Statements" shall have the meaning given such term in
Section 5.4.
"Company Stock" shall mean the common stock, no par value, of the Company.
"Confidential Information" shall mean all information exchanged heretofore
or hereafter between the Company, its affiliates and agents, on the one hand,
and the Bank, its affiliates and agents, on the other hand, which is information
related to the business, financial position or operations of the Person
responsible for furnishing the information or an Affiliate of such Person (such
information to include, by way of example only and not of limitation, client
lists, pricing information, company manuals, internal memoranda, strategic
plans, budgets, forecasts, projections, computer models, marketing plans, files
relating to loans originated by such Person, loans and loan participation
purchased by such Person from others, investments, deposits, leases, contracts,
employment records, minutes of board meetings (and committees thereof) and
stockholder meetings, legal proceedings, reports of examination by any
Governmental Entity, and such other records or documents such Person may supply
to the other Party pursuant to the terms of this Agreement or as contemplated
hereby). Notwithstanding the foregoing, "Confidential Information" shall not
include any information that (i) at the time of disclosure or thereafter is
generally available to and known by the public (other than as a result of an
improper disclosure directly or indirectly by the Company or the Bank, as the
case may be, or any of their officers, directors, employees or other
representatives), (ii) was available to the recipients on a non-confidential
basis from a source other than from the Persons responsible for furnishing the
information, provided that such source learned the information independently and
is not and was not bound by a confidentiality agreement with respect to the
information, or (iii) has been independently acquired or developed by the
recipients without violating any obligations under this Agreement.
"Consents" shall mean every consent, approval, absence of disapproval,
waiver or authorization from, or notice to, or registration or filing with, any
Person (as defined below).
"CRA" shall mean the Community Reinvestment Act.
"Deposit" shall mean any deposit as defined in Section 3(l) of the Federal
Deposit Insurance Act, as amended, to July 30, 1998 (12 USC Section 1813(l)).
"Determination Date" shall mean the last day of the month preceding the
Closing Date.
"Directors' Agreement" shall mean an agreement, substantially in the form of
EXHIBIT "B" hereto, pursuant to which each signatory shall agree to vote or
cause to be voted all shares of Bank Stock with respect to which such Person has
voting power on the date hereof or hereafter acquires to approve the Agreement
and the transactions contemplated hereby and all requisite matters related
thereto.
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<PAGE>
"DPC Property" shall mean voting securities, other personal property and
real property acquired by foreclosure or otherwise, in the ordinary course of
collecting a debt previously contracted in good faith, retained with the object
of sale for a period not longer than any applicable statutory holding period,
and recorded in the holder's business records as such.
"Effective Day" shall mean the day on which the Effective Time occurs.
"Effective Time" shall mean the date and time of the filing of the Agreement
of Merger with the Secretary of State (as defined below).
"Employee Plan" shall have the meaning given such term in Section 4.11(c).
"Encumbrance" shall mean any option, pledge, security interest, lien,
mechanic's lien, charge, encumbrance or restriction (whether on voting,
disposition or otherwise), whether imposed by agreement, understanding, law or
otherwise.
"Environmental Law" shall mean any federal, state, provincial or local
statute, law, ordinance, rule, regulation, order, consent, decree, judicial or
administrative decision or directive of the United States or other applicable
jurisdiction whether now existing or as hereinafter promulgated, issued or
enacted relating to: (A) pollution or protection of the environment, including
natural resources; (B) exposure of persons, including employees, to Hazardous
Substances (as defined below) or other products, materials or chemicals; (C)
protection of the public health or welfare from the effects of products,
by-products, wastes, emissions, discharges or releases of chemical or other
substances from industrial or commercial activities; or (D) regulation of the
manufacture, use or introduction into commerce of substances, including, without
limitation, their manufacture, formulation, packaging, labeling, distribution,
transportation, handling, storage and disposal. For the purposes of this
definition the term "Environmental Law" shall include, without limiting the
foregoing, the following statutes, as amended from time to time: (1) the Clean
Air Act, as amended, 42 U.S.C. Section7401 ET SEQ.; (2) the Federal Water
Pollution Control Act, as amended, 33 U.S.C. Section1251 ET SEQ.; (3) the
Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C.
Section6901 ET SEQ., (4) the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (including the Superfund Amendments and
Reauthorization Act of 1986), 42 U.S.C. Section9601 ET SEQ. ("CERCLA"); (5) the
Toxic Substances Control Act, as amended, 15 U.S.C. Section2601 ET SEQ.; (6) the
Occupational Safety and Health Act, as amended, 29 U.S.C. Section65; (7) the
Emergency Planning and Community Right-To-Know Act of 1986, 42 U.S.C.
Section11001 ET SEQ.; (8) the Mine Safety and Health Act of 1977, as amended, 30
U.S.C. Section801 ET SEQ.; (9) the Safe Drinking Water Act, 42 U.S.C.
Section300f ET SEQ.; (10) the Federal Water Pollution Control Act, as amended,
33 U.S.C. 1251, ET SEQ.; and (11) all comparable state and local laws, laws of
other applicable jurisdictions or orders and regulations including, but not
limited to, the Carpenter-Presley-Tanner Hazardous Substance Account Act, Cal.
Health & Safety Code Section25300 ET SEQ., the Porter-Cologne Water Quality
Control Action, 25140, 25501(j) and (k); 255501.1.25281 and 25250.1 of the
California Health and Safety Code and/or Article I or Title 22 of the California
Code of Regulations, Division 4, Chapter 30 (the "State Acts").
"Equity Securities" shall mean the capital stock of Bank or any options,
rights, warrants or other rights to subscribe for or purchase, or any plans,
contracts or commitments that are exercisable in, such capital stock or that
provide for the issuance of, or grant the right to acquire, or are convertible
into, or exchangeable for, such capital stock.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and all regulations thereunder.
"ESOP" shall mean the Valley Bank Employee Stock Ownership Plan.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and all rules and regulations thereunder.
"Exchange Agent" shall mean U. S. Stock Transfer Corporation, or, subject to
the reasonable approval of the Bank, any other financial institution or company
appointed by the Company to effect the exchange contemplated by Section 2.5.
"Executive Officer" shall mean a natural person who participates or has the
authority to participate (other than in the capacity of a director) in major
policy making functions of the Company or the Bank, whether or not such person
has a title or is serving with salary or other compensation.
"Expenses" shall have the meaning given such term in Section 13.1.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
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"FRB" shall mean the Board of Governors of the Federal Reserve System.
"GAAP" shall mean Generally Accepted Accounting Principles, consistently
applied from period to period, applicable to banks and bank holding companies,
as appropriate, for the period in question.
"Governmental Entity" shall mean any court or tribunal in any jurisdiction
or any United States federal, state, municipal, domestic, foreign or other
administrative agency, department, commission, board, bureau or other regulatory
or governmental authority or instrumentality.
"Hazardous Substances" shall mean (1) any "hazardous waste" as defined by
CERCLA and the State Acts, as such acts are in effect on the date hereof, and
any and all regulations promulgated thereunder; (2) any "hazardous substance" as
such term is defined by CERCLA; (3) any "regulated substance" as defined by the
State Acts; (4) asbestos requiring abatement, removal or encapsulation pursuant
to the requirements of any Governmental Entity; (5) polychlorinated biphenyls;
(6) petroleum products; (7) "hazardous chemicals" or "extremely hazardous
substances" in quantities sufficient to require reporting, registration,
notification and/or optional treatment or handling under the Emergency Planning
and Community Right to Know Act of 1986; (8) any "hazardous chemical" in levels
that would result in exposure greater than is allowed by permissible exposure
limits established pursuant to the Occupational Safety and Health Act of 1970;
(9) any substance that requires reporting, registration, notification, removal,
abatement and/or special treatment, storage, handling or disposal, under Section
6, 7 and 8 of the Toxic Substance Control Act (15 U.S.C. Section 2601); (10) any
toxic or hazardous chemical described in 29 C.F.R. 1910.1000-1047 in levels that
would result in exposure greater than those allowed by the permissible exposure
limits pursuant to such regulations; and (11) any (A) "hazardous waste", (B)
"solid waste" capable of causing a "release or threatened release" that present
an "imminent and substantial endangerment" to the public health and safety of
the environment, (C) "solid waste" that is capable of causing a "hazardous
substance incident" (D) "solid waste" with respect to which special requirements
are imposed by any applicable Governmental Entity upon the generation and
transportation thereof as such terms are defined and used within the meaning of
the State Acts, or (E) any "pollutant" or "toxic pollutant" as such term is
defined in the Federal Clean Water Act, 33 U.S.C. Section 1251-1376, as amended,
by Public Law 100-4, February 4, 1987, and the regulations promulgated
thereunder, including 40 C.F.R. Sections 122.1 and 122.26.
"Interim Bank" shall mean the interim California banking corporation
established by Company solely for the purpose of effecting the Merger.
"Interim Bank Stock" shall mean the common stock, no par value, of Interim
Bank.
"Managing Underwriter" shall mean Sutro (as defined below).
"Managing Underwriters" shall mean the Managing Underwriter and such other
firm or firms as the Company and the Managing Underwriter shall agree.
"Material Adverse Change" shall have the meaning given such term in Sections
4.17 and 5.12.
"Material Contract" shall have the meaning given such term in Section 4.12.
"Merger" shall mean the merger of the Bank with and into Interim Bank.
"Offering" shall mean a public offering underwritten by the Underwriters (as
defined below), as determined by the Company in its sole discretion, of a
certain number of shares of Company Stock as determined by the Company in its
sole discretion, of shares of the Company held by shareholders of the Bank and
The Bank of Hemet, and newly issued shares, at a gross offering price of not
less than $15.00 per share, as described in Section 7.14.
"Offering Price" shall mean the gross offering price per share of Company
Stock in the Offering.
"OREO" shall have the meaning given such term in Section 6.2(xx).
"Party" shall mean either the Company or the Bank and "Parties" shall mean
both the Company and Bank.
"Per Share Consideration" shall have the meaning given such term in Section
2.4.
"Permit" shall mean any United States federal, foreign, state, local or
other license, permit, franchise, certificate of authority, order or approval
necessary or appropriate under any applicable Rule (as defined below).
"Person" shall mean any natural person, corporation, trust, association,
unincorporated body, partnership, joint venture, Governmental Entity,
statutorily or regulatory sanctioned unit or any other person or organization.
"Profit Sharing Plan" shall mean the Valley Bank 401(k) Profit Sharing Plan.
"Proxy Statement" shall have the meaning given such term in Section 6.8.
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"RAP" shall mean regulatory accounting principles, if any, applicable to a
particular Person.
"Real Property" shall have the meaning given such term in subsection (a) of
Section 4.6.
"Representatives" shall have the meaning given such term in subsection (a)
of Section 6.3.
"Rule" shall mean any statute or law or any judgment, decree, injunction,
order, regulation or rule of any Governmental Entity with applicable
jurisdiction, including, without limitation, those relating to disclosure,
usury, equal credit opportunity, equal employment, fair credit reporting and
anticompetitive activities.
"S-1" means the registration statement on Form S-1 to be filed with the SEC
relating to the registration under the Securities Act of the shares of Company
Stock held by shareholders of the Bank and The Bank of Hemet to be sold, and
shares of Company Stock to be issued, in the Offering.
"S-4" means the registration statement on Form S-4, and such amendments
thereto, that is filed with the SEC to register the shares of Company Stock to
be issued in the Merger under the Securities Act and to clear use of the Proxy
Statement in connection with the Company Shareholders' Meeting and the Bank
Shareholders' Meeting pursuant to the regulations promulgated under the Exchange
Act.
"SEC" means the Securities and Exchange Commission.
"SEC Reports" shall mean all reports filed by a Party hereto pursuant to the
Exchange Act with the SEC or the FDIC.
"Secretary of State" shall mean the Secretary of State of the State of
California.
"Section 1300" shall mean Section 1300 ET SEQ. of the California
Corporations Code.
"Securities Act" shall mean the Securities Act of 1933, as amended, and all
rules and regulations thereunder.
"Selling Shareholder" shall mean any Bank shareholder or holder of a Bank
stock option who elects to sell his or her shares of Bank Stock or to exchange
his or her options and sell the Company Stock received in exchange therefor in
the Offering.
"State Acts" shall have the meaning given such term in the definition of
"Environmental Law."
"Surviving Bank" shall mean the bank surviving the Merger.
"Surviving Bank Stock" shall mean the common stock, $5.00 par value, of the
Surviving Bank.
"Sutro" shall mean Sutro & Company who may also act as a financial advisor
to the Company and as an underwriter in the Offering.
"Tax Filings" shall have the meaning given such term in Section 4.8.
"Third Party Consent" shall have the meaning given such term in Sections
6.17 and 7.8.
"To the knowledge" and "to the best knowledge" shall have the meanings given
such terms in Section 15.15.
"Unaudited Bank Financial Statements" shall have the meaning given such term
in Section 4.4.
"Understanding" shall have the meaning given such term in Section 4.12.
"Undesignated Shares" shall have the meaning given such term in Section
2.10.
"Underwriter" shall mean a group of broker/dealers that include the Managing
Underwriters as assembled by the Managing Underwriter with the consent of the
Company.
"Warrant" shall mean a warrant issuable by the Company at the Closing
exercisable into one (1) share of the Company for a ten year period from the
Closing Date with an exercise price equal to 122% of the Offering Price.
"Warrant Agreement" shall mean the warrant agreement attached hereto as
EXHIBIT "C."
ARTICLE II
THE MERGER AND RELATED MATTERS
2.1 THE MERGER. The Company agrees that it will use its best efforts, with
all necessary cooperation of the Bank, to perfect the organization of Interim
Bank in accordance with the CFC and the regulations promulgated thereunder prior
to the Closing Date. The directors and officers of Interim Bank, and the
Articles of Incorporation and Bylaws of Interim Bank, shall be determined by the
Company. Subject to the provisions of this Agreement, the Parties agree to
request that the approval of the Merger to be issued by the Commissioner, the
FDIC, the FRB and any other necessary regulatory agency on or prior to the
Closing Date shall provide that the Merger shall
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<PAGE>
become effective (the "Effective Time") as of the Closing Date. The Bank shall
cause its officers to execute the Agreement of Merger, as well as all other
necessary documents, in order to effect the Merger in accordance with the terms
hereof as requested by the Company. At the Effective Time of the Merger, the
following transactions will occur simultaneously:
(a) MERGER OF THE BANK AND INTERIM BANK. The Bank and Interim Bank
shall be merged under the certificate of authority of the Interim Bank, with
the Interim Bank being the Surviving Bank pursuant to the provisions of, and
with the effect provided in, the CGCL and the CFC, and shall continue its
corporate existence under the laws of the State of California. The name of
the Surviving Bank shall be "Valley Bank." Upon the consummation of the
Merger, the separate corporate existence of the Bank shall cease.
(b) EFFECT ON BANK STOCK. Subject to Section 2.3, each share of Bank
Stock issued and outstanding immediately prior to the Effective Time of the
Merger shall, on and at the Effective Time of the Merger, pursuant to the
Agreement of Merger and without any further action on the part of the Bank
or the holders of Bank Stock, be automatically cancelled and cease to be an
issued and outstanding share of Bank Stock, and shall be exchanged for and
converted into the right to receive the Per Share Consideration. Subject to
proration by the Company in its absolute and sole discretion to ensure that
the number of shares of Company Stock sold by the Bank Shareholders of the
Bank in the Offering is equal to 60% of the aggregate number of shares of
Company Stock received by the Bank Shareholders of the Bank, holders of Bank
Stock shall be provided the opportunity to sell in the Offering all the
shares of Company Stock received in exchange for Bank Stock, as provided in
Section 2.10. If more or less than 60% of the shares of Company Stock
received by the Bank Shareholders (including, for this purpose, holders of
Bank stock options, as provided in Section 2.8) of the Bank is elected to be
sold in the Offering, then the shares of Company Stock sold in the Offering
by each Selling Shareholder so electing shall be increased or decreased,
ratably in proportion to the number of shares requested to be sold, so that
the total number of shares sold in the Offering by the Bank Shareholders in
the aggregate is equal to 60% of the shares of Company Stock received by the
Bank Shareholders. The Selling Shareholders shall receive, for each share of
Company Stock sold in the Offering, the price at which shares are sold in
the Offering, without reduction for expenses or commissions of the Offering,
it being understood that the Company shall bear such expenses and
commissions.
(c) EFFECT ON INTERIM BANK STOCK. All shares of Interim Bank Stock
outstanding shall remain outstanding and shall be held by the Company.
(d) BANK CORPORATE GOVERNANCE CHANGES. The Charter Documents of the
Interim Bank as in effect immediately prior to the Effective Time shall
continue in effect after the Merger until thereafter amended in accordance
with applicable law. At the Effective Time of the Merger, the directors of
Interim Bank and the Bank shall be the directors of the Surviving Bank until
their successors have been chosen and qualified in accordance with the
Articles of Incorporation and Bylaws of the Surviving Bank. The officers of
Interim Bank and the Bank at the Effective Time of the Merger shall be the
officers of the Surviving Bank until they resign or are replaced or
terminated by the Board of Directors of the Surviving Bank or otherwise in
accordance with the Surviving Bank's Charter Documents. The obligations of
the Bank shall be assumed by the Surviving Bank, and operations including
the policies and procedures of the Bank, shall continue in effect at the
Surviving Bank after the Merger; except that the Bank and the Interim Bank
shall have taken prior to the Effective Time all necessary steps so that at
the Effective Time (i) at the request of the Company, Mr. N. Douglas Mills,
President and Chief Executive Officer of the Bank, shall resign from his
positions (but not as an employee of the Bank), in form and substance
satisfactory to the Company, either during the pendency of this transaction
or following the consummation of this transaction, without incurring any
liability on the part of any Party, except that (a) the Surviving Bank and
Mr. Mills will enter into the Second Amendment to Mr. Mills' Employment
Agreement originally dated September 26, 1996 and amended October 30, 1997,
upon the Bank's payment on the Closing Date to Mr. Mills of the compensation
described in revised Section 2.3 of the Second Amendment to Mr. Mills'
Employment Agreement with the Bank in the form attached hereto as Exhibit
2.1(d)(i)(a), (b) Mr. Mills will remain a director of the Surviving Bank
unless and until a successor is appointed by the Company, and (c) the Board
and/or the Company will not become liable for any obligations under Mr.
Mills' Salary Continuation Agreement dated October 19, 1995, as amended
October 30, 1997, nor, unless accelerated earlier by the Company in its sole
discretion, will such Salary Continuation Agreement accelerate, until
termination of Mr. Mills' employment with the Company or a subsidiary of the
Company pursuant to the Second Amendment to Mr. Mills' Employment Agreement;
(ii) Caswell shall have been appointed Chairman of the Board and Chief
Executive Officer of the Surviving Bank; (iii) except for the persons set
forth on Exhibit 2.1(d), which Exhibit shall be delivered by the Company to
the Bank within sixty (60) days of the date of the Agreement, each of the
directors of the Bank shall have tendered his resignation
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as a director of the Bank and Surviving Bank, in form and substance
satisfactory to the Company, without incurring any liability on the part of
any Party; (iv) the number of authorized directors, and the specific members
of the Board of Directors, of the Surviving Bank shall be changed as
determined in the sole discretion of the Company; (v) the Company shall name
additional directors in its sole discretion who shall be duly elected and
appointed to the Board of Directors of the Surviving Bank (or if any such
persons is unable to serve, such other person designated by the Company) and
shall serve until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified; (vi) the remaining
members of the Board of Directors of the Bank will agree to support any and
all expense reductions, consolidations, mergers, transfer of headquarters,
sale of assets, FRB membership, closure of branches, or any other corporate
changes as requested by the Company, consistent with their fiduciary duties;
and (vii) the Surviving Bank will assume the obligations of the employment
agreements for Bonnie Parrott, Mark A. Nugent, Marvin Lentini and Dianna
Williams, and the Surviving Bank will assume the obligations of Bank under
that "Employment Compensation Agreement" dated March 12, 1970 by and between
Bank and Walter M. Wachtel in favor of Willow Wachtel Decker (clauses
(i)-(vii) being hereinafter collectively referred to as the "Bank Corporate
Governance Changes.").
(e) The Charter Documents of the Company as in effect immediately prior
to the Effective Time shall continue in effect after the Merger until
thereafter amended in accordance with applicable law and the members of the
Board of Directors and the Executive Officers of the Company immediately
prior to the Merger shall continue in their respective positions after the
Merger and be the Board of Directors and the Executive Officers of the
Company, except that the Company shall have taken prior to the Effective
Time all necessary steps so that, (i) two (2) individuals from the Board of
Directors of the Bank, which are intended to be Mr. Marion Ashley and Mr. N.
Douglas Mills, shall be appointed to the Board of Directors of the Company,
(ii) two (2) individuals from the Board of Directors or executive staff of
The Bank of Hemet shall be appointed to the Board of Directors of the
Company, and (iii) the individuals elected to fill such four (4)
directorships shall be annual appointments as selected in the sole
discretion of the Company, and (iv) the Company shall appoint at the
Effective Time, and the Company shall continue to propose for election at
each successive Company annual shareholder meeting thereafter, the ratio of
that number of directors from the Bank's Board of Directors bears to the
total number of directors to be elected, compared to the ratio of the number
of former Bank's shares bears to the total number of shares of the Company,
with a minimum of two to be appointed or elected from the Bank's Board of
Directors, subject to the approval of the Company (clauses (i) and (iv)
being hereinafter collectively referred to as the "Company Corporate
Governance Changes").
2.2 EFFECT OF THE MERGER. At the Effective Time of the Merger, the
corporate existence of Interim Bank and the Bank shall be merged into and
continued in the Surviving Bank, and the Surviving Bank shall be deemed the same
corporation as each corporation participating in the Merger. All rights,
franchises, and interests of Interim Bank and Bank in and to every type of
property (real, personal and mixed) and choses in action shall be transferred to
and vested in the Surviving Bank by virtue of the Merger without any deed or
other transfer and the Surviving Bank shall hold and enjoy all rights of
property, franchises and interests, in the same manner and to the same extent as
such rights, franchises and interests were held or enjoyed by any one of the
consolidating corporations at the Effective Time of the Merger.
2.3 DISSENTING SHAREHOLDERS. (a) Any Bank Perfected Dissenting Shares
shall not be converted into the right to receive the Per Share Consideration,
but the holders thereof shall be entitled only to such rights as are granted
them by Section 1300. Each dissenting shareholder who is entitled to payment for
his shares of Bank Stock under Section 1300 shall receive such payment in an
amount as determined pursuant to Section 1300.
(b) If any shareholder of the Bank shall fail to perfect, or shall
effectively withdraw or lose, his or her rights under Section 1300, the Bank
Dissenting Shares of such holder shall be treated for purposes of this Article
II as any other shares of outstanding Bank Stock. If any holder of Bank Stock
shall fail to perfect, or shall effectively withdraw or lose, his or her right
to appraisal of and payment for his or her Bank Dissenting Shares under Section
1300, each share of Bank Dissenting Shares shall be converted into the right to
receive the Per Share Consideration.
2.4 THE AGGREGATE PURCHASE CONSIDERATION AND PER SHARE CONSIDERATION. The
Aggregate Purchase Consideration shall be equal to the sum of (i) the product of
1,171,906 and the Per Share Consideration and (ii) the Aggregate Option Price.
The Per Share Consideration shall be equal to 2/3 share of Company Stock for
each share of Bank Stock, plus one-third ( 1/3) Warrant.
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2.5 DELIVERY OF CONSIDERATION. At the Closing, the Company will deliver to
the Exchange Agent an amount of Company Stock and Warrants equal to the
Aggregate Purchase Consideration, plus any cash payment for a fractional share
of Company Stock. In the case of shares of Company Stock to be sold in the
Offering, as provided in Section 2.1(b), the Exchange Agent shall deliver such
shares to, or pursuant to the direction of, the Underwriters. In the case of all
other shares of Company Stock, and the cash and Warrants, the Exchange Agent
shall deliver the same to the Selling Shareholders, provided that share
certificates formerly evidencing Bank Stock (duly executed and in proper form
for transfer), or a lost certificate affidavit acceptable to the Company) shall
have been delivered to the Exchange Agent in accordance with this Section 2.5,
Section 2.10 and an agreement to be entered into between the Company and the
Exchange Agent.
2.6 NAME OF SURVIVING BANK. The name of the Surviving Bank shall be
"Valley Bank," unless the Company proposes to change such name following the
Closing Date, and the Board of Directors of the Bank hereby agrees to support
such name changes.
2.7 (RESERVED)
2.8 STOCK OPTIONS. Immediately prior to the Effective Time of the Merger,
all stock options will be fully vested and each holder of a Bank Option will be
given the opportunity to, in whole or in part, cancel such option and receive
Company Stock equal to the number of shares of Bank Stock covered by such option
multiplied by the number obtained by subtracting the exercise price of such
option from the Per Share Consideration in effect on the Closing Date (i.e.,
shares subject to option times ($10.00 minus exercise price of option), all
divided by $15.00) (the total of sum of such payments for all Bank Options so
cancelled shall be defined as the "Aggregate Option Price"). For each 2/3 share
of Company Stock paid by the Company in exchange for options on Bank Stock as
provided in the previous sentence, each holder of a bank option will also
receive one-third ( 1/3) Warrant. Each such option holder shall be afforded an
election to have the shares so received sold in the Offering, upon substantially
identical terms as the Selling Shareholders, and subject to proration together
with and on the same terms as the Selling Shareholders. All remaining Bank
Options which are entitled to participate in the Aggregate Option Price but the
holder of a Bank Option elects not to participate in the Aggregate Option Price
shall be cancelled immediately prior to the Effective Time of the Merger.
2.9 SHAREHOLDERS' AGREEMENTS. The Shareholders' Agreements previously
entered into by each of the Directors of the Bank continue to be in full force
and effect, and shall apply to the Agreement as amended pursuant to this Second
Amendment. By signing [the] Second Amendment [to this Agreement], each of the
Directors of the Bank so agrees.
2.10 (a) TRANSMITTAL LETTER. On or about the mailing date of the Joint
Proxy Statement/Prospectus, the Company, the Bank or the Company's Exchange
Agent shall mail appropriate transmittal materials to the stockholders of Bank
Stock, in form acceptable to the Company. The transmittal materials shall
include documentation by which stockholders may indicate their election
regarding the sale of shares in the Offering, subject to the possible adjustment
as provided in Section 2.1(b), and shall provide that sale in the Offering will
be contingent on the completion of the Offering. The transmittal letter shall
also contain a power of attorney authorizing an authorized representative of the
Company to exchange the Bank's shares for Company shares, and then immediately
deliver the Company shares to the Underwriter for sale in the Offering. The
transmittal letter shall also require a signature guarantee, from a bank or
brokerage with medallion capability. The holder of Bank Stock shall be
instructed to send to the Company, or to the entity designated by the Company
(which may be the Bank or the Exchange Agent), the holder's Bank Stock
certificates with the properly completed letter of transmittal. The transmittal
letter shall contain an election box which permits the holder to elect to sell
all of his or her shares of PCBG for cash or 60% of such shares (subject to
adjustment as elsewhere herein provided), and other appropriate and customary
transmittal materials (which shall specify that delivery shall be effected, and
risk of loss and title to the certificates theretofore representing shares of
Bank Stock shall pass, only upon proper delivery of such certificates to the
Exchange Agent in such form as Company requires). The transmittal materials
shall identify the Election Deadline established by the Company, which shall not
be less than 30 days from the date of mailing of such transmittal letter to the
holder (or such shorter time as the Bank may approve), and shall state that any
share of Bank Stock (other than Dissenting Common Stock) with respect to which
the holder (or the Beneficial Owner, as the case may be) shall not have
submitted an effective, properly completed letter of transmittal together with
the Bank Stock certificates (or customary affidavits and indemnification
regarding the loss or destruction of such certificates or the guaranteed
delivery of such certificates) prior to the Election Deadline shall be deemed to
be "Undesignated Shares" hereunder, and shall not sell Company Stock in the
Offering. The Bank shall provide to the Exchange Agent all information
reasonably necessary for it to perform its obligations as specified herein.
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(b) PROPER AND TIMELY ELECTION. Any Election shall have been properly made
and effective only if the Company or its designee shall have actually received a
properly completed letter of transmittal by the date and time established by the
Company and specified in the transmittal materials, as such date and time may be
extended by the Company in its discretion (the "Election Deadline"). A letter of
transmittal shall be deemed properly completed only if an Election is indicated
for each share of Bank Stock covered by such letter of transmittal and if
accompanied by one or more certificates (or customary affidavits and
indemnification regarding the loss or destruction of such certificates or the
guaranteed delivery of such certificates) representing all shares of Bank Stock
owned by the holder of Bank Stock, together with duly executed transmittal
materials included in or required by the letter of transmittal. Any Election may
be revoked or changed by the person submitting a revised, properly completed
letter of transmittal at or prior to the Election Deadline. In the event a
letter of transmittal is revoked prior to the Election Deadline, the shares of
Bank Stock represented by such Election shall automatically become Undesignated
Shares unless and until a new Election is properly made with respect to such
shares on or before the Election Deadline, and the Company shall cause the
certificates representing such shares of Bank Stock to be promptly returned
without charge to the person submitting the revoked Election upon written
request to that effect from the holder who submitted such Election Form. Subject
to the terms of this Agreement and of the Election, the Company or the Exchange
Agent shall have reasonable discretion to determine whether any election,
revocation or change has been properly or timely made and to disregard
immaterial defects in the letter of transmittal, and any decisions of the
Company and Bank required by the Exchange Agent and made in good faith in
determining such matters shall be binding and conclusive. Neither the Company
nor the Exchange Agent shall be liable for the failure to notify any person of
any defect in an Election or the letter of transmittal, provided that the
Company uses reasonable best efforts promptly to notify (or cause the Exchange
Agent promptly to notify) any holder of Bank Stock of any defect in an Election
or the Letter of Transmittal.
(c) If the aggregate number of shares of Bank Stock as to which Elections to
sell shall have effectively been made would, absent proration, result in the
sale in the Offering of fewer or more shares than are permitted pursuant to
Section 2.1(b), then the sales in the Offering shall be increased or decreased
pro rata as provided in Section 2.1(b) in order to ensure that the shares sold
by Selling Shareholders in the Offering equal 60% of all shares received by
Selling Shareholders (including, for this purpose, option holders).
(d) CALCULATIONS. The calculations required by this Section 2.1 shall be
prepared by the Company prior to the Effective Time and shall be set forth in a
certificate executed by the Chief Financial Officer or Chief Executive Officer
of the Company and furnished to the Bank at least two Business Days prior to the
Closing Date showing the manner of calculation in reasonable detail. Any cash
payment shall be rounded to the nearest cent.
(e) NO FRACTIONAL SHARES OR WARRANTS. Notwithstanding any other provisions
of this Agreement, each holder of shares of Bank Stock exchanged pursuant to the
Merger who would otherwise have been entitled to receive a fraction of a share
of Company Stock (after taking into account all certificates delivered by such
holder) shall receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional part of a share of Company Stock multiplied by $15.00.
Notwithstanding any other provision of this Agreement, no fractional Warrants
shall be issued, and no cash or other consideration shall be paid in lieu of
fractional Warrants. No holder will be entitled to dividends, voting rights or
any other rights as a shareholder in respect of any fractional share of Company
Stock.
ARTICLE III
THE CLOSING
3.1 CLOSING DATE. Consummation of the transactions contemplated by this
Agreement shall take place at the offices of Knecht & Hansen, 1301 Dove Street,
Suite 900, Newport Beach, California, or such other location as may be agreed
upon by the parties, on the Closing Date. The Effective Time shall occur
following the last to occur of (i) the receipt of all approvals and consents
specified in this Agreement and the expiration of the applicable waiting periods
specified in Article IX, and (ii) satisfaction of the conditions precedent set
forth in Articles IX, X and XI or written waiver of such conditions as provided
herein (the "Closing Date", "Effective Time of the Merger" or "Effective Time").
3.2 EXECUTION OF AGREEMENT OF MERGER. Prior to the Closing Date, and as
soon as practicable after approval by the Commissioner to organize Interim Bank,
the Agreement of Merger (as amended, if necessary, to conform to any
requirements of any Governmental Entity having authority over the Merger) shall
be executed by Bank and Interim Bank. On the Closing Date, the Agreement of
Merger, bearing the certification of the Secretary of State, together with all
requisite certificates shall be duly filed in the office of the Commissioner
after being filed with
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the California Secretary of State with the approval of the Commissioner endorsed
thereon, in accordance with the CGCL and Section 4880 ET SEQ. of the CFC.
3.3 DOCUMENTS TO BE DELIVERED. At the Closing the Parties shall deliver,
or cause to be delivered, such documents or certificates as may be necessary in
the reasonable opinion of counsel for any of the parties, to effectuate the
transactions called for in this Agreement. If, at any time after the Effective
Time of the Merger, the Company or its successors or assigns shall determine
that any further conveyance, assignment or other documents or any further action
is necessary or desirable to further effectuate the transactions set forth
herein or contemplated hereby, the officers and directors of the Parties hereto
shall execute and deliver, or cause to be executed and delivered, all such
documents as may be reasonably required to effectuate such transactions.
3.4 EXCHANGE PROCEDURES.
(a) EXCHANGE AGENT. Prior to the Effective Time, the Company shall deposit
with the Exchange Agent shares of Company Stock and Warrants to be issued to
selling shareholders of the Bank, such shares being the number of shares of
Company Stock equal to the Aggregate Purchase Consideration issuable in the
Merger. The Exchange Agent shall deliver or cause to be delivered to the
Underwriter those of such shares to be sold in the Offering. Upon completion of
the Offering, the Underwriter will deposit with the Exchange Agent the proceeds
of the sale of shares by selling shareholders in the Offering. The Exchange
Agent shall distribute to each selling shareholder the cash proceeds, shares of
Company Stock and Warrants to which such selling shareholder is entitled,
provided that the selling shareholder shall have delivered the requisite letter
of transmittal and Bank share certificates (or customary affidavits and
indemnification regarding the loss or destruction of such certificates or the
guaranteed delivery of such certificates). The Exchange Agent shall not be
entitled to vote or exercise any rights of ownership with respect to Company
Stock held by it from time to time hereunder, except that it shall receive and
hold all dividends or other distributions paid or distributed with respect to
such shares for the account of the persons entitled thereto.
(b) EXCHANGE OF CERTIFICATES. Each holder of a certificate formerly
representing Bank Stock (other than Dissenting Common Stock) who surrenders or
has surrendered such certificate (or customary affidavits and indemnification
regarding the loss or destruction of such certificate), together with duly
executed transmittal materials required by Section 2.10, to the Exchange Agent
shall, upon acceptance thereof, be entitled to the Per Share Consideration of a
certificate representing Company Stock or the proceeds of the sale of such stock
in the Offering and Warrants into which the shares of Bank Stock shall have been
converted pursuant hereto, as well as cash in lieu of any fractional shares of
Company Stock to which such holder would otherwise be entitled. The Exchange
Agent shall accept such Bank certificate upon compliance with such reasonable
and customary terms and conditions as the Exchange Agent may impose to effect an
orderly exchange thereof in accordance with normal practices. Until surrendered
as contemplated by this Section 3.4, each certificate representing Bank Stock
shall be deemed from and after the Effective Time to evidence only the right to
receive the Per Share Consideration Company Stock and a Warrant, as the case may
be, upon such surrender. The Company shall not be obligated to deliver the
consideration to which any former holder of Bank Stock is entitled as a result
of the Merger until such holder surrenders his certificate or certificates
representing shares of Bank Stock for exchange as provided in this Article III.
If any certificate for shares of Company Stock, or any check representing
declared but unpaid dividends, is to be issued in a name other than that in
which a certificate surrendered for exchange is issued, the certificate so
surrendered shall be properly endorsed and otherwise in proper form for transfer
and the person requesting such exchange shall affix any requisite stock transfer
tax stamps to the certificate surrendered or provide funds for their purchase or
establish to the satisfaction of the Exchange Agent that such taxes are not
payable.
(c) PAYMENT TO HOLDERS OF A BANK OPTION. Each holder of a Bank Option who
presents a demand for cancellation and payment of such Bank Option as provided
in Section 2.8 of the Agreement to the Exchange Agent prior to the Closing
shall, upon acceptance thereof, be entitled to the per share equivalent of the
Aggregate Option Price. Upon receipt of the Aggregate Purchase Consideration and
as soon as reasonably possible after the Closing, the Exchange Agent shall
deliver to each holder of a Bank Option the consideration due each such holder
under Section 2.8, or if applicable, Section 2.10, of the Agreement, in the form
of shares of Company Stock, Cash and Warrants as provided therein. The Exchange
Agent shall be entitled to rely upon the records of the Bank and the information
provided in such demand for cancellation documentation provided by any such
holder of a Bank Option, as verified by the Company as to the method and means
of payment and disposition of such consideration.
(d) AFFILIATES. Certificates surrendered for exchange by any person
constituting an "affiliate" of Bank for purposes of Rule 144(a) under the
Securities Act shall not be exchanged for certificates representing whole shares
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of Company Stock until the Company has received a written agreement from such
person as provided in Section 6.25.
3.5 VOTING AND DIVIDENDS. Former shareholders of record of Bank shall not
be entitled to vote after the Effective Time at any meeting of Company
shareholders the number of whole shares of Company Stock into which their
respective shares of Bank Stock are converted, until such holders have exchanged
their certificates representing Bank Stock for certificates representing Company
Stock in accordance with the provisions of this Agreement. Until surrendered for
exchange in accordance with the provisions of Sections 2.10 and 3.4 of this
Agreement, each certificate theretofore representing shares of Bank Stock shall
from and after the Effective Time represent for all purposes only the right to
receive the Per Share Consideration consisting of shares of Company Stock and a
Warrant, and cash in lieu of fractional shares, as set forth in this Agreement.
No dividends or other distributions declared or made after the Effective Time
with respect to Company Stock with a record date after the Effective Time shall
be paid to the holder of any unsurrendered certificate of Bank Stock with
respect to the shares of Company Stock represented thereby, until the holder of
such certificate of Common Stock shall surrender such certificate. Subject to
the effect of applicable laws, following surrender of any such certificates of
Bank Stock for which shares of Company Stock are to be issued, there shall be
paid to the holder of the certificates, without interest, (i) the amount of any
cash payable with respect to a fractional share of Company Stock to which such
holder is entitled pursuant to Section 2.1 and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of Company Stock, and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender and a payment date subsequent to
the Effective Time payable with respect to such whole shares of Company Stock.
3.6 NO LIABILITY. Neither the Company, the Bank nor the Exchange Agent
shall be liable to any holder of shares of Bank Stock for any shares of Company
Stock (or dividends or distributions with respect thereto) or cash delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
3.7 WITHHOLDING RIGHTS. The Company or the Exchange Agent shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Company Stock such amounts
as the Company or the Exchange Agent is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of state,
local or foreign tax law. To the extent that amounts are so withheld by the
Company or the Exchange Agent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the shares of
Bank Stock in respect of which such deduction and withholding was made by the
Company or the Exchange Agent.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BANK
The Bank represents and warrants to the Company as of July 30, 1998 as
follows:
4.1 ORGANIZATION AND GOOD STANDING. The Bank is a California banking
corporation duly organized and validly existing in good standing under the laws
of the State of California and it has the corporate power and authority to carry
on its business as presently conducted, and is authorized to transact business
as a bank. The Bank is a not a member of the Federal Reserve System and its
deposits are insured by the FDIC in the manner and to the extent provided by
law. The Bank has all requisite corporate power and authority to own, lease and
operate its properties and assets and to carry on its business as presently
conducted. The nature of its operations and the business transacted by it as of
the date hereof make licensing and qualification in any other state or
jurisdiction unnecessary. The Bank has delivered to the Company true and correct
copies of its Articles of Incorporation and Bylaws, as amended and in effect as
of the date hereof.
4.2 CAPITALIZATION. The authorized capital stock of Bank consists of
2,400,000 shares of Common Stock, $5.00 par value, of which 1,171,906 shares are
outstanding on the date hereof, and except for 7,872 shares issued on November
26, 1997 to Kenneth Ray, are all validly issued, fully paid and nonassessable,
and all 1,171,906 shares will be validly issued, fully paid and nonassessable on
the Closing Date. Except for stock options covering 262,914 shares of Bank Stock
granted pursuant to the Bank Stock Option Plan, and except as to preemptive
rights of Valley Bank shareholders, no unissued shares of Bank Stock or any
other securities of the Bank are subject to any warrants, options, rights or
commitments of any character, kind or nature and the Bank is not obligated to
issue or repurchase any shares of Bank Stock or any other security to or from
any person except in accordance with the terms of the Bank Stock Option Plan and
Agreements pursuant thereto, and true and correct copies, as amended
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and in effect as of the date hereof have been delivered to the Company. Exhibit
4.2 sets forth the name of each holder of a Bank Option, the number of shares of
Bank Stock covered by each such holder's option, the date of grant of each such
holder's option, the exercise price per share, the vesting schedule for each
such holder's option, and the expiration date of each such holder's option.
4.3 SUBSIDIARIES. Except as indicated in Exhibit 4.3, the Bank does not
own, directly or indirectly (except as pledgee pursuant to loans which are not
in default), any equity position or other voting interest in any corporation,
partnership, joint venture or other entity.
4.4 FINANCIAL STATEMENTS. The Bank has delivered to the Company copies of
the audited Balance Sheets of the Bank as of December 31, 1997 and 1996;
Statements of Income, Stockholders' Equity and Cash Flows for each of the years
ended December 31, 1997, 1996 and 1995, and the related notes and related
opinions thereon of McGladrey & Pullen, certified public accountants, with
respect to such financial statements (the "Audited Bank Financial Statements").
The Bank has delivered to the Company copies of the unaudited Balance Sheet of
the Bank as of September 30, 1998; Statement of Income, Stockholders' Equity and
Cash Flows for each of the nine months ended September 30, 1998, and the related
notes thereon (the "Unaudited Bank Financial Statements). The Bank has furnished
the Company with true and correct copies of each management letter or other
letter delivered to the Bank by McGladrey & Pullen in connection with the
Audited Bank Financial Statements or relating to any review of the internal
controls of the Bank by McGladrey & Pullen since January 1, 1996. The Audited
Bank Financial Statements and the Unaudited Bank Financial Statements: (i)
present fairly the financial condition and results of operations of the Bank as
of and for the dates or periods covered thereby in accordance with GAAP and RAP
consistently applied throughout the periods involved; (ii) are based on the
books and records of the Bank; (iii) contain and reflect reserves for all
material accrued liabilities and for all reasonably anticipated losses, and set
forth adequate reserves for loan losses and other contingencies to the extent
required by GAAP and RAP; and (iv) none of the Audited Bank Financial Statements
or Unaudited Bank Financial Statements contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained therein not misleading under GAAP or RAP. The books and
records of the Bank have been, and are being, maintained in all material
respects in accordance with GAAP and RAP and other applicable legal and
accounting requirements and reflect only actual transactions.
4.5 BOOKS AND RECORDS.
(a) The minute books of the Bank which have been made available to the
Company contain (i) true, accurate and complete records of all meetings and
actions taken by the Board of Directors, Board committees and shareholders of
the Bank, and (ii) true and complete copies of its Charter Documents.
(b) The Bank has records which accurately and validly reflect, in all
material respects, its transactions and accounting controls sufficient to insure
that such transactions are (i) in all material respects, executed in accordance
with management's general or specific authorization, and (ii) recorded in
conformity with GAAP or RAP; such records, to the extent they contain important
information pertaining to the Bank which is not easily and readily available
elsewhere, have been duplicated, and such duplicates are stored safely and
securely pursuant to procedures and techniques reasonably adequate for companies
of the size of the Bank and in the businesses in which the Bank is engaged; and
the data processing equipment and software used by the Bank in the operation of
its businesses (including any disaster recovery facility) to generate and
retrieve such records are reasonably adequate for companies of the size of the
Bank and in the businesses in which the Bank is engaged.
4.6 PROPERTY AND ASSETS. (a) Exhibit 4.6(a) sets forth a general
description (including the character of the ownership of the Bank) of all real
property of the Bank, including fees, leaseholds and all other interest in real
property (including real property that is DPC Property) ("Real Property").
Except as set forth on Exhibit 4.6(a), (i) the Bank has good and marketable
title, free and clear of any encumbrance, lien or charge of any kind or nature
(except liens for taxes not yet due) to all of the property, real, mixed or
intangible, reflected on the Audited Bank Financial Statements, except as
reflected therein or in the notes thereto (except property sold or transferred
or Encumbrances incurred in the ordinary course of business since the date
thereof) and except (a) Encumbrances in the aggregate which do not materially
detract from the value, interfere with the use, or restrict the sale, transfer
or disposition, of such properties and assets or otherwise materially and
adversely affect the Bank; (b) any lien for taxes not yet due; and (c) any
Encumbrances arising under the document that created the interest in the Real
Property (other than Encumbrances arising as a result of any breach or default
of the Bank); (ii) all leasehold interests for Real Property and any material
personal property used by the Bank in its business are held pursuant to lease
agreements which are valid and enforceable, except as the enforceability thereof
may be limited by
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applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of
general application relating to or affecting enforcement of creditors rights and
the application of equitable principles in any action, legal or equitable in
accordance with their terms; (iii) all such properties comply in all material
respects with all applicable private agreements, zoning requirements and other
governmental laws and regulations relating thereto and there are no condemnation
proceedings pending or, to the knowledge of the Bank, threatened with respect to
such properties; (iv) the Bank has valid title or other ownership rights under
licenses to all material intangible personal or intellectual property used by
the Bank in its business, free and clear of any claim, defense or right of any
other person or entity which is material to such property, subject only to
rights of the licensors pursuant to applicable license agreements, which rights
do not materially adversely interfere with the use of such property; and (v) all
material insurable properties owned or held by the Bank are adequately insured
in such amounts and against such risks as is customary with banks of similar
size. The Bank has furnished the Company with true and correct copies of all
leases included on Exhibit 4.6(a) delivered as of the date of July 30, 1998, all
title insurance policies relating to the Real Property and all documents
evidencing recordation of all recordable interest in the Real Property.
(b) Condition of Properties. All tangible properties of the Bank that are
material to the business, financial condition, or results of operations of the
Bank are in a good state of maintenance and repair, except for ordinary wear and
tear, and are adequate for the conduct of the business of the Bank as presently
conducted, and comply with all applicable Rules related thereto. Except as set
forth in Exhibit 4.6(b), (i) the execution of this Agreement, the performance of
the obligations of the Bank hereunder and the consummation of the transactions
contemplated herein, including the Merger, does not conflict with and will not
result in a breach or default under any lease, agreement or contract described
in Exhibit 4.6(b), or give any other party thereto a right to terminate or
modify any term thereof; (ii) the Bank has no obligation to improve any Real
Property; (iii) each lease and agreement under which the Bank is a lessor is in
full force and effect and is a valid and legally binding obligation of the Bank,
and, to the best knowledge of the Bank, each other party thereto; and (iv) the
Bank, and to the best knowledge of the Bank, each other party to any such lease
or agreement have performed in all material respects all the obligations
required to be performed by them to date under such lease or agreement and are
not in default in any material respect under any such lease or agreement and
there is no pending or, to the best knowledge of the Bank, threatened
proceeding, or proceeding which the Bank has reason to believe may be
threatened, with respect to such property or any such lease.
4.7 LITIGATION PROCEEDINGS AND AGREEMENTS WITH GOVERNMENTAL ENTITIES.
(a) The Bank is not engaged as a defendant in any legal or other proceedings
before any court, administrative agency or other Governmental Entity except as
is shown on Exhibit 4.7. Except as set forth on Exhibit 4.7, the Bank is not
aware of any "threatened or pending litigation" (within the meaning of Paragraph
5 of the American Bar Association Statement of Policy Regarding Lawyers'
Responses to Auditors' Requests for Information adopted December 8, 1975)
against the Bank. The Bank is not subject to any agreement, order, writ,
injunction or decree of any federal, state or local court, out of a proceeding
involving the Bank or any of its business or properties except as described in
Exhibit 4.7. The Bank has not been served with notice of, nor, to best of Bank's
knowledge is it currently under investigation with respect to, any violation of
federal, state or local law or administrative regulation. Except as set forth on
Exhibit 4.7, there is no (i) outstanding judgment, order, writ, injunction or
decree, stipulation or award of any Governmental Entity or by arbitration,
against, or to the knowledge of the Bank, affecting the Bank or its assets or
business that (a) has had or may have a material adverse effect on the assets,
liabilities, business, financial condition or results of operations of the Bank,
(b) requires any payment by, or excuses a material obligation of a third party
to make any payment to, the Bank, or (c) has the effect of prohibiting any
business practice of, or the acquisition, retention or disposition of property
by, the Bank; or (ii) legal, administrative, arbitration, investigatory or other
proceeding pending or, to the best knowledge of the Bank that has been
threatened, or which the Bank has reason to believe may be threatened, against
or affecting any director, officer, employee, agent or representative of the
Bank, in connection with which any such person has or may have rights to be
indemnified by the Bank.
(b) Except as set forth in Exhibit 4.7, the Bank is not a party to, or
otherwise subject to, any agreement or memorandum of understanding with or order
of any Governmental Entity charged with the supervision or regulation of banks
or engaged in the insurance of bank deposits, that restricts the conduct of its
business, or in any manner relates to its capital adequacy, its credit or
investment policies or its management.
4.8 TAXES AND ASSESSMENTS. The Bank has timely filed all federal income
and state franchise tax returns and all tax reports or returns which it is
required to file with applicable federal, state, county or local authorities and
agencies except (a) where the failure to make any such filing would not have any
materially adverse effect on the
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business, financial condition or results of operations of the Bank taken as a
whole, and (b) where the required filing date has been lawfully extended, and
the Bank has paid all taxes provided for and to be due in such returns and
reports ("Tax Filings"). The Bank's Tax Filings have never been examined by a
Governmental Entity, except for the pending audit for tax year 1997. As of
December 31, 1997, to the extent required by GAAP, the Bank had paid, or set up
adequate accruals for the payment of, all taxes, penalties and assessments for
which it was liable as of such date, whether or not disputed, with respect to
any and all United Sates federal, foreign, state, local, environmental
(including under any Environmental Law) and other taxes for the periods covered
by the financial statements of the Bank and for all prior and subsequent
periods. Except as set forth in Exhibit 4.8 the Bank has no knowledge of any
deficiency proposed to be assessed against it. The Bank has paid all assessments
made by the FDIC and the Commissioner required to be paid prior the date hereof.
There is currently no federal or state income tax audit or investigation in
process or to the best knowledge of the Bank any other pending investigation by
any authorized body of the taxes paid or to be paid by the Bank, and the Bank
has not been informed that any such audit or investigation is proposed, except
for the pending tax audit for 1997.
4.9 COMPLIANCE WITH LAWS AND REGULATIONS.
(a) Except as set forth in Exhibit 4.9, the Bank is not in default under or
in breach of any law, ordinance, rule, regulation, order, judgment or decree
applicable to it promulgated by any Governmental Entity having authority over
it, where such default or breach would have a material adverse effect on its
financial condition, results of operations, or business.
(b) The Bank has conducted in all material respects its businesses in
accordance with all applicable federal, foreign, state and local laws,
regulations and orders, including without limitation disclosure, usury, equal
credit opportunity, equal employment, fair credit reporting, antitrust,
licensing and other laws, regulations and orders, and the forms, procedures and
practices used by the Bank are in compliance with such laws, regulations, and
orders, except for such violations or noncompliance as will not have a material
adverse effect on the financial condition, results of operations, or business of
the Bank.
4.10 PERFORMANCE OF OBLIGATIONS. Except as set forth in Exhibit 4.10, the
Bank has performed in all respects all of the obligations required to be
performed by it to date and is not in default under or in breach of any term or
provision of any covenant, contract, lease, indenture or any other agreement to
which the Bank is a party or is subject or is otherwise bound, and no event has
occurred which, with the giving of notice or the passage of time or both, would
constitute such default or breach, where such default or breach would have a
material adverse effect on the financial condition, results of operations, or
business of the Bank. Except for loans of the Bank in default on July 30, 1998,
no party with whom the Bank has an agreement which is material to the financial
condition, results of operations or business of the Bank is in default
thereunder.
4.11 EMPLOYEES.
(a) Except as set forth in Exhibit 4.11(a), there are no understandings for
the employment of any officer or employee of the Bank which are not terminable
by the Bank without liability on not more than 30 days' notice. Except as set
forth in Exhibit 4.11(a), the Bank is not a party to an oral or written
consultant agreement not terminable upon 60 days' or less notice or involving
the payment of more than $10,000 per annum. Except as set forth in Exhibit
4.11(a), there are no material controversies pending or threatened between the
Bank and any of its employees. Except as disclosed in the Audited Bank Financial
Statements, the Unaudited Bank Financial Statement or in Exhibit 4.11(a), all
material sums due for employee compensation and benefits have been duly and
adequately paid or provided, and all deferred compensation obligations are fully
funded. The Bank is not a party to any collective bargaining agreement with
respect to any of its employees or any labor organization to which its employees
or any of them belong. Except as set forth in Exhibit 4.11(a), no director,
officer or employee of the Bank is entitled to receive any payment of any amount
under any employment agreement, severance plan or other benefit plan as a result
of the consummation of any transaction contemplated by this Agreement.
(b) Except as disclosed in Exhibit 4.11(b), (i) the Bank is and has been in
material compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
including, without limitation, any such laws respecting employment
discrimination and occupational safety and health requirements, and in any
unfair labor practice; (ii) there is no material unfair labor practice complaint
against the Bank pending or, to the knowledge of the Bank, threatened before the
National Labor Relations Board; (iii) there is no labor dispute, strike,
slowdown or stoppage actually pending or, to the knowledge of the Bank,
threatened against or directly affecting the Bank; and (iv) the Bank has not
experienced any material
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work stoppage or other material labor difficulty during the past five years,
except in each case which would not result in a Material Adverse Change.
(c) Except as disclosed in Exhibit 4.11(c), the Bank does not maintain,
contribute to or participate in or have any material liability under any
employee benefit plans, as defined in ERISA, or any nonqualified employee
benefit plans or deferred compensation, bonus, stock or incentive plans, or
other employee benefit or fringe benefit programs for the benefit of former or
current employees of the Bank (the "Employee Plans"). To the best knowledge of
the Bank, no present or former employee of the Bank has been charged with
breaching nor has breached a fiduciary duty under any of the Employee Plans. The
Bank does not participate in, nor has it in the past five years participated in,
nor has it any present or future obligation or liability under, any
multiemployer plan (as defined at Section 3(37) of ERISA). Except as may be
separately disclosed in Exhibit 4.11(c), the Bank does not maintain, contribute
to, or participate in, any plan that provides health, major medical, disability
or life insurance benefits to former employees of the Bank.
(d) Exhibit 4.11 (d) sets forth and describes all Employee Plans in which
the Bank participates, or by which it is bound, including, without limitation;
(i) any profit sharing, deferred compensation, bonus, stock option, stock
purchase, pension, retainer, consulting, retirement, welfare or incentive plan
or agreement whether legally binding or not; (ii) any plan providing for "fringe
benefits" to its employees, including but not limited to vacation, sick leave,
medical, hospitalization, life insurance and other insurance plans, and related
benefits; (iii) any written employment agreement and any other employment
agreement not terminable at will; or (iv) any other "employee benefit plan"
(within the meaning of Section 3(3) of ERISA) (collectively, the "Employee
Plans"). Except as set forth in Exhibit 4.11(d)(i), there are no negotiations,
demands or proposals that are pending or threatened that concern matters now
covered, or that would be covered, by any employment agreements or Employee Plan
other than amendments to plans qualified under Section 401 of the Code that are
required by the Tax Reform Act of 1986 and later legislation; (ii) the Bank is
in compliance with the material reporting and disclosure requirements of Part 1
of Subtitle IB of ERISA and the corresponding provisions of the Code to the
extent applicable to all such Employee Plans; (iii) the Bank has substantially
performed all of its obligations under all such Employee Plans and employment
agreements required to be performed heretofore; and (iv) there are no actions,
suits or claims (other than routine claims for benefits) pending or, to the best
knowledge of the Bank, threatened against any such Employee Plans and employment
agreements or the assets of such plans, and to the best knowledge of the Bank,
no facts exist which could give rise to any actions, suits or claims (other than
routine claims for benefits) against such plans or the assets of such plans.
(e) The "Employee Plans" (within the meaning of Section 3(2) of ERISA)
described on Exhibit 4.11(d) have been duly authorized by the Board of Directors
of the Bank. Except as set forth in Exhibit 4.11(d), each such plan and
associated trust intended to be qualified under Section 401(a) and to be exempt
from tax under Section 501(a) of the Code, respectively, has either received a
favorable determination letter from the Internal Revenue Service (the "IRS"),
has applied for such a determination letter or will apply for such a
determination letter before the expiration of the remedial amendment period set
forth in Section 401(b) of the Code, as the IRS may extend such period, and to
the best knowledge of the Bank, no event has occurred that will or could give
rise to disqualification of any such plan which is intended to be qualified
under Section 401(a) of the Code or loss of the exemption from tax of any such
trust which is intended to be exempt from tax under Section 501(a) of the Code.
No event has occurred that will or could subject any such plans to tax under
Section 511 of the Code. None of such plans has engaged in a merger or
consolidation with any other plan or transferred assets or liabilities from any
other plan. To the best of the Bank's knowledge, no prohibited transaction
(within the meaning of Section 409 or 502(i) of ERISA or Section 4975 of the
Code) or party-in-interest transaction (within the meaning of Section 406 of
ERISA) has occurred with respect to any of such plans which could subject the
Bank to an excise tax or penalty. To the best knowledge of the Bank, no employee
of the Bank has engaged in any transactions which could subject the Bank to
indemnify such person against liability. All costs of plans have been provided
for on the basis of consistent methods in accordance with sound actuarial
assumptions and practices. No Employee Plan has incurred any "accumulated
funding deficiency" (as defined in Section 302(2) of ERISA), whether or not
waived, taking into account contributions made within the period described in
Section 412(c)(10) of the Code; nor are there any unfunded amounts under any
Employee Plan which is required to be funded under Part 3 of Subtitle IB of
ERISA and Section 412 of the Code); nor has the Bank failed to make any
contributions or pay any amount due and owing as required by law or the terms of
any Employee Plan or employment agreement. Subject to amendments that are
required by the Tax Reform Act of 1986 and later legislation, since the last
valuation date for each
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Employee Plan, there has been no amendment or change to such plan that would
increase the amount of benefits thereunder.
(f) The Bank does not sponsor or participate in, or has not sponsored or
participated in, any employee benefit pension plan to which Section 4021 of
ERISA applies that would create a liability under Title IV of ERISA.
(g) The Bank does not sponsor or participate in, or has not sponsored or
participated in, any Employee Plan that is a "multi-employer plan" (within the
meaning of Section 3(37) of ERISA) that would subject such Person to any
liability with respect to any such plan.
(h) All group health plans of the Bank (including any plans of Affiliates of
the Bank that must be taken into account under Section 162(i) or (k) of the Code
as in effect immediately prior to the Technical and Miscellaneous Revenue Act of
1988 and Section 4980B of the Code) have been operated in compliance with the
group health plan continuation coverage requirements of Section 4980B of the
Code to the extent such requirements are applicable.
(i) There have been no acts or omissions by the Bank that have given rise to
or may give rise to fines, penalties, taxes, or related charges under Sections
502(c) or (i) or 4071 of ERISA or Chapter 43 of the Code which could be imposed
on the Bank.
(j) Except as described in Section 4.11(j), the Bank does not maintain any
Employee Plan or employment agreement pursuant to which any Employee Plan or
other payment will be required to be made by the Bank or pursuant to which any
other benefit will accrue or vest in any director, officer or employee the Bank,
in either case as a result of the consummation of the transactions contemplated
by the Agreement.
(k) No "reportable event," as defined in ERISA, has occurred with respect to
any of the Employee Plans.
(l) All amendments required to bring each of the employee benefit plans into
conformity with all of the provisions of ERISA and the Code and all other
applicable laws, rules and regulations have been made, or will be made before
the expiration of the remedial amendment period set forth under Section 401(b)
of the Code, as such period may be extended by the IRS.
(m) Exhibit 4.11(m) sets forth the name of each director, officer, employee,
agent or representative of the Bank and every other person entitled to receive
any benefit or any payment of any amount under any existing employment
agreement, severance plan or other benefit plan or Understanding as defined in
Section 4.12 as a result of the consummation of any transaction contemplated in
this Agreement, and with respect to each such person, the nature of such benefit
or the amount of such payment, the event triggering the benefit or payment, and
the date of, and parties to, such employment agreement, severance or other
benefit plan or Understanding. The Bank has furnished the Company with true and
correct copies of all documents with respect to the plans and agreements
referred to in Exhibit 4.11(d) delivered as of July 30, 1998, including all
amendments and supplements thereto, and all related summary plan descriptions.
For each of the employee pension benefit plans of the Bank referred to in
Exhibit 4.11(d) delivered as of July 30, 1998, the Bank has furnished the
Company with true and correct copies of (i) the Form 5500 which was filed in
each of the three most recent plan years, including without limitation, all
schedules thereto and all financial statements with attached opinions of
independent accountants to the extent required; (ii) the most recent
determination letter from the IRS; (iii) the statement of assets and liabilities
as of the most recent valuation date; and (iv) the statement of changes in fund
balance and in financial position or the statement of changes in net assets
available for benefits under each of said plans for the most recently ended plan
year. The documents referred to in subdivisions (iii) and (iv) fairly present
the financial condition of each of said plans as of and at such dates and the
results of operations of each of said plans, all in accordance with GAAP or on
the cash method of accounting applied on a consistent basis.
4.12 CONTRACTS AND AGREEMENTS. Except as listed in Exhibit 4.12, the Bank
is not a party to any oral or written agreement, commitment, or obligation
(hereinafter referred to as an "Understanding") which individually, or with all
other similar Understandings relating to the same or similar subject matter,
falls within any of the following classifications (hereinafter referred to as a
"Material Contract"):
(i) any Understanding dealing with advertising, brokerage, licensing,
dealership, representative or agency relationship;
(ii) any Understanding with any labor or collective bargaining
organization or association;
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(iii) any mortgage, pledge, conditional sales contract, security
agreement, or any other similar Understanding with respect to any real or
personal property in an amount in excess of $25,000, under which the Bank is
a debtor or to which any of its property is subject;
(iv) any profit sharing, group insurance, bonus, deferred compensation,
stock option, severance pay, pension, retirement, or any other similar
Understanding which might provide benefits to the employees, officers or
directors of the Bank;
(v) any Understanding for the future purchase of materials, supplies,
services, merchandise or equipment, the price of which exceeds $10,000 and
which will not be terminable without liability as to future purchases as of
the Effective Time; it being understood that materials, supplies, service,
merchandise or equipment shall not be deemed to include loans, repurchase or
reverse repurchase agreements, securities or other financial transactions
incurred by the Bank in the ordinary course of its banking business;
(vi) any Understanding for the sale of any of its assets, or for the
grant of any right to purchase any of its assets, properties or rights, or
which requires the consent of any third party to the transfer and assignment
of any of its assets, properties or rights; it being understood that the
foregoing shall not be deemed to include any Understanding for the sale of
mortgage loans, repurchase or reverse repurchase agreements, securities or
other financial transactions incurred by the Bank in the ordinary course of
its banking business;
(vii) any guarantee, subordination or other similar or related types of
Understanding except where the Bank is a beneficiary;
(viii) any Understanding for the borrowing of any money by the Bank (other
than time savings or demand deposits) or for a line of credit to it;
(ix) any Understanding for any one capital expenditure or series of
related capital expenditures in excess of $5,000 individually or $10,000 in
the aggregate;
(x) any real property lease, whether as lessor or lessee; or any
personal property lease, whether as lessor or lessee, involving payments in
excess of $500 per month;
(xi) any Understanding to make or participate in a loan (not yet fully
disbursed or funded) to any borrower or related group of borrowers, which
undisbursed or unfunded amount would exceed $50,000 unsecured or $100,000
secured, except government agency guaranteed loans, which are covered herein
only if the unguaranteed portion would exceed $250,000;
(xii) any Understanding of any kind (other than contracts relating to
demand or time deposits or otherwise made in the ordinary course of
business) with any director or officer of the Bank or with any member of the
immediate family of any such director of officer or with any partnership,
corporation, associate or entity of which any such person is an Affiliate;
(xiii) any Understanding for insurance of any type described in Section
4.13 below; or
(xiv) any Understanding, the purpose or effect of which could encompass
(a) merging with any person or bank or bank holding company other than with
the Company (b) the selling of any of its assets (except in the ordinary
course of business) or stock to any person, (c) recommending to any of its
shareholders that their Bank Stock be sold to any person or bank other than
the Company, or causing any other person to make such recommendations or
acquiescing in any such recommendations made by any other person, or (d) in
any other way transferring, directly or indirectly, control of the Bank.
Except as stated in Exhibit 4.12, true and correct copies of all documents
relating to the foregoing Understandings have been delivered by the Bank prior
to July 30, 1998.
As used in this Section 4.12, "immediate family" of a person shall mean his
or her spouse, parents, children, and siblings.
4.13 INSURANCE. The Bank has and at all times within three years of July
30, 1998 has had, in full force and effect policies of insurance and bonds
(including without limitation Bankers' blanket bond, fidelity coverage, director
and officer liability, fire, third party liability, use and occupancy) with
respect to its assets and business and against such casualties and contingencies
and of such amounts, types and forms which are customary in the banking industry
and are adequate or appropriate to cover its assets and businesses as set forth
in Exhibit 4.13. Set
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forth in Exhibit 4.13 is a schedule of all policies of insurance (other than
employee benefit, title or credit insurance) carried and owned by the Bank,
showing the name of the insurance or bonding company, a summary of the coverage,
the amounts, the deductible features, the annual premiums and the expiration
dates. If any such policy or bond is materially changed, terminated or modified
following July 30, 1998, such termination, change or modification shall be
promptly disclosed to the Company in writing. The Bank is not in default under
any such policy of insurance or bond such that it could be canceled, and all
material claims thereunder have been filed in a timely fashion. The Bank has
filed claims with or given notice of claim to its insurers or bonding companies
with respect to all material matters and occurrences for which it believes it
has coverage, in excess of the applicable deductible.
4.14 BROKERS. Except as indicated in Exhibit 4.14, no agent, broker,
investment banker, person or firm acting on behalf or under authority of the
Bank (except for any payments for fairness opinions as required in Section 10.9)
is or will be entitled to any broker's or finder's fee or any other commission
or similar fee directly or indirectly in connection with any of the transactions
contemplated by this Agreement.
4.15 AUTHORIZATION. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of the Bank. Assuming due and proper execution and
delivery of this Agreement by the Company, this Agreement constitutes a legal,
valid and binding agreement of the Bank in accordance with its respective terms,
except as the enforceability hereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or other laws of general application
relating to or affecting enforcement of creditors rights and the application of
equitable principles in any action, legal or equitable, and by Section 8(b) 6(D)
of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(b)(6)(D). Subject
to obtaining the requisite approval of this Agreement by the shareholders of the
Bank, the Bank has full corporate power and authority to perform its obligations
under this Agreement and the transactions contemplated hereby.
4.16 NO CONFLICTS; DEFAULTS. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, and compliance by the Bank with any provision hereof and
thereof will not (a) conflict with or result in a breach of, or default or loss
of any benefit under, any provision of its Charter Documents or, except as set
forth in Exhibit 4.16 any material agreement, instrument or obligation to which
it is a party or by which the property of the Bank is bound or give any other
party to any such agreement, instrument or obligation the right to terminate or
modify any term thereof; (b) except for the prior approval of the FRB,
Commissioner, any other required Governmental Entity and as set forth in Exhibit
4.16, require any Consents; or (c) result in the creation or imposition of any
Encumbrance on any of the properties or assets of the Bank; or (d) violate the
Charter Documents or any Rules to which the Bank is subject.
4.17 MATERIAL ADVERSE CHANGES. Except as specifically required, permitted
or effected by this Agreement, and except as set forth on Exhibit 4.17, since
December 31, 1997 there has not been, occurred or arisen any of the following
(whether or not in the ordinary course of business unless otherwise indicated)
("Material Adverse Changes"):
(a) Any materially adverse change in any of the assets, liabilities,
permits, methods of accounting or accounting practice, or manner of
conducting business, of the Bank or any other event or development that has
had or may reasonably be expected, when taken as a whole, to have a material
adverse effect on the assets, liabilities, Permits, business, financial
condition, or results of operations of the Bank or which should be disclosed
in order to make the Audited Bank Financial Statements not misleading;
(b) Any damage, destruction or other casualty loss (whether or not
covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, business, financial
condition, or results of operations of the Bank or that may involve a loss
of more than $50,000 in excess of applicable insurance coverage;
(c) Any amendment, modification or termination of any existing, or entry
into any new Material Contract or Permit that has had or may reasonably be
expected to have a material adverse effect on the assets, liabilities,
business, financial condition, or results of operations of the Bank;
(d) Any disposition by the Bank of an asset the lack of which has had or
may reasonably be expected to have a material adverse effect on the
business, financial condition, or results of operations of the Bank;
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(e) Any direct or indirect redemption, purchase or other acquisition by
the Bank of any Equity Securities or any declaration, setting aside or
payment of any dividend or other distribution on or in respect of Bank Stock
whether consisting of money, other personal property, real property or other
things of value;
(f) Any changes by the Bank in accounting principles or methods or tax
methods, except as required or permitted by, the Financial Accounting
Standards Board or by any Governmental Entity having jurisdiction over the
Bank;
(g) A reduction in the Bank's CAMELS rating;
(h) A reduction in the Bank's CRA rating to less than satisfactory;
(i) A reduction in shareholders' equity to less than 100% of the Bank's
shareholders' equity at December 31, 1997 as determined in accordance with
GAAP or RAP; and/or a material reduction in the Bank's projected earnings
except as to the transaction expenses related to this Agreement, as reduced
for any cash dividends as authorized by Section 6.2(vii);
(j) Any event of which the Bank obtains knowledge which may materially
and adversely affect the business, financial condition, results of
operations or prospects of the Bank; or
(k) Any event, development or circumstance that, to the best knowledge
of the Bank, will or, with the passage of time or the giving of notice or
both, is reasonably expected to result in the loss to the Bank of the
services of any Executive Officers of the Bank.
4.18 REPORTS AND FILINGS. Since January 1, 1995, the Bank has filed all
reports, returns, registrations and statements (such reports and filings
referred to as "Bank Filings"), together with any amendments required to be made
with respect thereto, that were required to be filed with (a) the FDIC, (b) the
Commissioner and (c) any other applicable Governmental Entity, including taxing
authorities, except where the failure to file such reports, returns,
registrations and statements has not had and is not reasonably expected to have
a material adverse effect on the business, financial condition, or results of
operations of the Bank. No administrative actions have been taken or orders
issued in connection with such Bank Filings. As of their respective dates, each
of such Bank Filings complied in all material respects with all Rules enforced
or promulgated by the Governmental Entity with which it was filed (or was
amended so as to be so promptly following discovery of any such noncompliance).
Any financial statement contained in any of such Bank Filings that was intended
to present the financial position of Bank fairly and was prepared in accordance
with GAAP or RAP consistently applied, except as stated therein, during the
periods involved. The Bank has furnished the Company with true and correct
copies of all Bank Filings filed by the Bank since January 1, 1995.
4.19 INFORMATION REGARDING LOANS. The Bank has provided the Company access
to all of the information in its possession concerning its loans, and such
information was true and correct in all material respects as of the date access
was provided. Except as may be disclosed in Exhibit 4.19, (i) all loans and
discounts shown on the Audited Bank Financial Statements at December 31, 1997 or
which were entered into after December 31, 1997, but before the Closing Date,
were and will be made in all material respects for good, valuable and adequate
consideration in the ordinary course of the business of the Bank, in accordance
in all material respects with the Bank's lending practices, and are not subject
to any material known defenses, setoffs or counterclaims, including without
limitation any such as are afforded by usury or truth in lending laws, except as
may be provided by bankruptcy, insolvency, reorganization, moratorium or other
laws of general application relating to or enforcement of creditor rights and
the application of equitable principles in any action, legal or equitable; (ii)
the notes or other evidences of indebtedness evidencing such loans and all forms
of pledges, mortgages and other collateral documents and security agreements
constituting the Bank's loan portfolio, taken as a whole, are and will be, in
all material respects, enforceable except as the enforceability hereof and
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, or other laws of general application relating to or affecting
enforcement of creditors rights and the application of equitable principles; and
(iii) the Bank has complied in all material respects, and will prior to the
Closing Date comply with all laws and regulations relating to such loans, or to
the extent there has not been such compliance, such failure to comply will not
materially interfere with the collection of any such loan. All loans and loan
commitments extended by the Bank and any extensions, renewals or continuations
of such loans and loan commitments that are on the Bank's books were made in
accordance with customary lending standards of the Bank in the ordinary course
of business. Such loans are evidenced by documentation based upon customary and
ordinary past practices of the Bank. Prior to the date hereof, the Bank has
provided the Company with a
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schedule which sets forth a description as of June 30, 1998 (a) by type and
classification, if any, of each loan, lease other extension of credit and
commitment to extend credit; (b) by type and classification, if any, of all
loans, leases, other extensions of credit and commitments to extend credit that
have been classified by any Governmental Entity or auditors (external or
internal) as "Watch List," "Substandard," "Doubtful," "Loss" or any comparable
classification; and (c) all consumer loans as to which any payment of principal,
interest or other amount is 90 days or more past due.
(b) The allowance for loan and lease losses for the Bank is adequate and
substantially in accordance with GAAP and RAP.
4.20 COMPLIANCE WITH CRA To the best knowledge of the Bank, the Bank's
compliance under the CRA should not constitute grounds for either the denial by
any Governmental Entity of any application to consummate the transactions
contemplated by this Agreement or the imposition of a materially burdensome
condition in connection with the approval of any such application.
4.21 CERTAIN INTERESTS. Except as described in Exhibit 4.12(xii), Exhibit
4.21 sets forth a description of each instance in which an officer or director
of the Bank (a) has any material interest in any property, real or personal,
tangible or intangible, used by or in connection with the business of the Bank;
(b) is indebted to the Bank except for normal business expense advances; or (c)
is a creditor (other than as a Deposit holder) of the Bank except for amounts
due under normal salary and related benefits or reimbursement of ordinary
business expenses. Except as set forth in Exhibit 4.21, all such arrangements
are arm's length transactions pursuant to normal commercial terms and
conditions.
4.22 BRANCHES. Exhibit 4.22 hereto sets forth the common name and location
of each office of the Bank, an indication of whether such office is a branch,
service center, or other place of business, whether such premises are owned or
leased, the basic terms of such leases, the common name and location of each
approved but unopened office, and a description of each application for
additional offices of the Bank, and the status of each such application. The
Bank has received appropriate and effective permits and governmental authority
where any Permit, approval or notice was required by law or regulation prior to
the establishment and operation of each such office now in operation. Except for
the offices described on Exhibit 4.22, the Bank does not operate or conduct
business out of any other location and the Bank does not have any current
application for, and the Bank has not received permission to open, any other
branch or to operate out of any other location.
4.23 UNDISCLOSED LIABILITY. The Bank has no liabilities or obligations,
either accrued or contingent, which are in excess of Ten Thousand Dollars
($10,000) individually or in the aggregate, which have not been:
(i) reflected or disclosed in the Audited Bank Financial Statements or
Unaudited Bank Financial Statements;
(ii) incurred subsequent to December 31, 1997, in the ordinary course of
business; or
(iii) disclosed on Exhibit 4.23 or any other exhibit to this Agreement.
To the best of the Bank's knowledge and the knowledge of their officers and
directors, after due investigation, there is no basis for the assertion against
the Bank of any liability, obligation or claim that is likely to result in or
cause any material adverse change in the business or financial condition of the
Bank, taken as a whole, which is not fairly reflected in the Audited Bank
Financial Statements, the Unaudited Bank Financial Statements or otherwise
disclosed on Exhibit 4.23 hereto.
4.24 ACCURACY OF INFORMATION FURNISHED. Except as to any statements or
information which shall include projections or forecasts, none of the statements
or information made or contained in any of the covenants, representations or
warranties of the Bank set forth in this Agreement or in any of the schedules,
exhibits, lists, certificates or other documents furnished herewith taken as a
whole contains any untrue statement of a material fact required to be stated
herein or therein or necessary to make the statements or information contained
herein or therein, in light of the circumstances in which they were made, not
misleading. As to any such information or statements which include projections
or forecast, such information or statements are based upon assumptions believed
by the Bank to be reasonable.
4.25 ENVIRONMENTAL LAWS. Except as may be disclosed in Exhibit 4.25, to
the best of the Bank's knowledge (and without conducting any site investigation
or other analysis for the purpose of making this representation), neither the
conduct nor operation of the Bank nor any condition of any Real Property
presently or previously
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owned, leased or operated by the Bank violates or violated Environmental Laws in
any respect material to the business of Bank taken as a whole and no condition
or event has occurred with respect to the Bank or any Real Property that, with
notice or the passage of time, or both, would constitute a violation material to
the business of the Bank taken as a whole of Environmental Laws or obligate (or
potentially obligate) the Bank to remedy, stabilize, neutralize or otherwise
alter the environmental condition of any such Real Property where the aggregate
cost of such actions would be material to the Bank taken as a whole. Except as
may be disclosed in Exhibit 4.25, the Bank has not received any notice from any
person or entity that the Bank or the operation or condition of any Real
Property ever owned, leased or operated by the Bank is or was in violation of
any Environmental Laws or that the Bank is responsible (or potentially
responsible) for remedying, or the cleanup of, any pollutants, contaminants, or
hazardous or toxic wastes, substances or materials at, on or beneath any such
Real Property.
4.26 COMMISSIONER AND FDIC EXAMINATIONS. (a) The Commissioner has
completed an examination of the Bank as of December 31, 1997, and (i) the
Commissioner believes the Bank's allowance for loan losses is adequate and the
Commissioner required no material adjustments, and (ii) the Bank's CAMELS rating
did not adversely change and the Bank's financial condition is deemed by the
Commissioner to be less than satisfactory; however, the Bank has made all
necessary adjustments and has followed the recommendations of the Commissioner.
(b) The FDIC has completed an examination of the Bank as of December 31,
1997, and (i) the FDIC believes the Bank's allowance for loan losses is adequate
and the FDIC required no material adjustments, and (ii) the Bank's CAMELS rating
did not adversely change and the Bank's financial condition is deemed by the
FDIC to be less than satisfactory; however, the Bank has made all necessary
adjustments and has followed the recommendations of the FDIC.
(c) The FDIC has completed an examination of the Bank for compliance with
Year 2000 safety and soundness issues as of June 9, 1998, and the FDIC has rated
the Bank "needs to improve" regarding the Bank's progress in addressing Year
2000 Safety and Soundness Progress Standards established by the FDIC.
4.27 INSIDER LOANS; OTHER TRANSACTIONS. The Bank has previously provided
the Company with a listing, current as of November 30, 1998, of all extensions
of credit made to the Bank and each of its Executive Officers and directors and
their related interests (all as defined under Federal Reserve Board Regulation
"O"), all of which have been made in compliance with Regulation O, which listing
is true, correct and complete in all material respects. The Bank does not owe
any amount to, nor does it have any contract or lease with or commitment to, any
of the present Executive Officers or directors of the Bank (other than for
compensation for current services not yet due and payable, and reimbursement of
expenses arising in the ordinary course of business).
4.28 DERIVATIVE TRANSACTIONS. The Bank is not a party to a transaction in
or involving forwards, futures, options on futures, swaps or other derivative
instruments.
4.29 TRUST ADMINISTRATION. The Bank presently does not exercise trust
powers, including, but not limited to, trust administration, and has not
exercised such trust powers for a period of at least 3 years prior to the date
hereof. The term "trusts" as used in this Section 4.29 includes (i) any and all
common law or other trusts between an individual, corporation or other entities
and the Bank, as trustee or co-trustee, including, without limitation, pension
or other qualified or nonqualified employee benefit plans, compensation,
testamentary, intervivos, and charitable trust indentures; (ii) any and all
decedents' estates where the Bank is serving or has served as a co-executor or
sole executor, personal representative or administrator, administrator de bonis
non, administrator de bonis non with will annexed, or in any similar fiduciary
capacity; (iii) any and all guardianships, conservatorships or similar positions
where the Bank is serving or has served as a co-grantor or a sole grantor or a
conservator or a co-conservator of the estate, or any similar fiduciary
capacity; and (iv) any and all agency and/or custodial accounts and/or similar
arrangements, including plan administrator for employee benefit accounts, under
which the Bank is serving or has served as an agent or custodian for the owner
or other party establishing the account with or without investment authority.
4.30 STATEMENTS TRUE AND CORRECT. None of the information supplied or to
be supplied by the Bank for inclusion in the S-1, the S-4 or the Proxy
Statement, or incorporated by reference therein, or any other document to be
filed with any Governmental Entity in connection with the transactions
contemplated hereby will, in the case of the S-1, the S-4 and the Proxy
Statement, when it is first mailed to the shareholders of the Bank, contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in light of the circumstances
under which such statements are made, not misleading or, in the case of the S-1
and the S-4, when it becomes effective, be false or misleading with respect to
any material fact, or omit to state any material fact necessary in order to make
the statements therein not misleading, or, in the case of the S-1, the S-4 and
Proxy Statement or any amendment thereof or supplement thereto, at the time of
the meeting of
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shareholders of the Bank, be false or misleading with respect to any material
fact or omit to state any material fact necessary to correct any statement or
remedy any omission in any earlier communication with respect to the
solicitation of any proxy for the Bank shareholders' meeting.
4.31 ACCURATE DISCLOSURE. The Bank agrees that through the Effective Time
of the Merger, each of its reports, and other filings required to be filed with
any applicable Governmental Entity will comply in all material respects with all
of the applicable statutes, Rules and regulations enforced or promulgated by the
Governmental Entity with which it will be filed and none will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any such report, or other filing that is intended to
present the financial position of the Bank, will fairly present the financial
position of the Bank in all material respects and will be prepared in accordance
with GAAP or RAP consistently applied during the periods involved.
Notwithstanding anything to the contrary set forth in this Section 4.31, the
Bank makes no representation or warranty with respect to any information
supplied by the Company, or contained in any of the Company's Reports.
4.32 YEAR 2000. The Bank has formed a Year 2000 management committee to
identify potential problems associated with the Year 2000 issues and to develop
resolution to any problems. The Bank is making satisfactory progress toward
compliance with Year 2000 safety and soundness issues affecting the Bank's
existing computer systems, and any related vendor or customer system.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Bank as follows:
5.1 ORGANIZATION AND GOOD STANDING. The Company is a California
corporation duly organized and validly existing in good standing under the laws
of the State of California, is proposed to be registered with the FRB to become
a bank holding company and it has the corporate power and authority to carry on
its business as presently conducted. The Company has all requisite corporate
power and authority to own, lease and operate its properties and assets and to
carry on its business as presently conducted. The nature of its operations and
the business transacted by it as of the date hereof make licensing and
qualification in any other state or jurisdiction unnecessary. The Company has
delivered to the Bank true and correct copies of its Articles of Incorporation
and Bylaws, as amended and in effect as of the date hereof.
5.2 CAPITALIZATION. The authorized capital stock of the Company consists
of 100,000,000 shares of Common Stock, no par value, of which 10,000 shares are
outstanding on the date hereof, all validly issued, fully paid and
nonassessable, and 100,000,000 shares of Preferred Stock, of which not more than
2 million shares have been issued or are to be issued before the Closing Date.
Except as provided in Exhibit 5.2, no unissued shares of Company Stock or any
other securities of the Company are subject to any warrants, options, rights or
commitments of any character, kind or nature and the Company is not obligated to
issue or repurchase any shares of Company Stock or any other security to or from
any person except in accordance with the terms of the proposed Company Stock
Option Plan and Agreements pursuant thereto. Exhibit 5.2 sets forth the name of
each holder of a Company stock option, the number of shares of Company Stock
covered by each such holder's option, the date of grant of each such holder's
option, the exercise price per share, the vesting schedule for each such
holder's option and the expiration date of each such holder's option.
5.3 SUBSIDIARIES. The Company does not own, directly or indirectly (except
as pledgee pursuant to loans which are not in default), any equity position or
other voting interest in any corporation, partnership, joint venture or other
entity.
5.4 FINANCIAL STATEMENTS. The Company has delivered, or will deliver when
available, to the Bank copies of the unaudited Statements of Financial Condition
of the Company as of December 31, 1997 and September 30, 1998 (the "Company
Financial Statements"). The Company Financial Statements: (i) present fairly the
financial condition and results of operations of the Company as of and for the
dates or periods covered thereby in accordance with GAAP consistently applied
throughout the periods involved; (ii) are based on the books and records of the
Company; (iii) contain and reflect reserves for all material accrued liabilities
and for all reasonably anticipated losses, and set forth adequate reserves loan
losses and other contingencies to the extent required by GAAP; and (iv) none of
the Company Financial Statements contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
contained therein not misleading under
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GAAP. The books and records of the Company have been, and are being, maintained
in all material respects in accordance with GAAP and other applicable legal and
accounting requirements and reflect any actual transactions. Since the Company
was recently incorporated, there are no audited financial statements of the
Company for December 31, 1997 or previous years.
5.5 BOOKS AND RECORDS.
(a) The minute books of the Company which have been made available to the
Bank contain (i) true, accurate and complete records of all meetings and actions
taken by the Board of Directors, Board committees and shareholders of the
Company, and (ii) true and complete copies of its Charter Documents.
(b) The Company has records which accurately and validly reflect, in all
material respects, its transactions and accounting controls sufficient to insure
that such transactions are (i) in all material respects, executed in accordance
with management's general or specific authorization, and (ii) recorded in
conformity with GAAP; such records, to the extent they contain important
information pertaining to the Company which is not easily and readily available
elsewhere, have been duplicated, and such duplicates are stored safely and
securely pursuant to procedures and techniques reasonably adequate for companies
of the size of the Company and in the businesses in which the Company is
engaged; and the data processing equipment and software used by the Company in
the operation of its businesses (including any disaster recovery facility) to
generate and retrieve such records are reasonably adequate for companies of the
size of the Company and in the businesses in which the Company is engaged.
5.6 PROPERTY AND ASSETS. (a) Exhibit 5.6(a) sets forth a general
description (including the character of the ownership of the Company) of all
real property of the Company, including fees, leaseholds and all other interest
in real property (including real property that is DPC Property) ("Real
Property"). Except as set forth on Exhibit 5.6(a), (i) the Company has good and
marketable title, free and clear of any encumbrance, lien or charge of any kind
or nature (except liens for taxes not yet due) to all of the property, real,
mixed or intangible, reflected on the Company's Financial Statements as of
December 31, 1997, except as reflected therein or in the notes thereto (except
property sold or transferred or Encumbrances incurred in the ordinary course of
business since the date thereof except (a) Encumbrances in the aggregate which
do not materially detract from the value, interfere with the use, or restrict
the sale, transfer or disposition, of such properties and assets or otherwise
materially and adversely affect the Company; (b) any lien for taxes not yet due;
and (c) any Encumbrances arising under the document that created the interest in
the real property (other than Encumbrances arising as a result of any breach or
default of the Company); (ii) all leasehold interests for real property and any
material personal property used by the Company in its business are held pursuant
to lease agreements which are valid and enforceable, except as the
enforceability hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other laws of general application relating to or
affecting enforcement of creditors rights and the application of equitable
principles in any action, legal or equitable in accordance with their terms;
(iii) all such properties comply in all material respects with all applicable
private agreements, zoning requirements and other governmental laws and
regulations relating thereto and there are no condemnation proceedings pending
or, to the knowledge of the Company, threatened with respect to such properties;
(iv) the Company has valid title or other ownership rights under licenses to all
material intangible personal or intellectual property used by the Company in its
business, free and clear of any claim, defense or right of any other person or
entity which is material to such property, subject only to rights of the
licensors pursuant to applicable license agreements, which rights do not
materially adversely interfere with the use of such property; and (v) all
material insurable properties owned or held by the Company are adequately
insured in such amounts and against such risks as is customary with banks of
similar size. The Company has furnished the Bank with true and correct copies of
all leases included on Exhibit 5.6(a) delivered as of July 30, 1998, all title
insurance policies relating to the Real Property and all documents evidencing
recordation of all recordable interest in the Real Property.
(b) Condition of Properties. All tangible properties of the Company that are
material to the business, financial condition, or results of operations of the
Company are in a good state of maintenance and repair, except for ordinary wear
and tear, and are adequate for the conduct of the business of the Company as
presently conducted. Except as set forth in Exhibit 5.6(b), (i) the execution of
this Agreement, the performance of the obligations of the Company hereunder and
the consummation of the transactions contemplated herein, including the Merger,
does not conflict with and will not result in a breach or default under any
lease, agreement or contract described in Exhibit 5.6(b), or give any other
party thereto a right to terminate or modify any term thereof; (ii) the Company
has no obligation to improve any Real Property; (iii) each lease and agreement
under which the Company is a lessor is in full force and effect and is a valid
and legally binding obligation of the Company, and, to the best knowledge of the
Company, each other party thereto; and (iv) the Company, and to the best
knowledge of the
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Company, each other party to any such lease or agreement have performed in all
material respects all the obligations required to be performed by them to date
under such lease or agreement and are not in default in any material respect
under any such lease or agreement and there is, to the best knowledge of the
Company, no pending or threatened proceeding, or proceeding which the Company
has reason to believe may be threatened, with respect to such property or any
such lease.
5.7 LITIGATION PROCEEDINGS AND AGREEMENTS WITH GOVERNMENTAL ENTITIES.
(a) The Company is not engaged as a defendant in any legal or other
proceedings before any court, administrative agency or other Governmental Entity
except as is shown on Exhibit 5.7. Except as set forth on Exhibit 5.7, the
Company is not aware of any "threatened or pending litigation" (within the
meaning of Paragraph 5 of the American Bar Association Statement of Policy
Regarding Lawyers' Responses to Auditors' Requests for Information adopted
December 8, 1975) against the Company. The Company is not subject to any
agreement, order, writ, injunction or decree of any federal, state or local
court, out of a proceeding involving the Company or any of its business or
properties except as described in Exhibit 5.7. The Company has not been served
with notice of, nor, to best of the Company's knowledge is it currently under
investigation with respect to, any violation of federal, state or local law or
administrative regulation. Except as set forth on Exhibit 5.7, there is no (i)
outstanding judgment, order, writ, injunction or decree, stipulation or award of
any Governmental Entity or by arbitration, against, or to the knowledge of the
Company, affecting the Company or its assets or business that (a) has had or may
have a material adverse effect on the assets, liabilities, business, financial
condition or results of operations of the Company, (b) requires any payment by,
or excuses a material obligation of a third party to make any payment to, the
Company, or (c) has the effect of prohibiting any business practice of, or the
acquisition, retention or disposition of property by, the Company; or (ii)
legal, administrative, arbitration, investigatory or other proceeding pending
or, to the best knowledge of the Company that has been threatened, or which the
Company has reason to believe may be threatened, against or affecting any
director, officer, employee, agent or representative of the Company, in
connection with which any such person has or may have rights to be indemnified
by the Company.
(b) Except as set forth in Exhibit 5.7, the Company is not a party to, or
otherwise subject to, any agreement or memorandum of understanding with or order
of any Governmental Entity charged with the supervision or regulation of bank
holding companies or banks or engaged in the insurance of bank deposits, that
restricts the conduct of its business, or in any manner relates to its capital
adequacy, its credit or investment policies or its management.
5.8 PERFORMANCE OF OBLIGATIONS. Except as set forth in Exhibit 5.8, the
Company has performed in all respects all of obligations required to be
performed by it to date and is not in default under or in breach of any term or
provision of any covenant, contract, lease, indenture or any other agreement to
which the Company is a party or is subject or is otherwise bound, and no event
has occurred which, with the giving of notice or the passage of time or both,
would constitute such default or breach, where such default or breach would have
a material adverse effect on the financial condition, results of operations, or
business of the Company. No party with whom the Company has an agreement which
is material to the financial condition, results of operations or business of the
Company is in default thereunder.
5.9 BROKERS. Except as indicated in Exhibit 5.9, no agent, broker,
investment banker, person or firm acting on behalf or under authority of the
Company (except for any payments for fairness opinions as required in Section
11.14) is or will be entitled to any broker's or finder's fee or any other
commission or similar fee directly or indirectly in connection with any of the
transactions contemplated by this Agreement.
5.10 INSURANCE. The Company has in full force and effect policies of
insurance and bonds with respect to its assets and business and against such
casualties and contingencies and of such amounts, types and forms which in the
judgment of the Company are adequate or appropriate to cover its assets and
businesses as set forth in Exhibit 5.10. Set forth in Exhibit 5.10 is a schedule
of all policies of insurance (other than title or credit insurance) carried and
owned by the Company, showing the name of the insurance or bonding company, a
summary of the coverage, the amounts, the deductible features, the annual
premiums and the expiration dates. If any such policy or bond is changed,
terminated or modified following July 30, 1998, such termination, change or
modification shall be promptly disclosed to the Bank in writing. The Company is
not in default under any such policy of insurance or bond such that it could be
canceled, and all material claims thereunder have been filed in a timely
fashion. The Company has filed claims with or given notice of claim to its
insurers or bonding companies with respect to all material matters and
occurrences for which it believes it has coverage.
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5.11 TAXES AND ASSESSMENTS. The Company has timely filed all federal
income and state franchise tax returns and all tax reports or returns which it
is required to file with applicable federal, state, county or local authorities
and agencies except (a) where the failure to make any such filing would not have
any materially adverse effect on the business, financial condition or results of
operations of the Company taken as a whole, and (b) where the required filing
date has been lawfully extended, and the Company has paid all taxes provided for
and to be due in such returns and reports ("Tax Filings"). The Company's Tax
Filings have never been examined by a Governmental Entity. As of December 31,
1997, to the extent required by GAAP, the Company had paid, or set up adequate
accruals for the payment of, all taxes, penalties and assessments for which it
was liable as of such date, whether or not disputed, with respect to any and all
United Sates federal, foreign, state, local, environmental (including under any
Environmental Law) and other taxes for the periods covered by the financial
statements of the Company and for all prior and subsequent periods. Except as
set forth in Exhibit 5.11 the Company has no knowledge of any deficiency
proposed to be assessed against it. The Company has paid all assessments made by
the FDIC and the Commissioner required to be paid prior the date hereof. There
is currently no federal or state income tax audit or investigation in process or
to the best knowledge of the Company any other pending investigation by any
authorized body of the taxes paid or to be paid by the Company, and the Company
has not been informed that any such audit or investigation is proposed.
5.12 MATERIAL ADVERSE CHANGES. Except as specifically required, permitted
or effected by this Agreement, and except as set forth on Exhibit 5.12 since
December 31, 1997 there has not been, occurred or arisen any of the following
(whether or not in the ordinary course of business unless otherwise
indicated)("Material Adverse Changes"):
(a) Any materially adverse change in any of the assets, liabilities,
permits, methods of accounting or accounting practice, or manner of
conducting business, of the Company or any other event or development that
has had or may reasonably be expected to have a material adverse effect on
the assets, liabilities, Permits, business, financial condition, or results
of operations of the Company or which should be disclosed in order to make
the Company Financial Statements not misleading;
(b) Any damage, destruction or other casualty loss (whether or not
covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, business, financial
condition, or results of operations of the Company or that may involve a
loss of more than $10,000 in excess of applicable insurance coverage;
(c) Any amendment, modification or termination of any existing, or entry
into any new, Material Contract or Permit that has had or may reasonably be
expected to have a material adverse effect on the assets, liabilities,
business, financial condition, or results of operations of the Company;
(d) Any disposition by the Company of an asset the lack of which has had
or may reasonably be expected to have a material adverse effect on the
business, financial condition, or results of operations of the Company;
(e) Any direct or indirect redemption, purchase or other acquisition by
the Company of any Equity Securities or any declaration, setting aside or
payment of any dividend or other distribution on or in respect of the
Company Stock whether consisting of money, other personal property, real
property or other things of value;
(f) Any event of which the Company obtains knowledge which may
materially and adversely affect the business, financial condition, results
of operations or prospects of the Company; or
(g) Any event, development or circumstance that, to the best knowledge
of the Company, will or, with the passage of time or the giving of notice or
both, is reasonably expected to result in the loss to the Company of the
services of any Executive Officer of the Company.
5.13 COMPLIANCE WITH LAWS AND REGULATIONS.
(a) Except as set forth in Exhibit 5.13, the Company is not in default under
or in breach of any law, ordinance, rule, regulation, order, judgment or decree
applicable to it promulgated by any Governmental Entity having authority over
it, where such default or breach would have a material adverse effect on its
financial condition, results of operations, or business.
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(b) To the best of its knowledge, the Company has conducted in all material
respects its businesses in accordance with all applicable federal, foreign,
state and local laws, regulations and orders, including without limitation
disclosure, usury, equal credit opportunity, equal employment, fair credit
reporting, antitrust, licensing and other laws, regulations and orders, and the
forms, procedures and practices used by the Company are in compliance with such
laws, regulations, and orders, except for such violations or noncompliance as
will not have a material adverse effect on the financial condition, results of
operations, or business of the Company.
5.14 AUTHORIZATION. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of the Company. Assuming due and proper execution and
delivery of this Agreement by the Bank, this Agreement constitutes a legal,
valid and binding agreement of the Company in accordance with its respective
terms, except as the enforceability hereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other laws of general
application relating to or affecting enforcement of creditors rights and the
application of equitable principles in any action, legal or equitable. Subject
to obtaining requisite approval of this Agreement by the shareholders of the
Company, if required, the Company has full corporate power and authority to
perform its obligations under this Agreement and the transactions contemplated
hereby.
5.15 NO CONFLICTS; DEFAULTS. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, and compliance by the Company with any provision hereof
will not (a) conflict with or result in a breach of, or default or loss of any
benefit under, any provision of its Charter Documents or, except as set forth in
Exhibit 5.15 any material agreement, instrument or obligation to which it is a
party or by which the property of the Company is bound or give any other party
to any such agreement, instrument or obligation the right to terminate or modify
any term thereof; (b) except for the prior approval of the FRB, the Commissioner
and any other required Governmental Entity, and as set forth in Exhibit 5.15,
require any Consents; (c) result in the creation or imposition of any
Encumbrance on any of the properties or assets or the Company; or (d) violate
the Charter Documents or any Rules to which the Company is subject.
5.16 REPORTS AND FILINGS. Since inception, the Company has filed all
reports, returns, registrations and statements (such reports and filings
referred to as "the Company Filings"), together with any amendments required to
be made with respect thereto, that were required to be filed with (a) the FRB,
(b) the Commissioner and (c) any other applicable Governmental Entity, including
taxing authorities, except where the failure to file such reports, returns,
registrations and statements has not had and is not reasonably expected to have
a material adverse effect on the business, financial condition, or results of
operations of the Company. No administrative actions have been taken or orders
issued in connection with the Company Filings. As of their respective dates,
each of the Company Filings complied in all material respects with all Rules
enforced or promulgated by the Governmental Entity with which it was filed (or
was amended so as to be so promptly following discovery of any such
noncompliance). Any financial statement contained in any of the Company Filings
that was intended to present the financial position of the Company fairly and
was prepared in accordance with GAAP or RAP consistently applied, except as
stated therein, during the periods involved.
5.17 ASSETS OF THE COMPANY. The assets of the Company upon the execution
of this Agreement consist of the following: (i) no material adverse change in
the Company's equity capital as of December 31, 1997; (ii) the experienced bank
holding company management services of Caswell; (iii) an engagement agreement
with experienced investment banking firms, the Underwriters, providing for
financial advisory services for the identification of possible acquisition
candidates, the negotiation of acquisition agreements and the firm commitment
underwriting of the Company Stock in the Offering in order to accomplish the
transactions (the "Engagement Agreement"), and (iv) an agreement to employ
Caswell.
5.18 UNDISCLOSED LIABILITY. The Company has no liabilities or obligations,
either accrued or contingent, which are in excess of Ten Thousand Dollars
($10,000) individually or in the aggregate, which have not been:
(i) reflected or disclosed in the Company Financial Statements;
(ii) incurred since inception, in the ordinary course of business; or
(iii) disclosed on Exhibit 5.18 or any other exhibit to this Agreement.
To the best of the Company's knowledge and the knowledge of its officers and
directors, after due investigation, there is no basis for the assertion against
the Company of any liability, obligation or claim that is likely to
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result in or cause any material adverse change in the business or financial
condition of the Company, taken as a whole, which is not fairly reflected in the
Company Financial Statements, or otherwise disclosed on Exhibit 5.18 hereto.
5.19 ACCURACY OF INFORMATION FURNISHED. Except as to any statements or
information which shall include projections or forecasts, none of the statements
or information made or contained in any of the covenants, representations or
warranties of the Company set forth in this Agreement or in any of the
schedules, exhibits, lists, certificates or other documents furnished herewith
taken as a whole contains any untrue statement of a material fact required to be
stated herein or therein or necessary to make the statements or information
contained herein or therein, in light of the circumstances in which they were
made, not misleading. As to any such information or statements which include
projections or forecast, such information or statements are based upon
assumptions believed by the Company to be reasonable.
5.20 AUTHORITY OF INTERIM BANK. The execution and delivery by Interim Bank
of the Agreement of Merger and, subject to the requisite approval of the
shareholder of Interim Bank, the consummation of the transactions completed
thereby will be duly and validly authorized by all necessary corporate action on
the part of Interim Bank, and the Agreement of Merger will be upon execution by
the parties thereto a valid and binding obligation of Interim Bank, enforceable
in accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the rights of creditors generally, by general equitable principles and by the
provisions of Section 8(b)(6)(D) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1818(b)(6)(D). The Company agrees to take any and all actions reasonably
necessary to ensure that Interim Bank consummates the transactions contemplated
hereby. Except as set forth in Exhibit 5.20, neither the execution and delivery
by Interim Bank of the Agreement of Merger, nor the consummation of the
transaction contemplated therein, nor compliance by Interim Bank with any of the
provisions thereof will (a) conflict with or result in a breach of any provision
of its Charter Documents, (b) except for approval by the shareholder of Interim
Bank and the prior approval of the FRB, the Commissioner or the FDIC, require
any Consents; (c) result in the creation or imposition of any Encumbrance on any
of the properties or assets of Interim Bank; or (d) subject to obtaining the
Consents referred to in subsection (b) of this Section 5.20, and the expiration
of any waiting period, violate any Rules to which Interim Bank is subject.
5.21 CAPITAL OF COMPANY, OFFERING AND COMMITMENTS. The Company intends to
use its best efforts to conduct the Offering in order to permit stockholders of
the Bank and The Bank of Hemet, to sell shares of Company Stock and to provide
capital for expenses, growth and operations of the Company. As of the date of
this Agreement, the Company and Sutro have entered into the Engagement
Agreement, a copy of which has been provided to the Bank and which has not been
terminated or materially altered, except that the Company can change its
relationship with Sutro, or increase or decrease the number of underwriters or
co-mangers of the Offering, in the Company's sole discretion. The Company shall
not impose any cost or expense of the Offering, including Underwriter costs and
expenses, on any selling shareholder.
5.22 REGULATORY APPROVALS. To the best knowledge of the Company, except as
described in Exhibit 5.22, the Company has no reason to believe that it would
not receive all required approvals from any Governmental Entity of any
application to consummate the transactions contemplated by this Agreement
without the imposition of a materially burdensome condition in connection with
the approval of any such application.
5.23 STATEMENTS TRUE AND CORRECT. None of the information supplied or to
be supplied by the Company for inclusion in the S-1, S-4 or the Proxy Statement,
or incorporated by reference therein, or any other document to be filed with any
Governmental Entity in connection with the transactions contemplated hereby
will, in the case of the S-1, S-4 and the Proxy Statement (or incorporated by
reference therein), contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which such statements are made, not
misleading, or, in the case of the S-1 and S-4, when it becomes effective, be
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements therein not misleading.
5.24 ACCURATE DISCLOSURE. The Company agrees that through the Effective
Time of the Merger, each of its reports, and other filings required to be filed
with any applicable Governmental Entity will comply in all material respects
with all of the applicable statutes, Rules and regulations enforced or
promulgated by the Governmental Entity with which it will be filed and none will
contain any untrue statement of a material fact or omit to state a
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material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they will be made, not
misleading. Any financial statement contained in any such report, or other
filing that is intended to present the financial position of the Company will
fairly present the financial position of the Company and will be prepared in
accordance with GAAP or RAP consistently applied during the periods involved.
Notwithstanding anything to the contrary set forth in this Section 5.24, the
Company makes no representation or warranty with respect to any information
supplied by the Bank.
5.25 OTHER TRANSACTIONS. The Company has informed the Bank of all other
acquisition transactions that the Company is contemplating or reviewing as of
the date of this Agreement.
5.26 DUE DILIGENCE. The Company and its representatives have had the
opportunity to conduct a due diligence of the Bank, and such due diligence has
been shared with the Managing Underwriter.
5.27 EMPLOYEES.
(a) Except as set forth in Exhibit 5.27(a), there are no understandings for
the employment of any officer or employee of the Company which are not
terminable by the Company without liability on not more than 30 days' notice.
Except as set forth in Exhibit 5.27(a), the Company is not a party to an oral or
written consultant agreement not terminable upon 60 days or less notice or
involving the payment of more than $10,000 per annum. Except as set forth in
Exhibit 5.27(a), there are no material controversies pending or threatened
between the Company and any of its employees. Except as disclosed in the Company
Financial Statements or in Exhibit 5.27(a), all material sums due for employee
compensation and benefits have been duly and adequately paid or provided for,
and all deferred compensation obligations are fully funded. The Company is not a
party to any collective bargaining agreement with respect to any of its
employees or any labor organization to which its employees or any of them
belong. Except as set forth in Exhibit 5.27(a), no director, officer or employee
of the Company is entitled to receive any payment of any amount under any
Employment Agreement, severance plan or other benefit plan as a result of the
consummation of any transaction contemplated by this Agreement. The Bank has
been provided with a complete and accurate listing of the names and current
annual salary rates of all persons employed by the Company, showing for each
such person the amounts paid or payable as salary, bonus payments and any
indirect compensation through September 30, 1998, the current pay rate as of
September 30, 1998, the names of all of the directors and officers of the
Company, and the names of all persons, if any, holding tax and other powers of
attorney for the Company.
(b) Except as disclosed in Exhibit 5.27(b), (i) the Company is and has been
in material compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
including, without limitation, any such laws respecting employment
discrimination and occupational safety and health requirements, and in any
unfair labor practice; (ii) there is no material unfair labor practice complaint
against the Company pending or, to the knowledge of the Company, threatened
before the National Labor Relations Board; (iii) there is no labor dispute,
strike, slowdown or stoppage actually pending or, to the knowledge of the
Company, threatened against or directly affecting the Company; and (iv) the
Company has not experienced any material work stoppage or other material labor
difficulty during the past five years, except in each case which would not
result in a Material Adverse Change.
(c) Except as disclosed in Exhibit 5.27(c), the Company does not maintain,
contribute to or participate in or have any material liability under any
employee benefit plans, as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or any nonqualified employee
benefit plans or deferred compensation, bonus, stock or incentive plans, or
other employee benefit or fringe benefit programs for the benefit of former or
current employees of the Company (the "Employee Plans"). No present or former
employee of the Company has been charged with breaching nor has breached a
fiduciary duty under any of the Employee Plans. The Company does not participate
in, nor has it in the past five years participated in, nor has it any present or
future obligation or liability under, any multiemployer plan (as defined at
Section 3(37) of ERISA). Except as may be separately disclosed in Exhibit
5.27(c), the Company does not maintain, contribute to, or participate in, any
plan that provides health, major medical, disability or life insurance benefits
to former employees of the Company.
(d) Exhibit 5.27(d) sets forth and describes all employee benefit plans in
which the Company participates, or by which it is bound, including, without
limitation; (i) any profit sharing, deferred compensation, bonus, stock option,
stock purchase, pension, retainer, consulting, retirement, welfare or incentive
plan or agreement whether legally binding or not; (ii) any plan providing for
"fringe benefits" to its employees, including but not limited to
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vacation, sick leave, medical, hospitalization, life insurance and other
insurance plans, and related benefits; (iii) any written employment agreement
and any other employment agreement not terminable at will; or (iv) any other
"employee benefit plan" (within the meaning of Section 3(3) of ERISA)
(collectively, the "Company Employee Plans"). Except as set forth in Exhibit
5.27(d), there are no negotiations, demands or proposals that are pending or
threatened that concern matters now covered, or that would be covered, by any
employment agreements or employee benefit plans other than amendments to plans
qualified under Section 401 of the Code that are required by the Tax Reform Act
of 1986 and later legislation; (ii) the Company is in compliance with the
material reporting and disclosure requirements of Part 1 of Subtitle IB of ERISA
and the corresponding provisions of the Code to the extent applicable to all
such Employee Plans; (iii) the Company has substantially performed all of its
obligations under all such employee benefit plans and employment agreements
required to be performed heretofore; and (iv) there are no actions, suits or
claims (other than routine claims for benefits) pending or, to the best
knowledge of the Company, threatened against any such employee benefit plans and
employment agreements or the assets of such plans, and to the best knowledge of
the Company, no facts exist which could give rise to any actions, suits or
claims (other than routine claims for benefits) against such plans or the assets
of such plans.
(e) The "employee pension benefit plans" (within the meaning of Section 3(2)
of ERISA) described on Exhibit 5.27(d) have been duly authorized by the Board of
Directors of the Company. Except as set forth in Exhibit 5.27(d), each such plan
and associated trust intended to be qualified under Section 401(a) and to be
exempt from tax under Section 501(a) of the Code, respectively, has either
received a favorable determination letter from the Internal Revenue Service (the
"IRS"), has applied for such a determination letter or will apply for such a
determination letter before the expiration of the remedial amendment period set
forth in Section 401(b) of the Code, as the IRS may extend such period, and to
the best knowledge of the Company, no event has occurred that will or could give
rise to disqualification of any such plan which is intended to be qualified
under Section 401(a) of the Code or loss of the exemption from tax of any such
trust which is intended to be exempt from tax under Section 501(a) of the Code.
No event has occurred that will or could subject any such plans to tax under
Section 511 of the Code. None of such plans has engaged in a merger or
consolidation with any other plan or transferred assets or liabilities from any
other plan. To the best of the their knowledge, no prohibited transaction
(within the meaning of Section 409 or 502(i) of ERISA or Section 4975 of the
Code) or party-in-interest transaction (within the meaning of Section 406 of
ERISA) has occurred with respect to any of such plans which could subject the
Company to an excise tax or penalty. To the best knowledge of the Company, no
employee of the Company has engaged in any transactions which could subject the
Company to indemnify such person against liability. All costs of plans have been
provided for on the basis of consistent methods in accordance with sound
actuarial assumptions and practices. No employee benefit plan has incurred any
"accumulated funding deficiency" (as defined in Section 302(2) of ERISA),
whether or not waived, taking into account contributions made within the period
described in Section 412(c)(10) of the Code; nor are there any unfunded amounts
under any employee benefit plan which is required to be funded under Part 3 of
Subtitle IB of ERISA and Section 412 of the Code); nor has the Company failed to
make any contributions or pay any amount due and owing as required by law or the
terms of any employee benefit plan or employment agreement. Subject to
amendments that are required by the Tax Reform Act of 1986 and later
legislation, since the last valuation date for each employee pension benefit
plan, there has been no amendment or change to such plan that would increase the
amount of benefits thereunder.
(f) The Company does not sponsor or participate in, or has not sponsored or
participated in, any employee benefit pension plan to which Section 4021 of
ERISA applies that would create a liability under Title IV of ERISA.
(g) The Company does not sponsor or participate in, or has not sponsored or
participated in, any employee benefit plan that is a "multi-employer plan"
(within the meaning of Section 3(37) of ERISA) that would subject such Person to
any liability with respect to any such plan.
(h) All group health plans of the Company (including any plans of Affiliates
of the Company that must be taken into account under Section 162(i) or (k) of
the Code as in effect immediately prior to the Technical and Miscellaneous
Revenue Act of 1988 and Section 4980B of the Code) have been operated in
compliance with the group health plan continuation coverage requirements of
Section 4980B of the Code to the extent such requirements are applicable.
(i) There have been no acts or omissions by the Company that have given rise
to or may give rise to fines, penalties, taxes, or related charges under
Sections 502(c) or (i) or 4071 of ERISA or Chapter 43 of the Code which could be
imposed on the Company.
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(j) Except as described in Section 5.27(j), the Company does not maintain
any employee benefit plan or employment agreement pursuant to which any Employee
Plan or other payment will be required to be made by the Company or pursuant to
which any other benefit will accrue or vest in any director, officer or employee
the Company, in either case as a result of the consummation of the transactions
contemplated by the Agreement.
(k) No "reportable event," as defined in ERISA, has occurred with respect to
any of the employee benefit plans.
(l) All amendments required to bring each of the employee benefit plans into
conformity with all of the provisions of ERISA and the Code and all other
applicable laws, rules and regulations have been made, or will be made before
the expiration of the remedial amendment period set forth under Section 401(b)
of the Code, as such period may be extended by the IRS.
(m) Exhibit 5.27(d) sets forth the name of each director, officer, employee,
agent or representative of the Company and every other person entitled to
receive any benefit or any payment of any amount under any existing employment
agreement, severance plan or other benefit plan or Understanding as a result of
the consummation of any transaction contemplated in this Agreement, and with
respect to each such person, the nature of such benefit or the amount of such
payment, the event triggering the benefit or payment, and the date of, and
parties to, such employment agreement, severance or other benefit plan or
Understanding. The Company has furnished the Bank with true and correct copies
of all documents with respect to the plans and agreements referred to in Exhibit
5.27(d) delivered as of the date of the Agreement, including all amendments and
supplements thereto, and all related summary plan descriptions. For each of the
employee pension benefit plans of the Company referred to in Exhibit 5.27(d)
delivered as of the date of the Agreement, the Company has furnished the Bank
with true and correct copies of (i) the Form 5500 which was filed in each of the
three most recent plan years, including without limitation, all schedules
thereto and all financial statements with attached opinions of independent
accountants to the extent required; (ii) the most recent determination letter
from the IRS; (iii) the statement of assets and liabilities as of the most
recent valuation date; and (iv) the statement of changes in fund balance and in
financial position or the statement of changes in net assets available for
benefits under each of said plans for the most recently ended plan year. The
documents referred to in subdivisions (iii) and (iv) fairly present the
financial condition of each of said plans as of and at such dates and the
results of operations of each of said plans, all in accordance with generally
accepted accounting principles or on the cash method of accounting applied on a
consistent basis.
5.28 CONTRACTS AND AGREEMENTS. Except as listed in Exhibit 5.28, the
Company is not a party to any oral or written agreement, commitment, or
obligation (hereinafter referred to as an "Understanding" or "Material
Contract") which individually, or with all other similar Understandings relating
to the same or similar subject matter, falls within any of the following
classifications:
(i) any Understanding dealing with advertising, brokerage, licensing,
dealership, representative or agency relationship;
(ii) any Understanding with any labor or collective bargaining
organization or association;
(iii) any mortgage, pledge, conditional sales contract, security
agreement, or any other similar Understanding with respect to any real or
personal property in an amount in excess of $25,000, under which the Company
is a debtor or to which any of its property is subject;
(iv) any profit sharing, group insurance, bonus, deferred compensation,
stock option, severance pay, pension, retirement, or any other similar
Understanding which might provide benefits to the employees, officers or
directors of the Company;
(v) any Understanding for the future purchase of materials, supplies,
services, merchandise or equipment, the price of which exceeds $5,000 and
which will not be terminable without liability as to future purchases as of
the Effective Time; it being understood that materials, supplies, service,
merchandise or equipment shall not be deemed to include loans, repurchase or
reverse repurchase agreements, securities or other financial transactions
incurred by the Company in the ordinary course of its banking business;
(vi) any Understanding for the sale of any of its assets, or for the
grant of any right to purchase any of its assets, properties or rights, or
which requires the consent of any third party to the transfer and assignment
of any of its assets, properties or rights; it being understood that the
foregoing shall not be deemed to include any Understanding for the sale of
mortgage loans, repurchase or reverse repurchase agreements, securities or
other financial transactions incurred by the Company in the ordinary course
of its banking business;
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(vii) any guarantee, subordination or other similar or related types of
Understanding except where the Company is a beneficiary;
(viii) any Understanding for the borrowing of any money by the Company
(other than time savings or demand deposits) or for a line of credit to it;
(ix) any Understanding for any one capital expenditure or series of
related capital expenditures in excess of $5,000 individually or $10,000 in
the aggregate;
(x) any real property lease, whether as lessor or lessee; or any
personal property lease, whether as lessor or lessee, involving payments in
excess of $500 per month;
(xi) any Understanding to make or participate in a loan (not yet fully
disbursed or funded) to any borrower or related group of borrowers, which
undisbursed or unfunded amount would exceed $50,000 unsecured or secured;
(xii) any Understanding of any kind (other than contracts relating to
demand or time deposits or otherwise made in the ordinary course of
business) with any director or officer of the Company or with any member of
the immediate family of any such director of officer or with any
partnership, corporation, associate or entity of which any such person is an
Affiliate;
(xiii) any Understanding for insurance of any type described in Section
5.10 above; or
(xiv) any Understanding, the purpose or effect of which could encompass
(a) merging with any person or bank or bank holding company other than with
the Company (b) the selling of any of its assets (except in the ordinary
course of business) or stock to any person, (c) recommending to any of its
shareholders that their Company Common Stock be sold to any person or bank
other than the person, or (d) in any other way transferring, directly or
indirectly, control of the Company.
Except as stated in Exhibit 5.28, true and correct copies of all documents
relating to the foregoing Understandings have been delivered by the Company to
the Bank prior to the date hereof.
As used in this Section 5.28, "immediate family" of a person shall mean his
or her spouse, parents, children, and siblings.
ARTICLE VI
COVENANTS OF THE BANK
The Bank covenants and agrees with the Company as follows:
6.1 BEST EFFORTS. The Bank shall use its best efforts to bring about the
satisfaction of the conditions specified in Articles IX and XI hereof.
6.2 CONDUCT OF BUSINESS. Unless the Company shall give its prior consent,
which consent will not be unreasonably withheld, or unless otherwise indicated,
until the Effective Time, the Bank will:
(i) conduct its affairs and business in the usual and ordinary course,
generally consistent with past practice, and in accordance with safe and
sound practices;
(ii) refrain from (a) creating, incurring, or suffering to exist, any
encumbrance or restriction of any kind against or in respect of any property
or right of the Bank except for such which are not material in amount or
nature to the financial condition or results of operations of the Bank,
except for a pledge or security interest given in connection with the
acceptance of government or public deposits; it being understood that the
foregoing shall not be deemed to preclude loans, repurchase or reverse
repurchase agreements, securities or other financial transactions incurred
in the ordinary course of the Bank's banking business, and (b) borrowing or
agreeing to borrow any amount of funds except in the ordinary course of
business, or directly or indirectly guaranteeing or agreeing to guarantee
any obligations of others except for such which are not material in amount
or nature to the financial condition or results of operations of the Bank;
(iii) refrain from making or becoming a party to any Material Contract or
material commitment, or renewing, extending, amending or modifying any such
contract or commitment except for loan and deposit transactions, in the
usual and ordinary course of business, consistent with past practice, and
refrain from making any loan or other extension of credit, or entering into
any commitment to make any loan or other extension of credit, to any Bank
director, officer or employee or 5% or more shareholder, except in
accordance with existing practice or policy;
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(iv) refrain from making any capital expenditures, except for ordinary
repairs and replacements not exceeding $10,000 for any one item;
(v) refrain from paying or agreeing to pay any bonus, extra
compensation, pension or severance pay, under any pension plan or otherwise,
or increasing the rate of compensation paid by the Bank at June 30, 1998, to
any officer, director, agent, consultant, or employee (except for raises and
bonuses consistent with past practices accrued and paid prior to the end of
the month prior to the Closing Date and except as contemplated by this
Agreement), and any such amounts shall be accrued and paid prior to the
Determination Date; or agreeing to enter into any employment agreements or
hire any officer level staff where such agreements or arrangements cannot be
terminated without any liability upon not more than 90 days notice;
(vi) maintain its assets and properties in good condition and repair
(ordinary wear and tear excepted) and refrain from selling or otherwise
disposing of any of its assets or properties, except in the usual and
ordinary course, consistent with prior customary practice, and in accordance
with safe and sound practices, and maintain the Bank's present branch
operations unless changed by mutual agreement;
(vii) refrain from declaring or paying any dividend on or making any
other distribution upon, or purchasing or redeeming, any shares of the Bank
Stock;
(viii) refrain from (a) issuing or selling or obligating itself to issue
or sell any shares of the Bank Stock or any other securities or any
warrants, rights or options to acquire Bank Stock or other securities, (b)
effecting a reclassification, recapitalization, split-up, exchange of
shares, readjustment or other similar change in or to any capital stock or
otherwise reorganize or recapitalize, except pursuant to Section 6.5;
(ix) refrain from directly or indirectly redeeming, purchasing or
otherwise acquiring any Bank Stock or stock of any corporation or any
interest in any business enterprise except as it relates to a foreclosure in
the usual and ordinary course of its business, or pursuant to the Bank's
ESOP;
(x) refrain from amending its Charter Documents except to the extent as
may be required or contemplated by this Agreement;
(xi) use its best efforts to preserve its business organization intact
and to retain its present officers and employees in a manner consistent with
the Bank's other obligations under this Agreement;
(xii) use its best efforts to preserve the goodwill of its depositors,
customers and those having business relations with it, refrain from
materially changing the make-up of the Bank's deposit structure, refrain
from amending, modifying, terminating or failing to renew or preserve its
business organization, material rights, franchises, Permits, and refrain
from taking any action which would jeopardize the continuance of the
goodwill of its customers where such action would have a material adverse
effect on the financial condition, or results of operations of the Bank in a
manner consistent with the Bank's other obligations under this Agreement;
(xiii) use its best efforts to maintain insurance and bond coverage at
least equal to that now in effect on all its properties and all properties
for which it is responsible and on its business operations, and carry the
same coverage for public liability, personal injury and property damage that
is now in effect, except if such insurance and coverage (a) is not available
except at extraordinary rates, or (b) is not available except under
materially different terms which are inconsistent with those in effect as of
July 30, 1998;
(xiv) meet its material contractual obligations and not become in default
in any material respect on any thereof;
(xv) duly observe and conform to lawful requirements applicable to its
business in all material respects;
(xvi) duly and timely file all reports and returns required to be filed
with any federal, state or local Governmental Entity unless any extensions
have been duly granted by such authorities;
(xvii) refrain from commencing, and cease any previously commenced
proceeding except for such proceedings with the Company, any proceeding to
merge, consolidate or liquidate or dissolve (except as contemplated by this
Agreement) or obligating itself to do so, subject to Sections 6.5 and 14.1;
(xviii) maintain its books of account and records in the regular manner
substantially in accordance with all applicable statutory and regulatory
requirements applied on a consistent basis;
(xix) except for instituting actions against borrowers of the Bank to
collect loans in default, refrain from instituting, settling, or agreeing to
any material claim, action or proceeding before any court or Governmental
Entity unless not instituting, settling or agreeing to any material claim,
action or proceeding would result in a Material Adverse Change to the Bank;
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(xx) refrain from making its credit underwriting policies, standards or
practices applicable to all loans relating to the making of loans and other
extensions of credit, or commitments to make loans and other extensions of
credit, less stringent than those in effect on the date hereof. The Bank
shall not grant or commit to grant, without receiving the Company's Consent,
(i) any loan or other extension of credit, including renewals, to an
existing customer of the Bank, if such loan or other extension of credit,
together with all other credit then outstanding to the same Person and all
Affiliates of such Person, would exceed $50,000, irrespective of any plans
or intentions to sell or participate all or a portion of such loans, on an
unsecured basis, or exceed $100,000 secured by a lien on real estate, cash
or readily marketable collateral, as that term is used in section 1220 ET
SEQ. of the CFC, except loans guaranteed by a government agency, which are
prohibited only if the unguaranteed portion of which would exceed $250,000,
(ii) any participation loans purchased or sold, or (iii) any renewals or
other extensions of credit to any borrower whose loans or other extensions
of credit have been classified by any Governmental Entity. In addition, Bank
shall not take any property into Other Real Estate Owned ("OREO"), or sell
any OREO property, without receiving the Company's Consent. Consent shall be
deemed granted if within three Business Days of written notice received by
the Company's designee, notice of objection in writing is not received by
Bank;
(xxi) refrain from making special or extraordinary material payments to
any Person other than as contemplated and as disclosed in this Agreement as
of the date hereof;
(xxii) except for transactions in accordance with safe and sound banking
practices, refrain from making any material investments, by purchase of
stock or securities, contributions to capital, property transfers, purchases
of any property or assets or otherwise, in any other individual, corporation
or other entity;
(xxiii) advise the Company promptly in writing of any Material Adverse
Change known to the Bank in the capital structure, financial condition,
results of operations or of any event or condition which with the passage of
time is reasonably likely to result in a Material Adverse Change to the
Bank, or of any other materially adverse change known to the Bank respecting
the business and operations of the Bank, or in the event the Bank determines
that the Merger will not be consummated because of any inability to meet the
conditions to the performance of the Company set forth in Article XI or of
any matter which would make the representations and warranties set forth in
Article IV hereof not true and correct in any material respect at the
Closing;
(xxiv) promptly advise the Company in writing of any event or any other
transaction within the Bank's knowledge whereby any person or related group
of persons acquires, directly or indirectly, record or beneficial ownership
(as defined in Rule 13d3 promulgated by the Exchange Act) or control of 5%
or more of the outstanding shares of Bank Stock prior to the record date
fixed for the Bank shareholders' meeting or any adjourned meeting thereof to
approve the transactions contemplated herein;
(xxv) charge-off all loans, receivables and other assets, or portions
thereof, deemed uncollectible in accordance with GAAP or RAP, applicable law
or regulation, or classified as "loss" or as directed by any Governmental
Entity; and maintain the allowance for loan losses of the Bank at a level
which in the reasonable opinion of the Bank's management is adequate to
provide for all known and estimated credit losses on loans and leases
outstanding and other inherent risks in the Bank's loan portfolio, but in no
case less than the level which is the reasonable opinion of the Bank's
management is adequate to provide for all known and reasonably expected
losses on assets outstanding in accordance with GAAP and RAP;
(xxvi) furnish to the Company, as soon as practicable, and in any event
within ten (10) days after it is prepared (except for the reports submitted
to the Board of Directors of the Bank, as described in clause (i) below,
which shall be furnished to the Company within ten (10) days after the
Bank's Board of Directors has reviewed the report), (i) a copy of any report
submitted to the Board of Directors of the Bank and access to the working
papers related thereto and copies of other operating or financial reports
prepared for management of any of their businesses and access to the working
papers thereto, provided, however, that the Bank need not furnish the
Company communications of the Bank's legal counsel regarding the Bank's
rights against and obligations to the Company or its Affiliates under this
Agreement, (ii) to the extent permitted by law, copies of all reports,
renewals, filings, certificates, statements and other documents filed with
or received from the FDIC and/or the Commissioner or any other Governmental
Entity, (iii) monthly unaudited average statements of condition and
statements of operations for the Bank, and quarterly unaudited statements of
condition and statements of operations for the Bank and statements of
changes in stockholders' equity for the Bank, in each case prepared in a
manner consistent with past practice, and (iv) such other reports as the
Company may reasonably request relating to the Bank. Each of the financial
statements delivered pursuant to this Section 6.2(xxvi), except as stated
therein, shall be prepared in accordance with the Bank's normal practices;
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(xxvii) consistent with the standards set forth in this subsection 6.2
(xxvii), the Bank agrees that through the Effective Time of the Merger, as
of their respective dates, (i) each of the Bank Filings will be true and
complete in all material respects; and (ii) each of the Bank Filings will
comply in all material respects with all of the statutes, rules and
regulations enforced or promulgated by the Governmental Entity with which it
will be filed and none will contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they will be made, not misleading. Any financial statement contained in any
of such Bank Filings that is intended to present the financial position of
the Bank will be prepared in accordance with GAAP or RAP consistently
applied, except as stated therein, during the periods involved;
(xxviii) maintain reserves for contingent liabilities in accordance with
GAAP and RAP;
(xxix) promptly notify the Company of the filing of any material
litigation, governmental or regulatory action, or similar proceeding or
notice of any claims against the Bank or any of its assets;
(xxx) conduct good faith settlement negotiations, and, with the written
consent of the Company, settle when deemed prudent by the Parties, of all
existing or threatened litigation as specified in Exhibits 4.7, or for any
new litigation filed or threatened from the date hereof to the Closing Date;
(xxxi) except in the ordinary course of business, refrain from canceling
or accelerating any material indebtedness owing to the Bank or any claims
which the Bank may possess or waive any material rights of substantial
value;
(xxxii) refrain from selling or otherwise disposing of any Real Property or
any material amount of any tangible or intangible personal property other
than properties acquired in foreclosure or otherwise in the ordinary
collection of indebtedness to the Bank;
(xxxiii) refrain from foreclosing upon or otherwise taking title to or
possession or control of any real property without first obtaining a phase
one environmental report thereon which indicates that the property is free
of pollutants, contaminants or hazardous or toxic waste materials; provided,
however, that the Bank shall not be required to obtain such a report with
respect to single family, non-agricultural residential property of one acre
or less to be foreclosed upon unless it has reason to believe that such
property might contain any such waste materials or otherwise might be
contaminated;
(xxxiv) refrain from committing any act or failing to do any act which will
cause a breach of any agreement, contract or commitment and which will have
a material adverse effect on the Bank's business, financial condition, or
results of operations; and
(xxxv) duly observe and conform to all applicable compliance requirements
for Year 2000 safety and soundness issues.
For purposes of this Section 6.2, the Company shall be deemed to have given
its consent to any action which is contrary to any specified covenant set forth
in this Section if, within five (5) Business Days, or three (3) Business Days
for loans, after actual receipt by the Company of written notice from the Bank
of the Bank's intention to act contrary to any of the specified covenants set
forth in this Section, the Company shall not have delivered to the Bank written
objection to any such action.
6.3 ACCESS TO INFORMATION. (a) As long as the transaction contemplated
herein has not been terminated, the Bank will afford the Company, its
representatives, counsel, accountants, agents and employees including the
underwriter selected to assist in the issuance of the common stock contemplated
in Section 9.1(iii) and its counsel (collectively "Company Representatives"),
access during normal business hours to all of its business, operations,
properties, personnel books, files and records and will do everything reasonably
necessary to enable the Company and the Company Representatives to make a
complete examination of the financial statements, books, records, loans and
leases, operating reports, audit reports, contracts and documents, and all other
information with respect to assets and properties of the Bank and the condition
thereof, and to update such examination at such intervals as the Company shall
deem appropriate. Such access shall include reasonable access by the Company and
the Company Representatives to auditors' work papers with respect to the
business and properties of the Bank, other than (i) books, records and documents
covered by the attorney-client privilege, or which are attorneys' work product,
and (ii) books, records and documents that the Bank is legally obligated to keep
confidential. Such examination shall be conducted in cooperation with the
officers of the Bank and in such a manner as to minimize, to the extent possible
consistent with the conducting of a comprehensive examination, any disruption
of, or interference with, the normal business operations of the Bank. No such
examination, however, shall constitute a waiver or relinquishment on the part of
the Company to rely upon the representations and warranties made by the Bank
herein or
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pursuant hereto; provided, that the Company shall promptly disclose in writing
to the Bank any fact or circumstance it may discover which it believes renders
any representation or warranty made by the Bank hereunder incorrect in any
respect. The Company will hold in strict confidence all documents and
information concerning the Bank so obtained (except to the extent that such
documents or information are a matter of public record or require disclosure in
the Proxy Statement or as may be necessary for the accomplishment of the
purposes of such examination) and, if the transactions contemplated herein are
not consummated, such confidence shall be maintained and all such documents
including all copies shall be returned to the Bank.
(b) As long as the transaction contemplated hereunder has not been
terminated, (i) one Company Representative, selected by the Company in its sole
discretion, shall be invited by the Bank to attend all regular and special Board
of Directors' and Loan Committee meetings of the Bank from the date hereof until
the Effective Time of the Merger, and (ii) one representative of Sutro shall be
invited by the Bank to attend all regular and special Board of Directors
meetings of the Bank from the date hereof until the Effective Time of the Merger
for the purpose of discussing the condition of the market for the Offering and
any possible Increase in Per Share Consideration. The Bank shall inform the
Company of such Board of Director meeting at least five (5) days in advance of
such meeting; provided, however, that the attendance of such Company
Representative shall not be permitted at any meeting, or portion thereof, for
the sole purpose of discussing the transactions contemplated by this Agreement
on the obligations of the Bank under this Agreement.
6.4 FINANCIAL STATEMENTS. In the event the following have not been
previously delivered prior to the date hereof, the Bank will deliver to the
Company a copy of the audited Statements of Financial Condition of the Bank as
of December 31, 1998; Statements of Earnings, Stockholders' Equity and Cash
Flows for the year ended December 31, 1998, the related notes and related
opinions thereon of McGladrey & Pullen, certified public accountants, with
respect to such financial statements (the "1998 Audited Bank Financial
Statements"). The Bank will furnish the Company with a true and correct copy of
the management letter or other letter delivered to the Bank by McGladrey &
Pullen in connection with the 1998 Audited Bank Financial Statements relating to
any review of the internal controls of the Bank by McGladrey & Pullen. The 1998
Audited Bank Financial Statements will: (i) present fairly the financial
condition and results of operations of the Bank as of and for the dates or
periods covered thereby in accordance with generally accepted accounting
principles consistently applied throughout the periods involved; (ii) be based
on the books and records of the Bank; (iii) contain and reflect reserves for all
material accrued liabilities and for all reasonably anticipated losses, and set
forth adequate reserves for loan losses and other contingencies, to the extent
required by GAAP; and (iv) none of the 1998 Audited Bank Financial Statements
will contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements contained therein not misleading
under GAAP.
6.5 NO SOLICITATION.
(a) The Bank shall not, and will cause each of its officers, directors,
employees, agents, legal and financial advisors and Affiliates not to, directly
or indirectly, make, solicit, encourage, initiate or, except as permitted in
this Section 6.5, enter into any agreement or agreement in principle, or
announce any intention to do any of the foregoing, concerning the acquisition of
the Bank, or substantially all of the Bank's business and properties or a
majority of Bank Stock or debt securities, whether by purchase, merger (other
than by the Company), purchase of assets, tender offer or otherwise (an
"Alternative Transaction").
(b) The Bank shall not, and will cause each of its officers, directors,
legal and financial advisors, agents and Affiliates not to, directly or
indirectly, participate in any negotiations or discussions regarding, or furnish
any information with respect to, or otherwise cooperate in any way in connection
with, or assist or participate in, facilitate or encourage, any effort or
attempt to effect or seek to effect, any Alternative Transaction with or
involving any Person other than the Company, unless the Bank shall have received
an unsolicited written offer from a Person other than the Company to effect an
Alternative Transaction and the Board of Directors of the Bank is advised in
writing by outside legal counsel that in the exercise of the fiduciary
obligations of the Bank's Board of Directors such information should be provided
to or such discussions or negotiations undertaken with the Person submitting
such unsolicited written offer.
(c) The Bank will promptly communicate to the Company the receipt of any
proposal with respect to any Alternative Transaction, and will keep the Company
informed as to the status of any such proposal; PROVIDED, HOWEVER,that the Bank
shall not be required to disclose any matters which, in the written opinion of
outside legal counsel, may not be disclosed in the exercise of the fiduciary
obligations of the Bank's Board of Directors.
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6.6 CERTAIN LOANS AND OTHER EXTENSIONS OF CREDIT. The Bank will promptly
inform the Company of the amounts and categories of any loans, leases or other
extensions of credit that have been criticized special mention or classified by
any bank regulatory authority or deemed by the Bank to require special attention
pursuant to its internal policies (collectively "Classified Credits"). In
addition, the Bank will furnish to the Company, as soon as practicable, and in
any event within seven days after receipt by the Bank's Board of Directors,
schedules including the following: (a) Classified Credits; (b) nonaccrual
credits; (c) accrual exception credits that are delinquent 90 or more days and
have not been placed on nonaccrual status; (d) participating loans and leases,
stating, with respect to each, whether it is purchased or sold, the loan or
lease type, and the originating unit; (e) loans or leases (including any
commitments) by the Bank to any director, officer or shareholder holding 5% or
more of the capital stock of such party; (f) letters of credit; (g) loans or
leases charged-off during the previous month; (h) loans or leases written down
during the previous month; and (i) OREO or assets owned, stating with respect to
each its type.
6.7 BREACHES. The Bank shall, in event it becomes aware of the impending
or threatened occurrence of any material event or condition which would cause or
constitute a breach (or would have caused or constituted a breach had such event
occurred or been known prior to the date hereof) of any of its representations
or agreements contained or referred to herein, give prompt written notice
thereof to the Company and, without limiting the Company's rights under
paragraph 14.1(a)(ii), the Bank shall use its best efforts to prevent or
promptly remedy the same.
6.8 SHAREHOLDER APPROVAL. As soon as practicable, the Company and the Bank
shall prepare the S-4 and the proxy statement ("Proxy Statement") and take all
action necessary in accordance with applicable Rules and its Charter Documents
to submit the Agreement and the transactions contemplated hereby to its
shareholders for approval by June 21, 1999, or as otherwise reasonably directed
by the Company. In connection with such submission, subject to its fiduciary
obligations specified in Section 6.5(b) the Bank's Board of Directors shall
recommend shareholder approval of all the matters referred to in this Section
6.8 and the Bank shall use its best efforts to obtain such shareholder approval.
6.9 COMPLIANCE WITH RULES. The Bank shall materially comply with the
requirements of all applicable Rules, the noncompliance with which would
materially and adversely affect the assets, liabilities, business, financial
condition, results of operations or prospects of the Bank.
6.10 TERMINATION OF THE BANK STOCK OPTION PLAN AND AGREEMENTS. The Bank
will take all steps necessary to cause the Bank Stock Option Plan to be
terminated as of or prior to the Effective Time of the Merger, will grant no
additional options under said plan prior to the Effective Time of the Merger,
and the Bank will not permit any options to be exercised as of or prior to the
Effective Time of the Merger, without any liability to any Party. The Bank will
also terminate all Stock Option Agreements following the payment of the
Aggregate Option Price, without any liability to any Party.
6.11 OFFICERS AND EMPLOYEES. Following the Closing Date, the Company and
the Bank will agree to consolidate and/or reduce certain back office and
administrative functions, and other overhead, of the Bank in order to reduce
Bank expense. Other than officers with employment contracts, each officer and
employee of the Bank has indicated in writing to the Bank that such officers and
employees agree to the Bank's Personnel Policy Manual and acknowledged his or
her at-will employment status while employed by the Bank, in the form attached
as Exhibit 6.11(a). The Company also will honor all Bank Employment Agreements
specified in Exhibit 4.11(a).
6.12 TERMINATION OF CONTRACTS AND ACCRUAL OF LIABILITIES. Upon
determination by the Company, the Bank shall obtain the termination of any
contracts, commitments or Understandings as defined in Section 4.12(v), and pay
any termination fees, for the future purchase of materials, supplies, services,
merchandise or equipment, the price of which exceeds $10,000 prior to the
Closing Date. Before the end of the month prior to the Closing Date, the Bank
shall have paid, or set-up adequate accruals for the payment of, all material
expenses that the Bank shall be liable for up to the Closing Date, including,
but not limited to, all accounting, attorney fees and data processing costs and
related costs in connection with this Agreement.
6.13 EXECUTION OF AGREEMENT OF MERGER. As soon as possible after receipt
of approval of the Commissioner to organize Interim Bank, subject to receipt of
any and all necessary approvals and Permits by any Governmental Entity and
approval by the Bank's shareholders, the Bank shall execute the Agreement of
Merger and any and all related documents.
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6.14 ACCOUNTANTS. Promptly upon request of the Company, the Bank will ask
its accountants to permit the Company or the Company Representatives to review
and examine the work papers relating to the Audited Bank Financial Statements
for the years ended December 31, 1995, 1996, 1997 and 1998, and the Bank will
permit such accountants to discuss with the Company any matter relating to the
audits of the Bank. In addition, the Bank will make available to the Company
copies of each management letter or other letter delivered to the Bank by its
accountants in connection with such financial statements or relating to any
review by its accountants of the internal controls of the Bank since January 1,
1995, unless previously provided to the Company and the Bank has instructed its
accountants to make available for inspection by the Company or the Company
Representatives all reports and working papers produced or developed by its
accountants in connection with their examination of such financial statements,
as well as all such reports and working papers for any periods for which any tax
of the party has not been finally determined or barred by applicable statutes of
limitation.
6.15 CORPORATE ACTION. The Bank shall take or cause to be taken all
necessary corporate action required to carry out the transactions contemplated
in this Agreement.
6.16 REGULATORY APPROVALS. Promptly following execution of this Agreement,
the parties hereto shall prepare, submit and file, or cause to be prepared,
submitted and filed, all applications for approvals and consents as may be
required of any of them, respectively, by applicable law and regulations with
respect to the transactions contemplated by this Agreement, including without
limitation any and all applications required to be filed with the Commissioner,
the FRB, the FDIC and such other Governmental Entity as the Company or the Bank
may reasonably believe necessary. Each party shall cooperate with the other in
the preparation of all of such applications and will furnish promptly upon
request all documents, information, financial statements or other materials as
may be required in order to complete such applications. Each party shall afford
the other a reasonable opportunity to review all such applications (except
confidential portions thereof) and all amendments and supplements thereto before
filing. The Company and the Bank each covenant and agree that any and all
information furnished by it to the other for inclusion in such applications will
not contain any untrue statement of a material fact and will not omit to state
any material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
6.17 NECESSARY CONSENTS. In addition to the regulatory approvals referred
to in Section 6.16, the parties hereto shall each apply for and diligently seek
to obtain all other third party consents or approvals which may be necessary for
the consummation of the Merger, including, without limitation, the written
consent of any lessors of real and personal property which property cannot be
assigned without the written consent of the other such lessors ("Third Party
Consent").
6.18 FURTHER ASSURANCES. The parties agree that from time to time, whether
prior to, at or after the Effective Time of the Merger, they will execute and
deliver such further instruments of conveyance and transfer and take such other
action as may reasonably be expected to consummate the transactions contemplated
hereby. The Company and the Bank each agrees to take such further action as may
reasonably be requested by the other in order to consummate the transactions
contemplated by this Agreement and that are not inconsistent with the other
provisions hereof, including compliance with all of the terms of Article II.
6.19 BANK EMPLOYEE BENEFITS. Prior to or at the Effective Time of the
Merger, the Bank will terminate the Bank Stock Option Plan. Upon the agreement
of the Company and the Bank, the Bank shall cause all Employee Plans of the Bank
to be terminated except as otherwise provided by applicable labor laws, or as
agreed between the Bank and the Company.
6.20 ENVIRONMENTAL REPORTS. Except as otherwise agreed to in writing by
the Company, the Bank shall provide to the Company, as soon as reasonably
practical, but not later than 45 days after the date hereof, a report of a phase
one environmental investigation on all Real Property owned, leased or operated
by Bank as of the date hereof (other than space in retail and similar
establishments leased by the Bank for automatic teller machines) and within ten
days after the acquisition or lease of any Real Property acquired or leased by
the Bank after the date hereof (other than space in retail and similar
establishments leased or operated by the Bank for automatic teller machines),
except as otherwise provided in Section 6.2(xxxiii). If required by the phase
one investigation in the Company's reasonable opinion, the Bank shall provide to
the Company a report of a phase two investigation on the Real Property or Real
Properties requiring such additional study. The Company shall have 15 business
days from the receipt of any such phase two investigation report to notify the
Bank of any objection to the contents of such report. Should the cost of taking
all remedial and corrective actions and measures (i) required by applicable
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law, or (ii) recommended or suggested by such report or reports or prudent in
light of serious life, health or safety concerns, in the aggregate, exceed the
sum of Twenty-Five Thousand Dollars ($25,000) as reasonably estimated by an
environmental expert retained for such purpose by the Company and reasonably
acceptable to the Bank, or if the cost of such actions and measures cannot be so
reasonably estimated by such expert to be $25,000 or less with any reasonable
degree of certainty, the Company shall have the right to terminate the Agreement
pursuant to Article IV, Section 14.1(e) hereof, for a period of 10 business days
following receipt of such estimate or indication of the cost of such actions and
measures.
6.21 NO CONFLICTS; DEFAULTS. The execution, delivery and performance of
the Agreement of Merger and the consummation of the transactions contemplated
therein, and compliance by the Bank with any provision thereof will not (a)
conflict with or result in a breach of, or default or loss of any benefit under,
any provision of its Charter Documents or, except as set forth in Exhibit 6.21
any material agreement, instrument or obligation to which the Surviving Bank
will become a party or by which the property of the Surviving Bank will become
bound or give any other party to any such agreement, instrument or obligation
the right to terminate or modify any term thereof; (b) except for the prior
approval of the FRB, the FDIC and the Commissioner and as set forth in Exhibit
6.21, require any Consents; (c) result in the creation or imposition of any
Encumbrance on any of the properties or assets of the Surviving Bank; or (d)
violate the Charter Documents or any Rules to which the Surviving Bank is
subject.
6.22 THE OFFERING. The Bank will assist the Company in connection with the
preparation of the offering materials for the issuance of the Company Stock
contemplated by this Agreement, and such assistance will include, but not
necessarily be limited to, the preparation or provision, as appropriate, of
information concerning the business, properties and personnel of the Bank needed
in connection with the issuance of the Company Stock and the closing of the
Offering, as well as any and all comfort letters from McGladrey & Pullen or
other legal counsel of the Bank, and any and all necessary opinions from Aldrich
& Bonnefin or other legal counsel of the Bank, with respect to the Offering as
reasonably required and specified by the Underwriters. Such information to be
supplied by the Bank will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not intentionally misleading.
6.23 S-4, PROXY STATEMENT AND THE OFFERING. The Company and the Bank will
prepare the S-4 and the Proxy Statement, and the Bank will assist the Company in
connection with preparation of the Registration Statement for the Offering,
contemplated by this Agreement, and such preparation and assistance will
include, but not necessarily be limited to, the preparation or provision, as
appropriate, of information concerning the business, properties and personnel of
the Bank needed in connection with the issuance of the Company Stock, the S-4
and the Proxy Statement and the closing of the Merger. Such information to be
prepared or supplied by the Bank including any and all information furnished by
the Bank for inclusion in all applications and statements filed with the
appropriate regulatory authorities for approval of, or consent to, the Merger
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
6.24 PUBLICITY. The initial press release announcing this Agreement shall
be a joint press release and thereafter the Company and the Bank shall consult
with each other in issuing any press releases or otherwise making public
statements with respect to the transactions contemplated hereby and in making
any filings with any Governmental Entity or with any national securities
exchange with respect thereto. If any party hereto, on the advice of counsel,
determines that a disclosure is required by law, it may make such disclosure
without the consent of the other parties, but only after affording the other
party a reasonable opportunity to review and comment upon the disclosure. The
parties hereby agree that all public statements after the initial press release
announcing this Agreement referring to the Bank shall be made by Mr. N. Douglas
Mills, and all public statements made after the initial press release announcing
this Agreement referring to the Company shall be made by Mr. E. Lynn Caswell,
and both parties agree that all public statements shall be made by mutual
agreement with consultation with the Managing Underwriter.
6.25 AFFILIATES AND FIVE PERCENT SHAREHOLDER AGREEMENTS. Within thirty
(30) days of the execution of this Agreement, (a) the Bank shall deliver to the
Company a letter identifying all persons who are then "affiliates" of the Bank
for purposes of Rule 145 under the Securities Act and (b) the Bank shall advise
the persons identified in such letter of the resale restrictions imposed by
applicable securities laws and shall use reasonable efforts to obtain from each
person identified in such letter a written agreement substantially in the form
attached hereto as
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Exhibit 6.25. The Bank shall use reasonable efforts to obtain from any person
who becomes an affiliate of the Bank after the Bank's delivery of the letter
referred to above, and on or prior to the date of the Bank's Shareholders'
Meeting to approve this Agreement, a written agreement substantially in the form
attached as Exhibit 6.25 hereto as soon as practicable after obtaining such
status. At least 10 Business Days prior to the issuance of the opinion required
by Section 9.8, the Bank shall use its best efforts to cause each person or
group of persons who holds more than five percent (5%) of Bank Stock (regardless
of whether such person is an "affiliate" under Rule 145) to deliver to the
Company's accountants and Knecht & Hansen, a letter stating that such
shareholder(s) has no present plan or intention to dispose of Bank Stock and
committing that such shareholder(s) will not dispose of Bank Stock in a manner
to cause a violation of the "continuity of shareholder interest" requirements of
Treasury Regulation 1.368-1.
ARTICLE VII
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Bank as follows:
7.1 BEST EFFORTS. The Company shall use its best efforts to bring about
the satisfaction of the conditions specified in Articles IX and X hereof.
7.2 CONDUCT OF BUSINESS. Unless the Bank shall give its prior consent,
which consent will not be unreasonably withheld, or unless otherwise indicated,
until the Effective Time, the Company will:
(i) conduct its affairs and business in the usual and ordinary course,
generally consistent with past practice, and in accordance with safe and
sound practices;
(ii) refrain from amending its Charter Documents except to the extent as
may be required or contemplated by this Agreement, and except as the Company
proposes to amend its articles of incorporation and bylaws as attached to
this Agreement as Exhibit 7.2(ii);
(iii) use its best efforts to preserve its business organization intact
and to retain its present officers and employees in a manner consistent with
the Company's other obligations under this Agreement;
(iv) use its best efforts to preserve the goodwill of those having
business relations with the Company, refrain from amending, modifying,
terminating or failing to renew or preserve its business organization,
material rights, franchises, Permits, and refrain from taking any action
which would jeopardize the continuance of the goodwill of its customers
where such action would have, taken as a whole, a material adverse effect on
the financial condition, or results of operations of the Company in a manner
consistent with the Company's other obligations under this Agreement;
(v) duly and timely file all reports and returns required to be filed
with any federal, state or local Governmental Entity unless any extensions
have been duly granted by such authorities;
(vi) maintain its books of account and records in the regular manner
substantially in accordance with all applicable statutory and regulatory
requirements applied on a consistent basis;
(vii) advise the Bank promptly in writing of any material adverse change
known to the Company in the capital structure, financial condition, results
of operations, or of any event or condition which with the passage of time
is reasonably likely to result in a material adverse change in the capital
structure, financial condition or results of operations of the Company, or
in the event the Company determines that the Merger will not be consummated
because of any inability to meet the conditions to the performance of the
Bank set forth in Article X or of any matter which would make the
representations and warranties set forth in Article V hereof not true and
correct in any material respect at the Closing;
(viii) the Company agrees that through the Effective Time of the Merger,
as of their respective dates, (i) each of the Company Filings will be true
and complete in all material respects; and (ii) each of the filings with any
regulatory agency will comply in all material respects with all of the
statutes, rules and regulations enforced or promulgated by the Governmental
Entity with which it will be filed and none will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any of such Company Filings that is intended to
present the financial
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position of the entities or entity to which it relates will fairly present
the financial position of such entities or entity and will be prepared in
accordance with GAAP or RAP consistently applied, except as stated therein,
during the periods involved.
For purposes of this Section 7.2, the Bank shall be deemed to have given its
consent to any action which is contrary to any specified covenant set forth in
this Section if, within five (5) Business Days, after actual receipt by the Bank
of written notice from the Company of the Company's intention to act contrary to
any of the specified covenants set forth in this Section, the Bank shall not
have delivered to the Company written objection to any such action.
7.3 ACCESS TO INFORMATION. The Company will afford the Bank, its
representatives, counsel, accountants, agents and employees (collectively "Bank
Representatives"), access during normal business hours to all of its business,
operations, properties, books, files and records and will do everything
reasonably necessary to enable the Bank and the Bank Representatives to make a
complete examination of the financial statements, books, records, loans and
leases, operating reports, audit reports, contracts and documents, and all other
information with respect to assets and properties of the Company and the
condition thereof, and to update such examination at such intervals as the Bank
shall deem appropriate. Such access shall include reasonable access by the Bank
and the Bank Representatives to auditors' work papers with respect to the
business and properties of the Company, other than (i) books, records and
documents covered by the attorney-client privilege, or which are attorneys' work
product, and (ii) books, records and documents that the Company is legally
obligated to keep confidential. Such examination shall be conducted in
cooperation with the officers of the Company and in such a manner as to
minimize, to the extent possible consistent with the conducting of a
comprehensive examination, any disruption of, or interference with, the normal
business operations of the Company. No such examination, however, shall
constitute a waiver or relinquishment on the part of the Bank to rely upon the
representations and warranties made by the Company herein or pursuant hereto;
provided, that the Bank shall promptly disclose in writing to the Company any
fact or circumstance it may discover which it believes renders any
representation or warranty made by the Company hereunder incorrect in any
respect. The Bank will hold in strict confidence all documents and information
concerning the Company so obtained (except to the extent that such documents or
information are a matter of public record or require disclosure in the Proxy
Statement or as may be necessary for the accomplishment of the purposes of such
examination) and, if the transactions contemplated herein are not consummated,
such confidence shall be maintained and all such documents including all copies
shall be returned to the Company.
7.4 BREACHES. The Company shall, in event it becomes aware of the
impending or threatened occurrence of any event or condition which would cause
or constitute a breach (or would have caused or constituted a breach had such
event occurred or been known prior to the date hereof) of any of its
representations or agreements contained or referred to herein, given prompt
written notice thereof to the Bank and, without limiting the Bank's rights under
paragraph 14.1(a)(ii), the Company shall use its best efforts to prevent or
promptly remedy the same.
7.5 COMPLIANCE WITH RULES. The Company shall comply with the requirements
of all applicable Rules, the noncompliance with which would materially and
adversely affect the assets, liabilities, business, financial condition, or
results of operations of the Company taken as a whole. The Company shall also
comply with all securities statutes, rules and regulations, whether federal or
state, in connection with the Offering. Except for information supplied by the
Bank pursuant to Section 6.22, the information contained in the Offering
disclosure documents shall not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
7.6 CORPORATE ACTION. The Company shall take or cause to be taken all
necessary corporate action required to carry out the transactions contemplated
in this Agreement and the Agreement of Merger, including without limitation, all
necessary action required to organize and fund Interim Bank.
7.7 REGULATORY APPROVALS. Promptly following execution of this Agreement,
the parties hereto shall prepare, submit and file, or cause to be prepared,
submitted and filed, all applications for approvals and consents as may be
required of any of them, respectively, by applicable law and regulations with
respect to the transactions contemplated by this Agreement, including without
limitation any and all applications required to be filed with the Commissioner,
the FRB, the FDIC and such other Governmental Entity as the Company or the Bank
may reasonably believe necessary. Each party shall cooperate with the other in
the preparation of all of such applications and will furnish promptly upon
request all documents, information, financial statements or other materials as
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may be required in order to complete such applications. Each party shall afford
the other a reasonable opportunity to review all such applications (except
confidential portions thereof) and all amendments and supplements thereto before
filing. The Company and the Bank each covenant and agree that any and all
information furnished by it to the other for inclusion in such applications will
not contain any untrue statement of a material fact and will not omit to state
any material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
7.8 NECESSARY CONSENTS. In addition to the regulatory approvals referred
to in Section 7.7, the parties hereto shall each apply for and diligently seek
to obtain all other third party consents or approvals which may be necessary for
the consummation of the Merger, including, without limitation, the written
consent of any lessors of real and personal property which property cannot be
assigned without the written consent of the other such lessors ("Third Party
Consent").
7.9 FURTHER ASSURANCES. The parties agree that from time to time, whether
prior to, at or after the Effective Time of the Merger, they will execute and
deliver such further instruments of conveyance and transfer and take such other
action as may reasonably be expected to consummate the transactions contemplated
hereby. The Company and the Bank each agree to take such further action as may
reasonably be requested by the other in order to consummate the transactions
contemplated by this Agreement and that are not inconsistent with the other
provisions hereof, including compliance with the terms of Article II.
7.10 (RESERVED)
7.11 (RESERVED)
7.12 INDEMNIFICATION AND INSURANCE.
(a) The Company will cause the Bank to maintain in effect policies of
directors' and officers' liability insurance (with such coverage, terms and
conditions as are no less advantageous than the insurance presently maintained
by the Bank with respect to the present and former officers and directors,
specifically including a "peace of mind" coverage endorsement or policy covering
current Bank directors not to exceed $16,000) with respect to all matters
arising from facts or events which occurred before the Effective Time of the
Merger for which the Bank would have had an obligation to indemnify its
directors and officers.
(b) If the Company or any of its successors or assigns (i) shall consolidate
with or merge into any other corporation or entity and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) shall transfer all or substantially all of its properties and assets to any
individual, corporation or other entity, then and in each such case, the Company
shall take no action to impair the rights provided in this Section 7.12.
7.13 EXECUTION OF AGREEMENT OF MERGER. As soon as practicable after
receipt of approval of the Commissioner to organize Interim Bank, the Company as
the sole shareholder of Interim Bank, shall approve the Merger and shall cause
Interim Bank to execute the Agreement of Merger and take any and all other
actions reasonably necessary to consummate the transactions contemplated herein.
7.14 THE OFFERING.
(a) The Company intends to conduct the Offering in order to permit
stockholders of the Bank and The Bank of Hemet, to sell shares of Company Stock
and to provide capital for expenses, growth and operations of the Company. All
shareholders of the Bank will be given the opportunity to sell shares of the
Company (whether in exchange for Bank Stock or Bank Options) in the Offering,
subject to proration as provided in Section 2.1(b). Shares of Company Stock sold
by the selling shareholders will not incur any cost and expenses of the
Offering, and pursuant to the terms of this Section 7.14, the net proceeds from
the Offering will not be less than $15.00 per share.
(b) All holders of Bank Options who exchange their options for shares of
Company Stock and elect to sell the shares of Company Stock so received may do
so without having to first exercise such options. Such option holders wishing to
sell shares of Company Stock underlying their options to be received in exchange
for the Bank Options may do so by depositing with the Exchange Agent the options
with respect to the shares of Bank Stock to be exchanged prior to the Offering,
together with appropriate Letters of Transmittal properly completed and
executed. At the time of the Merger, the Bank Options will be deemed exchanged
for the number of shares of Company Stock and Warrants as provided in Section
2.8, and upon completion of the Offering, the Exchange
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Agent will distribute to each former option holder (a) the proceeds of sale of
those of such shares that are sold in the Offering, and (b) the shares and cash
to which the former option holder is entitled.
(c) All Directors and executive officers of the Company and the Surviving
Bank, except Willow Decker and Mark Nugent, have undertaken in writing with the
Underwriters not to sell any Warrants or shares of Company Stock held by them
for a period of six months following the completion of the Offering unless
specifically granted permission to do so by the Underwriters, such undertaking
is in full force and effect. It is understood that the Underwriters will (a)
reduce the period from six months to ninety (90) days and (b) exclude from the
effect of these undertakings those shares sold in the Offering. Mark Nugent will
execute similar undertakings within 15 days of the day of the Second Amendment.
The Bank will use its best efforts to have Willow Decker execute similar
undertakings.
(d) Simultaneously with, and upon the condition of, the consummation of the
acquisition of the Bank, the Company through the Underwriters intends to
consummate the Offering at a gross public offering price of at least $15.00 per
share. If the Offering cannot be consummated at a gross public offering price of
at least $15.00 per share, the Company will not be obligated to proceed with the
Offering and the acquisition of the Bank, and the Bank shall not be obligated to
consummate the Merger.
(e) The Managing Underwriter has entered into an Engagement Agreement with
the Company which has not terminated and has not withdrawn the letter expressing
their degree of confidence, and the Managing Underwriter will promptly notify
the parties if such withdrawal should occur.
7.15 AUTHORIZATION. The execution and delivery of the Agreement of Merger
and the consummation of the transactions contemplated thereby will have been
duly authorized by the Board of Directors of Interim Bank. The Agreement of
Merger will constitute a legal, valid and binding agreement of Interim Bank in
accordance with its respective terms, except as the enforceability thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
other laws of general application relating to or affecting enforcement of
creditors rights and the application of equitable principles in any action,
legal or equitable. Interim Bank will have full corporate power and authority to
perform its obligations under the Agreement of Merger and the transactions
contemplated thereby.
7.16 NO CONFLICTS; DEFAULTS. The execution, delivery and performance of
the Agreement of Merger and the consummation of the transactions contemplated
therein, and compliance by Interim Bank with any provision thereof will not (a)
conflict with or result in a breach of, or default or loss of any benefit under,
any provision of its Charter Documents or, except as set forth in Exhibit 7.16
any material agreement, instrument or obligation to which Interim Bank will
become a party or by which the property of Interim Bank will become bound or
give any other party to any such agreement, instrument or obligation the right
to terminate or modify any term thereof; (b) except for the prior approval of
the FRB, the FDIC and the Commissioner and as set forth in Exhibit 7.16, require
any Consents; (c) result in the creation or imposition of any Encumbrance on any
of the properties or assets of Interim Bank; or (d) violate the Charter
Documents or any Rules to which Interim Bank is subject.
7.17 ACCURACY OF INFORMATION FURNISHED. Except as to any statements or
information which shall include projections or forecasts, none of the statements
or information made or contained in any of the covenants, representations or
warranties of the Company set forth in this Agreement or in any of the
schedules, exhibits, lists, certificates or other documents furnished herewith
contains any untrue statement of a material fact required to be stated herein or
therein or necessary to make the statements or information contained herein or
therein, in light of the circumstances in which they were made, not misleading.
As to any such information or statements which include projections or forecast,
such information or statements are based upon assumptions believed by the
Company to be reasonable. The Company shall further amend or supplement the
schedules as of the Closing Date if necessary to reflect any additional changes
in the status of the Company.
7.18 1999 STOCK OPTION PLAN. Prior to or following the completion of the
transactions contemplated herein, the Company will use its best efforts to
establish the Company's 1999 Stock Option Plan for the benefit of directors,
officers and key employees of the Company and the Bank.
7.19 FURTHER ASSURANCES. The Company knows of no reason that the
transaction would not consummate. Without the prior approval of the Bank, the
Company will not enter into any further agreements to acquire another financial
institution that would adversely affect the transaction consummated by this
Agreement.
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7.20 FINANCIAL STATEMENTS. In the event the following have not been
previously delivered prior to the date hereof, the Company will deliver to the
Bank a copy of the audited Statements of Financial Condition of the Company as
of December 31, 1998; Statements of Earnings, Stockholders' Equity and Cash
Flows for the year ended December 31, 1998, the related notes and related
opinions thereon of Arthur Andersen LLP certified public accountants, with
respect to such financial statements (the "1998 Audited Company Financial
Statements"). The Company will furnish the Bank with a true and correct copy of
the management letter or other letter delivered to the Company by Arthur
Andersen LLP in connection with the 1998 Audited Company Financial Statements
relating to any review of the internal controls of the Company by Arthur
Andersen LLP. The 1998 Audited Company Financial Statements will: (i) present
fairly the financial condition and results of operations of the Company as of
and for the dates or periods covered thereby in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved; (ii) be based on the books and records of the Company; (iii) contain
and reflect reserves for all material accrued liabilities and for all reasonably
anticipated losses, and set forth adequate reserves for loan losses and other
contingencies, to the extent required by GAAP; and (iv) none of the 1998 Audited
Company Financial Statements will contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
contained therein not misleading under GAAP.
ARTICLE VIII
FURTHER COVENANTS OF THE COMPANY AND THE BANK
The parties covenant and agree as follows:
8.1 S-4, PROXY STATEMENT AND REGISTRATION STATEMENT FOR THE OFFERING.
(a) As promptly as practicable, the Company and the Bank shall use their
best efforts to prepare and file the S-4 in which the Proxy Statement will be
included as a prospectus, and the Registration Statement for the Offering with
the SEC and any other applicable Governmental Entity. The Bank agrees to provide
the information necessary for inclusion in the S-4, the Proxy Statement and the
Registration Statement for the Offering. The Company will use its best effort to
have the S-4 and the Proxy Statement declared effective under the Securities Act
as promptly as practicable after it is filed and to satisfy the requirements of
the SEC and any other Governmental Entity.
(b) After the date of the filing of the S-4 and the Registration Statement
for the Offering with the SEC and any other Governmental Entity, each of the
Parties agrees to promptly notify the other of and to correct any information
furnished by such party that shall have become false or misleading in any
material respect and to cooperate with the other to take all steps necessary to
file with the SEC and any other Governmental Entity and have declared effective
or cleared by the Commissioner and any other Governmental Entity any amendment
or supplement to the S-4 and the Registration Statement for the Offering so as
to correct such information and to cause the S-4 and the Registration Statement
for the Offering as so corrected to be disseminated to the shareholders of the
Company and the Bank to the extent required by applicable Rules. All documents
that the Company files with the SEC or any other Governmental Entity in
connection with this Agreement will comply as to form in all material respects
with the provisions of applicable Rules.
(c) The Company shall take all required action with appropriate Governmental
Entities under state securities or blue sky laws in connection with the issuance
of Company Stock and Warrants pursuant to this Agreement.
(d) The Bank and the Company, through their respective Board of Directors,
will recommend that its shareholders approve the transactions contemplated
hereby, and both parties will use their best efforts to obtain the affirmative
votes of the holders of the largest possible percentage of its outstanding
Common Stock, so long as it is consistent with its fiduciary obligation to do
so.
8.2 SECURITIES LAWS. In obtaining the consent of its shareholders of the
matters described in Section 8.1 hereof, the Company, the Bank and their
respective officers, directors and controlling shareholders will, in all
respects, comply with the Rules and regulations of the SEC and any other
Governmental Entity applicable to commercial banks, other applicable provisions
of the United States Code, the Rules and regulations of the SEC and the
securities laws of all states in which shareholders of the parties reside as
applicable.
Without in any way limiting the generality of the foregoing, the Company and
the Bank agree that the Notice of Meeting, Proxy Statement submitted in
connection therewith, form of Proxy and other solicitation materials that
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will be used in soliciting the aforesaid shareholder approvals and
authorizations and the Registration Statement for the offering:
(i) will be filed with, and not be used before the same are cleared for
use by the SEC, other Governmental Entities having jurisdiction over the
Company and the Bank, and this transaction, and the securities
administrators of all states in which their respective shareholders reside
as applicable;
(ii) will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading, except that neither party warrants
the accuracy or completeness of any information contained therein which is
furnished to it by the other relating to the business, assets, properties,
financial condition or management of the other or any corporation or person
affiliated or contractually obligated to become affiliated therewith,
whether by merger, acquisition of assets or otherwise;
(iii) the Company and the Bank will use their best efforts to obtain
clearance by all appropriate Governmental Entities for the use of its Notice
of Meeting, Proxy Statement, form of Proxy and other solicitation materials.
Each party will consult and cooperate with the other in the preparation of
all such proxy solicitation materials for the Bank Shareholders' Meeting and
the Company's Shareholders Meeting, and the Bank and the Company agree not
to transmit any proxy materials without the prior consent of the other party
and its counsel; and
(iv) the Company and the Bank shall each covenant and agree and each pay
their own expenses in connection with the preparation and filing, including
attorney fees, of the Notice of Meeting, Proxy Statement, form of Proxy and
other solicitation materials.
8.3 MAILING OF PROXY STATEMENT. The Bank and the Company each covenant and
agree that they will use their best efforts and shall cooperate with each other
in the preparation, filing and mailing of the Proxy Statement as soon as it is
reasonably practicable and is permitted under applicable law; it being the
intention of the Company and the Bank to include their December 31, 1998
financial statements and information, and any necessary quarterly financial
statements and information, in the financial disclosures contained in the Proxy
Statement.
8.4 MATERIALS TO BE FURNISHED PRIOR TO MAILING DATES. On or prior to the
mailing date of the Proxy Statement ("Bank Mailing Date"), the Bank (a) shall
use its best efforts to cause an appropriate firm that shall be selected by the
Bank in its discretion, subject to the reasonable approval of the Company, to
deliver to the Company a copy of any letter to the Board of Directors of Bank,
dated as of a date not more than five days prior to such mailing date, in form
and substance satisfactory to the Company to the effect set forth in Section
10.4 hereof, (b) shall have received a letter by a date not more than five days
prior to the Bank Mailing Date, to the effect that the consideration to be
received by the shareholders of the Bank in the Merger is fair from a financial
point of view, and (c) shall have received a letter by a date not more than five
days prior to the Bank Mailing Date, of the valuation of dissenters rights
shares as described in Section 1300.
8.5 REGULATORY APPROVALS. The Bank and the Company each agree to use their
best efforts to provide promptly such information and reasonable assistance as
may be requested by the other party to this Agreement and to take promptly such
other actions as shall be necessary or appropriate in order to consummate the
transactions contemplated hereby. Without limiting the foregoing, the Bank and
the Company will each (a) prepare, submit and file, or cause to be prepared,
submitted and filed, all applications for all authorizations, consents, orders
and approvals of federal, state, local and other Governmental Entities and
officials necessary under applicable law for the performance of its obligations
pursuant to this Agreement and the consummation of the transactions contemplated
hereby, (b) use their best efforts to obtain all such authorizations, consents,
orders and approvals as expeditiously as possible in accordance with the terms
of this Agreement, and (c) cooperate fully with each other in promptly seeking
to obtain such authorizations, consents, orders and approvals, including without
limitation, in each case, the approval of the FRB, the FDIC and the
Commissioner. The Bank and the Company each agree to promptly provide the other
with copies of all applications referred to in clause (a) above and copies of
all written communications, letters, reports or other documents delivered to or
received from any Governmental Entity, and copies of all memoranda relating to
discussions with such Governmental Entity, if any, with respect to the Merger,
except that the Company and the Bank shall not be required to provide the other
with any of the foregoing documents submitted or received on a confidential or
privileged basis or which incorporate confidential information relating to other
financial institutions. The Parties agree that through the Effective Time of the
Merger, each of its reports, registration statements and other filings required
to be filed with any applicable
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Governmental Entity will comply in all material respects with the applicable
statutes, rules and regulations enforced or promulgated by the Governmental
Entity with which it will be filed and none will contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Any financial statement contained in any
such report, registration statement or other filing that is intended to
represent the financial position of the Party to which it relates will fairly
present the financial position of such Party and will be prepared in accordance
with GAAP or RAP consistently applied during the periods involved.
8.6 CORPORATE GOVERNANCE.
(a) Prior to the Effective Time, the Bank shall take all necessary steps to
effect the Bank Corporate Governance Changes at the Effective Time.
(b) Prior to the Effective Time, the Company shall take all necessary steps
to effect the Company Corporate Governance Changes at the Effective Time.
8.7 NASDAQ. Prior to or at the Effective Time, the Company shall take all
necessary steps to list the Company's Stock on the Nasdaq National Market System
at the Effective Time of the Merger.
ARTICLE IX
CONDITIONS PRECEDENT TO THE CONTEMPLATED TRANSACTIONS
The obligations of the Parties to consummate the transactions as provided
for herein are subject to the fulfillment, at or prior to the Effective Time, of
the following conditions:
9.1 PERMITS AND APPROVALS. Appropriate permits or approvals from the
Commissioner, the FRB, the FDIC and/or any other Governmental Entities which are
necessary to carry out the transactions contemplated in this Agreement, shall
have been received, the United States Department of Justice shall not have taken
any adverse action within the period allowed under 12 U.S.C. Section 1828(c)(6),
and all other statutory or regulatory requirements for the valid completion of
the transactions contemplated hereby shall have been satisfied. Said permits and
approvals shall include, but shall not be limited to, the following:
(i) prior written approval from the Commissioner pursuant to the CFC,
the FDIC pursuant to 12 U.S.C. Section 1828(c)(2) and the FRB pursuant to
the Federal Reserve Act and the BHC Act;
(ii) to the extent required by applicable Rule, all Consents of any
Governmental Entity, including, without limitation, those of the FRB, the
FDIC and the Commissioner, shall have been obtained, granted or waived for
organization of Interim Bank and the Merger, and all applicable waiting
periods under all rules shall have expired; and
(iii) all approvals, orders and/or permits necessary for the Offering and
any other necessary regulatory approvals and the issuance of approvals or
assurances from the Commissioner, the FRB, the FDIC, the SEC, any blue sky
authority and any other necessary Governmental Entity having authority over
the Merger that the approval of the Merger will be forthcoming that are
satisfactory to the Company, that would allow the Company to commence the
marketing of the Offering by the Company to complete the Merger as described
in this Agreement.
9.2 ABSENCE OF LITIGATION. On the Closing Date and at the Effective Time:
(i) there shall be no action pending before any court of competent jurisdiction
in which any injunction is sought by any Governmental Entity against the
transactions contemplated hereby; and (ii) there shall be in effect no order,
writ, injunction or decree of any court or Governmental Entity prohibiting the
consummation of any of the transactions contemplated hereby.
9.3 SHAREHOLDER APPROVAL. The Agreement, the Merger, and the other
transactions contemplated hereby, shall have been approved by the holders of at
least two-thirds ( 2/3) of the issued and outstanding shares of Bank Stock
entitled to vote and the requisite approval of the Company as the sole
shareholder of Interim Bank as soon as practicable. Any and all other action
required by the shareholders of the Bank or the Company to authorize or effect
the transactions called for herein shall have been duly and validly taken.
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9.4 STOCK OFFERING. An election to sell shares in the Offering shall have
been made, and proper documentation submitted, so that, after application of the
proration provisions of Section 2.1(b), if necessary, 60% of Company Stock
received by holders of Bank Stock are available for sale in the Offering. The
Company shall have entered into a firm commitment underwriting agreement for the
Offering (at an offering price of at least $15.00 per share by Selling
Shareholders of 60% of the Bank Stock), and all conditions to the consummation
of the Offering contained in the Underwriting Agreement, other than the
completion of the mergers of Interim Valley Bank with the Bank and of PCBG
Merger Corporation with The Bank of Hemet, shall have been satisfied or waived,
and the Company and the Bank shall have received evidence thereof reasonably
satisfactory to them.
9.5 S-1, S-4 AND PROXY STATEMENT. The S-4, Proxy Statement and the S-1
shall have been declared effective by the SEC, the Commissioner, and any other
Governmental Entity, as appropriate, and shall not be the subject of any stop
order or proceeding seeking or threatening a stop order. The Company shall have
received all state securities or "Blue Sky" permits and other authorization
necessary to issue the Company Stock in the Offering and the S-4 in order to
consummate the Merger.
9.6 NASDAQ. The Company's Common Stock will be listed on the Nasdaq
National Market System at the Effective Time.
9.7 SEVERANCE POLICY. The Bank and the Company have agreed to a severance
policy as set forth on Exhibit 9.7.
9.8 TAX OPINION. The Company shall have received from its accountants an
opinion for the benefit of the holders of Bank Stock reasonably satisfactory to
the Company and the Bank to the effect that the Merger shall not result in the
recognition of gain or loss for federal income tax purposes to the Company or
the Bank, the issuance of Company Stock or Warrants shall not result in the
recognition of gain or loss by the holders of Bank Stock who receive Company
Stock and Warrants in connection with the Merger, and shall state that the
holding period for Company Stock for purposes of capital gains taxation, shall
include the period during which Bank Stock was held. This opinion shall be dated
prior to the date the Proxy Statement is first mailed to the shareholders of the
Company and the Bank and such opinions shall not have been withdrawn or modified
in any respect.
ARTICLE X
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE BANK
All of the obligations of the Bank to consummate the transactions
contemplated herein shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions, or their waiver by resolution of the
Board of Directors of the Bank:
10.1 LEGAL OPINION. The Bank shall have received the opinion of Knecht &
Hansen, acting as counsel for the Company, dated as of the Closing Date, in
substantially the form of EXHIBIT 10.1.
10.2 CERTIFICATE OF NO DEFAULT. All covenants, terms and conditions of
this Agreement to be complied with and performed by the Company at or before the
Closing Date shall have been complied with and performed in all material
respects and the representations and warranties of the Company contained in
Article V hereof shall have been true and correct in all material respects as of
the Effective Time, with the same effect as though such representations and
warranties had been made on and as of the Effective Time, except as otherwise
specified in, or permitted or contemplated by, this Agreement. The Company shall
have delivered to the Bank, a certificate dated the Closing Date, signed by the
President, certifying the fulfillment of this condition.
10.3 CLOSING DOCUMENTS. The Company shall have delivered to the Bank all
items required by the Bank pursuant to Section 3.3, all of which documents shall
be properly executed and, if required by the Bank, acknowledged before a notary.
10.4 EFFECTIVE S-4 AND PROXY STATEMENT. The S-4 and the Proxy Statement
shall have been approved or otherwise become effective and no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by any Governmental Entity at the
Closing Date.
10.5 REGULATORY APPROVALS AND RELATED CONDITIONS. Any and all governmental
and regulatory approvals and Consents referred to in Article IX and any other
section of this Agreement shall have been granted without the imposition of
conditions, or with conditions subject to the approval of the Company and the
Bank, that are or
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would have become applicable to the Company or the Surviving Bank, and that the
Company reasonably and in good faith concludes would materially adversely affect
the financial condition or operations of the Company or the Surviving Bank, or
otherwise would be materially burdensome; provided, however, that conditions or
requirements which are imposed on purchasers or acquired institutions by
Governmental Entities in comparable transactions shall not be deemed to be a
basis for excuse of performance under this Agreement. All actions necessary to
authorize the execution, delivery and performance of the Agreement by the
Company and consummation of the Merger by the Company and Interim Bank shall
have been duly and validly taken by the Board of Directors of the Company and
Interim Bank.
10.6 THIRD PARTY CONSENTS. The Company shall have obtained all consents of
other parties to the Company's material mortgages, notes, leases, franchises,
agreements, licenses and permits as may be necessary to permit the transactions
contemplated herein to be consummated, without default, acceleration, breach or
loss of rights or benefits thereunder.
10.7 ABSENCE OF CERTAIN CHANGES. As of the Closing Date there shall not
exist any of the following:
(i) any change(s) in the financial condition or results of operation of
the Company since inception which individually is or in the aggregate are
materially adverse to the Company; or
(ii) any damage, destruction, loss or event materially and adversely
affecting the properties, business or prospects of the Company on a
consolidated basis.
10.8 VALIDITY OF TRANSACTIONS. The validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to the Bank
hereunder, shall be subject to the approval, to be reasonably exercised, of
counsel for the Bank.
10.9 FAIRNESS OPINION. Prior to solicitation of shareholder approval, the
Bank shall have received an opinion pursuant to Section 8.4 confirming the
fairness of the terms of the Merger from a financial perspective, and such
opinion shall not have been withdrawn prior to the mailing date of the Proxy
Statement.
10.10 NASDAQ LISTING. The shares of Company Stock issuable pursuant to
this transaction shall have been duly authorized for listing, subject to notice
of issuance, on the Nasdaq National Market System.
ARTICLE XI
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY
All of the obligations of the Company to consummate the transactions
contemplated herein shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions, or their waiver by resolution of the
Board of Directors of the Company, as appropriate:
11.1 LEGAL OPINION. The Company shall have received the opinion of Aldrich
& Bonnefin acting as counsel for the Bank, dated as of the Closing Date, in
substantially the form of Exhibit 11.1.
11.2 CERTIFICATE OF NO DEFAULT. All covenants, terms and conditions of
this Agreement to be complied with and performed by the Bank at or before the
Closing Date shall have been complied with and performed in all material
respects and the representations and warranties of the Bank contained in Article
IV hereof shall have been true and correct in all material respects as of the
Effective Time, with the same effect as though such representations and
warranties had been made on and as of the Effective Time, except as otherwise
specified in, or permitted or contemplated by, this Agreement. The Bank shall
have delivered to the Company a certificate, dated the Closing Date, signed by
the President and Chief Financial Officer of the Bank, certifying the
fulfillment of this condition.
11.3 CLOSING DOCUMENTS. The Bank shall have delivered to the Company all
items required by the Company pursuant to Section 3.3, all of which documents
shall be properly executed and, if required by the Company, acknowledged before
a notary.
11.4 EFFECTIVE S-1, S-4 AND PROXY STATEMENT. The S-1, S-4 and the Proxy
Statement shall have become effective and no stop order suspending the
effectiveness thereof shall be in effect and no proceedings therefor shall be
pending or threatened by the SEC, FDIC, the Commissioner, the FRB or any blue
sky authority at the Closing Date.
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11.5 BANK DISSENTING SHAREHOLDERS AGAINST MERGER. The Bank's shareholders
voting against the Merger or the Bank's shareholders giving notice in writing to
the Bank at or before the Bank's meeting that such shareholder dissents from the
Merger, on a combined basis, shall hold not more than ten percent (10%) of the
outstanding shares of the Bank.
11.6 REGULATORY APPROVALS AND RELATED CONDITIONS. Any and all governmental
and regulatory approvals and Consents referred to in Article IX and any other
section of this Agreement shall have been granted without the imposition of
conditions, or with conditions subject to the approval of the Company, that are
or would have become applicable to the Company or the Surviving Bank and that
the Company reasonably and in good faith concludes would materially adversely
affect the financial condition or operations of the Company or the Surviving
Bank, or otherwise would be materially burdensome; provided, however, that
conditions or requirements which are imposed on purchasers or acquired
institutions by Governmental Entities in comparable transactions shall not be
deemed to be a basis for excuse of performance under this Agreement.
11.7 THIRD PARTY CONSENTS. The Company shall have obtained all consents of
other parties to the Company's material mortgages, notes, leases, franchises,
agreements, licenses and permits as may be necessary to permit the transactions
contemplated herein to be consummated, without default, acceleration, breach or
loss of rights or benefits thereunder.
11.8 ABSENCE OF CERTAIN CHANGES. As of the Closing Date, there shall not
exist any of the following: (i) any Material Adverse Change as defined in
Section 4.17, (ii) any damage, destruction, loss or event materially and
adversely affecting the properties, business or prospects of the Bank; or (iii)
any material adverse change in the deposit structure of the Bank from July 30,
1998 to the Closing Date.
11.9 BANK STOCK OPTION PLAN; AND OFFICERS AND EMPLOYEES. The Bank shall
have caused the Bank Stock Option Plan to be terminated as of or prior to the
Effective Time of the Merger and shall have obtained the consents or agreements
specified in, and otherwise shall have complied with the terms of, Section 6.10.
Pursuant to California Law and its employment policies and practices, the Bank
shall have complied with Section 6.11 of this Agreement as of the Effective Time
of the Merger.
11.10 DIRECTOR AGREEMENTS. Pursuant to Section 2.9, concurrently with the
execution of this Agreement, each director of the Bank shall enter into separate
agreements with the Company in the form attached hereto as EXHIBIT "B".
11.11 TERMINATION OF CONTRACTS. Except as otherwise directed by the
Company, the Bank shall have terminated all contracts, commitments or
understandings as defined in Section 4.12(v) for the future purchase of
materials, supplies, services, merchandise or equipment, the price of which
exceeds $10,000, and any expense incurred in connection with such terminations
shall have been charged in full to the Bank prior the last day of the month
preceding the Closing Date which have been designated by the Company and agreed
to by the Bank. Before the Determination Date prior to the Closing Date, the
Bank shall have paid, or set-up adequate accruals for the payment of all
material expenses that the Bank shall be liable for up to the Closing Date,
including, but not limited to, all accounting and attorney fees in connection
with this Agreement.
11.12 VALIDITY OF TRANSACTIONS. The validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to the Company
hereunder, shall be subject to the approval, to be reasonably exercised, of
counsel for the Company.
11.13 EMPLOYEE BENEFIT PLANS. Upon the agreement of the Company and the
Bank, the Bank's Employee Plans, programs and arrangements, have been terminated
on terms and conditions satisfactory to the Parties, and all benefits payable
under such plans, programs and arrangements shall be accrued prior to the
Closing Date.
11.14 FAIRNESS OPINION. Prior to commencement of the marketing of the
Offering described in Sections 9.1(iii) and 9.4, the Company in its discretion
may receive an opinion concerning the fairness of the terms of the Merger to the
shareholders of the Company from a financial point of view.
11.15 STOCK OFFERING. The Bank shall have provided such information as
deemed reasonably necessary by the Company in connection with the sale of stock
including but not limited to, certificates of its officers and directors
attesting to, among other things, the truthfulness and correctness of the
representations contained in this Agreement, opinions of legal counsel and
comfort letters from the Bank's accountants.
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11.16 S-4, THE PROXY STATEMENT AND REGULATORY APPLICATIONS. The Bank shall
have provided such information as deemed reasonably necessary by the Company in
connection with the S-4 and the Proxy Statement and any other regulatory
applications including but not limited to, certificates of its officers and
directors attesting to, among other things, the truthfulness and correctness of
the representations contained in this Agreement, opinions of legal counsel and
comfort letters from the Bank's accountants.
11.17 BLUE SKY MATTERS. The issuance of the Company Stock in the Offering
and the S-4 shall have been qualified or registered with the appropriate
Governmental Entity under state securities or Blue Sky laws, and such
qualification or registrations are in effect on the Closing Date.
11.18 PROFESSIONAL FEES. The Bank's costs and expenses in connection with
the transaction contemplated by this Agreement, including investment banker,
accounting, attorney and any other costs and expenses, shall not exceed the
amount that would be reasonable and customary for a transaction as described in
this Agreement. Of these expenses, the accounting and attorney fees and
expenses, and related costs and expenses thereto incurred from May 1, 1998
through the Closing Date, of the Bank shall not exceed $175,000 in the
aggregate.
11.19 YEAR 2000. The Bank shall certify that the Bank is making
satisfactory progress for compliance with Year 2000 safety and soundness issues
with respect to its own computer systems, and the computer systems of its
vendors and customers.
ARTICLE XII
DISSENTING SHAREHOLDERS OF BANK
Any shareholder of the Bank who lawfully dissents shall be entitled to
receive cash for the fair market value of his or her shares determined in
accordance with Section 1300.
ARTICLE XIII
EXPENSES
13.1 EXPENSES. All fees and Expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the Party incurring
such Expenses. For the purposes of this Agreement, "Expenses" shall include, but
not be limited to, all expenses relating to such transactions including, legal,
accounting, investment banking fees and cost reimbursements, fees and costs of
consultants, costs of proxy statements and shareholder action on the Merger, and
if accrued according to GAAP as of the Determination Date by Bank, and provided
such expenses would be properly tax deductible, the net after tax effect of
severance payments and employee benefits under employment contracts and employee
benefit plans reflected in Exhibits 4.11(a), (c), (j) and (m), including but not
limited to accrual of any and all unfunded or accelerated obligations
thereunder.
ARTICLE XIV
TERMINATION
14.1 TERMINATION OF THIS AGREEMENT.
(a) Notwithstanding that this Agreement and the Agreement of Merger may have
already been approved by shareholders of one or both of constituent corporations
to the transactions contemplated by this Agreement, this Agreement may be
terminated prior to the Effective Time of the Merger:
(i) by mutual agreement of the parties, in writing;
(ii) by (A) the Company immediately upon the expiration of 30 days from
the date that the Company has given notice to the Bank of a material breach
or default by the Bank in the performance of any covenant, agreement,
representation, warranty, duty or obligation hereunder or (B) the Bank
immediately upon the expiration of 30 days from the date that the Bank has
given notice to the Company of a breach or default by the Company in the
performance of any covenant, agreement, representation, warranty, duty or
obligation hereunder, except for Sections 5.18 and 7.14; and
(iii) by the Company or the Bank if any Governmental Entity denies or
refuses to grant the approvals, consents or authorizations required to be
obtained, or if any Governmental Entity approves the transaction
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covered and contemplated by this Agreement upon conditions not reasonably
acceptable to the Company, in order to consummate the transactions covered
and contemplated by this Agreement. If any regulatory application filed
pursuant to this Agreement hereof should be finally denied or disapproved by
the respective Governmental Entity, then this Agreement thereupon shall be
deemed terminated and canceled; provided, however, that a request for
additional information or undertaking by the Company, as a condition for
approval, shall not be deemed to be a denial or disapproval so long as the
Company diligently provides the requested information or undertaking. In the
event an application is denied pending an appeal, petition for review, or
similar such act on the part of the Company (hereinafter referred to as the
"appeal") then the application will be deemed denied unless the Company
prepares and timely files such appeal and continues the appellate process
for purposes of obtaining the necessary approval within 45 days thereafter.
(iv) by the Company or the Bank if (A) the Board of Directors of the
Bank approves a transaction (or the Bank executes a letter of intent or
other agreement) pursuant to which any person or entity or related group of
persons or entities acquires, directly or indirectly, record or beneficial
ownership (as defined in Rule 13d3 promulgated by the SEC pursuant to the
Exchange Act) or control of 25% or more of the outstanding shares of Bank
Stock or other securities of the Bank; (B) any person or entity or related
group of persons or entities seeks to acquire 25% or more of the outstanding
shares of Bank Stock by tender offer or otherwise, and the Board of
Directors of the Bank does not advise the Bank's shareholders that the
Bank's Board of Directors does not support such tender offer or acquisition
and that it supports the Merger; (C) if the Bank violates its covenant
pursuant to Section 6.2 (xxiii) and (xxiv); (D) the Merger does not receive
the requisite approval of the Bank's shareholders; or (E) the Bank engages
in an Alternative Transaction pursuant to the terms of Section 6.5;
(v) by the Company or the Bank immediately upon the expiration of 15
days from the date that the Bank or the Company has given notice to the
other Party of a default by the Company in the performance of Sections 5.18
and 7.14; or
(vi) by the Company or the Bank by June 28, 1999, unless regulatory
approvals and/or completion of the Offering is relatively imminent and is
expected to be completed within 30 days of July 2, 1999, in which case the
date in this subsection shall be automatically extended for up to an
additional 30 days.
(b) Notwithstanding that this Agreement and the Agreement of Merger may have
already been approved by shareholders of one or both of the constituent
corporations to the Merger, this Agreement shall be terminated prior to the
Effective Time of the Merger if any conditions specified in Articles IX, X or XI
have not been satisfied or waived in writing by the party authorized to waive
such conditions unless mutually extended by the parties hereto.
(c) Regulatory Enforcement Matters. In the event that Bank or the Company or
any of their respective subsidiaries shall, after July 30, 1998, become a party
or subject to any new or amended written agreement, memorandum of understanding,
cease and desist order, imposition of civil money penalties or other regulatory
enforcement action or proceeding with any federal or state agency charged with
the supervision or regulation of banks or bank holding companies which is
material to the Bank or the Company and their respective subsidiaries taken as a
whole, then either the Company or the Bank may terminate this Agreement.
(d) (reserved)
(e) Notwithstanding anything to the contrary contained herein:
(i) If this Agreement is terminated by the Bank before the Closing Date
pursuant to Sections 14.1(a)(ii)(B), (not including Sections 5.18 or 7.14)
hereof, the Company shall pay to the Bank, as reasonable and full liquidated
damages and reasonable compensation for the loss sustained thereby and not
as a penalty or forfeiture, the direct expenses incurred by the Bank in
connection with the transaction contemplated by this Agreement, plus 50% of
such expenses, up to a maximum of $500,000, within ten (10) business days of
such termination;
(ii) If this Agreement is terminated by the Company before the Closing
Date pursuant to Sections 14.1(a)(ii)(A) hereof, the Bank shall pay to the
Company, as reasonable and full liquidated damages and reasonable
compensation for the loss sustained thereby, and not as a penalty or
forfeiture, the direct expenses incurred by the Company in connection with
the transaction contemplated by this Agreement, plus 50% of such expenses,
up to a maximum of $500,000 within ten (10) business days of such
termination; and
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(iii) If this Agreement is terminated by the Company before the Closing
pursuant to Section 14.1(a)(iv)(C) or (D) hereof, the Bank will pay to the
Company, as reasonable and full liquidated damages and reasonable
compensation for the loss sustained thereby, and not as a penalty or
forfeiture, the direct expenses incurred by the Company in connection with
the transaction contemplated by this Agreement, plus 50% of such expenses,
within ten (10) business days of such termination, except that if the
Agreement is terminated by the Company pursuant to Section 14.1(a)(iv)(A),
(B) or (E) hereof, the Bank will pay to the Company, as reasonable and full
liquidated damages and reasonable compensation for the loss sustained
thereby, and not as a penalty or forfeiture, $1,750,000 within ten (10)
business days of such termination.
(iv) If this Agreement is terminated by the Company before the Closing
as a result of a default by the Company in the performance of Sections 5.18
and 7.14, no costs, expenses, fees or other liability or damages will be
accrued or incurred by the Company.
ARTICLE XV
GENERAL PROVISIONS
15.1 CONFIDENTIALITY. All Confidential Information disclosed heretofore or
hereafter by either Party to this Agreement to the other Party to this Agreement
shall be kept confidential by such other Party and shall not be used by such
other Party otherwise than as herein contemplated, except to the extent that (a)
it is necessary or appropriate to disclose to the Bank or the Company or as may
otherwise be required by Rule (any disclosure of Confidential Information to a
Governmental Entity shall be accompanied by a request that such Governmental
Entity preserve the confidentiality of such Confidential Information); or (b) to
the extent such duty as to confidentiality is waived by the other Party. Such
obligation as to confidentiality and nonuse shall survive the termination of
this Agreement pursuant to Article XIV. In the event of such termination and on
request of the other Party, such Party shall use all reasonable efforts to (y)
return to the other Party all documents (and reproductions thereof) received
from such other Party that contain Confidential Information (and, in the case of
reproductions, all such reproductions made by the receiving Party); and (z)
destroy the originals and all copies of any analyses, computations, studies or
other documents prepared for the internal use of such Party that include
Confidential Information, unless otherwise advised by counsel in connection with
any controversy under the Agreement.
15.2 PUBLICITY. The Parties shall coordinate all publicity relating to the
transactions contemplated by this Agreement, and no Party shall issue any press
release, publicity statement, shareholder communication or other public notice
relating to this Agreement or any of the transactions contemplated hereby
without obtaining the prior consent of the other Party except to the extent that
independent legal counsel to the Party, as the case may be, shall deliver a
written opinion to the Party that a particular action is required by applicable
Rules. The Parties hereby agree that all public statements after the initial
press release announcing this Agreement referring to the Bank shall be made by
Mr. N. Douglas Mills, and all public statements made after the initial press
release announcing this Agreement referring to the Company shall be made by Mr.
E. Lynn Caswell, and both Parties agree that all public statements shall be made
by mutual agreement.
15.3 INDEMNIFICATION.
(a) The Bank agrees to defend, indemnify and hold harmless the Company, its
officers and directors, attorneys, accountants and each person who controls the
Company within the meaning of the Securities Act from and against any costs,
damages, liabilities and expenses of any nature, insofar as any such costs,
damages, liabilities and expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Proxy Statement, the Company's Offering disclosure documents or any amendments
or supplements thereto, or arise out of or are based solely upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading based upon
information with respect to the Bank furnished to the Company by or on behalf of
the Bank specifically for use therein; provided, however, that the Bank shall
not be liable in any such case to the extent that any such cost, damage,
liability or expense arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in the Proxy
Statement, the Company's Offering disclosure documents or amendments or
supplements thereto, in reliance upon and in conformity with information with
respect to the Company furnished to the Bank by or on behalf of the Company
specifically for use therein.
(b) The Company agrees to defend indemnify and hold harmless the Bank, its
officers and directors, attorneys, accountants and each person who controls the
Bank within the meaning of the Securities Act from and
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against any costs, damages, liabilities and expenses of any nature, insofar as
any such costs, damages, liabilities or expenses arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the Proxy Statement, the Company's Offering disclosure documents or any
amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make statements therein not misleading based
solely upon information with respect to the Company and its subsidiaries
furnished to the Bank by or on behalf of the Company and its subsidiaries
specifically for use therein; provided, however, that the Company shall not be
liable in any such case to the extent that any such cost, damage, liability or
expense arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in the Proxy Statement, the
Company's Offering disclosure documents or amendments or supplements thereto, in
reliance upon and in conformity with information with respect to the Bank
furnished to the Company by or on behalf of the Bank specifically for use
therein.
(c) Promptly after receipt by the Party to be indemnified pursuant to this
section ("Indemnified Party") of notice of (i) any claim or (ii) the
commencement of any action or proceeding, Indemnified Party will give the other
Party "(Indemnifying Party") written notice of such claim or the commencement of
such action or proceeding. Indemnifying Party shall have the right, at its
option, to compromise or defend, by its own counsel, any such matter involving
Indemnified Party's asserted liability, at the expense of the Indemnifying
Party. In the event that Indemnifying Party shall undertake to compromise or
defend any such asserted liability, it shall promptly notify Indemnified Party
of its intention to do so, and Indemnified Party agrees to cooperate fully with
Indemnifying Party and its counsel in the compromise of, or defense against, any
such asserted liability. In any event, Indemnifying Party shall have the right
to participate in the defense of such asserted liability. In any event
Indemnifying Party shall have the right to participate in the defense of such
asserted liability.
15.4 NOTICES. All notices, demands or other communications hereunder shall
be in writing and be made by (a) hand delivery; (b) overnight mail; (c) United
States mail, first class, certified or registered, postage prepaid; or (d)
facsimile transmission, and shall be deemed to have been duly given (i) on the
date of service if delivered by hand or facsimile transmission (provided that
facsimile notices are also mailed by United States mail, first class, certified
or registered, postage prepaid); (ii) on the next day if delivered by overnight
mail or delivery service; or (iii) 72 hours after mailing if mailed by United
States mail, first class, certified or registered, postage prepaid, and properly
addressed as follows:
(a) If to the Bank:
N. Douglas Mills, President and Chief Executive Officer
Valley Bank
24010 Sunnymead Drive
Moreno Valley, California 92555-0188
Telecopier No.: (909) 242-1903
With a copy to:
Mark E. Aldrich, Esq.
Aldrich & Bonnefin
18200 Von Karman Avenue, Suite 730
Irvine, California 92612-1029
Telecopier No.: (949) 474-0617
(b) If to the Company:
Mr. E. Lynn Caswell, Chairman and CEO
Pacific Community Banking Group
23332 Mill Creek Drive, Suite 230
Laguna Hills, California 92653
Telecopier No.: (949) 458-2086
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With a copy to:
Loren P. Hansen, Esquire
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, California 92660
Telecopier No.: (949) 851-1732
The persons or addresses to which mailings or deliveries shall be made may
change from time to time by notice given pursuant to the provisions of this
Section 15.4.
15.5 SUCCESSORS AND ASSIGNS. Subject to Section 7.12 and 15.3, all terms
and provisions of this Agreement shall be binding upon and inure to the benefit
of the Parties hereto and their respective transferees, successors and assigns;
provided, however, that, except as otherwise contemplated herein, this Agreement
and all rights, privileges, duties and obligations of the Parties hereto may not
be assigned or delegated by any party hereto without the prior written consent
of the other Party to this Agreement and any purported assignment in violation
of this Section 15.5 shall be null and void.
15.6 THIRD PARTY BENEFICIARIES. Except as provided in Section 7.12, each
party hereto intends that this Agreement shall not benefit, or create any right
or cause of action in or on behalf of, any Person other than the Parties hereto.
15.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
15.8 GOVERNING LAW. This Agreement is made and entered into in the State
of California and the laws of the State of California shall govern the validity
and interpretation hereof and the performance of the parties hereto of their
respective duties and obligations hereunder.
15.9 CAPTIONS. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement.
15.10 WAIVER AND MODIFICATION. No waiver of any term, provision or
condition of this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be or construed as a further or continuing waiver
of any such term, provision or condition of this Agreement. This Agreement and
the Agreement of Merger, when executed and delivered, may be modified or amended
by action of the Board of Directors of the Company and the Bank without action
by their respective shareholders to the extent permitted by law. This Agreement
may be modified or amended only by an instrument of equal formality signed by
the Parties of their duly authorized agents.
15.11 ATTORNEYS' FEES. In the event either of the Parties to this
Agreement brings an action or suit against the other Party by reason of any
breach of any covenant, agreement, representation, warranty or other provision
hereof, or any breach of any duty or obligation created hereunder by such other
Party, the prevailing Party, as determined by the court or other body having
jurisdiction, shall be entitled to have and recover of and from the losing
Party, as determined by the court or other body have jurisdiction, all
reasonable costs and expenses incurred or sustained by such prevailing Party in
connection with such suit or action, including, without limitation, legal fees
and court costs (whether or not taxable as such).
15.12 ENTIRE AGREEMENT. The making, execution and delivery of this
Agreement by the Parties hereto have not been induced by any representations,
statements, warranties or agreements other than those herein expressed. This
Agreement embodies the entire understanding of the Parties and there are no
further or other agreements or understandings, written or oral, in effect
between the Parties relating to the subject matter hereof, unless expressly
referred to by reference herein.
15.13 SEVERABILITY. Whenever possible, each provision of this Agreement
and every related document shall be interpreted in such manner as to be valid
under applicable law. However, if any provision of any of the foregoing shall be
invalid or prohibited under said applicable law, it shall be construed,
interpreted and limited to effectuate its purpose to the maximum legally
permissible extent. If it cannot be so construed and interpreted so as to be
valid under such law, such provision shall be ineffective to the extent of such
invalidity or prohibition without invalidating the remainder of such provision
or the remaining provisions of this Agreement, and this Agreement
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<PAGE>
shall be construed to the maximum extent possible to carry out its terms without
such invalid or unenforceable provision or portion thereof.
15.14 EFFECT OF DISCLOSURE. Any list, statement, document, writing or
other information set forth in, referenced to or attached to any schedule or
exhibit delivered pursuant to any provision of this Agreement shall be deemed to
constitute disclosure for purposes of any other schedule or exhibit required to
be delivered pursuant to any other provision of this Agreement.
15.15 KNOWLEDGE. Whenever any statement herein or in any schedule,
exhibit, certificate or other documents delivered to any Party pursuant to this
Agreement is made "to the knowledge" or "to the best knowledge" of any Party or
other person, such Party or other person, who shall be an officer of a Party,
shall make such statement only after conducting an investigation which such
person determines in good faith to be reasonable under the circumstances of the
subject matter thereof, and each such statement shall constitute a
representation that such investigation has been conducted.
15.16 TERMINATION OF REPRESENTATION, WARRANTIES AND COVENANTS. The
representations, warranties and covenants of each Party contained herein or in
any certificate or other writing delivered by such Party pursuant hereto or in
connection herewith shall not survive the Merger other than those provided for
in Sections 2.1(b), 2.1(c), 7.12, 13.1, 14.1(e), 15.1, 15.3, 15.11 and 15.12
which shall survive a termination.
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement on
the day and year first above written.
PACIFIC COMMUNITY BANKING GROUP
By: /s/ E. Lynn Caswell
------------------------------------
E. Lynn Caswell, Chairman of the
Board and Chief Executive Officer
VALLEY BANK
By: /s/ Marion V. Ashley
------------------------------------
Marion V. Ashley
Chairman of the Board
By: /s/ N. Douglas Mills
------------------------------------
N. Douglas Mills
President and Chief Executive
Officer
By: /s/ Juan P. Renteria
------------------------------------
Juan P. Renteria
Director
By: /s/ Jesse Washington
------------------------------------
Jesse Washington
Director
By: /s/ George E. Wilson
------------------------------------
George E. Wilson
Director
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<PAGE>
By: /s/ Helga Wolf
--------------------------------------
Helga Wolf
Director
By: /s/ Eugene H. Wood
------------------------------------
Eugene H. Wood
Director
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<PAGE>
APPENDIX C
THE BANK OF HEMET FAIRNESS OPINION
BAXTER FENTRISS AND COMPANY
9100 ARBORETUM PARKWAY SUITE 280 RICHMOND, VIRGINIA 23266
(804) 323-7540 FAX (804) 323-7457
MARCH 24, 1999
THE BOARD OF DIRECTORS
THE BANK OF HEMET
1600 E. FLORIDA AVENUE
HEMET, CA 92544
The Bank of Hemet, Hemet, California ("Hemet") and Pacific Community Banking
Group, Laguna Hills, CA ("PCBG") have entered into an agreement providing for
the acquisition of Hemet by PCBG ("Acquisition"). The terms of the Acquisition
are set forth in the First Restatement of the Agreement and Plan of
Reorganization dated January 5, 1999 as amended ("Agreement").
The terms of the Acquisition provide that, with the possible exception of
those shares as to which dissenter's rights may be perfected, the per share
consideration of Hemet common stock to be the sum of (i) $51.00 in cash or PCBG
Common Stock or a combination of cash and PCBG Common Stock and (ii) a warrant
to purchase 1.00 share of PCBG Common Stock ("Consideration").
You have asked our opinion as to whether the proposed transaction pursuant
to the terms of the Acquisition are fair to the respective shareholders of Hemet
from a financial point of view.
In rendering our opinion, we have evaluated the proforma consolidated
financial statements of Hemet and PCBG, including PCBG's pending acquisition of
Valley Bank ("Valley"). In addition, we have, among other things: (a) to the
extent deemed relevant, analyzed selected public information of certain other
financial institutions and compared Hemet from a financial point of view to the
other financial institutions; (b) compared the terms of the Agreement with the
terms of certain other comparable transactions to the extent information
concerning such acquisitions was publicly available; (c) reviewed the drafts of
the Agreement and related documents, and (d) made such other analyses and
examinations as described below and deemed necessary. We also met with various
senior officers of Hemet, Valley and PCBG to discuss the foregoing as well as
other matters that may be relevant. However, we have not completed a formal due
diligence of PCBG or reviewed the final draft of the Agreement and our opinion
is based upon representations made by senior officers of Hemet, Valley and PCBG.
We have not independently verified the financial and other information
concerning Hemet, Valley or PCBG, or other data which we have considered in our
review. We have assumed the accuracy and completeness of all such information;
however, we have no reason to believe that such information is not accurate and
complete. Our conclusion is rendered on the basis of securities market
conditions
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prevailing as of the date hereof and on the conditions and prospects, financial
and otherwise, of Hemet, Valley and PCBG as they exist and are known to us as of
December 31, 1998.
We have acted as financial advisor to Hemet and Valley in connection with
the Acquisition and will receive from both a fee for our services, a significant
portion of which is contingent upon the consummation of the Acquisition.
It is understood that this opinion may be included in its entirely in any
communication by Hemet or the Board of Directors to the stockholders of Hemet or
PCBG. The opinion may not, however, be summarized, excerpted from or otherwise
publicly referred to without our prior written consent.
Based on the foregoing, and subject to the limitations described above, we
are of the opinion that the Consideration is fair to the shareholders of Hemet
from a financial point of view.
Sincerely,
Baxter Fentriss and Company
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APPENDIX D
VALLEY BANK FAIRNESS OPINION
BAXTER FENTRISS AND COMPANY
9100 ARBORETUM PARKWAY SUITE 280 RICHMOND, VIRGINIA 23266
(804) 323-7540 FAX (804) 323-7457
MARCH 29, 1999
THE BOARD OF DIRECTORS
VALLEY BANK
24010 SUNNYMEAD BLVD.
MORENO VALLEY, CA 92553
Valley Bank, Moreno Valley, CA ("Valley"), The Bank of Hemet, Hemet, CA
("Hemet") and Pacific Community Banking Group, Laguna Hills, CA ("PCBG") have
entered into an agreement providing for the merger of Valley, Hemet and PCBG
("Merger"). The terms of the Merger are set forth in the First Restatement of
the Agreement and Plan of Reorganization ("Agreement") dated January 5, 1999 and
as amended in March of 1999.
The terms of the Merger provide that, with the possible exception of those
shares as to which dissenter's rights may be perfected, the per share
consideration of Valley common stock to be (i) the sum of $10.00 in a
combination of cash and or PCBG common stock; (ii) 1/3 (one-third) of a warrant
to purchase PCBG stock; and (iii) a special dividend of $0.52 per share which
will be payable on or about the Closing Date. These components are hereinafter
referred to together as "Consideration."
You have asked our opinion as to whether the proposed transaction pursuant
to the terms of the Agreement are fair to the respective shareholders of Valley
from a financial point of view.
In rendering our opinion, we have evaluated the pro forma consolidated
financial statements of Valley and Hemet, including PCBG's pending merger with
Hemet. In addition, we have, among other things: (a) to the extent deemed
relevant, analyzed selected public information of certain other financial
institutions and compared Valley from a financial point of view to the other
financial institutions; (b) compared the terms of the Agreement with the terms
of certain other comparable transactions to the extent information concerning
such acquisitions was publicly available; (c) reviewed the drafts of the
Agreement and related documents; and (d) made such other analyses and
examinations as described below and deemed necessary. We also met with various
senior officers of Valley, Hemet and PCBG to discuss the foregoing as well as
other matters that may be relevant. However we have not completed a formal due
diligence of PCBG and our opinion is based upon representations made by senior
officers of Valley, Hemet and PCBG. We have not independently verified the
financial and other information concerning Valley, Hemet or PCBG, or other data
which we have considered in our review. We have assumed the accuracy and
completeness of all such information; however, we have no reason
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<PAGE>
to believe that such information is not accurate and complete. Our conclusion is
rendered on the basis of securities market conditions prevailing as of the date
hereof and on the conditions and prospects, financial and otherwise, of Valley,
Hemet and PCBG as they exist and are known to us as of December 31, 1998.
We have acted as financial advisor to Valley and Hemet in connection with
the Merger and will receive from both a fee for our services, a significant
portion of which is contingent upon the consummation of the Merger.
It is understood that this opinion may be included in its entirety in any
communication by Valley or the Board of Directors to the stockholders of Valley
or PCBG. The opinion may not, however, be summarized, excerpted from or
otherwise publicly referred to without our prior written consent.
Based on the foregoing, and subject to the limitations described above, we
are of the opinion that the transaction is fair to the shareholders of Valley
from a financial point of view.
Sincerely,
Baxter Fentriss and Company
D-2
<PAGE>
APPENDIX E
CHAPTER 13
OF
CALIFORNIA GENERAL CORPORATIONS LAW
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. Dissenters' Rights
SECTION 1300. SHAREHOLDER IN SHORT-FORM MERGER; PURCHASE AT FAIR MARKET VALUE;
"DISSENTING SHARES"; "DISSENTING SHAREHOLDER"
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of Governors
of the Federal Reserve System, and the notice of meeting of shareholders to
act upon the reorganization summarizes this section and Sections 1301, 1302,
1303 and 1304; provided, however, that this provision does not apply to any
shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of shares described
in subparagraph (A) or (B) if demands for payment are filed with respect to
5 percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
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SECTION 1301. NOTICE TO HOLDER OF DISSENTING SHARES OF REORGANIZATION APPROVAL;
DEMAND FOR PURCHASE OF SHARES; CONTENTS OF DEMAND
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. STAMPING OR ENDORSING DISSENTING SHARES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST
THEREON; WHEN PRICE TO BE PAID
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
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SECTION 1304. ACTION BY DISSENTERS TO DETERMINE WHETHER SHARES ARE DISSENTING
SHARES OR FAIR MARKET VALUE OF DISSENTING SHARES OR BOTH; JOINDER OF
SHAREHOLDERS; CONSOLIDATION OF ACTIONS; DETERMINATION OF ISSUES; APPOINTMENT
OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. DUTY AND REPORT OF APPRAISERS; COURT'S CONFIRMATION OF REPORT;
DETERMINATION OF FAIR MARKET VALUE BY COURT; JUDGMENT, AND PAYMENT; APPEAL;
COSTS OF ACTION
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. PREVENTION OF PAYMENT TO HOLDERS OF DISSENTING SHARES OF FAIR
MARKET VALUE; EFFECT
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
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SECTION 1307. DISPOSITION OF DIVIDENDS UPON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. RIGHTS AND PRIVILEGES OF DISSENTING SHARES; WITHDRAWAL OF DEMAND
FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
SECTION 1309. WHEN DISSENTING SHARES LOSE THEIR STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR COMPENSATION OR VALUATION PENDING
LITIGATION
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. SHARES TO WHICH CHAPTER INAPPLICABLE
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
SECTION 1312. ATTACK ON VALIDITY OF REORGANIZATION OR SHORT-FORM MERGER; RIGHTS
OF SHAREHOLDERS; BURDEN OF PROOF
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or
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short-form merger or to have the reorganization or short-form merger set aside
or rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The court
in any action attacking the validity of the reorganization or short-form merger
or to have the reorganization or short-form merger set aside or rescinded shall
not restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article V of the Registrant's Articles of Incorporation provides that the
liability of the directors of the corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law. Article VI of
the Registrant's Articles of Incorporation provides that the corporation is
authorized to provide for the indemnification of agents (as defined in Section
317 of the California General Corporation Law) of the corporation in excess of
that expressly permitted by such Section 317 for breach of duty to the
corporation and its shareholders to the fullest extent permissible under
California law.
Article III of the Registrant's Bylaws provides, in pertinent part, that
each person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another foreign or domestic corporation
or other entity, shall be indemnified by the Registrant to the full extent
permitted by the General Corporation Law of the State of California or any other
applicable laws. Article III also authorizes the registrant to enter into one or
more agreements with any person which provides for indemnification greater or
different than that provided for in that Article.
The Registrant has entered into an indemnification agreement with its
Chairman and Chief Executive Officer on the forms incorporated by reference as
Exhibit 10.1 to this Registration Statement.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
2.1 First Restatement of Agreement and Plan of Reorganization by and between
Registrant and The Bank of Hemet dated January 5, 1999.
2.2 First Amendment to First Restatement of Agreement and Plan of
Reorganization by and between Registrant and The Bank of Hemet dated
March 24, 1999.
2.3 Second Amendment to First Restatement of Agreement and Plan of
Reorganization by and between Registrant and The Bank of Hemet dated
April 2, 1999.
2.4 First Restatement of Agreement and Plan of Reorganization by and between
Registrant and Valley Bank dated as of January 5, 1999.
2.5 First Amendment to First Restatement of Agreement and Plan of
Reorganization by and between Registrant and Valley Bank dated March 4,
1999.
2.6 Second Amendment to First Restatement of Agreement and Plan of
Reorganization by and between Registrant and Valley Bank dated April 12,
1999.
3.1 Articles of Incorporation of Registrant.
3.2 Certificate of Amendment of Articles of Incorporation of Registrant
3.3 Restated Bylaws of Registrant.
3.4 Certificate of Determination.
4.1* Specimen Stock Certificate.
4.2 Form of Warrant to Purchase Stock of Pacific Community Banking Group
5.1* Opinion of Morrison & Foerster LLP.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
8.1* Tax Opinion of Arthur Andersen LLP.
10.1 Form of Indemnification Agreement.
10.2 Employment Agreement between Registrant and E. Lynn Caswell.
10.3 Agreement between Registrant and Harold R. Williams, Jr.
10.4 Registrant's 1999 Stock Option Plan.
10.5 Shareholder Agreement.
10.6 Form of Warrant Purchase Agreement.
10.7 Form of Non-competition and Consulting Agreements.
10.8 Form of Continuation Agreement between The Bank of Hemet and certain
executives (Jaqua, McDonough) dated March 22, 1995, as amended.
10.9 Head Office Lease, 1600 E. Florida Avenue, Hemet, California.
10.10 Form of Executive Employment Agreement dated September 26, 1996 between
Valley Bank and each of Marvin Lentini, Mark Nugent, Bonnie Parrott and
Dianna Williams.
10.11 Executive Employment Agreement dated September 26, 1996, as amended
October 30, 1997, between Valley Bank and N. Douglas Mills.
10.12 Executive Salary Continuation Agreement, dated October 19, 1995, as
amended October 30, 1997, between Valley Bank and N. Douglas Mills.
10.13 Second Amendment to Employment Agreement between Valley Bank and N.
Douglas Mills.
10.14 Form of The Bank of Hemet Proxy.
10.15 Form of Valley Bank Proxy.
10.16 Fairness Opinion of Baxter Fentriss & Company with reference to The Bank
of Hemet-- Appendix C of joint proxy statement/prospectus incorporated
by reference.
10.17 Fairness Opinion of Baxter Fentriss & Company with reference to Valley
Bank-- Appendix D of joint proxy statement/prospectus incorporated by
reference.
23.1* Consent of Morrison & Foerster LLP (included in their opinion filed as
Exhibit 5.1).
23.2 Consent of Arthur Andersen, LLP for Financial Statements.
23.4 Consent of McGladrey Pullen LLP for Valley Bank Financial Statements.
24.1 Power of Attorney. (Please refer to p. II-4)
27.1 Financial Data Schedule for the year ended December 31, 1998.
99.1 Consent of James Jaqua
99.2 Consent of N. Douglas Mills
99.3 Consent of Marion V. Ashley
99.4 Consent of Baxter Fentriss and Company
99.5 Consent of Harold R. Williams, Jr.
99.6 Form of Transmittal Letter for Surrender and Exchange of Shares by The
Bank of Hemet Shareholders.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
99.7 Form of Transmittal Letter for Surrender and Exchange of Shares by Valley
Bank Shareholders.
</TABLE>
- ------------------------
* To be filed by amendment.
(b) Financial Statement Schedules
No schedules are included because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
2. That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(b)(1)The undersigned registrant hereby undertakes as follows: That prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (h)(1) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415 (Section 230.415 of this
chapter), will be filed as a part of an amendment to the registration statement
and will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officer and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, Pacific
Community Banking Group has been advised that in the opinion of the
II-3
<PAGE>
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the joint proxy
statement/prospectus pursuant to Item 4 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Laguna
Hills, County of Orange, State of California, on April 16, 1999.
<TABLE>
<S> <C> <C>
PACIFIC COMMUNITY BANKING GROUP
By: /s/ E. LYNN CASWELL
-----------------------------------------
Chairman of the Board, Chief Executive
Officer and Chief Financial Officer
</TABLE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints E. Lynn Caswell and Loren P.
Hansen, and each of them, as his true and lawful attorneys-in-fact and agents,
jointly and severally, with full power of substitution and resubstitution, for
and in his stead, in any and all capacities, to sign on his behalf this
Registration Statement on Form S-4 in connection with the offering of common
stock and warrants by Pacific Community Banking Group and to execute any
amendments thereto (including post-effective amendments), including a
registration statement filed pursuant to Rule 462(b), or certificates that may
be required in connection with this Registration Statement, and to file the
same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission and granting unto said
attorneys-in-fact and agents, and each of them, jointly and severally, the full
power and authority to do and perform each and every act and thing necessary or
advisable to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, jointly or severally, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, each thereunto duly authorized, in the City of Laguna
Hills, County of Orange, State of California, as of April 16, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>
E. Lynn Caswell, Chairman
/s/ E. LYNN CASWELL of the Board of
- ------------------------------ Directors, Chief
E. Lynn Caswell Executive Officer and
Chief Financial Officer
/s/ MITCHELL ALLEN
- ------------------------------ Mitchell Allen, Director
Mitchell Allen
/s/ ALFRED JANNARD
- ------------------------------ Alfred Jannard, Director
Alfred Jannard
/s/ CARLOS SAENZ
- ------------------------------ Carlos Saenz, Director
Carlos Saenz
/s/ HENRY SCHIELEIN
- ------------------------------ Henry Schielein, Director
Henry Schielein
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 First Restatement of Agreement and Plan of Reorganization by and between Registrant and The Bank of
Hemet dated January 5, 1999.
2.2 First Amendment to First Restatement of Agreement and Plan of Reorganization by and between Registrant
and The Bank of Hemet dated March 24, 1999.
2.3 Second Amendment to First Restatement of Agreement and Plan of Reorganization by and between Registrant
and The Bank of Hemet dated April 2, 1999.
2.4 First Restatement of Agreement and Plan of Reorganization by and between Registrant and Valley Bank
dated as of January 5, 1999.
2.5 First Amendment to First Restatement of Agreement and Plan of Reorganization by and between Registrant
and Valley Bank dated March 4, 1999.
2.6 Second Amendment to First Restatement of Agreement and Plan of Reorganization by and between Registrant
and Valley Bank dated April 13, 1999.
3.1 Articles of Incorporation of Registrant.
3.2 Certificate of Amendment of Articles of Incorporation.
3.3 Restated Bylaws of Registrant.
3.4 Certificate of Determination.
4.1* Specimen Stock Certificate.
4.2 Form of Warrant to Purchase Stock of Pacific Community Banking group.
5.1* Opinion of Morrison & Foerster LLP.
8.1* Tax Opinion of Arthur Andersen LLP.
10.1 Form of Indemnification Agreement.
10.2 Employment Agreement between Registrant and E. Lynn Caswell.
10.3 Agreement between Registrant and Harold R. Williams, Jr.
10.4* Registrant's 1999 Stock Option Plan.
10.5 Shareholder Agreement.
10.6 Form of Warrant Purchase Agreement.
10.7 Form of Non-competition and Consulting Agreements.
10.8 Form of Continuation Agreement between The Bank of Hemet and certain executives (Jaqua, McDonough) dated
March 22, 1995, as amended.
10.9 Head Office Lease, 1600 E. Florida Avenue, Hemet, California.
10.10 Form of Executive Employment Agreement dated September 26, 1996 between Valley Bank and each of Marvin
Lentini, Mark Nugent, Bonnie Parrott and Dianna Williams.
10.11 Executive Employment Agreement dated September 26, 1996, as amended October 30, 1997, between Valley
Bank and N. Douglas Mills.
10.12 Executive Salary Continuation Agreement, dated October 19, 1995, as amended October 30, 1997, between
Valley Bank and N. Douglas Mills.
10.13 Second Amendment to Employment Agreement between Valley Bank and N. Douglas Mills.
10.14 Form of The Bank of Hemet Proxy.
10.15 Form of Valley Bank Proxy.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.16 Fairness Opinion of Baxter Fentriss & Company with reference to The Bank of Hemet-- Appendix C of joint
proxy statement/prospectus incorporated by reference.
10.17 Fairness Opinion of Baxter Fentriss & Company with reference to Valley Bank--Appendix D of joint proxy
statement/prospectus incorporated by reference.
23.1* Consent of Morrison & Foerster LLP (included in their opinion filed as Exhibit 5.1).
23.2 Consent of Arthur Andersen, LLP for Financial Statements.
23.4 Consent of McGladrey Pullen LLP for Valley Bank Financial Statements.
24.1 Power of Attorney. (Please refer to p. II-4)
27.1 Financial Data Schedule for the year ended December 31, 1998.
99.1 Consent of James Jaqua
99.2 Consent of N. Douglas Mills
99.3 Consent of Marion V. Ashley
99.4 Consent of Baxter Fentriss and Company
99.5 Consent of Harold R. Williams, Jr.
99.6 Form of Transmittal Letter for Surrender and Exchange of Shares by The Bank of Hemet Shareholders.
99.7 Form of Transmittal Letter for Surrender and Exchange of Shares by Valley Bank Shareholders.
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
EXHIBIT 2.1
First Restatement of
Agreement and Plan of Reorganization
by and between
Pacific Community Banking Group
and
The Bank of Hemet
dated
January 5, 1999
<PAGE>
FIRST RESTATEMENT OF
AGREEMENT AND PLAN OF REORGANIZATION
by and between
PACIFIC COMMUNITY BANKING GROUP
AND
THE BANK OF HEMET
Dated: January 5, 1999
<PAGE>
FIRST RESTATEMENT OF
AGREEMENT AND PLAN OF REORGANIZATION
THIS FIRST RESTATEMENT OF AGREEMENT AND PLAN OF REORGANIZATION
(hereinafter referred to as the "Agreement") is made and entered into as of
January 5, 1999, by and between THE BANK OF HEMET (the "Bank"), a California
banking corporation, and PACIFIC COMMUNITY BANKING GROUP (the "Company"), a
California corporation.
R E C I T A L S
A. The Bank is a California banking corporation duly organized
and existing under the laws of the State of California with its principal
office in the City of Hemet, County of Riverside, State of California. The
Company is a proposed bank holding company duly organized and existing under
the laws of the State of California with its principal office in the City of
Laguna Hills, County of Orange, State of California;
B. The parties desire to provide for the acquisition by the
Company of all of the outstanding shares of the common stock, no par value of
the Bank ("Bank Stock") pursuant to the Merger (as defined below), subject to
the terms and conditions specified herein, as follows:
(a) The Company will establish PCBG Merger Corporation
(as defined below) as a wholly-owned subsidiary; and
(b) The Bank and PCBG Merger Corporation will enter into
an Agreement of Merger (as defined below) providing for the merger of PCBG
Merger Corporation and the Bank under the state charter of the Bank;
C. At the Effective Time (hereinafter defined below) of the
Merger, all of the issued and outstanding shares of Bank Stock, except for
shares of Bank Stock held by Dissenting Shareholders (as hereinafter defined
below), shall be converted into and exchanged for a combination of cash and
Warrants exercisable into shares of Company Stock all upon the terms and
subject to the conditions hereinafter set forth;
D. As a condition and inducement to the Company's willingness
to enter into this Agreement, the Bank and the Company are entering into,
immediately after the execution and delivery hereof, a Warrant Purchase
Agreement (the "Warrant Agreement") dated as of the date hereof and attached
hereto as EXHIBIT "C", pursuant to which the Bank shall grant to the Company
an option to purchase shares of the common stock, no par value, of the Bank
representing
1
<PAGE>
19.9% of Bank stock to be outstanding after giving pro forma effect to the
issuance of such shares at a price of $46.50 per Bank Stock;
E. The Merger requires certain shareholder and regulatory
approvals and may be effected only after the necessary approvals have been
obtained;
F. The parties desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
certain conditions to the Merger; and
G. Subject to any specific provisions of this Agreement, it is
the intent of the parties that the Company by reason of this Agreement shall
not (until consummation of the Merger) control, and shall not be deemed to
control the Bank or any of its subsidiaries, directly or indirectly, and
shall not exercise or be deemed to exercise, directly or indirectly, a
controlling influence over the management or policies of the Bank or any of
its subsidiaries;
H. The Company and the Bank desire that this First Restatement
of the Agreement and Plan of Reorganization now govern the rights and
obligations of the Parties in place of that certain Agreement and Plan of
Reorganization dated July 30, 1998.
Accordingly, to consummate the transactions set forth above and
in consideration of the mutual covenants, agreements, representations and
warranties contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. Capitalized terms used in this Agreement
shall have the meanings set forth below unless the context otherwise requires:
"Affiliate" means any Person (as defined below) that directly, or
through one or more intermediaries controls, or is controlled by, or is under
common control with, the Person specified.
"Aggregate Option Price" shall have the meaning given such term
in Section 2.8.
"Aggregate Purchase Consideration" shall have the meaning given
such term in Section 2.4.
2
<PAGE>
"Agreement of Merger" shall mean the Agreement of Merger to be
entered into by and between PCBG Merger Corporation and the Bank
substantially in the form of EXHIBIT "A" hereto, but subject to any changes
that may be necessary to conform to any requirements of any Governmental
Entity having authority over the Merger.
"Alternative Transaction" shall have the meaning given such term
in Section 6.5.
"Audited Bank Financial Statements" shall have the meaning given
such term in Section 4.4.
"BHC Act" shall mean the Bank Holding Company Act of 1956, as
amended.
"Bank" shall mean The Bank of Hemet.
"Bank Corporate Governance Changes" shall have the meaning given
such term in Section 2.1 (d).
"Bank Dissenting Shares" means shares of Bank Stock held by
"Dissenting shareholders" within the meaning of Chapter 13 of the CGCL.
"Bank Employment Agreements" shall mean any employment agreement,
severance agreement, "golden parachute" agreement or any other agreement
which provides for payments to employees of the Bank upon termination of
employment, including termination after a change in control.
"Bank Filings" shall have the meaning given such term in Section
4.18.
"Bank Options" shall mean options to purchase Bank Stock (as
defined below) pursuant to the Bank Stock Option Plan (as defined below).
"Bank Perfected Dissenting Shares" means Dissenting Shares which
the holders thereof have not withdrawn or caused to lose their status as Bank
Dissenting Shares.
"Bank Representatives" shall have the meaning given such term in
Section 7.3.
"Bank Stock" shall mean the meaning given such term in Recital B.
"Bank Stock Option Plan" shall mean The Bank of Hemet 1994 Stock
Option Plan.
3
<PAGE>
"Baxter" shall mean Baxter, Fentriss and Company, who shall serve
as the financial advisor to the Bank.
"Benefit Arrangement" means any plan or arrangement maintained or
contributed to by a Party, including an "employee benefit plan" within the
meaning of ERISA (as defined below), (but exclusive of base salary and base
wages) which provides for any form of current or deferred compensation,
bonus, stock option, profit sharing, benefit, retirement, incentive, group
health or insurance, welfare or similar plan or arrangement for the benefit
of any employee or class of employee, whether active or retired, of a Party.
"Business Day" shall mean any day other than a Saturday, Sunday
or day on which commercial banks in California are authorized or required to
be closed.
"Caswell" shall mean Mr. E. Lynn Caswell, Chairman of the Board
and Chief Executive Officer of the Company.
"CERCLA" shall have the meaning given such term in the definition
of Environmental Law.
"CFC" means the California Financial Code.
"CGCL" means the California General Corporations Law.
"Charter Documents" shall mean, with respect to any business
organization, any certificate or articles of incorporation or association,
any bylaws, any partnership agreement and any other similar documents that
regulate the basic organization of the business organization and its internal
relations.
"Classified Credit" shall have the meaning given such term in
Section 6.6.
"Closing" shall mean the consummation of the transactions
contemplated by this Agreement on the Closing Date (as defined below) at the
law offices of Knecht & Hansen, 1301 Dove Street, Suite 900, Newport Beach,
California 92660, or at such other place as the Parties (as defined below)
may agree upon.
"Closing Date" shall mean, unless the Parties (as defined below)
agree on another date, the first Friday or as soon as possible following the
Determination Date, and in no case more than 30 days following the receipt of
the approvals and consents and expiration of the waiting periods specified in
Section 9.1 have occurred and/or have been obtained, the receipt of the
necessary cash capital by
4
<PAGE>
the Company in order to complete the transaction as contemplated by this
Agreement, and satisfaction of the remaining conditions to the transaction as
contemplated by this Agreement.
"Code" shall mean the United States Internal Revenue Code of
1986, as amended, and all regulations thereunder.
"Commissioner" shall mean the California Commissioner of
Financial Institutions.
"Company" shall mean Pacific Community Banking Group, a
California corporation.
"Company Corporate Governance Changes" shall have the meaning
given such term in Section 2.1(e).
"Company Filings" shall have the meaning given such term in
Section 5.13.
"Company Representatives" shall have the meaning given such term
in Section 6.3.
"Company Stock Option Plan" shall mean the proposed Pacific
Community Banking Group 1998 Stock Option Plan.
"Company Financial Statements" shall have the meaning given such
term in Section 5.4.
"Company Stock" shall mean the common stock, no par value, of the
Company.
"Confidential Information" shall mean all information exchanged
heretofore or hereafter between the Company, its affiliates and agents, on
the one hand, and the Bank, its affiliates and agents, on the other hand,
which is information related to the business, financial position or
operations of the Person responsible for furnishing the information or an
Affiliate of such Person (such information to include, by way of example only
and not of limitation, client lists, pricing information, company manuals,
internal memoranda, strategic plans, budgets, forecasts, projections,
computer models, marketing plans, files relating to loans originated by such
Person, loans and loan participation purchased by such Person from others,
investments, deposits, leases, contracts, employment records, minutes of
board meetings (and committees thereof) and stockholder meetings, legal
proceedings, reports of examination by any Governmental Entity, and such
other records or documents such Person may supply to the other Party pursuant
to the terms of this Agreement or as contemplated hereby). Notwithstanding
the
5
<PAGE>
foregoing, "Confidential Information" shall not include any information that
(i) at the time of disclosure or thereafter is generally available to and
known by the public (other than as a result of an improper disclosure
directly or indirectly by the Company or the Bank, as the case may be, or any
of their officers, directors, employees or other representatives), (ii) was
available to the recipients on a non-confidential basis from a source other
than from the Persons responsible for furnishing the information, provided
that such source learned the information independently and is not and was not
bound by a confidentiality agreement with respect to the information, or
(iii) has been independently acquired or developed by the recipients without
violating any obligations under this Agreement.
"Consents" shall mean every consent, approval, absence of
disapproval, waiver or authorization from, or notice to, or registration or
filing with, any Person (as defined below).
"CRA" shall mean the Community Reinvestment Act.
"Deposit" shall mean any deposit as defined in Section 3(I) of
the Federal Deposit Insurance Act, as amended, to the date of this Agreement
(12 USC Section 1813(I)).
"Determination Date" shall mean the last day of the month
preceding the Closing Date.
"Directors' Agreement" shall mean an agreement, substantially in
the form of EXHIBIT "B" hereto, pursuant to which each signatory shall agree
to vote or cause to be voted all shares of Bank Stock with respect to which
such Person has voting power on the date hereof or hereafter acquires to
approve the Agreement and the transactions contemplated hereby and all
requisite matters related thereto.
"DPC Property" shall mean voting securities, other personal
property and real property acquired by foreclosure or otherwise, in the
ordinary course of collecting a debt previously contracted in good faith,
retained with the object of sale for a period not longer than one year, or
any applicable statutory holding period, and recorded in the holder's
business records as such.
"Effective Day" shall mean the day on which the Effective Time
occurs.
"Effective Time" shall mean the date and time of the filing of
the Agreement of Merger with the Secretary of State (as defined below).
"Employee Plan" shall have the meaning given such term in Section
4.11(c).
6
<PAGE>
"Encumbrance" shall mean any option, pledge, security interest,
lien, mechanic's lien, charge, encumbrance or restriction (whether on voting,
disposition or otherwise), whether imposed by agreement, understanding, law
or otherwise.
"Environmental Law" shall mean any federal, state, provincial or
local statute, law, ordinance, rule, regulation, order, consent, decree,
judicial or administrative decision or directive of the United States or
other jurisdiction whether now existing or as hereinafter promulgated, issued
or enacted relating to: (A) pollution or protection of the environment,
including natural resources; (B) exposure of persons, including employees, to
Hazardous Substances (as defined below) or other products, materials or
chemicals; (C) protection of the public health or welfare from the effects of
products, by-products, wastes, emissions, discharges or releases of chemical
or other substances from industrial or commercial activities; or (D)
regulation of the manufacture, use or introduction into commerce of
substances, including, without limitation, their manufacture, formulation,
packaging, labeling, distribution, transportation, handling, storage and
disposal. For the purposes of this definition the term "Environmental Law"
shall include, without limiting the foregoing, the following statutes, as
amended from time to time: (1) the Clean Air Act, as amended, 42 U.S.C.
Section 7401 ET SEQ.; (2) the Federal Water Pollution Control Act, as
amended, 33 U.S.C. Section 1251 ET SEQ.; (3) the Resource Conservation and
Recovery Act of 1976, as amended, 42 U.S.C. Section 6901 ET SEQ., (4) the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended (including the Superfund Amendments and Reauthorization Act of
1986), 42 U.S.C Section 9601 ET SEQ.("CERCLA"); (5) the Toxic Substances
Control Act, as amended, 15 U.S.C. Section 2601 ET SEQ.; (6) the Occupational
Safety and Health Act, as amended, 29 U.S.C. Section 65; (7) the Emergency
Planning and Community Right-To-Know Act of 1986, 42 U.S.C. Section 11001 ET
SEQ.; (8) the Mine Safety and Health Act of 1977, as amended, 30 U.S.C.
Section 801 ET SEQ.; (9) the Safe Drinking Water Act, 42 U.S.C. Section 300f
ET SEQ.; (10) the Federal Water Pollution Control Act, as amended (33 U.S.C.
1251, ET SEQ.; and (11) all comparable state and local laws, laws of other
jurisdictions or orders and regulations including, but not limited to, the
Carpenter-Presley- Tanner Hazardous Substance Account Act, Cal. Health &
Safety Code Section 25300 ET SEQ., the Porter-Cologne Water Quality Control
Action, 25140, 25501(j) and (k); 255501.1.25281 and 25250.1 of the California
Health and Safety Code and/or Article I or Title 22 of the California Code of
Regulations, Division 4, Chapter 30 (the "State Acts"); laws of other
jurisdictions or orders and regulations; or the presence of which causes or
threatens to cause a nuisance, trespass or other common law tort upon real
property or adjacent properties or poses or threatens to pose a hazard to the
health or safety of persons or without limitation, which contains gasoline,
diesel fuel or other petroleum hydrocarbons; polychlorinated biphenyls
(PCB's), asbestos or urea formaldehyde foam insulation.
"Equity Securities" shall mean the capital stock of Bank or any
options, rights, warrants or other rights to subscribe for or purchase, or
any plans,
7
<PAGE>
contracts or commitments that are exercisable in, such capital stock or that
provide for the issuance of, or grant the right to acquire, or are
convertible into, or exchangeable for, such capital stock.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and all regulations thereunder.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and all rules and regulations thereunder.
"Exchange Agent" shall mean U. S. Stock Transfer Corporation, or,
subject to the reasonable approval of the Bank, any other financial
institution or company appointed by the Company to effect the exchange
contemplated by Section 2.5.
"Executive Officer'' shall mean a natural person who participates
or has the authority to participate (other than in the capacity of a
director) in major policy making functions, whether or not such person has a
title or is serving with salary or other compensation.
"Expected Net Proceeds" shall mean $52.6 million.
"Expenses" shall have the meaning given such term in Section 13.1.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"FRB" shall mean the Board of Governors of the Federal Reserve
System.
"GAAP" shall mean Generally Accepted Accounting Principles,
consistently applied from period to period, applicable to banks and bank
holding companies, as appropriate, for the period in question.
"Governmental Entity" shall mean any court or tribunal in any
jurisdiction or any United States federal, state, municipal, domestic,
foreign or other administrative agency, department, commission, board, bureau
or other regulatory or governmental authority or instrumentality.
"Hazardous Substances" shall mean (1) any "hazardous waste" as
defined by CERCLA and the State Acts, as such acts are in effect on the date
hereof, and any and all regulations promulgated thereunder; (2) any
"hazardous substance" as such term is defined by CERCLA; (3) any "regulated
substance" as defined by the State Acts; (4) asbestos requiring abatement,
removal or encapsulation pursuant to the requirements of any Governmental
Entity; (5) polychlorinated biphenyls; (6) petroleum products; (7) "hazardous
chemicals" or
8
<PAGE>
"extremely hazardous substances" in quantities sufficient to require
reporting, registration, notification and/or optional treatment or handling
under the Emergency Planning and Community Right to Know Act of 1986; (8) any
"hazardous chemical" in levels that would result in exposure greater than is
allowed by permissible exposure limits established pursuant to the
Occupational Safety and Health Act of 1970; (9) any substance that requires
reporting, registration, notification, removal, abatement and/or special
treatment, storage, handling or disposal, under Section 6, 7 and 8 of the
Toxic Substance Control Act (15 U.S.C. Section 2601); (10) any toxic or
hazardous chemical described in 29 C.F.R. 1910.1000-1047 in levels that would
result in exposure greater than those allowed by the permissible exposure
limits pursuant to such regulations; and (11) any (A) "hazardous waste", (B)
"solid waste" capable of causing a "release or threatened release" that
present an "imminent and substantial endangerment" to the public health and
safety of the environment, (C) "solid waste" that is capable of causing a
"hazardous substance incident" (D) "solid waste" with respect to which
special requirements are imposed by any applicable Governmental Entity upon
the generation and transportation thereof as such terms are defined and used
within the meaning of the State Acts, or (E) any "pollutant" or "toxic
pollutant" as such term is defined in the Federal Clean Water Act, 33 U.S.C.
Section 1251-1376, as amende, by Public Law 100-4, February 4, 1987, and the
regulations promulgated thereunder, including 40 C.F.R. Sections 122.1 and
122.26.
"Managing Underwriter" shall mean Sutro (as defined below).
"Managing Underwriters" shall mean the Managing Underwriter and
such other firm or firms as the Company and the Managing Underwriter shall
agree.
"Material Adverse Change" shall have the meaning given such term
in Sections 4.17 and 5.9.
"Material Contract" shall have the meaning given such term in
Section 4.12.
"Merger" shall mean the merger of the PCBG Merger Corporation
with and into the Bank.
"Offering" shall mean a public offering underwritten by the
Underwriters (as defined below), as determined by the Company in its sole
discretion, and based upon current market conditions and assumptions of
sufficient shares of the Company Stock at a gross offering price to be
determined by the Company and its underwriters, in order to fund cash portion
of the acquisition of the Bank by the Company, to provide new capital for
growth of the Company following the acquisition of the Bank by the Company,
and the payment of any necessary expenses of the Company as provided herein,
as determined by the Company in its sole discretion.
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"Offering Price" shall mean the gross offering price per share of
Company Stock in the Offering.
"OREO" shall have the meaning given such term in Section 6.2(xx).
"Party" shall mean either the Company or the Bank and "Parties"
shall mean both the Company and Bank.
"Per Share Consideration" shall have the meaning given such term
in Section 2.4.
"Permit" shall mean any United States federal, foreign, state,
local or other license, permit, franchise, certificate of authority, order or
approval necessary or appropriate under any applicable Rule (as defined
below).
"Person" shall mean any natural person, corporation, trust,
association, unincorporated body, partnership, joint venture, Governmental
Entity, statutorily or regulatory sanctioned unit or any other person or
organization.
"Proxy Statement" shall have the meaning given such term in
Section 6.8.
"RAP" shall mean regulatory accounting principles, if any,
applicable to a particular person.
"Real Property" shall have the meaning given such term in
subsection (a) of Section 4.6.
"Representatives" shall have the meaning given such term in
subsection (a) of Section 6. 3.
"Rule" shall mean any statute or law or any judgment, decree,
injunction, order, regulation or rule of any Governmental Entity, including,
without limitation, those relating to disclosure, usury, equal credit
opportunity, equal employment, fair credit reporting and anticompetitive
activities.
"S-1" means the registration statement on Form S-1 to be filed
with the SEC relating to the registration under the Securities Act of the
shares of Company Stock to be issued in the Offering.
"S-4" means the registration statement on Form S-4, and such
amendments thereto, that is filed with the SEC to register the Warrants to be
issued in the Merger under the Securities Act and to clear use of the Proxy
Statement in connection with the Company Shareholders' Meeting and the Bank
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Shareholders' Meeting pursuant to the regulations promulgated under the
Exchange Act.
"SEC" means the Securities and Exchange Commission.
"SEC Reports" shall mean all reports filed by a Party hereto
pursuant to the Exchange Act with the SEC or the FDIC.
"Secretary of State" shall mean the Secretary of State of the
State of California.
"Section 1300" shall mean Section 1300 ET SEQ. of the California
Corporations Code.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and all rules and regulations thereunder.
"State Acts" shall have the meaning given such term in the
definition of "Environmental Law."
"Surviving Bank" shall mean the bank surviving the Merger.
"Surviving Bank Stock" shall mean the common stock, no par value,
of the Surviving Bank.
"Sutro" shall mean Sutro & Company who may also act as a
financial advisor to the Company and as an underwriter in the Offering.
"Tax Filings" shall have the meaning given such term in Section
4.8.
"Third Party Consent" shall have the meaning given such term in
Sections 6.17 and 7.8.
"To the knowledge" and "to the best knowledge" shall have the
meanings given such terms in Section 15.15.
"Total Acquisition Costs" shall mean the sum of the Aggregate
Purchase Consideration for the Bank and Valley Bank.
"Unaudited Bank Financial Statements" shall have the meaning
given such term in Section 4.4.
"Understanding" shall have the meaning given such term in Section
4.11(m) or 4.12.
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"Underwriter" shall mean a group of broker/dealers that include
the Managing Underwriters as assembled by the Managing Underwriter with the
consent of the Company.
"Warrant" shall mean a warrant issuable by the Company at the
Closing exercisable into one (1) share of the Company for each share of Bank
Stock exchanged for a ten year period from the Closing Date with an exercise
price equal to 122% of the Offering Price.
"Warrant Agreement" shall mean the warrant agreement attached
hereto as Exhibit "D."
ARTICLE II
THE MERGER AND RELATED MATTERS
2.1 THE MERGER. The Company agrees that it will use its best
efforts, with all necessary cooperation of the Bank, to perfect the
organization of PCBG Merger Corporation in accordance with the CGCL prior to
the Closing Date. The directors and officers of PCBG Merger Corporation, and
the Articles of Incorporation and Bylaws of PCBG Merger Corporation, shall be
determined by the Company. Subject to the provisions of this Agreement, the
Parties agree to request that the approval of the Merger to be issued by the
Commissioner, the FDIC, the FRB and any other necessary regulatory agency on
or prior to the Closing Date shall provide that the Merger shall become
effective (the "Effective Time") as of the Closing Date. The Bank shall
cause its officers to execute the Agreement of Merger, as well as all other
necessary documents, in order to effect the Merger in accordance with the
terms hereof as requested by the Company. At the Effective Time of the
Merger, the following transactions will occur simultaneously:
(a) MERGER OF THE BANK AND PCBG MERGER CORPORATION. The Bank
and PCBG Merger Corporation shall be merged under the certificate of
authority of the Bank, with the Bank being the Surviving Bank pursuant to the
provisions of, and with the effect provided in, the CGCL and the CFC, and
shall continue its corporate existence under the laws of the State of
California. The name of the Surviving Bank shall be "The Bank of Hemet."
Upon the consummation of the Merger, the separate corporate existence of PCBG
Merger Corporation shall cease.
(b) EFFECT ON BANK STOCK. Subject to Section 2.3, each share
of Bank Stock issued and outstanding immediately prior to the Effective Time
of the Merger shall, on and at the Effective Time of the Merger, pursuant to
the Agreement of Merger and without any further action on the part of the
Bank or the holders of Bank Stock, be automatically cancelled and cease to be
an issued and outstanding share of Bank Stock, and shall be exchanged for and
converted into the right to receive the Per Share Consideration.
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(c) EFFECT ON PCBG MERGER CORPORATION STOCK. Each share of
PCBG Merger Corporation Stock issued and outstanding immediately prior to the
Effective Time of the Merger shall, on and at the Effective Time of the
Merger, pursuant to the Agreement of Merger and without any further action on
the part of the Bank or the holder of the PCBG Merger Corporation Stock be
converted into, and shall for all purposes be deemed to represent, one share
of Surviving Bank Stock, and one certificate representing one share of the
Surviving Bank Stock will be issued to the Company.
(d) BANK CORPORATE GOVERNANCE CHANGES. The Charter Document of
the Bank as in effect immediately prior to the Effective Time shall continue
in effect after the Merger until thereafter amended in accordance with
applicable law and the operations of the Bank shall continue in effect after
the Merger; except that the Bank shall have taken prior to the Effective Time
all necessary steps so that at the Effective Time (i) James B. Jaqua,
President, Chief Executive Officer and a director of the Bank, shall have
tendered his resignation from his positions at the Bank, in form and
substance satisfactory to the Company, without incurring any liability on the
part of any Party; the Bank and the Company will honor Mr. Jaqua's Executive
Salary Continuation Agreement dated March 22, 1995; Mr. Jaqua will continue
as Chairman of Banklink for a one (1) year period, with no management
authority and no additional compensation, subject to possible annual
reappointment as Chairman of Banklink in the sole discretion of the Company;
the Company intends to appoint Mr. Jaqua as the Bank's representative on the
Company's Board of Directors as described in Section 2.1(e), and any such
Bank representation on the Company's Board of Directors shall be for a
minimum three (3) year period; and the Company in its sole discretion may
extend such time period. Mr. Jaqua's appointments as Chairman of Banklink
and as a director of the Company shall be annual appointments to be made by
the Company in its sole discretion; and Mr. Jaqua and the Company will enter
into a noncompetition agreement and a consulting agreement, the forms of
which are attached hereto as part of Exhibit 2.1(d)(1); (ii) Caswell shall
have been appointed Chairman of the Board and Chief Executive Officer of the
Bank; (iii) John J. McDonough, Chairman of the Board of the Bank, shall
resign as Chairman of the Board of the Bank but shall remain a member of the
Board of Directors of the Bank unless and until a successor is chosen by the
Company, the Bank shall honor Mr. McDonough's Executive Salary Continuation
Agreement dated August 17, 1981; and the Company and Mr. McDonough will enter
into a noncompetition agreement and a consulting agreement, the forms of
which are attached hereto as part of Exhibit 2.1(d)(2), (iv) except for the
persons set forth on Exhibit 2.1(d), which Exhibit shall be delivered by the
Company to the Bank within sixty (60) days of the date of the Agreement, each
of the directors of the Bank shall have tendered his resignation as a
director of the Bank, in form and substance satisfactory to the Company,
without incurring any liability on the part of any Party; (v) the number of
authorized directors, and the specific members of the Board of Directors, of
the Bank shall be changed as
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determined in the sole discretion of the Company; and (vi) the Company shall
name additional directors in its sole discretion who shall be duly elected
and appointed to the Board of Directors of the Bank (or if any such persons
is unable to serve, such other person designated by the Company) and shall
serve until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified (clauses (i)-(vi) being
hereinafter collectively referred to as the "Bank Corporate Governance
Changes.").
(e) COMPANY CORPORATE GOVERNANCE CHANGES. The Charter
Documents of the Company as in effect immediately prior to the Effective Time
shall continue in effect after the Merger until thereafter amended in
accordance with applicable law and the members of the Board of Directors and
the Executive Officers of the Company immediately prior to the Merger shall
continue in their respective positions after the Merger and be the Board of
Directors and the Executive Officers of the Company, except that the Company
shall have taken prior to the Effective Time all necessary steps so that, (i)
the Company's Charter Documents shall be amended to provide for a range of
directors of between five (5) to nine (9), and at least seven (7)
individuals, including one individual from the Board of Directors of the
Bank, which is intended to be Mr. Jaqua, and which shall be for a maximum of
(3) three years unless the Company in its sole discretion decides to extend
such time period, and two (2) individuals from the Board of Directors of
Valley Bank, all three of whom shall be annual appointments as selected in
the sole discretion of the Company, excluding Caswell who is currently the
sole director and who shall remain a director, shall be appointed to the
Board of Directors of the Company in the sole discretion of the Company
(clause (i) being hereinafter collectively referred to as the "Company
Corporate Governance Changes").
2.2 EFFECT OF THE MERGER. At the Effective Time of the Merger,
the corporate existence of PCBG Merger Corporation and the Bank shall be
merged into and continued in the Surviving Bank, and the Surviving Bank shall
be deemed the same corporation as each corporation participating in the
Merger. All rights, franchises, and interests of PCBG Merger Corporation and
Bank in and to every type of property (real, personal and mixed) and choses
in action shall be transferred to and vested in the Surviving Bank by virtue
of the Merger without any deed or other transfer and the Surviving Bank shall
hold and enjoy all rights of property, franchises and interests, in the same
manner and to the same extent as such rights, franchises and interests were
held or enjoyed by any one of the consolidating corporations at the Effective
Time of the Merger.
2.3 DISSENTING SHAREHOLDERS. (a) Any Bank Perfected Dissenting
Shares shall not be converted into the right to receive the Per Share
Consideration, but the holders thereof shall be entitled only to such rights
as are granted them by Section 1300. Each dissenting shareholder who is
entitled to payment for his
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shares of Bank Stock under Section 1300 shall receive such payment in an
amount as determined pursuant to Section 1300.
(b) If any shareholder of the Bank shall fail to perfect, or
shall effectively withdraw or lose, his or her rights under Section 1300, the
Bank Dissenting Shares of such holder shall be treated for purposes of this
Article II as any other shares of outstanding Bank Stock. If any holder of
Bank Stock shall fail to perfect, or shall effectively withdraw or lose, his
or her right to appraisal of and payment for his or her Bank Dissenting
Shares under Section 1300, each share of Bank Dissenting Shares shall be
converted into the right to receive the Per Share Consideration.
2.4 THE AGGREGATE PURCHASE CONSIDERATION AND PER SHARE
CONSIDERATION. The Aggregate Purchase Consideration shall be equal to the
sum of (i) the product of 844,278 and the Per Share Consideration and (ii)
the Aggregate Option Price. The Per Share Consideration shall be equal to
$51.00 in cash. One (1) Warrant shall be added to the Per Share
Consideration for each $51.00 paid in cash. The Per Share Consideration will
be increased (the "Increase in Per Share Consideration"), up to a maximum of
$58.50 per share, calculated as follows: the quotient of (a) the ratio of
the Aggregate Purchase Consideration to the Total Acquisition Costs,
multiplied by the difference between the net proceeds received in the
Offering and the Expected Net Proceeds in the Offering, divided by (b) the
sum of the total number of issued and outstanding shares of Bank Stock and
the number of Bank Options outstanding as of the date of this Agreement. An
Illustration of such calculation is attached as Exhibit 2.4(a). In the event
of such increase in the Per Share Consideration, the number of Warrants shall
be reduced and shall be calculated as follows: the amount of the reduction
of the Warrants per share of Bank Stock shall be equal to the Increase in Per
Share Consideration divided by $18.00. An illustration of such calculation
is attached as Exhibit 2.4(b).
2.5 DELIVERY OF CONSIDERATION. At the Closing, the Company
will deliver to the Exchange Agent an amount of cash equal to the Aggregate
Purchase Consideration, and the Warrants, plus any cash payment for a
fractional share of Company Stock. Delivery to such holders of the cash and
Warrants to which they are entitled will subsequently be made by the Exchange
Agent against delivery of share certificates formerly evidencing Bank Stock
(duly executed and in proper form for transfer) to the Exchange Agent in
accordance with this Section 2.5 and an agreement to be entered into between
the Company and the Exchange Agent.
2.6 NAME OF SURVIVING BANK. The name of the Surviving Bank
shall be "The Bank of Hemet," unless the Company proposes to change such name
following the Closing Date, and the Board of Directors of the Bank agrees to
support such name change.
2.7 (Reserved)
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2.8 STOCK OPTIONS. Immediately prior to the Effective Time of
the Merger, all stock options will be fully vested and each holder of a Bank
Option will be given the opportunity to, in whole or in part, cancel such
option and receive at the Closing an amount in cash equal to the number of
shares of Bank Stock covered by such option multiplied by the number obtained
by subtracting the exercise price of such option from the Per Share
Consideration in effect on the Closing Date (the total of sum of such
payments for all Bank Options so cancelled shall be defined as the "Aggregate
Option Price"). For each $51.00 of cash paid by the Company in the previous
sentence, each holder of a bank option will receive one (1) Warrant. Such
cash payment may be made either by the Bank, the Company or a combination of
both as determined in the sole discretion of the Company. All remaining Bank
Options which are entitled to participate in the Aggregate Option Price but
the holder of a Bank Option elects not to participate in the Aggregate Option
Price shall be cancelled immediately prior to the Effective Time of the
Merger.
2.9 DIRECTORS' AGREEMENTS. Concurrently with the execution of
this Agreement, the Bank shall cause each of its directors to enter into the
Directors' Agreement.
2.10 TRANSMITTAL LETTER. Immediately after the Effective Time of
the Merger, the Company shall instruct the Exchange Agent to mail appropriate
transmittal materials to the former stockholders of Bank Stock, and the form
of such transmittal letter shall be subject to the reasonable approval of the
Bank.
ARTICLE III
THE CLOSING
3.1 CLOSING DATE. Consummation of the transactions
contemplated by this Agreement shall take place at the office of the Bank,
3715 Sunnyside Drive, Riverside, California, or such other location as may be
agreed upon by the parties, on the Closing Date. The Effective Time shall
occur following the last to occur of (i) the receipt of all approvals and
consents specified in this Agreement and the expiration of the applicable
waiting periods specified in Article IX, and (ii) satisfaction of the
conditions precedent set forth in Articles IX, X and XI or written waiver of
such conditions as provided herein (the "Closing Date", "Effective Time of
the Merger" or "Effective Time").
3.2 EXECUTION OF AGREEMENT OF MERGER. Prior to the Closing
Date, and as soon as practicable after the organization of PCBG Merger
Corporation, the Agreement of Merger (as amended, if necessary, to conform to
any requirements of any Governmental Entity having authority over the Merger)
shall be executed by Bank and PCBG Merger Corporation. On the Closing Date,
the Merger shall become
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effective in accordance with the approvals granted by the Commissioner, the
FDIC and the FRB, and the Agreement of Merger, together with all requisite
certificates, shall be duly filed with the California Secretary of State.
3.3 DOCUMENTS TO BE DELIVERED. At the Closing the Parties
shall deliver, or cause to be delivered, such documents or certificates as
may be necessary in the reasonable opinion of counsel for any of the parties,
to effectuate the transactions called for in this Agreement. If, at any time
after the Effective Time of the Merger, the Company or its successors or
assigns shall determine that any further conveyance, assignment or other
documents or any further action is necessary or desirable to further
effectuate the transactions set forth herein or contemplated hereby, the
officers and directors of the Parties hereto shall execute and deliver, or
cause to be executed and delivered, all such documents as may be reasonably
required to effectuate such transactions.
3.4 NO FRACTIONAL WARRANTS. Notwithstanding any other
provision of this Agreement, no fractional Warrants shall be issued, and no
cash or other consideration shall be paid in lieu of fractional Warrants.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BANK
The Bank represents and warrants to the Company as follows:
4.1 ORGANIZATION AND GOOD STANDING. The Bank is a California
banking corporation duly organized and validly existing in good standing
under the laws of the State of California and it has the corporate power and
authority to carry on its business as presently conducted, and is authorized
to transact business as a bank. The Bank is a not a member of the Federal
Reserve System and its deposits are insured by the FDIC in the manner and to
the extent provided by law. The Bank has all requisite corporate power and
authority to own, lease and operate its properties and assets and to carry on
its business as presently conducted. The nature of its operations and the
business transacted by it as of the date hereof make licensing and
qualification in any other state or jurisdiction unnecessary. The Bank has
delivered to the Company true and correct copies of its Articles of
Incorporation and Bylaws, as amended and in effect as of the date hereof,
4.2 CAPITALIZATION. The authorized capital stock of Bank
consists of 20,000,000 shares of Common Stock, no par value, of which 844,278
shares are outstanding on the date hereof, all validly issued, fully paid and
nonassessable, and 10,000,000 shares of Preferred Stock, none of which are
outstanding. Except for stock options covering 46,968 shares of Bank Stock
granted pursuant to the Bank Stock Option Plan and the Warrant Agreement, no
unissued shares of Bank Stock or any other securities of the Bank are subject
to any warrants, options, rights or
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commitments of any character, kind or nature and the Bank is not obligated to
issue or repurchase any shares of Bank Stock or any other security to or from
any person except in accordance with the terms of the Bank Stock Option Plan
and Agreements pursuant thereto, and true and correct copies, as amended and
in effect as of the date hereof have been delivered to the Company. Exhibit
4.2 sets forth the name of each holder of a Bank Option, the number of shares
of Bank Stock covered by each such holder's option, the date of grant of each
such holder's option, the exercise price per share, the vesting schedule for
each such holder's option, and the expiration date of each such holder's
option.
4.3 SUBSIDIARIES. Except as indicated in Exhibit 4.3, the Bank
does not own, directly or indirectly (except as pledgee pursuant to loans
which are not in default), any equity position or other voting interest in
any corporation, partnership, joint venture or other entity.
4.4 FINANCIAL STATEMENTS. The Bank has delivered to the
Company copies of the audited Consolidated Balance Sheets of the Bank as of
December 31, 1997 and 1996; Consolidated Statements of Operations,
Stockholders' Equity and Cash Flows for each of the years ended December 31,
1997, 1996 and 1995, and the related notes and related opinions thereon of
Arthur Andersen LLP, certified public accountants, with respect to such
financial statements (the "Audited Bank Financial Statements"). The Bank has
delivered to the Company copies of the unaudited Consolidated Balance Sheet
of the Bank as of September 30, 1998; Consolidated Statement of Operations,
Stockholders' Equity and Cash Flows for the nine month period ended September
30, 1998, and the related notes thereon (the "Unaudited Bank Financial
Statements). The Bank has furnished the Company with true and correct copies
of each management letter or other letter delivered to the Bank by Arthur
Andersen LLP in connection with the Audited Bank Financial Statements or
relating to any review of the internal controls of the Bank by Arthur
Andersen LLP since January 1, 1996. The Audited Bank Financial Statements
and the Unaudited Bank Financial Statements: (i) present fairly the financial
condition and results of operations of the Bank as of and for the dates or
periods covered thereby in accordance with GAAP and RAP consistently applied
throughout the periods involved; (ii) are based on the books and records of
the Bank; (iii) contain and reflect reserves for all material accrued
liabilities and for all reasonably anticipated losses, and set forth adequate
reserves for loan losses and other contingencies to the extent required by
GAAP and RAP; and (iv) none of the Audited Bank Financial Statements or
Unaudited Bank Financial Statements contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained therein not misleading under GAAP or RAP. The books and
records of the Bank have been, and are being, maintained in all material
respects in accordance with GAAP and RAP and other applicable legal and
accounting requirements and reflect only actual transactions.
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4.5 BOOKS AND RECORDS.
(a) The minute books of the Bank which have been made available to
the Company contain (i) true, accurate and complete records of all meetings and
actions taken by the Board of Directors, Board committees and shareholders of
the Bank, and (ii) true and complete copies of its Charter Documents.
(b) The Bank has records which accurately and validly reflect, in
all material respects, its transactions and accounting controls sufficient to
insure that such transactions are (i) in all material respects, executed in
accordance with management's general or specific authorization, and (ii)
recorded in conformity with GAAP or RAP; such records, to the extent they
contain important information pertaining to the Bank which is not easily and
readily available elsewhere, have been duplicated, and such duplicates are
stored safely and securely pursuant to procedures and techniques reasonably
adequate for companies of the size of the Bank and in the businesses in which
the Bank is engaged; and the data processing equipment and software used by the
Bank in the operation of its businesses (including any disaster recovery
facility) to generate and retrieve such records are reasonably adequate for
companies of the size of the Bank and in the businesses in which the Bank is
engaged.
4.6 PROPERTY AND ASSETS. (a) Exhibit 4.6(a) sets forth a general
description (including the character of the ownership of the Bank) of all real
property of the Bank, including fees, leaseholds and all other interest in real
property (including real property that is DPC Property) ("Real Property").
Except as set forth on Exhibit 4.6(a), (i) the Bank has good and marketable
title, free and clear of any encumbrance, lien or charge of any kind or nature
(except liens for taxes not yet due) to all of the property, real, mixed or
intangible, reflected on the Audited Bank Financial Statements, except as
reflected therein or in the notes thereto (except property sold or transferred
or Encumbrances incurred in the ordinary course of business since the date
thereof except (a) Encumbrances in the aggregate which do not materially detract
from the value, interfere with the use, or restrict the sale, transfer or
disposition, of such properties and assets or otherwise materially and adversely
affect the Bank; (b) any lien for taxes not yet due; and (c) any Encumbrances
arising under the document that created the interest in the Real Property (other
than Encumbrances arising as a result of any breach or default of the Bank);
(ii) all leasehold interests for Real Property and any material personal
property used by the Bank in its business are held pursuant to lease agreements
which are valid and enforceable, except as the enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
other laws of general application relating to or affecting enforcement of
creditors rights and the application of equitable principles in any action,
legal or equitable in accordance with their terms; (iii) all such properties
comply in all material respects with all applicable private agreements, zoning
requirements and other governmental laws and regulations relating thereto and
there are no condemnation proceedings pending or, to the knowledge of the Bank,
threatened with respect to such
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properties; (iv) the Bank has valid itle or other ownership rights under
licenses to all material intangible personal or intellectual property used by
the Bank in its business, free and clear of any claim, defense or right of
any other person or entity which is material to such property, subject only
to rights of the licensors pursuant to applicable license agreements, which
rights do not materially adversely interfere with the use of such property;
and (v) all material insurable properties owned or held by the Bank are
adequately insured in such amounts and against such risks as is customary
with banks of similar size. The Bank has furnished the Company with true and
correct copies of all leases included on Exhibit 4.6(a) delivered as of the
date of the Agreement.
(b) CONDITION OF PROPERTIES. All tangible properties of the
Bank that are material to the business, financial condition, or results of
operations of the Bank are in a good state of maintenance and repair, except
for ordinary wear and tear, and are adequate for the conduct of the business
of the Bank as presently conducted, and comply with all applicable Rules
related thereto. Except as set forth in Exhibit 4.6(a), (i) the execution of
this Agreement, the performance of the obligations of the Bank hereunder and
the consummation of the transactions contemplated herein, including the
Merger, does not conflict with and will not result in a breach or default
under any lease, agreement or contract described in Exhibit 4.6(a), or give
any other party thereto a right to terminate or modify any term thereof; (ii)
the Bank has no obligation to improve any Real Property; (iii) each lease and
agreement under which the Bank is a lessor is in full force and effect and is
a valid and legally binding obligation of the Bank, and, to the best
knowledge of the Bank, each other party thereto; and (iv) the Bank, and to
the best knowledge of the Bank, each other party to any such lease or
agreement have performed in all material respects all the obligations
required to be performed by them to date under such lease or agreement and
are not in default in any material respect under any such lease or agreement
and there is no pending or, to the best knowledge of the Bank, threatened
proceeding, or proceeding which the Bank has reason to believe may be
threatened, with respect to such property or any such lease.
4.7 LITIGATION PROCEEDINGS AND AGREEMENTS WITH GOVERNMENTAL
ENTITIES.
(a) The Bank is not engaged as a defendant in any legal or other
proceedings before any court, administrative agency or other Governmental Entity
except as is shown on Exhibit 4.7. Except as set forth on Exhibit 4.7, the Bank
is not aware of any "threatened or pending litigation" (within the meaning of
Paragraph 5 of the American Bar Association Statement of Policy Regarding
Lawyers' Responses to Auditors' Requests for Information adopted December 8,
1975) against the Bank. The Bank is not subject to any agreement, order, writ,
injunction or decree of any federal, state or local court, out of a proceeding
involving the Bank or any of its business or properties except as described in
Exhibit 4.7. The Bank has not been served with notice of, nor, to best of
Bank's knowledge is it currently under investigation with respect to, any
violation of
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federal, state or local law or administrative regulation. Except as set
forth on Exhibit 4.7, there is no (i) outstanding judgment, order, writ,
injunction or decree, stipulation or award of any Governmental Entity or by
arbitration, against, or to the knowledge of the Bank, affecting the Bank or
its assets or business that (a) has had or may have a material adverse effect
on the assets, liabilities, business, financial condition or results of
operations of the Bank, (b) requires any payment by, or excuses a material
obligation of a third party to make any payment to, the Bank, or (c) has the
effect of prohibiting any business practice of, or the acquisition, retention
or disposition of property by, the Bank; or (ii) legal, administrative,
arbitration, investigatory or other proceeding pending or, to the best
knowledge of the Bank that has been threatened, or which the Bank has reason
to believe may be threatened, against or affecting any director, officer,
employee, agent or representative of the Bank, in connection with which any
such person has or may have rights to be indemnified by the Bank.
(b) Except as set forth in Exhibit 4.7, the Bank is not a party
to, or otherwise subject to, any agreement or memorandum of understanding
with or order of any Governmental Entity charged with the supervision or
regulation of banks or engaged in the insurance of bank deposits, that
restricts the conduct of its business, or in any manner relates to its
capital adequacy, its credit or investment policies or its management.
4.8 TAXES AND ASSESSMENTS. The Bank has timely filed all
federal income and state franchise tax returns and all tax reports or returns
which it is required to file with applicable federal, state, county or local
authorities and agencies except (a) where the failure to make any such filing
would not have any materially adverse effect on the business, financial
condition or results of operations of the Bank taken as a whole, and (b)
where the required filing date has been lawfully extended, and the Bank has
paid all taxes provided for and to be due in such returns and reports ("Tax
Filings"). Except as set forth in Exhibit 4.8, the Bank's Tax Filings have
not been examined by a Governmental Entity in the past five (5) years. As of
December 31, 1997, to the extent required by GAAP, the Bank had paid, or set
up adequate accruals for the payment of, all taxes, penalties and assessments
for which it was liable as of such date, whether or not disputed, with
respect to any and all United Sates federal, foreign, state, local,
environmental (including under any Environmental Law) and other taxes for the
periods covered by the financial statements of the Bank and for all prior and
subsequent periods. Except as set forth in Exhibit 4.8 the Bank has no
knowledge of any deficiency proposed to be assessed against it. The Bank has
paid all assessments made by the FDIC and the Commissioner required to be
paid prior the date hereof. There is currently no federal or state income
tax audit or investigation in process or to the best knowledge of the Bank
any other pending investigation by any authorized body of the taxes paid or
to be paid by the Bank, and the Bank has not been informed that any such
audit or investigation is proposed.
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4.9 COMPLIANCE WITH LAWS AND REGULATIONS.
(a) Except as set forth in Exhibit 4.9, the Bank is not in default
under or in breach of any law, ordinance, rule, regulation, order, judgment or
decree applicable to it promulgated by any Governmental Entity having authority
over it, where such default or breach would have a material adverse effect on
its financial condition, results of operations, or business.
(b) The Bank has conducted in all material respects its businesses
in accordance with all applicable federal, foreign, state and local laws,
regulations and orders, including without limitation disclosure, usury, equal
credit opportunity, equal employment, fair credit reporting, antitrust,
licensing and other laws, regulations and orders, and the forms, procedures and
practices used by the Bank are in compliance with such laws, regulations, and
orders, except for such violations or noncompliance as will not have a material
adverse effect on the financial condition, results of operations, or business of
the Bank.
4.10 PERFORMANCE OF OBLIGATIONS. Except as set forth in Exhibit
4.10, the Bank has performed in all respects all of the obligations required to
be performed by it to date and is not in default under or in breach of any term
or provision of any covenant, contract, lease, indenture or any other agreement
to which the Bank is a party or is subject or is otherwise bound, and no event
has occurred which, with the giving of notice or the passage of time or both,
would constitute such default or breach, where such default or breach would have
a material adverse effect on the financial condition, results of operations, or
business of the Bank, except for loans of the Bank in default on the date of
this Agreement. No party with whom the Bank has an agreement which is material
to the financial condition, results of operations or business of the Bank is in
default thereunder.
4.11 EMPLOYEES.
(a) Except as set forth in Exhibit 4.11(a), there are no
understandings for the employment of any officer or employee of the Bank
which are not terminable by the Bank without liability on not more than 30
days' notice. Except as set forth in Exhibit 4.11(a), the Bank is not a
party to an oral or written consultant agreement not terminable upon 60 days'
or less notice or involving the payment of more than $10,000 per annum.
Except as set forth in Exhibit 4.11(a), there are no material controversies
pending or threatened between the Bank and any of its employees. Except as
disclosed in the Audited Bank Financial Statements, the Unaudited Bank
Financial Statement or in Exhibit 4.11(a), all material sums due for employee
compensation and benefits have been duly and adequately paid or provided, and
all deferred compensation obligations are fully funded. The Bank is not a
party to any collective bargaining agreement with respect to any of its
employees or any labor organization to which its employees or
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any of them belong. Except as set forth in Exhibit 4.11(a), no director,
officer or employee of the Bank is entitled to receive any payment of any
amount under any employment agreement, severance plan or other benefit plan
as a result of the consummation of any transaction contemplated by this
Agreement.
(b) Except as disclosed in Exhibit 4.11(b), (i) the Bank is and
has been in material compliance with all applicable laws respecting employment
and employment practices, terms and conditions of employment and wages and
hours, including, without limitation, any such laws respecting employment
discrimination and occupational safety and health requirements, and in any
unfair labor practice; (ii) there is no material unfair labor practice complaint
against the Bank pending or, to the knowledge of the Bank, threatened before the
National Labor Relations Board; (iii) there is no labor dispute, strike,
slowdown or stoppage actually pending or, to the knowledge of the Bank,
threatened against or directly affecting the Bank; and (iv) the Bank has not
experienced any material work stoppage or other material labor difficulty during
the past five years, except in each case which would not result in a Material
Adverse Change.
(c) Except as disclosed in Exhibit 4.11(c), the Bank does not
maintain, contribute to or participate in or have any material liability under
any employee benefit plans, as defined in ERISA, or any nonqualified employee
benefit plans or deferred compensation, bonus, stock or incentive plans, or
other employee benefit or fringe benefit programs for the benefit of former or
current employees of the Bank (the "Employee Plans"). To the best knowledge of
the Bank, no present or former employee of the Bank has been charged with
breaching nor has breached a fiduciary duty under any of the Employee Plans.
The Bank does not participate in, nor has it in the past five years participated
in, nor has it any present or future obligation or liability under, any
multiemployer plan (as defined at Section 3(37) of ERISA). Except as may be
separately disclosed in Exhibit 4.11(c), the Bank does not maintain, contribute
to, or participate in, any plan that provides health, major medical, disability
or life insurance benefits to former employees of the Bank.
(d) Exhibit 4.11 (d) sets forth and describes all Employee Plans
in which the Bank participates, or by which it is bound, including, without
limitation; (i) any profit sharing, deferred compensation, bonus, stock option,
stock purchase, pension, retainer, consulting, retirement, welfare or incentive
plan or agreement whether legally binding or not; (ii) any plan providing for
"fringe benefits" to its employees, including but not limited to vacation, sick
leave, medical, hospitalization, life insurance and other insurance plans, and
related benefits; (iii) any written employment agreement and any other
employment agreement not terminable at will; or (iv) any other "employee benefit
plan" (within the meaning of Section 3(3) of ERISA) (collectively, the "Employee
Plans"). Except as set forth in Exhibit 4.11(d), (i) there are no negotiations,
demands or proposals that are pending or threatened that concern matters now
covered, or that would be covered, by any employment agreements or Employee Plan
other than amendments
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to plans qualified under Section 401 of the Code that are required by the Tax
Reform Act of 1986 and later legislation; (ii) the Bank is in compliance with
the material reporting and disclosure requirements of Part 1 of Subtitle IB
of ERISA and the corresponding provisions of the Code to the extent
applicable to all such Employee Plans; (iii) the Bank has substantially
performed all of its obligations under all such Employee Plans and employment
agreements required to be performed heretofore; and (iv) there are no
actions, suits or claims (other than routine claims for benefits) pending or,
to the best knowledge of the Bank, threatened against any such Employee Plans
and employment agreements or the assets of such plans, and to the best
knowledge of the Bank, no facts exist which could give rise to any actions,
suits or claims (other than routine claims for benefits) against such plans
or the assets of such plans.
(e) The "Employee Plans" (within the meaning of Section 3(2) of
ERISA) described on Exhibit 4.11(d) have been duly authorized by the Board of
Directors of the Bank. Except as set forth in Exhibit 4.11(d), each such plan
and associated trust intended to be qualified under Section 401(a) and to be
exempt from tax under Section 501(a) of the Code, respectively, has either
received a favorable determination letter from the Internal Revenue Service (the
"IRS"), has applied for such a determination letter or will apply for such a
determination letter before the expiration of the remedial amendment period set
forth in Section 401(b) of the Code, as the IRS may extend such period, and to
the best knowledge of the Bank, no event has occurred that will or could give
rise to disqualification of any such plan which is intended to be qualified
under Section 401(a) of the Code or loss of the exemption from tax of any such
trust which is intended to be exempt from tax under Section 501(a) of the Code.
No event has occurred that will or could subject any such plans to tax under
Section 511 of the Code. None of such plans has engaged in a merger or
consolidation with any other plan or transferred assets or liabilities from any
other plan. To the best of the Bank's knowledge, no prohibited transaction
(within the meaning of Section 409 or 502(i) of ERISA or Section 4975 of the
Code) or party-in-interest transaction (within the meaning of Section 406 of
ERISA) has occurred with respect to any of such plans which could subject the
Bank to an excise tax or penalty. To the best knowledge of the Bank, no employee
of the Bank has engaged in any transactions which could subject the Bank to
indemnify such person against liability. All costs of plans have been provided
for on the basis of consistent methods in accordance with sound actuarial
assumptions and practices. No Employee Plan has incurred any "accumulated
funding deficiency" (as defined in Section 302(2) of ERISA), whether or not
waived, taking into account contributions made within the period described in
Section 412(c)(10) of the Code; nor are there any unfunded amounts under any
Employee Plan which is required to be funded under Part 3 of Subtitle IB of
ERISA and Section 412 of the Code); nor has the Bank failed to make any
contributions or pay any amount due and owing as required by law or the terms of
any Employee Plan or employment agreement. Subject to amendments that are
required by the Tax Reform Act of 1986 and later legislation, since the last
valuation date for each
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Employee Plan, there has been no amendment or change to such plan that would
increase the amount of benefits thereunder.
(f) The Bank does not sponsor or participate in, or has not
sponsored or participated in, any employee benefit pension plan to which Section
4021 of ERISA applies that would create a liability under Title IV of ERISA.
(g) The Bank does not sponsor or participate in, or has not
sponsored or participated in, any Employee Plan that is a "multi-employer plan"
(within the meaning of Section 3(37) of ERISA) that would subject such Person to
any liability with respect to any such plan.
(h) All group health plans of the Bank (including any plans of
Affiliates of the Bank that must be taken into account under Section 162(i) or
(k) of the Code as in effect immediately prior to the Technical and
Miscellaneous Revenue Act of 1988 and Section 4980B of the Code) have been
operated in compliance with the group health plan continuation coverage
requirements of Section 4980B of the Code to the extent such requirements are
applicable.
(i) There have been no acts or omissions by the Bank that have
given rise to or may give rise to fines, penalties, taxes, or related charges
under Sections 502(c) or (i) or 4071 of ERISA or Chapter 43 of the Code which
could be imposed on the Bank.
(j) Except as described in Section 4.11(j), the Bank does not
maintain any Employee Plan or employment agreement pursuant to which any
Employee Plan or other payment will be required to be made by the Bank or
pursuant to which any other benefit will accrue or vest in any director, officer
or employee the Bank, in either case as a result of the consummation of the
transactions contemplated by the Agreement.
(k) No "reportable event," as defined in ERISA, has occurred with
respect to any of the Employee Plans.
(l) All amendments required to bring each of the employee benefit
plans into conformity with all of the provisions of ERISA and the Code and all
other applicable laws, rules and regulations have been made, or will be made
before the expiration of the remedial amendment period set forth under Section
401(b) of the Code, as such period may be extended by the IRS.
(m) Exhibit 4.11(m) sets forth the name of each director, officer,
employee, agent or representative of the Bank and every other person entitled to
receive any benefit or any payment of any amount under any existing employment
agreement, severance plan or other benefit plan or Understanding as a result of
the consummation of any transaction contemplated in this Agreement, and with
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respect to each such person, the nature of such benefit or the amount of such
payment, the event triggering the benefit or payment, and the date of, and
parties to, such employment agreement, severance or other benefit plan or
Understanding. The Bank has furnished the Company with true and correct copies
of all documents with respect to the plans and agreements referred to in Exhibit
4.11(d) delivered as of the date of the Agreement, including all amendments and
supplements thereto, and all related summary plan descriptions. For each of the
employee pension benefit plans of the Bank referred to in Exhibit 4.11(d)
delivered as of the date of the Agreement, the Bank has furnished the Company
with true and correct copies of (i) the Form 5500 which was filed in each of the
three most recent plan years, including without limitation, all schedules
thereto and all financial statements with attached opinions of independent
accountants to the extent required; (ii) the most recent determination letter
from the IRS; (iii) the statement of assets and liabilities as of the most
recent valuation date; and (iv) the statement of changes in fund balance and in
financial position or the statement of changes in net assets available for
benefits under each of said plans for the most recently ended plan year. The
documents referred to in subdivisions (iii) and (iv) fairly present the
financial condition of each of said plans as of and at such dates and the
results of operations of each of said plans, all in accordance with GAAP or on
the cash method of accounting applied on a consistent basis.
4.12 CONTRACTS AND AGREEMENTS. Except as listed in Exhibit 4.12,
the Bank is not a party to any oral or written agreement, commitment, or
obligation (hereinafter referred to as an "Understanding" or "Material
Contract") which individually, or with all other similar Understandings relating
to the same or similar subject matter, falls within any of the following
classifications:
(i) any Understanding dealing with advertising, brokerage,
licensing, dealership, representative or agency relationship;
(ii) any Understanding with any labor or collective
bargaining organization or association;
(iii) any mortgage, pledge, conditional sales contract,
security agreement, or any other similar Understanding with respect to any real
or personal property in an amount in excess of $25,000, under which the Bank is
a debtor or to which any of its property is subject;
(iv) any profit sharing, group insurance, bonus, deferred
compensation, stock option, severance pay, pension, retirement, or any other
similar Understanding which might provide benefits to the employees, officers or
directors of the Bank;
(v) any Understanding for the future purchase of
materials, supplies, services, merchandise or equipment, the price of which
exceeds $20,000
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and which will not be terminable without liability as to future purchases as
of the Effective Time; it being understood that materials, supplies, service,
merchandise or equipment shall not be deemed to include loans, repurchase or
reverse repurchase agreements, securities or other financial transactions
incurred by the Bank in the ordinary course of its banking business;
(vi) any Understanding for the sale of any of its assets,
or for the grant of any right to purchase any of its assets, properties or
rights, or which requires the consent of any third party to the transfer and
assignment of any of its assets, properties or rights; it being understood that
the foregoing shall not be deemed to include any Understanding for the sale of
mortgage loans, repurchase or reverse repurchase agreements, securities or other
financial transactions incurred by the Bank in the ordinary course of its
banking business;
(vii) any guarantee, subordination or other similar or
related types of Understanding except where the Bank is a beneficiary;
(viii) any Understanding for the borrowing of any money by
the Bank (other than time savings or demand deposits) or for a line of credit to
it;
(ix) any Understanding for any one capital expenditure or
series of related capital expenditures in excess of $25,000 individually or
$100,000 in the aggregate;
(x) any real property lease, whether as lessor or lessee;
or any personal property lease, whether as lessor or lessee, involving payments
in excess of $1000 per month;
(xi) any Understanding to make or participate in a loan
(not yet fully disbursed or funded) to any borrower or related group of
borrowers, which undisbursed or unfunded amount would exceed $500,000 unsecured
or secured;
(xii) any Understanding of any kind (other than contracts
relating to demand or time deposits or otherwise made in the ordinary course of
business) with any director or officer of the Bank or with any member of the
immediate family of any such director of officer or with any partnership,
corporation, associate or entity of which any such person is an Affiliate;
(xiii) any Understanding for insurance other than as
described in Section 4.13 below; or
(xiv) any Understanding, the purpose or effect of which
could encompass (a) merging with any person or bank or bank holding company
other than with the Company (b) the selling of any of its assets (except in the
ordinary course of business) or stock to any person, (c) recommending to any of
its
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shareholders that their Bank Stock be sold to any person or bank other
than the Company, or causing any other person to make such recommendations or
acquiescing in any such recommendations made by any other person, or (d) in
any other way transferring, directly or indirectly, control of the Bank.
Except as stated in Exhibit 4.12, true and correct copies of all
documents relating to the foregoing Understandings have been delivered by the
Bank prior to the date hereof.
As used in this Section 4.12, "immediate family" of a person shall
mean his or her spouse, parents, children, and siblings.
4.13 INSURANCE. The Bank has and at all times within three years
of the date of this Agreement has had, in full force and effect policies of
insurance and bonds (including without limitation Bankers' blanket bond,
fidelity coverage, director and officer liability, fire, third party liability,
use and occupancy) with respect to its assets and business and against such
casualties and contingencies and of such amounts, types and forms which are
customary in the banking industry and are adequate or appropriate to cover its
assets and businesses as set forth in Exhibit 4.13. Set forth in Exhibit 4.13
is a schedule of all policies of insurance (other than title or credit
insurance) carried and owned by the Bank, showing the name of the insurance or
bonding company, a summary of the coverage, the amounts, the deductible
features, the annual premiums and the expiration dates. If any such policy or
bond is changed, terminated or modified following the date of this Agreement,
such termination, change or modification shall be promptly disclosed to the
Company in writing. The Bank is not in default under any such policy of
insurance or bond such that it could be canceled, and all material claims
thereunder have been filed in a timely fashion. The Bank has filed claims with
or given notice of claim to its insurers or bonding companies with respect to
all material matters and occurrences for which it believes it has coverage.
4.14 BROKERS. Except as indicated in Exhibit 4.14, no agent,
broker, investment banker, person or firm acting on behalf or under authority of
the Bank (except for any payments for fairness opinions as required in Section
10.9) is or will be entitled to any broker's or finder's fee or any other
commission or similar fee directly or indirectly in connection with any of the
transactions contemplated by this Agreement.
4.15 AUTHORIZATION. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of the Bank. Assuming due and proper
execution and delivery of this Agreement by the Company, this Agreement
constitutes a legal, valid and binding agreement of the Bank in accordance with
its respective terms, except as the enforceability hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of
general
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application relating to or affecting enforcement of creditors rights and the
application of equitable principles in any action, legal or equitable, and by
Section 8(b) 6(D) of the Federal Deposit Insurance Act, 12 U.S.C. Section
1818(b)(6)(D). Subject to obtaining the requisite approval of this Agreement
by the shareholders of the Bank, the Bank has full corporate power and
authority to perform its obligations under this Agreement and the
transactions contemplated hereby.
4.16 NO CONFLICTS; DEFAULTS. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, and compliance by the Bank with any
provision hereof and thereof will not (a) conflict with or result in a breach
of, or default or loss of any benefit under, any provision of its Charter
Documents or, except as set forth in Exhibit 4.16 any material agreement,
instrument or obligation to which it is a party or by which the property of the
Bank is bound or give any other party to any such agreement, instrument or
obligation the right to terminate or modify any term thereof; (b) except for the
prior approval of the FRB, Commissioner, any other required Governmental Entity
and as set forth in Exhibit 4.16, require any Consents; or (c) result in the
creation or imposition of any Encumbrance on any of the properties or assets of
the Bank; or (d) violate the Charter Documents or any Rules to which the Bank is
subject.
4.17 MATERIAL ADVERSE CHANGES. Except as specifically required,
permitted or effected by this Agreement, and except as set forth on Exhibit
4.17, since December 31, 1997 there has not been, occurred or arisen any of the
following (whether or not in the ordinary course of business unless otherwise
indicated) ("Material Adverse Changes"):
(a) Any materially adverse change in any of the assets,
liabilities, permits, methods of accounting or accounting practice, or manner of
conducting business, of the Bank or any other event or development that has had
or may reasonably be expected to have a material adverse effect on the assets,
liabilities, Permits, business, financial condition, or results of operations of
the Bank or which should be disclosed in order to make the Audited Bank
Financial Statements not misleading;
(b) Any damage, destruction or other casualty loss (whether or not
covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, business, financial
condition, or results of operations of the Bank or that may involve a loss of
more than $20,000 in excess of applicable insurance coverage;
(c) Any amendment, modification or termination of any existing, or
entry into any new Material Contract or Permit that has had or may reasonably be
expected to have a material adverse effect on the assets, liabilities, business,
financial condition, or results of operations of the Bank;
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(d) Any disposition by the Bank of an asset the lack of which has
had or may reasonably be expected to have a material adverse effect on the
business, financial condition, or results of operations of the Bank;
(e) Any direct or indirect redemption, purchase or other
acquisition by the Bank of any Equity Securities or any declaration, setting
aside or payment of any dividend or other distribution on or in respect of Bank
Stock whether consisting of money, other personal property, real property or
other things of value;
(f) Any changes by the Bank in accounting principles or methods or
tax methods, except as required or permitted by, the Financial Accounting
Standards Board or by any Governmental Entity having jurisdiction over the Bank;
(g) A reduction in the Bank's CAMELS rating;
(h) A reduction in the Bank's CRA rating to less than
satisfactory;
(i) A reduction in shareholders' equity to less than 100% of the
Bank's shareholders' equity at December 31, 1998 as reduced for any cash
dividends paid in 1999 or as authorized by Section 6.2(vii) and as determined in
accordance with GAAP or RAP; and/or a reduction in the Bank's 1999 net income to
less than 85% of the Bank's 1999 projected net income, as agreed between the
Bank and Company;
(j) Any event of which the Bank obtains knowledge which may
materially and adversely affect the business, financial condition, results of
operations or prospects of the Bank; or
(k) Any event, development or circumstance that, to the best
knowledge of the Bank, will or, with the passage of time or the giving of notice
or both, is reasonably expected to result in the loss to the Bank of the
services of any Executive Officers of the Bank.
4.18 REPORTS AND FILINGS. Since January 1, 1995, the Bank has
filed all reports, returns, registrations and statements (such reports and
filings referred to as "Bank Filings"), together with any amendments required
to be made with respect thereto, that were required to be filed with (a) the
FDIC, (b) the Commissioner and (c) any other applicable Governmental Entity,
including taxing authorities, except where the failure to file such reports,
returns, registrations and statements has not had and is not reasonably expected
to have a material adverse effect on the business, financial condition, or
results of operations of the Bank. No administrative actions have been taken or
orders issued in connection with such Bank Filings. As of their respective
dates, each of such Bank Filings complied in all material respects with all
Rules enforced or promulgated by the Governmental
30
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Entity with which it was filed (or was amended so as to be so promptly
following discovery of any such noncompliance). Any financial statement
contained in any of such Bank Filings that was intended to present the
financial position of Bank fairly and was prepared in accordance with GAAP or
RAP consistently applied, except as stated therein, during the periods
involved. The Bank has made available to the Company true and correct copies
of all Bank Filings filed by the Bank since January 1, 1995.
4.19 INFORMATION REGARDING LOANS. The Bank has provided the
Company access to all of the information in its possession concerning its loans,
and such information was true and correct in all material respects as of the
date access was provided. Except as may be disclosed in Exhibit 4.19, (i) all
loans and discounts shown on the Audited Bank Financial Statements at December
31, 1997 or which were entered into after December 31, 1997, but before the
Closing Date, were and will be made in all material respects for good, valuable
and adequate consideration in the ordinary course of the business of the Bank,
in accordance in all material respects with the Bank's lending practices, and
are not subject to any material known defenses, setoffs or counterclaims,
including without limitation any such as are afforded by usury or truth in
lending laws, except as may be provided by bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
enforcement of creditor rights and the application of equitable principles in
any action, legal or equitable; (ii) the notes or other evidences of
indebtedness evidencing such loans and all forms of pledges, mortgages and other
collateral documents and security agreements constituting the Bank's loan
portfolio, taken as a whole, are and will be, in all material respects,
enforceable except as the enforceability hereof and thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of
general application relating to or affecting enforcement of creditors rights and
the application of equitable principles; and (iii) the Bank has complied in all
material respects, and will prior to the Closing Date comply with all laws and
regulations relating to such loans, or to the extent there has not been such
compliance, such failure to comply will not materially interfere with the
collection of any such loan. All loans and loan commitments extended by the
Bank and any extensions, renewals or continuations of such loans and loan
commitments that are n the Bank's books were made in accordance with customary
lending standards of the Bank in the ordinary course of business. Such loans
are evidenced by documentation based upon customary and ordinary past practices
of the Bank. Prior to the date hereof, the Bank has provided the Company with a
schedule which sets forth a description (a) by type and classification, if any,
of each loan, lease or other extension of credit and commitment to extend
credit; (b) by type and classification, if any, of all loans, leases, other
extensions of credit and commitments to extend credit that have been classified
by any Governmental Entity or auditors (external or internal) as "Watch List,"
"Substandard," "Doubtful," "Loss" or any comparable classification; and (c) all
consumer loans as to which any payment of principal, interest or other amount is
90 days or more past due.
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(b) As of (i) the date of this Agreement, (ii) the Determination
Date and (iii) the Closing Date, the allowance for loan and lease losses for the
Bank is adequate and in accordance with GAAP and RAP.
4.20 COMPLIANCE WITH CRA To the best knowledge of the Bank, the
Bank's compliance under the CRA should not constitute grounds for either the
denial by any Governmental Entity of any application to consummate the
transactions contemplated by this Agreement or the imposition of a materially
burdensome condition in connection with the approval of any such application.
4.21 CERTAIN INTERESTS. Except as described in Exhibit 4.12(xii),
Exhibit 4.21 sets forth a description of each instance in which an executive
officer or director of the Bank (a) has any material interest in any property,
real or personal, tangible or intangible, used by or in connection with the
business of the Bank; (b) is indebted to the Bank except for normal business
expense advances; or (c) is a creditor (other than as a Deposit holder) of the
Bank except for amounts due under normal salary and related benefits or
reimbursement of ordinary business expenses. Except as set forth in Exhibit
4.21, all such arrangements are arm's length transactions pursuant to normal
commercial terms and conditions.
4.22 BRANCHES. Exhibit 4.22 hereto sets forth the common name and
location of each office of the Bank, an indication of whether such office is a
branch, service center, or other place of business, whether such premises are
owned or leased, the basic terms of such leases, the common name and location of
each approved but unopened office, and a description of each application for
additional offices of the Bank, and the status of each such application. The
Bank has received appropriate and effective permits and governmental authority
where any Permit, approval or notice was required by law or regulation prior to
the establishment and operation of each such office now in operation. Except
for the offices described on Exhibit 4.22, the Bank does not operate or conduct
business out of any other location and the Bank does not have any current
application for, and the Bank has not received permission to open, any other
branch or to operate out of any other location.
4.23 UNDISCLOSED LIABILITY. The Bank has no liabilities or
obligations, either accrued or contingent, which are in excess of Twenty
Thousand Dollars ($20,000) individually or in the aggregate, which have not
been:
(i) reflected or disclosed in the Audited Bank Financial
Statements or Unaudited Bank Financial Statements;
(ii) incurred subsequent to December 31, 1997, in the
ordinary course of business; or
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(iii) disclosed on Exhibit 4.23 or any other exhibit to this
Agreement.
To the best of the Bank's knowledge and the knowledge of their
executive officers and directors, after due investigation, there is no basis for
the assertion against the Bank of any liability, obligation or claim that is
likely to result in or cause any material adverse change in the business or
financial condition of the Bank, taken as a whole, which is not fairly reflected
in the Audited Bank Financial Statements, the Unaudited Bank Financial
Statements or otherwise disclosed on Exhibit 4.23 hereto.
4.24 ACCURACY OF INFORMATION FURNISHED. Except as to any
statements or information which shall include projections or forecasts, none of
the statements or information made or contained in any of the covenants,
representations or warranties of the Bank set forth in this Agreement or in any
of the schedules, exhibits, lists, certificates or other documents furnished
herewith taken as a whole contains any untrue statement of a material fact
required to be stated herein or therein or necessary to make the statements or
information contained herein or therein, in light of the circumstances in which
they were made, not misleading. As to any such information or statements which
include projections or forecast, such information or statements are based upon
assumptions believed by the Bank to be reasonable.
4.25 ENVIRONMENTAL LAWS. Except as may be disclosed in Exhibit
4.25, to the best of the Bank's knowledge (and without conducting any site
investigation or other analysis for the purpose of making this representation),
neither the conduct nor operation of the Bank nor any condition of any Real
Property presently or previously owned, leased or operated by the Bank violates
or violated Environmental Laws in any respect material to the business of Bank
taken as a whole and no condition or event has occurred with respect to the Bank
or any Real Property that, with notice or the passage of time, or both, would
constitute a violation material to the business of the Bank taken as a whole of
Environmental Laws or obligate (or potentially obligate) the Bank to remedy,
stabilize, neutralize or otherwise alter the environmental condition of any such
Real Property where the aggregate cost of such actions would be material to the
Bank taken as a whole. Except as may be disclosed in Exhibit 4.25, the Bank has
not received any notice from any person or entity that the Bank or the operation
or condition of any Real Property ever owned, leased or operated by the Bank is
or was in violation of any Environmental Laws or that the Bank is responsible
(or potentially responsible) for remedying, or the cleanup of, any pollutants,
contaminants, or hazardous or toxic wastes, substances or materials at, on or
beneath any such Real Property.
4.26 COMMISSIONER AND FDIC EXAMINATIONS. (a) The Commissioner has
completed an examination of the Bank as of November 30, 1996, and (i) the
Commissioner believes the Bank's allowance for loan losses is adequate and the
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Commissioner required no material adjustments, and (ii) the Bank's CAMELS rating
did not adversely change and the Bank's financial condition is deemed by the
Commissioner to be satisfactory.
(b) The FDIC has completed an examination of the Bank as of
December 31, 1997, and (i) the FDIC believes the Bank's allowance for loan
losses is adequate and the FDIC required no material adjustments, and (ii) the
Bank's CAMELS rating did not adversely change and the Bank's financial condition
is deemed by the FDIC to be satisfactory.
(c) The FDIC has completed an examination of the Bank and Banklink
Corporation, the Bank's data processing subsidiary, for compliance with Year
2000 safety and soundness issues as of February 3, 1998, and the FDIC has rated
the Bank and Banklink Corporation at least satisfactory regarding the Bank's and
Banklink Corporation's progress in addressing Year 2000 Safety and Soundness
Progress Standards established by the FDIC. Further, Banklink Corporation has
also been rated satisfactory regarding its progress in addressing Year 2000
Safety and Soundness issues.
4.27 INSIDER LOANS; OTHER TRANSACTIONS. The Bank has previously
provided the Company with a listing, current as of November May 301, 1998, of
all extensions of credit made to the Bank and each of its Executive Officers and
directors and their related interests (all as defined under Federal Reserve
Board Regulation "O"), all of which have been made in compliance with Regulation
O, which listing is true, correct and complete in all material respects. The
Bank does not owe any amount to, nor does it have any contract or lease with or
commitment to, any of the present Executive Officers or directors of the Bank
(other than for compensation for current services not yet due and payable, and
reimbursement of expenses arising in the ordinary course of business).
4.28 DERIVATIVE TRANSACTIONS. The Bank is not a party to a
transaction in or involving forwards, futures, options on futures, swaps or
other derivative instruments.
4.29 TRUST ADMINISTRATION. The Bank presently does not exercise
trust powers, including, but not limited to, trust administration, and has not
exercised such trust powers for a period of at least 3 years prior to the date
hereof. The term "trusts" as used in this Section 4.29 includes (i) any and all
common law or other trusts between an individual, corporation or other entities
and the Bank, as trustee or co-trustee, including, without limitation, pension
or other qualified or nonqualified employee benefit plans, compensation,
testamentary, intervivos, and charitable trust indentures; (ii) any and all
decedents' estates where the Bank is serving or has served as a co-executor or
sole executor, personal representative or administrator, administrator de bonis
non, administrator de bonis non with will annexed, or in any similar fiduciary
capacity; (iii) any and all guardianships,
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conservatorships or similar positions where the Bank is serving or has served
as a co-grantor or a sole grantor or a conservator or a co-conservator of the
estate, or any similar fiduciary capacity; and (iv) any and all agency and/or
custodial accounts and/or similar arrangements, including plan administrator
for employee benefit accounts, under which the Bank is serving or has served
as an agent or custodian for the owner or other party establishing the
account with or without investment authority.
4.30 STATEMENTS TRUE AND CORRECT. None of the information
supplied or to be supplied by the Bank for inclusion in the S-1, the S-4 or
the Proxy Statement, or incorporated by reference therein, or any other
document to be filed with any Governmental Entity in connection with the
transactions contemplated hereby will, in the case of the S-1, the S-4 and
the Proxy Statement, when it is first mailed to the shareholders of the Bank,
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in light of the
circumstances under which such statements are made, not misleading or, in the
case of the S-1 and the S-4, when it becomes effective, be false or
misleading with respect to any material fact, or omit to state any material
fact necessary in order to make the statements therein not misleading, or, in
the case of the S-1, the S-4 and Proxy Statement or any amendment thereof or
supplement thereto, at the time of the meeting of shareholders of the Bank,
be false or misleading with respect to any material fact or omit to state any
material fact necessary to correct any statement or remedy any omission in
any earlier communication with respect to the solicitation of any proxy of
the Bank shareholders' meeting.
4.31 ACCURATE DISCLOSURE. The Bank agrees that through the
Effective Time of the Merger, each of its reports, and other filings required to
be filed with any applicable Governmental Entity will comply in all material
respects with all of the applicable statutes, Rules and regulations enforced or
promulgated by the Governmental Entity with which it will be filed and none will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they will be made, not misleading. Any
financial statement contained in any such report, or other filing that is
intended to present the financial position of the Bank will fairly present the
financial position of the Bank and will be prepared in accordance with GAAP or
RAP consistently applied during the periods involved. Notwithstanding anything
to the contrary set forth in this Section 4.31, the Bank makes no representation
or warranty with respect to any information supplied by the Company.
4.32 YEAR 2000. The Bank and Banklink Corporation have formed a
Year 2000 management committee to identify potential problems associated with
the Year 2000 issues and to develop resolutions to any problems. The Bank and
Banklink Corporation are making satisfactory progress for compliance with Year
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2000 safety and soundness issues in order to ensure that the Bank's and Banklink
Corporation's existing computer systems are Year 2000 compliant.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Bank as follows:
5.1 ORGANIZATION AND GOOD STANDING. The Company is a California
corporation duly organized and validly existing in good standing under the laws
of the State of California, is proposed to be registered with the FRB to become
a bank holding company and it has the corporate power and authority to carry on
its business as presently conducted. The Company has all requisite corporate
power and authority to own, lease and operate its properties and assets and to
carry on its business as presently conducted. The nature of its operations and
the business transacted by it as of the date hereof make licensing and
qualification in any other state or jurisdiction unnecessary. The Company has
delivered to the Bank true and correct copies of its Articles of Incorporation
and Bylaws, as amended and in effect as of the date hereof.
5.2 CAPITALIZATION. The authorized capital stock of the Company
consists of 100,000,000 shares of Common Stock, no par value, of which 10,000
shares are outstanding on the date hereof, all validly issued, fully paid and
nonassessable, and 100,000,000 shares of Preferred Stock, none of which are
outstanding. Except as provided in Exhibit 5.2, no unissued shares of Company
Stock or any other securities of the Company are subject to any warrants,
options, rights or commitments of any character, kind or nature and the Company
is not obligated to issue or repurchase any shares of Company Stock or any other
security to or from any person except in accordance with the terms of the
proposed Company Stock Option Plan and Agreements pursuant thereto. Exhibit 5.2
sets forth the name of each holder of a Company stock option, the number of
shares of Company Stock covered by each such holder's option, the date of grant
of each such holder's option, the exercise price per share, the vesting schedule
for each such holder's option and the expiration date of each such holder's
option.
5.3 SUBSIDIARIES. Except for PCBG Merger Corporation, which the
Company intends to own prior to the Closing Date, the Company does not own,
directly or indirectly (except as pledgee pursuant to loans which are not in
default), any equity position or other voting interest in any corporation,
partnership, joint venture or other entity.
5.4 FINANCIAL STATEMENTS. The Company has delivered to the Bank
copies of the unaudited Statements of Financial Condition of the Company as of
December 31, 1997 (the "Company Financial Statements"). The Company Financial
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Statements: (i) present fairly the financial condition and results of operations
of the Company as of and for the dates or periods covered thereby in accordance
with GAAP consistently applied throughout the periods involved; (ii) are based
on the books and records of the Company; (iii) contain and reflect reserves for
all material accrued liabilities and for all reasonably anticipated losses, and
set forth adequate reserves loan losses and other contingencies to the extent
required by GAAP; and (iv) none of the Company Financial Statements contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein not misleading under GAAP.
The books and records of the Company have been, and are being, maintained in all
material respects in accordance with GAAP and other applicable legal and
accounting requirements and reflect any actual transactions. Since the Company
was recently incorporated, there are no audited financial statements of the
Company for December 31, 1997 or previous years.
5.5 LITIGATION PROCEEDINGS AND AGREEMENTS WITH GOVERNMENTAL
ENTITIES.
(a) The Company is not engaged as a defendant in any legal or
other proceedings before any court, administrative agency or other Governmental
Entity except as is shown on Exhibit 5.5. Except as set forth on Exhibit 5.5,
the Company is not aware of any "threatened or pending litigation" (within the
meaning of Paragraph 5 of the American Bar Association Statement of Policy
Regarding Lawyers' Responses to Auditors' Requests for Information adopted
December 8, 1975) against the Company. The Company is not subject to any
agreement, order, writ, injunction or decree of any federal, state or local
court, out of a proceeding involving the Company or any of its business or
properties except as described in Exhibit 5.5. The Company has not been served
with notice of, nor, to best of the Company's knowledge is it currently under
investigation with respect to, any violation of federal, state or local law or
administrative regulation. Except as set forth on Exhibit 5.5, there is no (i)
outstanding judgment, order, writ, injunction or decree, stipulation or award of
any Governmental Entity or by arbitration, against, or to the knowledge of the
Company, affecting the Company or its assets or business that (a) has had or may
have a material adverse effect on the assets, liabilities, business, financial
condition or results of operations of the Company, (b) requires any payment by,
or excuses a material obligation of a third party to make any payment to, the
Company, or (c) has the effect of prohibiting any business practice of, or the
acquisition, retention or disposition of property by, the Company; or (ii)
legal, administrative, arbitration, investigatory or other proceeding pending
or, to the best knowledge of the Company that has been threatened, or which the
Company has reason to believe may be threatened, against or affecting any
director, officer, employee, agent or representative of the Company, in
connection with which any such person has or may have rights to be indemnified
by the Company.
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(b) Except as set forth in Exhibit 5.5, the Company is not a party
to, or otherwise subject to, any agreement or memorandum of understanding with
or order of any Governmental Entity charged with the supervision or regulation
of bank holding companies or banks or engaged in the insurance of bank deposits,
that restricts the conduct of its business, or in any manner relates to its
capital adequacy, its credit or investment policies or its management.
5.6 PERFORMANCE OF OBLIGATIONS. Except as set forth in Exhibit
5.6, the Company has performed in all respects all of obligations required to be
performed by it to date and is not in default under or in breach of any term or
provision of any covenant, contract, lease, indenture or any other agreement to
which the Company is a party or is subject or is otherwise bound, and no event
has occurred which, with the giving of notice or the passage of time or both,
would constitute such default or breach, where such default or breach would have
a material adverse effect on the financial condition, results of operations, or
business of the Company. No party with whom the Company has an agreement which
is material to the financial condition, results of operations or business of the
Company is in default thereunder.
5.7 BROKERS. Except as indicated in Exhibit 5.7, no agent,
broker, investment banker, person or firm acting on behalf or under authority of
the Company (except for any payments for fairness opinions as required in
Section 11.14) is or will be entitled to any broker's or finder's fee or any
other commission or similar fee directly or indirectly in connection with any of
the transactions contemplated by this Agreement.
5.8 INSURANCE. The Company has in full force and effect policies
of insurance and bonds with respect to its assets and business and against such
casualties and contingencies and of such amounts, types and forms which in the
judgment of the Company are adequate or appropriate to cover its assets and
businesses as set forth in Exhibit 5.8. Set forth in Exhibit 5.8 is a schedule
of all policies of insurance (other than title or credit insurance) carried and
owned by the Company, showing the name of the insurance or bonding company, a
summary of the coverage, the amounts, the deductible features, the annual
premiums and the expiration dates. If any such policy or bond is changed,
terminated or modified following the date of this Agreement, such termination,
change or modification shall be promptly disclosed to the Bank in writing. The
Company is not in default under any such policy of insurance or bond such that
it could be canceled, and all material claims thereunder have been filed in a
timely fashion. The Company has filed claims with or given notice of claim to
its insurers or bonding companies with respect to all material matters and
occurrences for which it believes it has coverage.
5.9 MATERIAL ADVERSE CHANGES. Except as specifically required,
permitted or effected by this Agreement, and except as set forth on Exhibit 5.9
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since inception there has not been, occurred or arisen any of the following
(whether or not in the ordinary course of business unless otherwise
indicated)("Material Adverse Changes"):
(a) Any materially adverse change in any of the assets,
liabilities, permits, methods of accounting or accounting practice, or manner of
conducting business, of the Company or any other event or development that has
had or may reasonably be expected to have a material adverse effect on the
assets, liabilities, Permits, business, financial condition, or results of
operations of the Company or which should be disclosed in order to make the
Company Financial Statements not misleading.
(b) Any damage, destruction or other casualty loss (whether or not
covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, business, financial
condition, or results of operations of the Company or that may involve a loss of
more than $10,000 in excess of applicable insurance coverage;
(c) Any amendment, modification or termination of any existing, or
entry into any new, Material Contract or Permit that has had or may reasonably
be expected to have a material adverse effect on the assets, liabilities,
business, financial condition, or results of operations of the Company;
(d) Any disposition by the Company of an asset the lack of which
has had or may reasonably be expected to have a material adverse effect on the
business, financial condition, or results of operations of the Company; or
(e) Any direct or indirect redemption, purchase or other
acquisition by the Company of any Equity Securities or any declaration, setting
aside or payment of any dividend or other distribution on or in respect of the
Company Stock whether consisting of money, other personal property, real
property or other things of value.
5.10 COMPLIANCE WITH LAWS AND REGULATIONS.
(a) Except as set forth in Exhibit 5.10, the Company is not in
default under or in breach of any law, ordinance, rule, regulation, order,
judgment or decree applicable to it promulgated by any Governmental Entity
having authority over it, where such default or breach would have a material
adverse effect on its financial condition, results of operations, or business.
(b) To the best of its knowledge, the Company has conducted in all
material respects its businesses in accordance with all applicable federal,
foreign, state and local laws, regulations and orders, including without
limitation disclosure, usury, equal credit opportunity, equal employment, fair
credit reporting, antitrust,
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licensing and other laws, regulations and orders, and the forms, procedures
and practices used by the Company are in compliance with such laws,
regulations, and orders, except for such violations or noncompliance as will
not have a material adverse effect on the financial condition, results of
operations, or business of the Company.
5.11 AUTHORIZATION. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of the Company. Assuming due and proper
execution and delivery of this Agreement by the Bank, this Agreement constitutes
a legal, valid and binding agreement of the Company in accordance with its
respective terms, except as the enforceability hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of
general application relating to or affecting enforcement of creditors rights and
the application of equitable principles in any action, legal or equitable.
Subject to obtaining requisite approval of this Agreement by the shareholders of
the Company, if required, the Company has full corporate power and authority to
perform its obligations under this Agreement and the transactions contemplated
hereby.
5.12 NO CONFLICTS; DEFAULTS. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, and compliance by the Company with
any provision hereof will not (a) conflict with or result in a breach of, or
default or loss of any benefit under, any provision of its Charter Documents or,
except as set forth in Exhibit 5.12 any material agreement, instrument or
obligation to which it is a party or by which the property of the Company is
bound or give any other party to any such agreement, instrument or obligation
the right to terminate or modify any term thereof; (b) except for the prior
approval of the FRB, the Commissioner and any other required Governmental
Entity, and as set forth in Exhibit 5.12, require any Consents; (c) result in
the creation or imposition of any Encumbrance on any of the properties or assets
or the Company; or (d) violate the Charter Documents or any Rules to which the
Company is subject.
5.13 REPORTS AND FILINGS. Since inception, the Company has filed
all reports, returns, registrations and statements (such reports and filings
referred to as "the Company Filings"), together with any amendments required to
be made with respect thereto, that were required to be filed with (a) the FRB,
(b) the Commissioner and (c) any other applicable Governmental Entity, including
taxing authorities, except where the failure to file such reports, returns,
registrations and statements has not had and is not reasonably expected to have
a material adverse effect on the business, financial condition, or results of
operations of the Company. No administrative actions have been taken or orders
issued in connection with the Company Filings. As of their respective dates,
each of the Company Filings complied in all material respects with all Rules
enforced or promulgated by the Governmental Entity with which it was filed (or
was amended so as to be so
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promptly following discovery of any such noncompliance). Any financial
statement contained in any of the Company Filings that was intended to
present the financial position of the Company fairly and was prepared in
accordance with GAAP or RAP consistently applied, except as stated therein,
during the periods involved.
5.14 (reserved)
5.15 UNDISCLOSED LIABILITY. The Company has no liabilities or
obligations, either accrued or contingent, which are in excess of Ten Thousand
Dollars ($10,000) individually or in the aggregate, which have not been:
(i) reflected or disclosed in the Company Financial
Statements;
(ii) incurred since inception, in the ordinary course of
business; or
(iii) disclosed on Exhibit 5.15 or any other exhibit to this
Agreement.
To the best of the Company's knowledge and the knowledge of its
officers and directors, after due investigation, there is no basis for the
assertion against the Company of any liability, obligation or claim that is
likely to result in or cause any material adverse change in the business or
financial condition of the Company, taken as a whole, which is not fairly
reflected in the Company Financial Statements, or otherwise disclosed on Exhibit
5.15 hereto.
5.16 ACCURACY OF INFORMATION FURNISHED. Except as to any
statements or information which shall include projections or forecasts, none of
the statements or information made or contained in any of the covenants,
representations or warranties of the Company set forth in this Agreement or in
any of the schedules, exhibits, lists, certificates or other documents furnished
herewith taken as a whole contains any untrue statement of a material fact
required to be stated herein or therein or necessary to make the statements or
information contained herein or therein, in light of the circumstances in which
they were made, not misleading. As to any such information or statements which
include projections or forecast, such information or statements are based upon
assumptions believed by the Company to be reasonable.
5.17 AUTHORITY OF PCBG MERGER CORPORATION. The execution and
delivery by PCBG Merger Corporation of the Agreement of Merger and, subject to
the requisite approval of the shareholder of PCBG Merger Corporation, the
consummation of the transactions completed thereby will be duly and validly
authorized by all necessary corporation action on the part of PCBG Merger
Corporation, and the Agreement of Merger will be, upon execution by the parties
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thereto, a valid and binding obligation of PCBG Merger Corporation, enforceable
in accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the rights of creditors generally, by general equitable principles. Except as
set forth in Exhibit 5.17, neither the execution and delivery by PCBG Merger
Corporation of the Agreement of Merger, nor the consummation of the transaction
contemplated therein, nor compliance by PCBG Merger Corporation with any of the
provisions thereof will (a) conflict with or result in a breach of any provision
of its Charter Documents; (b) except for approval by the shareholder of PCBG
Merger Corporation and the prior approval of the Commissioner or the FRB,
require any Consents; (c) result in the creation or imposition of any
Encumbrance on any of the properties or assets of PCBG Merger Corporation; or
(d) subject to obtaining the Consents referred to in subsection (b) of this
Section 5.17, and the expiration of any waiting period, violate any Rules to
which PCBG Merger Corporation is subject.
5.18 CAPITAL OF COMPANY, OFFERING AND COMMITMENTS. As of the date
of this Agreement, the Company does not have sufficient capital to consummate
the transactions contemplated by this Agreement. The Company intends to conduct
the Offering in order to raise sufficient cash capital to carry out the
acquisition of the Bank, provide capital for growth and operations of the
Company, and the other transactions contemplated by this Agreement.
5.19 REGULATORY APPROVALS. To the best knowledge of the Company,
except as described in Section 5.19 of this Agreement, the Company has no reason
to believe that it would not receive all required approvals from any
Governmental Entity of any application to consummate the transactions
contemplated by this Agreement without the imposition of a materially burdensome
condition in connection with the approval of any such application.
5.20 STATEMENTS TRUE AND CORRECT. None of the information supplied
or to be supplied by the Company for inclusion in the S-1, the S-4 or the Proxy
Statement, or incorporated by reference therein, or any other document to be
filed with any Governmental Entity in connection with the transactions
contemplated hereby will, in the case of the S-1, S-4 and the Proxy Statement
(or incorporated by reference therein), contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which such
statements are made, not misleading, or, in the case of the S-1 and the S-4,
when it becomes effective, be false or misleading with respect to any material
fact, or omit to state any material fact necessary in order to make the
statements therein not misleading.
5.21 ACCURATE DISCLOSURE. The Company agrees that through the
Effective Time of the Merger, each of its reports, and other filings required to
be filed with any applicable Governmental Entity will comply in all material
respects with all of the applicable statutes, Rules and regulations enforced or
promulgated
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by the Governmental Entity with which it will be filed and none will contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they will be made, not misleading.
Any financial statement contained in any such report, or other filing that is
intended to present the financial position of the Company will fairly present
the financial position of the Company and will be prepared in accordance with
GAAP or RAP consistently applied during the periods involved.
Notwithstanding anything to the contrary set forth in this Section 5.21, the
Company makes no representation or warranty with respect to any information
supplied by the Bank.
5.22 OTHER TRANSACTIONS. The Company has informed the Bank of all
other acquisition transactions that the Company is contemplating or reviewing as
of the date of this Agreement.
5.23 DUE DILIGENCE. The Company and its representatives have had
the opportunity to conduct a due diligence of the Bank, and such due diligence
has been shared with the Managing Underwriter. As of December 15, 1998, the
Company and its agents have completed a primary review of the financial
condition of the Bank, and to the best knowledge of the Company and its agents,
no item concerning the financial condition of the Bank has come to the attention
of the Company or its agents that would preclude the consummation of the Merger
as described herein.
ARTICLE VI
COVENANTS OF THE BANK
The Bank covenants and agrees with the Company as follows:
6.1 BEST EFFORTS. The Bank shall use its best efforts to bring
about the satisfaction of the conditions specified in Articles IX and XI hereof.
6.2 CONDUCT OF BUSINESS. Unless the Company shall give its prior
consent, which consent will not be unreasonably withheld, or unless otherwise
indicated, until the Effective Time, the Bank will:
(i) conduct its affairs and business in the usual and
ordinary course, generally consistent with past practice, and in accordance with
safe and sound practices;
(ii) refrain from (a) creating, incurring, or suffering to
exist, any encumbrance or restriction of any kind against or in respect of any
property or right of the Bank except for such which are not material in amount
or nature to the financial condition or results of operations of the Bank,
except for a pledge or
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security interest given in connection with the acceptance of government or
public deposits; it being understood that the foregoing shall not be deemed
to preclude loans, repurchase or reverse repurchase agreements, securities or
other financial transactions incurred in the ordinary course of the Bank's
banking business, and (b) borrowing or agreeing to borrow any amount of funds
except in the ordinary course of business, or directly or indirectly
guaranteeing or agreeing to guarantee any obligations of others except for
such which are not material in amount or nature to the financial condition or
results of operations of the Bank;
(iii) refrain from making or becoming a party to any
Material Contract or material commitment, or renewing, extending, amending or
modifying any such contract or commitment except for loan and deposit
transactions, in the usual and ordinary course of business, consistent with past
practice; and refrain from making any loan or other extension of credit, or
entering into any commitment to make any loan or other extension of credit, to
any Bank director, executive officer or employee or 5% or more shareholder,
except in accordance with existing practice or policy; and refrain from
extending any lease;
(iv) refrain from making any capital expenditures or
commitments to do so, except for ordinary repairs and replacements, exceeding
$50,000 for any one item or $200,000 for all items in the aggregate;
(v) refrain from paying or agreeing to pay any bonus,
extra compensation, pension or severance pay, under any pension plan or
otherwise, or increasing the rate of compensation paid by the Bank at June 30,
1998, to any officer, director, agent, consultant, or employee (except for
raises and bonuses consistent with past practices accrued and paid prior to the
Determination Date and except as contemplated by this Agreement), and any such
amounts shall be accrued or paid in accordance with GAAP prior to the
Determination Date; or agreeing to enter into any employment agreements or hire
any officer level staff where such agreements or arrangements cannot be
terminated without any liability upon not more than 90 days notice; or agreeing
to hire any president of Banklink;
(vi) maintain its assets and properties in good condition
and repair (ordinary wear and tear excepted) and refrain from selling or
otherwise disposing of any of its assets or properties, except in the usual and
ordinary course, consistent with prior customary practice, and in accordance
with safe and sound practices, and maintain the Bank's present branch operations
unless changed by mutual agreement;
(vii) refrain from declaring or paying any dividend on or
making any other distribution upon, or purchasing or redeeming, any shares of
the Bank Stock;
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(viii) refrain from (a) issuing or selling or obligating
itself to issue or sell any shares of the Bank Stock or any other securities or
any warrants, rights or options to acquire Bank Stock or other securities,
except for the exercise of the Warrant Agreement, (b) effecting a
reclassification, recapitalization, split-up, exchange of shares, readjustment
or other similar change in or to any capital stock or otherwise reorganize or
recapitalize;
(ix) refrain from directly or indirectly redeeming,
purchasing or otherwise acquiring any Bank Stock or stock of any corporation or
any interest in any business enterprise except as it relates to a foreclosure in
the usual and ordinary course of its business;
(x) refrain from amending its Charter Documents except to
the extent as may be required or contemplated by this Agreement;
(xi) use its best efforts to preserve its business
organization intact and to retain its present officers and employees in a manner
consistent with the Bank's other obligations under this Agreement;
(xii) use its best efforts to preserve the goodwill of its
depositors, customers and those having business relations with it, refrain from
materially changing the make-up of the Bank's deposit structure, refrain from
amending, modifying, terminating or failing to renew or preserve its business
organization, material rights, franchises, Permits, and refrain from taking any
action which would jeopardize the continuance of the goodwill of its customers
where such action would have a material adverse effect, taken as a whole, on the
financial condition, or results of operations of the Bank in a manner consistent
with the Bank's other obligations under this Agreement;
(xiii) use its best efforts to maintain insurance and bond
coverage at least equal to that now in effect on all its properties and all
properties for which it is responsible and on its business operations, and carry
the same coverage for public liability, personal injury and property damage that
is now in effect, except if such insurance and coverage (a) is not available
except at extraordinary rates, or (b) is not available except under materially
different terms which are inconsistent with those in effect as of the date of
this Agreement, and following the receipt of the consent of the Company, renew
the Bank's directors and officers liability insurance policy;
(xiv) meet its material contractual obligations and not
become in default in any material respect on any thereof;
(xv) duly observe and conform to lawful requirements
applicable to its business in all material respects;
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(xvi) duly and timely file all reports and returns required
to be filed with any federal, state or local Governmental Entity unless any
extensions have been duly granted by such authorities;
(xvii) refrain from commencing any proceeding to merge,
consolidate or liquidate or dissolve (except as contemplated by this Agreement)
or obligating itself to do so;
(xviii) maintain its books of account and records in the
regular manner substantially in accordance with all applicable statutory and
regulatory requirements applied on a consistent basis;
(xix) except for instituting actions against borrowers of
the Bank to collect loans in default, refrain from instituting, settling, or
agreeing to any material claim, action or proceeding before any court or
Governmental Entity unless not instituting, settling or agreeing to any material
claim, action or proceeding would result in a Material Adverse Change to the
Bank;
(xx) refrain from making its credit underwriting policies,
standards or practices applicable to all loans relating to the making of loans
and other extensions of credit, or commitments to make loans and other
extensions of credit, less stringent than those in effect on the date hereof.
The Bank shall not grant or commit to grant, without receiving the Company's
Consent, (i) any loan or other extension of credit, including renewals, to an
existing customer of the Bank, if such loan or other extension of credit,
together with all other credit then outstanding to the same Person and all
Affiliates of such Person, would exceed $1,000,000, irrespective of any plans or
intentions to sell or participate all or a portion of such loans, on an
unsecured basis or $1,500,000 secured by a lien on real estate, cash or readily
marketable collateral, as that term is used in section 1220 ET SEQ. of the CFC,
(ii) any participation loans purchased or sold, or (iii) any renewals or other
extensions of credit to any borrower whose loans or other extensions of credit
have been classified by any Governmental Entity. In addition, Bank shall not
take any property into Other Real Estate Owned ("OREO"), or sell any OREO
property, not in the ordinary course of the Bank's business or not in accordance
with the Bank's policy concerning OREO without receiving the Company's Consent.
Consent shall be deemed granted if within three Business Days of written notice
received by the Company's designee, notice of objection in writing is not
received by Bank;
(xxi) refrain from making special or extraordinary material
payments to any Person other than as contemplated and as disclosed in this
Agreement as of the date hereof;
(xxii) except for transactions in accordance with safe and
sound banking practices, refrain from making any material investments, by
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purchase of stock or securities, contributions to capital, property transfers,
purchases of any property or assets or otherwise, in any other individual,
corporation or other entity;
(xxiii) advise the Company promptly in writing of any Material
Adverse Change known to the Bank in the capital structure, financial condition,
results of operations or of any event or condition which with the passage of
time is reasonably likely to result in a Material Adverse Change to the Bank, or
of any other materially adverse change known to the Bank respecting the business
and operations of the Bank, or in the event the Bank determines that the Merger
will not be consummated because of any inability to meet the conditions to the
performance of the Company set forth in Article XI or of any matter which would
make the representations and warranties set forth in Article IV hereof not true
and correct in any material respect at the Closing;
(xxiv) promptly advise the Company in writing of any event or
any other transaction within the Bank's knowledge whereby any person or related
group of persons acquires, directly or indirectly, record or beneficial
ownership (as defined in Rule 13d3 promulgated by the Exchange Act or control of
5% or more of the outstanding shares of Bank Stock prior to the record date
fixed for the Bank shareholders' meeting or any adjourned meeting thereof to
approve the transactions contemplated herein;
(xxv) charge-off all loans, receivables and other assets, or
portions thereof, deemed uncollectible in accordance with GAAP or RAP,
applicable law or regulation, or classified as "loss" or as directed by any
Governmental Entity; and maintain the allowance for loan losses of the Bank at a
level which in the reasonable opinion of the Bank's management is adequate to
provide for all known and estimated credit losses on loans and leases
outstanding and other inherent risks in the Bank's loan portfolio, but in no
case less than the level which in the reasonable opinion of the Bank's
management is adequate to provide for all known and reasonably expected losses
on assets outstanding in accordance with GAAP and RAP;
(xxvi) furnish to the Company, as soon as practicable, and in
any event within ten (10) days after it is prepared (except for the reports
submitted to the Board of Directors of the Bank, as described in clause (i)
below, which shall be furnished to the Company within ten (10) days after the
Bank's Board of Directors has reviewed the report), (i) a copy of any report
submitted to the Board of Directors of the Bank and access to the working papers
related thereto and copies of other operating or financial reports prepared for
management of any of their businesses and access to the working papers thereto,
provided, however, that the Bank need not furnish the Company communications of
the Bank's legal counsel regarding the Bank's rights against and obligations to
the Company or its Affiliates under this Agreement, (ii) to the extent permitted
by law, copies of all
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reports, renewals, filings, certificates, statements and other documents
filed with or received from the FDIC and/or the Commissioner or any other
Governmental Entity, (iii) monthly unaudited statements of condition and
statements of operations for the Bank, and quarterly unaudited statements of
condition and statements of operations for the Bank and statements of changes
in stockholders' equity for the Bank, in each case prepared in a manner
consistent with past practice, and (iv) such other reports as the Company may
reasonably request relating to the Bank. Each of the financial statements
delivered pursuant to this Section 6.2(xxvi), except as stated therein, shall
be prepared in accordance with the Bank's normal practices;
(xxvii) consistent with the standards set forth in this
subsection 6.2 (xxvii), the Bank agrees that through the Effective Time of the
Merger, as of their respective dates, (i) each of the Bank Filings will be true
and complete in all material respects; and (ii) each of the Bank Filings will
comply in all material respects with all of the statutes, rules and regulations
enforced or promulgated by the Governmental Entity with which it will be filed
and none will contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they will be made, not
misleading. Any financial statement contained in any of such Bank Filings that
is intended to present the financial position of the Bank will be prepared in
accordance with GAAP or RAP consistently applied, except as stated therein,
during the periods involved;
(xxviii) maintain reserves for contingent liabilities in
accordance with GAAP and RAP;
(xxix) promptly notify the Company of the filing of any
material litigation, governmental or regulatory action, or similar proceeding or
notice of any claims against the Bank or any of its assets;
(xxx) Except for the Donohoe litigation previously described
or those matters described in Exhibit 4.11(b), conduct good faith settlement
negotiations, and, with the written consent of the Company, settle when deemed
prudent by the Parties, of all existing or threatened litigation as specified in
Exhibits 4.7, or for any new litigation filed or threatened from the date hereof
to the Closing Date;
(xxxi) except in the ordinary course of business, refrain
from canceling or accelerating any material indebtedness owing to the Bank or
any claims which the Bank may possess or waive any material rights of
substantial value;
(xxxii) refrain from selling or otherwise disposing of any
Real Property or any material amount of any tangible or intangible personal
property
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other than properties acquired in foreclosure or otherwise in the ordinary
collection of indebtedness to the Bank;
(xxxiii) refrain from foreclosing upon or otherwise taking
title to or possession or control of any real property without first obtaining a
phase one environmental report thereon which indicates that the property is free
of pollutants, contaminants or hazardous or toxic waste materials; provided,
however, that the Bank shall not be required to obtain such a report with
respect to single family, non-agricultural residential property of one acre or
less to be foreclosed upon unless it has reason to believe that such property
might contain any such waste materials or otherwise might be contaminated;
(xxxiv) refrain from committing any act or failing to do any
act which will cause a breach of any agreement, contract or commitment and which
will have a material adverse effect on the Bank's business, financial condition,
or results of operations; and
(xxxv) duly observe and conform, and Banklink Corporation
shall duly observe and conform, to all compliance requirements for Year 2000
safety and soundness issues.
For purposes of this Section 6.2, the Company shall be deemed to
have given its consent to any action which is contrary to any specified covenant
set forth in this Section if, within five (5) Business Days, or three (3)
Business Days for loans, after actual receipt by the Company of written notice
from the Bank of the Bank's intention to act contrary to any of the specified
covenants set forth in this Section, the Company shall not have delivered to the
Bank written objection to any such action.
6.3 ACCESS TO INFORMATION. (a) As long as the transaction
contemplated herein has not been terminated, the Bank will afford the Company,
its representatives, counsel, accountants, agents and employees including the
underwriter selected to assist in the issuance of the common stock contemplated
in Section 9.1(iii) and its counsel (collectively "Company Representatives"),
access during normal business hours to all of its business, operations,
properties, personnel books, files and records and will do everything reasonably
necessary to enable the Company and the Company Representatives to make a
complete examination of the financial statements, books, records, loans and
leases, operating reports, audit reports, contracts and documents, and all other
information with respect to assets and properties of the Bank and the condition
thereof, and to update such examination at such intervals as the Company shall
deem appropriate. Such access shall include reasonable access by the Company
and the Company Representatives to auditors' work papers with respect to the
business and properties of the Bank, other than (i) books, records and documents
covered by the attorney-client privilege, or which are attorneys' work product,
and (ii) books,
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records and documents that the Bank is legally obligated to keep
confidential. Such examination shall be conducted in cooperation with the
officers of the Bank and in such a manner as to minimize, to the extent
possible consistent with the conducting of a comprehensive examination, any
disruption of, or interference with, the normal business operations of the
Bank. No such examination, however, shall constitute a waiver or
relinquishment on the part of the Company to rely upon the representations
and warranties made by the Bank herein or pursuant hereto; provided, that the
Company shall disclose any fact or circumstance it may discover which it
believes renders any representation or warranty made by the Bank hereunder
incorrect in any respect. The Company will hold in strict confidence all
documents and information concerning the Bank so obtained (except to the
extent that such documents or information are a matter of public record or
require disclosure in the Proxy Statement or as may be necessary for the
accomplishment of the purposes of such examination) and, if the transactions
contemplated herein are not consummated, such confidence shall be maintained
and all such documents including all copies shall be returned to the Bank.
(b) As long as the transaction contemplated hereunder has not been
terminated, (i) one Company Representative, selected by the Company in its sole
discretion, shall be invited by the Bank to attend all regular and special Board
of Directors' meetings of the Bank from the date hereof until the Effective Time
of the Merger and (ii) one representative of Sutro shall be invited by the Bank
to attend all regular and special Board of Director meetings of the Bank from
the date hereof until the Effective Time of the Merger for the purpose of
discussing the condition of the market for the Offering. The Bank shall inform
the Company of such Board of Director meeting at least five (5) days in advance
of such meeting; provided, however, that the attendance of such Company
Representative shall not be permitted at any meeting, or portion thereof, for
the sole purpose of discussing the transactions contemplated by this Agreement
on the obligations of the Bank under this Agreement.
6.4 FINANCIAL STATEMENTS. In the event the following have not
been previously delivered prior to the date hereof, within three (3) days of
receipt from Arthur Andersen LLP, the Bank will deliver to the Company a copy of
the audited Statements of Financial Condition of the Bank as of December 31,
1998; Statements of Earnings, Stockholders' Equity and Cash Flows for the year
ended December 31, 1998, the related notes and related opinions thereon of
Arthur Andersen LLP, with respect to such financial statements (the "1998
Audited Bank Financial Statements"). The Bank will furnish to the Company with
a true and correct copy of the management letter or other letter delivered to
the Bank by Arthur Andersen LLP in connection with the 1998 Audited Bank
Financial Statements relating to any review of the internal controls of the Bank
by Arthur Andersen LLP. The 1998 Audited Bank Financial Statements will: (i)
present fairly the financial condition and results of operations of the Bank as
of and for the dates or periods covered thereby in accordance with generally
accepted accounting
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principles consistently applied throughout the periods involved; (ii) be
based on the books and records of the Bank; (iii) contain and reflect
reserves for all material accrued liabilities and for all reasonably
anticipated losses, and set forth adequate reserves for loan losses and other
contingencies, to the extent required by GAAP; and (iv) none of the 1998
Audited Bank Financial Statements will contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained therein not misleading under GAAP.
6.5 NO SOLICITATION.
(a) The Bank shall not, and will cause each of its officers,
directors, employees, agents, legal and financial advisors and Affiliates not
to, directly or indirectly, make, solicit, encourage, initiate or, except as
permitted in this Section 6.5, enter into any agreement or agreement in
principle, or announce any intention to do any of the foregoing, concerning the
acquisition of the Bank, or substantially all of the Bank's business and
properties or a majority of Bank Stock or debt securities, whether by purchase,
merger (other than by the Company), purchase of assets, tender offer or
otherwise (an "Alternative Transaction").
(b) The Bank shall not, and will cause each of its officers,
directors, legal and financial advisors, agents and Affiliates not to, directly
or indirectly, participate in any negotiations or discussions regarding, or
furnish any information with respect to, or otherwise cooperate in any way in
connection with, or assist or participate in, facilitate or encourage, any
effort or attempt to effect or seek to effect, any Alternative Transaction with
or involving any Person other than the Company, unless the Bank shall have
received an unsolicited written offer from a Person other than the Company to
effect an Alternative Transaction and the Board of Directors of the Bank is
advised in writing by outside legal counsel that in the exercise of the
fiduciary obligations of the Bank's Board of Directors such information should
be provided to or such discussions or negotiations undertaken with the Person
submitting such unsolicited written offer.
(c) The Bank will promptly communicate to the Company the receipt
of any proposal with respect to any Alternative Transaction, and will keep the
Company informed as to the status of any such proposal; PROVIDED, HOWEVER, that
the Bank shall not be required to disclose any matters which, in the written
opinion of outside legal counsel, may not be disclosed in the exercise of the
fiduciary obligations of the Bank's Board of Directors.
6.6 CERTAIN LOANS AND OTHER EXTENSIONS OF CREDIT. The Bank will
promptly inform the Company of the amounts and categories of any loans, leases
or other extensions of credit that have been criticized special mention or
classified by any bank regulatory authority or deemed by the Bank to require
special attention pursuant to its internal policies (collectively "Classified
Credits"). In addition, the Bank will furnish to the Company, as soon as
practicable, and in any event within
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seven days after receipt by the Bank's Board of Directors, schedules
including the following: (a) Classified Credits; (b) nonaccrual credits; (c)
accrual exception credits that are delinquent 90 or more days and have not
been placed on nonaccrual status; (d) participating loans and leases,
stating, with respect to each, whether it is purchased or sold, the loan or
lease type, and the originating unit; (e) loans or leases (including any
commitments) by the Bank to any director, officer or shareholder holding 5%
or more of the capital stock of such party; (f) letters of credit; (g) loans
or leases charged-off during the previous month; (h) loans or leases written
down during the previous month; and (i) OREO or assets owned, stating with
respect to each its type.
6.7 BREACHES. The Bank shall, in event it becomes aware of the
impending or threatened occurrence of any event or condition which would cause
or constitute a breach (or would have caused or constituted a breach had such
event occurred or been known prior to the date hereof) of any of its
representations or agreements contained or referred to herein, give prompt
written notice thereof to the Company and, without limiting the Company's rights
under paragraph 14.1(a)(ii), the Bank shall use its best efforts to prevent or
promptly remedy the same.
6.8 SHAREHOLDER APPROVAL. As soon as practicable, the Company and
the Bank shall prepare the S-4 and the proxy statement ("Proxy Statement") and
take all action necessary in accordance with applicable Rules and its Charter
Documents to submit the Agreement and the transactions contemplated hereby to
its shareholders for approval by April 1, 1999, or as soon thereafter as is
reasonably possible. In connection with such submission, subject to its
fiduciary obligations specified in Section 6.5(b) the Bank's Board of Directors
shall recommend shareholder approval of all the matters referred to in this
Section 6.8 and the Bank shall use its best efforts to obtain such shareholder
approval.
6.9 COMPLIANCE WITH RULES. The Bank shall comply with the
requirements of all applicable Rules, the noncompliance with which would
materially and adversely affect the assets, liabilities, business, financial
condition, results of operations or prospects of the Bank.
6.10 TERMINATION OF THE BANK STOCK OPTION PLAN AND AGREEMENTS. The
Bank will take all steps necessary to cause the Bank Stock Option Plan to be
terminated as of or prior to the Effective Time of the Merger, will grant no
additional options under said plan prior to the Effective Time of the Merger,
and the Bank will not permit any options to be exercised as of or prior to the
Effective Time of the Merger.
6.11 OFFICERS AND EMPLOYEES. Following the Closing Date, the
Company and the Bank will agree to consolidate and/or reduce certain back office
and administrative functions, and other overhead, of the Bank in order to reduce
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Bank expense. Other than officers with employment contracts, the Bank will
use its best efforts to cause each officer and employee of the Bank to
indicate in writing to the Company that such officers and employees will
agree to the Bank's employment policies, procedures and handbook, acknowledge
his or her at-will employment status while employed by the Bank, and
acknowledge his or her salary or compensation and title while employed by the
Bank, in the form similar to that attached as EXHIBIT 6.11(a). The Company
also will honor all Bank Employment Agreements specified in EXHIBIT 4.11(a).
The Bank will cancel by the Closing Date the keyman life insurance policy and
the disability insurance policy for Mr. Jaqua.
6.12 TERMINATION OF CONTRACTS AND ACCRUAL OF LIABILITIES. Upon
determination by the Company, the Bank shall obtain the termination of any
contracts, commitments or Understanding as defined in Section 4.12(v), and pay
or accrue as of the Closing Date for any termination fees, for the future
purchase of materials, supplies, services, merchandise or equipment, the price
of which exceeds $20,000. The Bank shall also cancel the consulting contract
with Mr. Cockrum effective as of the Closing Date. Before the Determination
Date, the Bank shall have paid, or set-up adequate accruals for the payment of,
all expenses, including, but not limited to, professional fees as outlined in
Section 11.18, and expenses as outlined in Section 13.1, but only to the extent
that such fees and expenses shall be chargeable to the after tax net income of
the Bank up to the Determination Date in accordance with GAAP.
6.13 EXECUTION OF AGREEMENT OF MERGER. As soon as possible after
organization of PCBG Merger Corporation, subject to receipt of any and all
necessary approvals and Permits by any Governmental Entity and approval by the
Bank's shareholders, the Bank shall execute the Agreement of Merger and any and
all related documents.
6.14 ACCOUNTANTS. Promptly upon request of the Company, the Bank
will ask its accountants to permit the Company or the Company Representatives to
review and examine the work papers relating to the Audited Bank Financial
Statements for the years ended December 31, 1995, 1996, 1997 and 1998, and the
Bank will permit such accountants to discuss with the Company any matter
relating to the audits of the Bank. In addition, the Bank will make available
to the Company copies of each management letter or other letter delivered to the
Bank by its accountants in connection with such financial statements or relating
to any review by its accountants of the internal controls of the Bank since
January 1, 1995, unless previously provided to the Company and the Bank has
instructed its accountants to make available for inspection by the Company or
the Company Representatives all reports and working papers produced or developed
by its accountants in connection with their examination of such financial
statements, as well as all such reports and working papers for any periods for
which any tax of the party has not been finally determined or barred by
applicable statutes of limitation.
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6.15 CORPORATE ACTION. The Bank shall take or cause to be taken
all necessary corporate action required to carry out the transactions
contemplated in this Agreement.
6.16 REGULATORY APPROVALS. Promptly following execution of this
Agreement, the parties hereto shall prepare, submit and file, or cause to be
prepared, submitted and filed, all applications for approvals and consents as
may be required of any of them, respectively, by applicable law and regulations
with respect to the transactions contemplated by this Agreement, including
without limitation any and all applications required to be filed with the
Commissioner, the FRB, the FDIC and such other Governmental Entity as the
Company or the Bank may reasonably believe necessary. Each party shall
cooperate with the other in the preparation of all of such applications and will
furnish promptly upon request all documents, information, financial statements
or other materials as may be required in order to complete such applications.
Each party shall afford the other a reasonable opportunity to review all such
applications (except confidential portions thereof) and all amendments and
supplements thereto before filing. The Company and the Bank each covenant and
agree that any and all information furnished by it to the other for inclusion in
such applications will not contain any untrue statement of a material fact and
will not omit to state any material fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
6.17 NECESSARY CONSENTS. In addition to the regulatory approvals
referred to in Section 6.16, the parties hereto shall each apply for and
diligently seek to obtain all other third party consents or approvals which may
be necessary for the consummation of the Merger, including, without limitation,
the written consent of any lessors of real and personal property which property
cannot be assigned without the written consent of the other such lessors ("Third
Party Consent").
6.18 FURTHER ASSURANCES. The parties agree that from time to time,
whether prior to, at or after the Effective Time of the Merger, they will
execute and deliver such further instruments of conveyance and transfer and take
such other action as may reasonably be expected to consummate the transactions
contemplated hereby. The Company and the Bank each agrees to take such further
action as may reasonably be requested by the other in order to consummate the
transactions contemplated by this Agreement and that are not inconsistent with
the other provisions hereof, including compliance with all of the terms of
Article II.
6.19 BANK EMPLOYEE BENEFITS. Upon the mutual agreement of the Bank
and the Company, the Bank shall cause all Employee Plans of the Bank to be
terminated except as otherwise provided by applicable labor laws as of the
Effective Time of the Merger.
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6.20 ENVIRONMENTAL REPORTS. Except for the Banklink leases, the
1600 Florida Avenue lease, and foreclosed OREO, and except as otherwise agreed
to in writing by the Company, the Bank shall provide to the Company, as soon as
reasonably practical, but not later than 45 days after the date hereof, a report
of a phase one environmental investigation on all Real Property owned, leased or
operated by Bank as of the date hereof (other than space in retail and similar
establishments leased by the Bank for automatic teller machines) and within ten
days after the acquisition or lease of any Real Property acquired or leased by
the Bank after the date hereof (other than space in retail and similar
establishments leased or operated by the Bank for automatic teller machines),
except as otherwise provided in Section 6.2(xxxiii). If required by the phase
one investigation in the Company's reasonable opinion, the Bank shall provide to
the Company a report of a phase two investigation on the Real Property or Real
Properties requiring such additional study. The Company shall have 15 business
days from the receipt of any such phase two investigation report to notify the
Bank of any objection to the contents of such report. If the cost of taking all
remedial and corrective actions and measures (i) required by applicable law, or
(ii) recommended or suggested by such report or reports or prudent in light of
serious life, health or safety concerns, in the aggregate, is in excess of the
sum of Three Hundred Thousand Dollars ($300,000) as reasonably estimated by an
environmental expert retained for such purpose by the Company and reasonably
acceptable to the Bank, or if the cost of such actions and measures cannot be so
reasonably estimated by such expert to be, in the aggregate, $300,000 or less
with any reasonable degree of certainty, the Company shall have the right to
terminate the Agreement pursuant to Article IV, Section 14.1(e) hereof, for a
period of 10 business days following receipt of such estimate or indication that
the cost of such actions and meaures.
6.21 NO CONFLICTS; DEFAULTS. The execution, delivery and
performance of the Agreement of Merger and the consummation of the transactions
contemplated therein, and compliance by the Bank with any provision thereof will
not (a) conflict with or result in a breach of, or default or loss of any
benefit under, any provision of its Charter Documents or, except as set forth in
Exhibit 6.21 any material agreement, instrument or obligation to which the
Surviving Bank will become a party or by which the property of the Surviving
Bank will become bound or give any other party to any such agreement, instrument
or obligation the right to terminate or modify any term thereof; (b) except for
the prior approval of the FRB, the FDIC and the Commissioner and as set forth in
Exhibit 6.21, require any Consents; (c) result in the creation or imposition of
any Encumbrance on any of the properties or assets of the Surviving Bank; or (d)
violate the Charter Documents or any Rules to which the Surviving Bank is
subject.
6.22 THE OFFERING. The Bank will assist the Company in connection
with the preparation of the offering materials for the issuance of the Company
Stock contemplated by this Agreement, and such assistance will include, but not
necessarily be limited to, the preparation or provision, as appropriate, of
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information concerning the business, properties and personnel of the Bank needed
in connection with the issuance of the Company Stock and the closing of the
Offering, as well as any and all comfort letters from Arthur Andersen LLP , and
any and all necessary opinions from Gary Steven Findley & Associates, with
respect to the Offering as specified by the Underwriters. Such information to
be supplied by the Bank will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not intentionally misleading.
6.23 S-4, PROXY STATEMENT AND THE OFFERING. The Company and the
Bank will prepare the S-4 and the Proxy Statement, and the Bank will assist the
Company in connection with preparation of the S-1, contemplated by this
Agreement, and such preparation and assistance will include, but not necessarily
be limited to, the preparation or provision, as appropriate, of information
concerning the business, properties and personnel of the Bank needed in
connection with the issuance of the Company Stock, the S-4 and the Proxy
Statement and the closing of the Merger. Such information to be prepared by the
Bank including any and all information furnished by the Bank for inclusion in
all applications and statements filed with the appropriate regulatory
authorities for approval of, or consent to, the Merger will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
6.24 PUBLICITY. The initial press release announcing this
Agreement shall be a joint press release and thereafter the Company and the Bank
shall consult with each other in issuing any press releases or otherwise making
public statements with respect to the transactions contemplated hereby and in
making any filings with any Governmental Entity or with any national securities
exchange with respect thereto. If any party hereto, on the advice of counsel,
determines that a disclosure is required by law, it may make such disclosure
without the consent of the other parties, but only after affording the other
party a reasonable opportunity to review and comment upon the disclosure. The
parties hereby agree that all public statements after the initial press release
announcing this Agreement referring to the Bank shall be made by Mr. James B.
Jaqua, and all public statements made after the initial press release announcing
this Agreement referring to the Company shall be made by Mr. E. Lynn Caswell,
and both parties agree that all public statements shall be made by mutual
agreement with consultation with the Managing Underwriter.
6.25 AFFILIATES AND FIVE PERCENT SHAREHOLDER AGREEMENTS. Within
thirty (30) days of the execution of this Agreement, (a) the Bank shall deliver
to the Company a letter identifying all persons who are then "affiliates" of the
Bank for purposes of Rule 145 under the Securities Act and (b) the Bank shall
advise the persons identified in such letter of the resale restrictions imposed
by applicable
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securities laws and shall use reasonable efforts to obtain from each person
identified in such letter a written agreement substantially in the form
attached hereto as Exhibit 6.25. The Bank shall use reasonable efforts to
obtain from any person who becomes an affiliate of the Bank after the Bank's
delivery of the letter referred to above, and on or prior to the date of the
Bank's Shareholders' Meeting to approve this Agreement, a written agreement
substantially in the form attached as Exhibit 6.25 hereto as soon as
practicable after obtaining such status. At least 10 Business Days prior to
the filing of the S-4, the Bank shall use its best efforts to cause each
person or group of persons who holds more than five percent (5%) of Bank
Stock (regardless of whether such person is an "affiliate" under Rule 145) to
deliver to the Company's accountants and Knecht & Hansen, a letter stating
that such shareholder(s) has no present plan or intention to dispose of Bank
Stock and committing that such shareholder(s) will not dispose of Bank Stock
in a manner to cause a violation of the "continuity of shareholder interest"
requirements of Treasury Regulation 1.368-1.
ARTICLE VII
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Bank as follows:
7.1 BEST EFFORTS. The Company shall use its best efforts to bring
about the satisfaction of the conditions specified in Articles IX and X hereof.
7.2 CONDUCT OF BUSINESS. Unless the Bank shall give its prior
consent, which consent will not be unreasonably withheld, or unless otherwise
indicated, until the Effective Time, the Company will:
(i) conduct its affairs and business in the usual and
ordinary course, generally consistent with past practice, and in accordance with
safe and sound practices;
(ii) refrain from amending its Charter Documents except to
the extent as may be required or contemplated by this Agreement;
(iii) use its best efforts to preserve its business
organization intact and to retain its present officers and employees in a manner
consistent with the Company's other obligations under this Agreement;
(iv) use its best efforts to preserve the goodwill of those
having business relations with the Company, refrain from amending, modifying,
terminating or failing to renew or preserve its business organization, material
rights, franchises, Permits, and refrain from taking any action which would
jeopardize the continuance of the goodwill of its customers where such action
would have, taken
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as a whole, a material adverse effect on the financial condition, or results
of operations of the Company in a manner consistent with the Company's other
obligations under this Agreement;
(v) duly and timely file all reports and returns required
to be filed with any federal, state or local Governmental Entity unless any
extensions have been duly granted by such authorities;
(vi) maintain its books of account and records in the
regular manner substantially in accordance with all applicable statutory and
regulatory requirements applied on a consistent basis;
(vii) advise the Bank promptly in writing of any material
adverse change known to the Company in the capital structure, financial
condition, results of operations, or of any event or condition which with the
passage of time is reasonably likely to result in a material adverse change in
the capital structure, financial condition or results of operations of the
Company, or in the event the Company determines that the Merger will not be
consummated because of any inability to meet the conditions to the performance
of the Bank set forth in Article X or of any matter which would make the
representations and warranties set forth in Article V hereof not true and
correct in any material respect at the Closing;
(viii) the Company agrees that through the Effective Time of
the Merger, as of their respective dates, (i) each of the Company Filings will
be true and complete in all material respects; and (ii) each of the filings with
any regulatory agency will comply in all material respects with all of the
statutes, rules and regulations enforced or promulgated by the Governmental
Entity with which it will be filed and none will contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they will be made, not misleading. Any financial statement contained in
any of such Company Filings that is intended to present the financial position
of the entities or entity to which it relates will fairly present the financial
position of such entities or entity and will be prepared in accordance with GAAP
or RAP consistently applied, except as stated therein, during the periods
involved;
For purposes of this Section 7.2, the Bank shall be deemed to have
given its consent to any action which is contrary to any specified covenant set
forth in this Section if, within five (5) Business Days, after actual receipt by
the Bank of written notice from the Company of the Company's intention to act
contrary to any of the specified covenants set forth in this Section, the Bank
shall not have delivered to the Company written objection to any such action.
7.3 ACCESS TO INFORMATION. The Company will afford the Bank, its
representatives, counsel, accountants, agents and employees (collectively "Bank
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Representatives"), access during normal business hours to all of its
business, operations, properties, books, files and records and will do
everything reasonably necessary to enable the Bank and the Bank
Representatives to make a complete examination of the financial statements,
books, records, loans and leases, operating reports, audit reports, contracts
and documents, and all other information with respect to assets and
properties of the Company and the condition thereof, and to update such
examination at such intervals as the Bank shall deem appropriate. Such
access shall include reasonable access by the Bank and the Bank
Representatives to auditors' work papers with respect to the business and
properties of the Company, other than (i) books, records and documents
covered by the attorney-client privilege, or which are attorneys' work
product, and (ii) books, records and documents that the Company is legally
obligated to keep confidential. Such examination shall be conducted in
cooperation with the officers of the Company and in such a manner as to
minimize, to the extent possible consistent with the conducting of a
comprehensive examination, any disruption of, or interference with, the
normal business operations of the Company. No such examination, however,
shall constitute a waiver or relinquishment on the part of the Bank to rely
upon the representations and warranties made by the Company herein or
pursuant hereto; provided, that the Bank shall disclose any fact or
circumstance it may discover which it believes renders any representation or
warranty made by the Company hereunder incorrect in any respect. The Bank
will hold in strict confidence all documents and information concerning the
Company so obtained (except to the extent that such documents or information
are a matter of public record or require disclosure in the Proxy Statement or
as may be necessary for the accomplishment of the purposes of such
examination) and, if the transactions contemplated herein are not
consummated, such confidence shall be maintained and all such documents
including all copies shall be returned to the Company.
7.4 BREACHES. The Company shall, in event it becomes aware of
the impending or threatened occurrence of any event or condition which would
cause or constitute a breach (or would have caused or constituted a breach
had such event occurred or been known prior to the date hereof) of any of its
representations or agreements contained or referred to herein, given prompt
written notice thereof to the Bank and, without limiting the Bank's rights
under paragraph 14.1(a)(ii), the Company shall use its best efforts to
prevent or promptly remedy the same.
7.5 COMPLIANCE WITH RULES. The Company shall comply with the
requirements of all applicable Rules, the noncompliance with which would
materially and adversely affect the assets, liabilities, business, financial
condition, or results of operations of the Company taken as a whole. The
Company shall also comply with all securities statutes, rules and
regulations, whether federal or state, in connection with the Offering.
Except for information supplied by the Bank pursuant to Section 6.22, the
information contained in the Offering disclosure documents shall not contain
any untrue statement of a material fact or omit to
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state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
7.6 CORPORATE ACTION. The Company shall take or cause to be
taken all necessary corporate action required to carry out the transactions
contemplated in this Agreement and the Agreement of Merger, including without
limitation, all necessary action required to organize and fund PCBG Merger
Corporation.
7.7 REGULATORY APPROVALS. Promptly following execution of this
Agreement, the parties hereto shall prepare, submit and file, or cause to be
prepared, submitted and filed, all applications for approvals and consents as
may be required of any of them, respectively, by applicable law and
regulations with respect to the transactions contemplated by this Agreement,
including without limitation any and all applications required to be filed
with the Commissioner, the FRB, the FDIC and such other Governmental Entity
as the Company or the Bank may reasonably believe necessary. Each party
shall cooperate with the other in the preparation of all of such applications
and will furnish promptly upon request all documents, information, financial
statements or other materials as may be required in order to complete such
applications. Each party shall afford the other a reasonable opportunity to
review all such applications (except confidential portions thereof) and all
amendments and supplements thereto before filing. The Company and the Bank
each covenant and agree that any and all information furnished by it to the
other for inclusion in such applications will not contain any untrue
statement of a material fact and will not omit to state any material fact
required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading.
7.8 NECESSARY CONSENTS. In addition to the regulatory
approvals referred to in Section 7.7, the parties hereto shall each apply for
and diligently seek to obtain all other third party consents or approvals
which may be necessary for the consummation of the Merger, including, without
limitation, the written consent of any lessors of real and personal property
which property cannot be assigned without the written consent of the other
such lessors ("Third Party Consent").
7.9 FURTHER ASSURANCES. The parties agree that from time to
time, whether prior to, at or after the Effective Time of the Merger, they
will execute and deliver such further instruments of conveyance and transfer
and take such other action as may reasonably be expected to consummate the
transactions contemplated hereby. The Company and the Bank each agree to
take such further action as may reasonably be requested by the other in order
to consummate the transactions contemplated by this Agreement and that are
not inconsistent with the other provisions hereof, including compliance with
the terms of Article II.
7.10 (reserved).
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7.11 (reserved).
7.12 INDEMNIFICATION AND INSURANCE.
(a) The Company will cause the Bank to maintain in effect
policies of directors' and officers' liability insurance (with such coverage,
terms and conditions as are no less advantageous than the insurance presently
maintained by the Bank with respect to the officers and directors)with
respect to all matters arising from facts or events which occurred before the
Effective Time of the Merger, and for a three (3) year period thereafter, for
which the Bank would have had an obligation to indemnify its directors and
officers.
(b) If the Company or any of its successors or assigns (i)
shall consolidate with or merge into any other corporation or entity and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) shall transfer all or substantially all of
its properties and assets to any individual, corporation or other entity,
then and in each such case, the Company shall take no action to impair the
rights provided in this Section 7.12.
7.13 EXECUTION OF AGREEMENT OF MERGER. As soon as practicable
after the organization of PCBG Merger Corporation, the Company as the sole
shareholder of PCBG Merger Corporation, shall approve the Merger and shall
cause PCBG Merger Corporation to execute the Agreement of Merger.
7.14 THE OFFERING.
(a) The Company intends to conduct the Offering in order to
raise sufficient cash capital to complete the acquisition of the Bank,
provide capital for growth and operations of the Company, and to otherwise
carry out the transaction contemplated by this Agreement.
(b) All Directors and officers of the Company and the Surviving
Bank will undertake in writing with the Underwriters not to sell any Warrants
or shares of Company Stock held by them for a period of six months following
the completion of the Offering unless specifically granted permission to do
so by the Underwriters.
(c) Simultaneously with, and upon the condition of, the
consummation of the acquisition of the Bank, the Company through the
Underwriters intends to consummate the Offering at a gross public offering
price to be determined by the Company and the Underwriters. Based upon
current market conditions and assumptions, the Offering will consist of
sufficient shares of Company Stock offered to the public at a gross offering
price to be determined by the Company and the Managing Underwriter. The
shares constituting the Offering
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will be comprised of newly issued shares of Company Stock to fund the cash
portion of the acquisition of the Bank and to provide the Company with new
capital for growth and operations of the Company following the acquisition of
the Bank and the consummation of the Offering.
(d) The Managing Underwriter has not withdrawn, or materially
and adversely modified, the letter expressing their degree of confidence, and
the Managing Underwriter will promptly notify the parties if such withdrawal
should occur.
7.15 AUTHORIZATION. The execution and delivery of the Agreement
of Merger and the consummation of the transactions contemplated thereby will
have been duly authorized by the Board of Directors of PCBG Merger
Corporation. The Agreement of Merger will constitute a legal, valid and
binding agreement of PCBG Merger Corporation in accordance with its
respective terms, except as the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or other laws
of general application relating to or affecting enforcement of creditors
rights and the application of equitable principles in any action, legal or
equitable. PCBG Merger Corporation will have full corporate power and
authority to perform its obligations under the Agreement of Merger and the
transactions contemplated thereby.
7.16 NO CONFLICTS; DEFAULTS. The execution, delivery and
performance of the Agreement of Merger and the consummation of the
transactions contemplated therein, and compliance by PCBG Merger Corporation
with any provision thereof will not (a) conflict with or result in a breach
of, or default or loss of any benefit under, any provision of its Charter
Documents or, except as set forth in Exhibit 7.16 any material agreement,
instrument or obligation to which PCBG Merger Corporation will become a party
or by which the property of PCBG Merger Corporation will become bound or give
any other party to any such agreement, instrument or obligation the right to
terminate or modify any term thereof; (b) except for the prior approval of
the FRB, the FDIC and the Commissioner and as set forth in Exhibit 7.16,
require any Consents; (c) result in the creation or imposition of any
Encumbrance on any of the properties or assets of PCBG Merger Corporation; or
(d) violate the Charter Documents or any Rules to which PCBG Merger
Corporation is subject.
7.17 ACCURACY OF INFORMATION FURNISHED. Except as to any
statements or information which shall include projections or forecasts, none
of the statements or information made or contained in any of the covenants,
representations or warranties of the Company set forth in this Agreement or
in any of the schedules, exhibits, lists, certificates or other documents
furnished herewith contains any untrue statement of a material fact required
to be stated herein or therein or necessary to make the statements or
information contained herein or therein, in light of the circumstances in
which they were made, not misleading. As
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to any such information or statements which include projections or forecast,
such information or statements are based upon assumptions believed by the
Company to be reasonable. The Company shall further amend or supplement the
schedules as of the Closing Date if necessary to reflect any additional
changes in the status of the Company.
7.18 1999 STOCK OPTION PLAN. Prior to or following the
completion of the transactions contemplated herein, the Company will use its
best efforts to establish the Company's 1999 Stock Option Plan for the
benefit of directors, officers and key employees of the Company and the Bank.
7.19 FURTHER ASSURANCES. The Company knows of no reason that
the transaction would not consummate. Without the prior approval of the
Bank, the Company will not enter into any further agreements to acquire
another financial institution that would materially and adversely affect the
transaction or the timing contemplated by this Agreement.
ARTICLE VIII
FURTHER COVENANTS OF THE COMPANY AND THE BANK
The parties covenant and agree as follows:
8.1 S-4, PROXY STATEMENT AND REGISTRATION STATEMENT FOR THE
OFFERING.
(a) As promptly as practicable, the Company and the Bank shall
use their best efforts to prepare and file the S-4, in which the Proxy
Statement will be included as a prospectus, and the S-1 with the SEC and any
other Governmental Entity. The Bank agrees to provide the information
necessary for inclusion in the S-4, the Proxy Statement and the S-1. The
Company will use its best efforts to have the S-4 and the Proxy Statement
declared effective under the Securities Act as promptly as practicable after
it is filed and to satisfy the requirements of the SEC and any other
Governmental Entity.
(b) After the date of the filing of the S-4 and the S-1 with
the SEC and any other Governmental Entity, each of the Parties agrees to
promptly notify the other of and to correct any information furnished by such
party that shall have become false or misleading in any material respect and
to cooperate with the other to take all steps necessary to file with the SEC
and any other Governmental Entity and have declared effective or cleared by
the SEC and any other Governmental Entity any amendment or supplement to the
S-1 and the S-4 so as to correct such information and to cause the S-4 and
the S-1 as so corrected to be disseminated to the shareholders of the Company
and the Bank to the extent required by applicable Rules. All documents that
the Company files with the SEC or any other
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Governmental Entity in connection with this Agreement will comply as to form
in all material respects with the provisions of applicable Rules.
(c) The Company shall take all required action with appropriate
Governmental Entities under state securities or blue sky laws in connection
with the issuance of Company Stock pursuant to this Agreement.
(d) The Bank and the Company, through their Board of Directors,
will recommend that its shareholders approve the transactions contemplated
hereby, and both parties will use their best efforts to obtain the
affirmative votes of the holders of the largest possible percentage of its
outstanding Common Stock, so long as it is consistent with its fiduciary
obligation to do so.
8.2 FEDERAL SECURITIES LAWS. In obtaining the consent of its
shareholders of the matters described in Section 8.1 hereof, the Company, the
Bank and their respective officers, directors and controlling shareholders
will, in all respects, comply with the Rules and regulations of the SEC and
any other Governmental Entity promulgated under the Exchange Act applicable
to commercial banks which are reporting companies, other applicable
provisions of the United States Code, the Rules and regulations of the SEC
and the securities laws of all states in which shareholders of the parties
reside as applicable.
Without in any way limiting the generality of the foregoing, the
Company and the Bank agrees that the Notice of Meeting, Proxy Statement
submitted in connection therewith, form of Proxy and other solicitation
materials that will be used in soliciting the aforesaid shareholder approvals
and authorizations and the S-1:
(i) will be filed with, and not be used before the same
are cleared for use by, the SEC, other Governmental Entities having
jurisdiction over the Company and the Bank, and this transaction, and the
securities administrators of all states in which their respective
shareholders reside as applicable;
(ii) will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, except that neither
party warrants the accuracy or completeness of any information contained
therein which is furnished to it by the other relating to the business,
assets, properties, financial condition or management of the other or any
corporation or person affiliated or contractually obligated to become
affiliated therewith, whether by merger, acquisition of assets or otherwise;
(iii) the Company and the Bank will use their best
efforts to obtain clearance by all appropriate Governmental Entities for the
use of its Notice of Meeting, Proxy Statement, form of Proxy and other
solicitation materials. Each
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party will consult and cooperate with the other in the preparation of all
such proxy solicitation materials for the Bank Shareholders' Meeting and the
Company's Shareholders Meeting, and the Bank and the Company agree not to
transmit any proxy materials without the prior consent of the other party and
its counsel; and
(iv) the Company and the Bank shall each covenant and
agree and each pay their own expenses in connection with the preparation and
filing, including attorney fees, of the Notice of Meeting, Proxy Statement,
form of Proxy and other solicitation materials.
8.3 MAILING OF PROXY STATEMENT. The Bank and the Company each
covenant and agree that they will use their best efforts and shall cooperate
with each other in the preparation, filing and mailing of the Proxy Statement
as soon as it reasonably practicable and is permitted under applicable law;
it being the intention of the Bank to include its December 31, 1998 financial
statements and information, and any necessary quarterly financial statements
and information, in the financial disclosures contained in the Proxy
Statement.
8.4 MATERIALS TO BE FURNISHED PRIOR TO MAILING DATES. On or
prior to the mailing date of the Proxy Statement ("Bank Mailing Date"), the
Bank (a) shall use its best efforts to cause an appropriate firm that shall
be selected by the Bank in its discretion, subject to the reasonable approval
of the Company, to deliver to the Company a copy of any letter to the Board
of Directors of Bank, dated as of a date not more than five days prior to
such mailing date, in form and substance satisfactory to the Company to the
effect set forth in Section 10.9 hereof, (b) shall have received a letter by
a date not more than five days prior to the Bank Mailing Date, to the effect
that the consideration to be received by the shareholders of the Bank in the
Merger is fair from a financial point of view, and (c) shall have received a
letter by a date not more than five days prior to the Bank Mailing Date, of
the valuation of dissenters rights shares as described in Section 1300.
8.5 REGULATORY APPROVALS. The Bank and the Company each agree
to use their best efforts to provide promptly such information and reasonable
assistance as may be requested by the other party to this Agreement and to
take promptly such other actions as shall be necessary or appropriate in
order to consummate the transactions contemplated hereby. Without limiting
the foregoing, the Bank and the Company will each (a) prepare, submit and
file, or cause to be prepared, submitted and filed, all applications for all
authorizations, consents, orders and approvals of federal, state, local and
other Governmental Entities and officials necessary under applicable law for
the performance of its obligations pursuant to this Agreement and the
consummation of the transactions contemplated hereby, (b) use their best
efforts to obtain all such authorizations, consents, orders and approvals as
expeditiously as possible in accordance with the terms of this Agreement, and
(c) cooperate fully with each other in promptly seeking to obtain such
authorizations, consents, orders and approvals, including
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without limitation, in each case, the approval of the FRB, the FDIC and the
Commissioner. The Bank and the Company each agree to promptly provide the
other with copies of all applications referred to in clause (a) above and
copies of all written communications, letters, reports or other documents
delivered to or received from any Governmental Entity, and copies of all
memoranda relating to discussions with such Governmental Entity, if any, with
respect to the Merger, except that the Company and the Bank shall not be
required to provide the other with any of the foregoing documents submitted
or received on a confidential basis or which incorporate confidential
information relating to other financial institutions. The Parties agree that
through the Effective Time of the Merger, each of its reports, registration,
statements and other filings required to be filed with any applicable
Governmental Entity will comply in all material respects with the applicable
statues, rules and regulations enforced or promulgated by the Governmental
Entity with which it will be filed and none will contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Any financial
statement contained in any such report, registration statement or other
filing that is intended to represent the financial position of the Party to
which it relates will fairly present the financial position of such Party and
will be prepared in accordance with GAAP or RAP consistently applied during
the periods involved.
8.6 CORPORATE GOVERNANCE.
(a) Prior to the Effective Time, the Bank shall take
all necessary steps to effect the Bank Corporate Governance Changes at the
Effective Time.
(b) Prior to the Effective Time, the Company shall take
all necessary steps to effect the Company Corporate Governance Changes at the
Effective Time.
8.7 NASDAQ. The Company's Stock will be listed on the Nasdaq
National Market System at the Effective Time of the Merger.
ARTICLE IX
CONDITIONS PRECEDENT TO THE CONTEMPLATED TRANSACTIONS
The obligations of the Parties to consummate the transactions as
provided for herein are subject to the fulfillment, at or prior to the
Effective Time, of the following conditions:
9.1 PERMITS AND APPROVALS. Appropriate permits or approvals
from the Commissioner, the FRB, the FDIC and/or any other Governmental
Entities which
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are necessary to carry out the transactions contemplated in this Agreement,
shall have been received, the United States Department of Justice shall not
have taken any adverse action within the period allowed under 12 U.S.C.
Section 1828(c)(6), and all other statutory or regulatory requirements for
the valid completion of the transactions contemplated hereby shall have been
satisfied. Said permits and approvals shall include, but shall not be limited
to, the following:
(i) prior written approval from the Commissioner
pursuant to the CFC, the FDIC pursuant to 12 U.S.C. Section 1828(c)(2) and
the FRB pursuant to the Federal Reserve Act and the BHC Act;
(ii) to the extent required by applicable Rule, all
Consents of any Governmental Entity, including, without limitation, those of
the FRB, the FDIC and the Commissioner, shall have been obtained, granted or
waived for organization of PCBG Merger Corporation and the Merger, and all
applicable waiting periods under all rules shall have expired; and
(iii) all approvals, orders and/or permits necessary for
the Offering and any other necessary regulatory approvals and the issuance of
approvals or assurances from the Commissioner, the FRB, the FDIC, the SEC,
any blue sky authority and any other necessary Governmental Entity having
authority over the Merger that the approval of the Merger will be forthcoming
that are satisfactory to the Company, that would allow the Company to
commence the marketing of the Offering by the Company to complete the Merger
as described in this Agreement.
9.2 ABSENCE OF LITIGATION. On the Closing Date and at the
Effective Time: (i) there shall be no action pending before any court of
competent jurisdiction in which any injunction is sought by any Governmental
Entity against the transactions contemplated hereby; and (ii) there shall be
in effect no order, writ, injunction or decree of any court or Governmental
Entity prohibiting the consummation of any of the transactions contemplated
hereby.
9.3 SHAREHOLDER APPROVAL. The Agreement, the Merger, and the
other transactions contemplated hereby, shall have been approved by the
holders of at least a majority of the issued and outstanding shares of Bank
Stock entitled to vote and the requisite approval of the Company as the sole
shareholder of PCBG Merger Corporation as soon as practicable. Any and all
other action required by the shareholders of the Bank or the Company to
authorize or effect the transactions called for herein shall have been duly
and validly taken.
9.4 STOCK OFFERING. The Company shall close the Offering as
soon as is reasonably possible, the Company shall have received the amount of
cash necessary to complete the Merger as provided in Section 2.5, and to
carry out the transactions contemplated hereby.
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9.5 S-1, S-4 AND PROXY STATEMENT. The S-4, Proxy Statement and
the S-1 shall have been declared effective by the SEC or the FDIC, as
appropriate, and shall not be the subject of any stop order or proceeding
seeking or threatening a stop order. The Company shall have received all
state securities or "Blue Sky" permits and other authorization necessary to
issue the Company Stock in the Offering and the S-4 in order to consummate
the Merger.
9.6 NASDAQ. The Company's Common Stock issued in the Offering
will be listed on the Nasdaq National Market System at the Effective Time.
9.7 SEVERANCE POLICY. The Bank and the Company shall continue
the Bank's present severance policy.
ARTICLE X
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE BANK
All of the obligations of the Bank to consummate the transactions
contemplated herein shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions, or their waiver by resolution of
the Board of Directors of the Bank:
10.1 LEGAL OPINION. The Bank shall have received the opinion of
Knecht & Hansen, acting as counsel for the Company, dated as of the Closing
Date, in substantially the form of EXHIBIT 10.1.
10.2 CERTIFICATE OF NO DEFAULT. All covenants, terms and
conditions of this Agreement to be complied with and performed by the Company
at or before the Closing Date shall have been complied with and performed in
all material respects and the representations and warranties of the Company
contained in Article V hereof shall have been true and correct in all
material respects as of the Effective Time, with the same effect as though
such representations and warranties had been made on and as of the Effective
Time, except as otherwise specified in, or permitted or contemplated by, this
Agreement. The Company shall have delivered to the Bank, a certificate dated
the Closing Date, signed by the President, certifying the fulfillment of this
condition.
10.3 CLOSING DOCUMENTS. The Company shall have delivered to the
Bank all items required by the Bank pursuant to Section 3.3, all of which
documents shall be properly executed and, if required by the Bank,
acknowledged before a notary.
10.4 EFFECTIVE S-4 AND PROXY STATEMENT. The S-4 and the Proxy
Statement shall have been approved or otherwise become effective and no stop
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order suspending the effectiveness thereof shall be in effect and no
proceedings therefor shall be pending or threatened by any Governmental
Entity at the Closing Date.
10.5 REGULATORY APPROVALS AND RELATED CONDITIONS. Any and all
governmental and regulatory approvals and Consents referred to in Article IX
and any other section of this Agreement shall have been granted without the
imposition of conditions, or with conditions subject to the approval of the
Company and the Bank, that are or would have become applicable to the Company
or the Surviving Bank, and that the Company reasonably and in good faith
concludes would materially adversely affect the financial condition or
operations of the Company or the Surviving Bank, or otherwise would be
materially burdensome; provided, however, that conditions or requirements
which are imposed on purchasers or acquired institutions by Governmental
Entities in comparable transactions shall not be deemed to be a basis for
excuse of performance under this Agreement. All actions necessary to
authorize the execution, delivery and performance of the Agreement by the
Company and consummation of the Merger by the Company and PCBG Merger
Corporation shall have been duly and validly taken by the Board of Directors
of the Company and the PCBG Merger Corporation.
10.6 THIRD PARTY CONSENTS. The Company shall have obtained all
consents of other parties to the Company's material mortgages, notes, leases,
franchises, agreements, licenses and permits as may be necessary to permit
the transactions contemplated herein to be consummated, without default,
acceleration, breach or loss of rights or benefits thereunder.
10.7 ABSENCE OF CERTAIN CHANGES. As of the Closing Date there
shall not exist any of the following:
(i) any change(s) in the financial condition or results
of operation of the Company since inception which individually is or in the
aggregate are materially adverse to the Company; or
(ii) any damage, destruction, loss or event materially
and adversely affecting the properties, business or prospects of the Company
on a consolidated basis.
10.8 VALIDITY OF TRANSACTIONS. The validity of all transactions
herein contemplated, as well as the form and substance of all opinions,
certificates, instruments of transfer and other documents to be delivered to
the Bank hereunder, shall be subject to the approval, to be reasonably
exercised, of counsel for the Bank.
10.9 FAIRNESS OPINION. Prior to solicitation of shareholder
approval, the Bank shall have received an opinion pursuant to Section 8.4
confirming the
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fairness of the terms of the Merger from a financial perspective, and such
opinion shall not have been withdrawn prior to the mailing date of the Proxy
Statement.
10.10 NASDAQ LISTING. The Company will have the shares of
Company Stock issuable pursuant to this transaction duly authorized for
listing, subject to notice of issuance, on the Nasdaq National Market System.
ARTICLE XI
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF THE COMPANY
All of the obligations of the Company to consummate the
transactions contemplated herein shall be subject to the satisfaction, at or
prior to the Closing Date, of the following conditions, or their waiver by
resolution of the Board of Directors of the Company, as appropriate:
11.1 LEGAL OPINION. The Company shall have received the opinion
of Gary Steven Findley & Associates acting as counsel for the Bank, dated as
of the Closing Date, in substantially the form of EXHIBIT 11.1.
11.2 CERTIFICATE OF NO DEFAULT. All covenants, terms and
conditions of this Agreement to be complied with and performed by the Bank at
or before the Closing Date shall have been complied with and performed in all
material respects and the representations and warranties of the Bank
contained in Article IV hereof shall have been true and correct in all
material respects as of the Effective Time, with the same effect as though
such representations and warranties had been made on and as of the Effective
Time, except as otherwise specified in, or permitted or contemplated by, this
Agreement. The Bank shall have delivered to the Company a certificate, dated
the Closing Date, signed by the President of the Bank, certifying the
fulfillment of this condition.
11.3 CLOSING DOCUMENTS. The Bank shall have delivered to the
Company all items required by the Company pursuant to Section 3.3, all of
which documents shall be properly executed and, if required by the Company,
acknowledged before a notary.
11.4 EFFECTIVE S-1, S-4 AND PROXY STATEMENT. The S-1, the S-4
and the Proxy Statement shall have become effective and no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the SEC, FDIC, the Commissioner,
the FRB or any blue sky authority at the Closing Date.
11.5 BANK DISSENTING SHAREHOLDERS AGAINST MERGER. The Bank's
shareholders voting against the Merger or the Bank's shareholders giving
notice in
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writing to the Bank at or before the Bank's meeting that such shareholder
dissents from the Merger, on a combined basis, shall hold not more than ten
percent (10%) of the outstanding shares of the Bank.
11.6 REGULATORY APPROVALS AND RELATED CONDITIONS. Any and all
governmental and regulatory approvals and Consents referred to in Article IX
and any other section of this Agreement shall have been granted without the
imposition of conditions, or with conditions subject to the approval of the
Company, that are or would have become applicable to the Company or the
Surviving Bank and that the Company reasonably and in good faith concludes
would materially adversely affect the financial condition or operations of
the Company or the Surviving Bank, or otherwise would be materially
burdensome; provided, however, that conditions or requirements which are
imposed on purchasers or acquired institutions by Governmental Entities in
comparable transactions shall not be deemed to be a basis for excuse of
performance under this Agreement.
11.7 THIRD PARTY CONSENTS. The Company shall have obtained all
consents of other parties to the Company's material mortgages, notes, leases,
franchises, agreements, licenses and permits as may be necessary to permit
the transactions contemplated herein to be consummated, without default,
acceleration, breach or loss of rights or benefits thereunder.
11.8 ABSENCE OF CERTAIN CHANGES. As of the Closing Date, there
shall not exist any of the following: (i) any change(s) in the consolidated
financial condition, or results of operation of the Bank since December 31,
1997, which individually is or in the aggregate are materially adverse to the
Bank; (ii) any damage, destruction, loss or event materially and adversely
affecting the properties, business or prospects of the Bank; or (iii) any
material adverse change in the deposit structure of the Bank from the date of
this Agreement to the Closing Date.
11.9 BANK STOCK OPTION PLAN; AND OFFICERS AND EMPLOYEES. The
Bank shall have caused the Bank Stock Option Plan to be terminated as of or
prior to the Effective Time of the Merger and shall have obtained the
consents or agreements specified in, and otherwise shall have complied with
the terms of, Section 6.10. Pursuant to California Law and its employment
policies and practices, the Bank shall have complied with Section 6.11 of
this Agreement as of the Effective Time of the Merger.
11.10 DIRECTOR AGREEMENTS. Pursuant to Section 2.9, concurrently
with the execution of this Agreement, each director of the Bank shall enter
into separate agreements with the Company in the form attached hereto as
EXHIBIT "B".
11.11 TERMINATION OF CONTRACTS. As determined by the Company
under Section 6.12, the Bank shall have obtained the terminations of any
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contracts, commitments or Understandings as defined in Section 4.12(v), and
paid or accrued as of the Closing Date for any termination fees for the
future purchases of materials, supplies, services, merchandise or equipment,
the price of which exceeds $20,000.
11.12 VALIDITY OF TRANSACTIONS. The validity of all transactions
herein contemplated, as well as the form and substance of all opinions,
certificates, instruments of transfer and other documents to be delivered to
the Company hereunder, shall be subject to the approval, to be reasonably
exercised, of counsel for the Company.
11.13 EMPLOYEE BENEFIT PLANS. Upon the mutual agreement of the
Company and the Bank regarding whether any Employee Plan should be
terminated, the Company shall have received satisfactory evidence that the
Bank has caused such Employee Plan to be terminated, except as otherwise
provided by applicable labor laws, as of the effective Time of the Merger,
and that all benefits payable under such plans, programs and arrangements
have been paid or accrued as of the Closing Date.
11.14 FAIRNESS OPINION. Prior to commencement of the marketing
of the Offering described in Sections 9.1(iii) and 9.4, the Company in its
discretion may receive an opinion concerning the fairness of the terms of the
Merger to the shareholders of the Company from a financial point of view.
11.15 STOCK OFFERING. The Bank shall have provided such
information as deemed necessary by the Company in connection with the sale of
stock including but not limited to, certificates of its officers and
directors attesting to, among other things, the truthfulness and correctness
of the representations contained in this Agreement, opinions of legal counsel
and comfort letters from the Bank's accountants.
11.16 S-4, PROXY STATEMENT AND REGULATORY APPLICATIONS. The Bank
shall have provided such information as deemed necessary by the Company in
connection with the S-4 and the Proxy Statement and any other regulatory
applications including but not limited to, certificates of its officers and
directors attesting to, among other things, the truthfulness and correctness
of the representations contained in this Agreement, opinions of legal counsel
and comfort letters from the Bank's accountants.
11.17 BLUE SKY MATTERS. The issuance of the Company Stock in the
Offering and the S-4 shall have been qualified or registered with the
appropriate Governmental Entity under state securities or Blue Sky laws, and
such qualification or registrations are in effect on the Closing Date.
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11.18 PROFESSIONAL FEES. The Bank's costs and expenses for
professional expenses in connection with the transaction contemplated by this
Agreement, including investment banking, accounting, attorney and any related
costs and expenses, shall not exceed the amount that would be reasonable and
customary for a transaction as described in this Agreement. Investment
banking fees are as set forth in Exhibit 4.14. The accounting and attorney
fees, and related costs and expenses thereto, of the Bank shall not exceed
$175,000 in the aggregate. The Company agrees that it will promptly
reimburse the Bank at the close or termination for the first $50,000 of legal
and attorney fees and expenses incurred by the Bank since November 15, 1998
directly related to this transaction with the Company, and the Bank shall pay
for any additional accounting and attorney fees and expenses incurred by the
Bank thereafter. The Company also consents to the Bank paying at the close
up to $25,000 to William Cochrum for his investment banking services to the
Bank related to this transaction with the Company.
11.19 YEAR 2000. The Bank shall certify that the Bank and
Banklink Corporation are making satisfactory progress toward compliance with
Year 2000 safety and soundness issues with respect to their own computer
systems.
ARTICLE XII
DISSENTING SHAREHOLDERS OF BANK
Any shareholder of the Bank who lawfully dissents shall be
entitled to receive cash for the fair market value of his or her shares
determined in accordance with Section 1300.
ARTICLE XIII
EXPENSES
13.1 EXPENSES. All fees and out-of-pocket costs incurred in
connection with the transactions contemplated by this Agreement, including
but not limited to legal, accounting, investment banking fees and cost
reimbursements, fees and cost of consultants, costs of proxy statements and
shareholder action on the Merger, shall be paid by the party incurring such
costs.
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ARTICLE XIV
TERMINATION
14.1 Termination of this Agreement.
(a) Notwithstanding that this Agreement and the Agreement of
Merger may have already been approved by shareholders of one or both of
constituent corporations to the transactions contemplated by this Agreement,
this Agreement may be terminated prior to the Effective Time of the Merger:
(i) by mutual agreement of the parties, in writing;
(ii) by (A) the Company immediately upon the expiration
of 30 days from the date that the Company has given notice to the Bank of a
material breach or default by the Bank in the performance of any covenant,
agreement, representation, warranty, duty or obligation hereunder or (B) the
Bank immediately upon the expiration of 30 days from the date that the Bank
has given notice to the Company of a breach or default by the Company in the
performance of any covenant, agreement, representation, warranty, duty or
obligation hereunder, except for Sections 5.18 and 7.14
(iii) by the Company or the Bank if any Governmental
Entity denies or refuses to grant the approvals, consents or authorizations
required to be obtained, or if any Governmental Entity approves the
transaction covered and contemplated by this Agreement upon conditions not
reasonably acceptable to the Company, in order to consummate the transactions
covered and contemplated by this Agreement. If any regulatory application
filed pursuant to this Agreement hereof should be finally denied or
disapproved by the respective Governmental Entity, then this Agreement
thereupon shall be deemed terminated and canceled; provided, however, that a
request for additional information or undertaking by the Company, as a
condition for approval, shall not be deemed to be a denial or disapproval so
long as the Company diligently provides the requested information or
undertaking. In the event an application is denied pending an appeal,
petition for review, or similar such act on the part of the Company
(hereinafter referred to as the "appeal") then the application will be deemed
denied unless the Company prepares and timely files such appeal and continues
the appellate process for purposes of obtaining the necessary approval.
(iv) by the Company or the Bank if (A) the Board of
Directors of the Bank approves a transaction (or the Bank executes a letter
of intent or other agreement) pursuant to which any person or entity or
related group of persons or entities acquires, directly or indirectly, record
or beneficial ownership (as defined in Rule 13d3 promulgated by the SEC
pursuant to the Exchange Act) or control of 10% or more of the outstanding
shares of Bank Stock or other securities of the
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Bank; (B) any person or entity or related group of persons or entities seeks
to acquire 10% or more of the outstanding shares of Bank Stock by tender
offer or otherwise, and the Board of Directors of the Bank does not advise
the Bank's shareholders that the Bank's Board of Directors does not support
such tender offer or acquisition and that it supports the Merger; (C) if the
Bank violates its covenant pursuant to Section 6.2 (xxiii) and (xxiv); (D)
the Merger does not receive the requisite approval of the Bank's
shareholders; or (E) any Person or entity commences an Alternative
Transaction pursuant to the terms of Section 6.5;
(v) by the Company or the Bank immediately upon the
expiration of 15 days from the date that the Bank or the Company has given
notice to the Company of a default by the Company in the performance of
Sections 5.18 and 7.14;
(vi) by the Company or the Bank by May 15, 1999, unless
regulatory approvals and/or completion of the Offering is relatively imminent
and is expected to be completed in the near future, in which case the date in
this subsection shall be automatically extended for up to an additional 30
days.
(b) Notwithstanding that this Agreement and the Agreement of
Merger may have already been approved by shareholders of one or both of the
constituent corporations to the Merger, this Agreement shall be terminated
prior to the Effective Time of the Merger if any conditions specified in
Articles IX, X or XI have not been satisfied or waived in writing by the
party authorized to waive such conditions unless mutually extended by the
parties hereto.
(c) Regulatory Enforcement Matters. In the event that Bank or
the Company or any of their respective subsidiaries shall, after the date of
this Agreement, become a party or subject to any new or amended written
agreement, memorandum of understanding, cease and desist order, imposition of
civil money penalties or other regulatory enforcement action or proceeding
with any federal or state agency charged with the supervision or regulation
of banks or bank holding companies which is material to the Bank or the
Company and their respective subsidiaries taken as a whole, then either the
Company or the Bank may terminate this Agreement.
(d) (reserved)
(e) Notwithstanding anything to the contrary contained herein:
(i) If this Agreement is terminated by the Bank before
the Closing Date pursuant to Sections 14.1(a)(ii)(B), (not including Sections
5.18 or 7.14) hereof, the Company shall pay to the Bank, as reasonable and
full liquidated damages and reasonable compensation for the loss sustained
thereby and not as a penalty or forfeiture, the expenses incurred by the Bank
in connection with the
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transactions contemplated by this Agreement, including, but not limited to,
those costs and expenses outlined in Section 11.18, plus 50% of such
expenses, up to a maximum of $500,000, within ten (10) Business Days of such
termination;
(ii) If this Agreement is terminated by the Company
before the Closing Date pursuant to Sections 14.1(a)(ii)(A) hereof, the Bank
shall pay to the Company, as reasonable and full liquidated damages and
reasonable compensation for the loss sustained thereby, and not as a penalty
or forfeiture, the expenses incurred by the Company in connection with the
transactions contemplated by this Agreement, plus 50% of such expenses, up to
a maximum of $500,000 within ten (10) Business Days of such termination; and
(iii) If this Agreement is terminated by the Company
before the Closing pursuant to Section 14.1(a)(iv) hereof, and the Warrant is
not exercised by the Company, the Bank will pay to the Company, as reasonable
and full liquidated damages and reasonable compensation for the loss
sustained thereby, and not as a penalty or forfeiture, the expenses incurred
by the Company in connection with the transaction contemplated by this
Agreement, plus 50% of such expenses, within ten (10) Business Days of such
termination.
ARTICLE XV
GENERAL PROVISIONS
15.1 CONFIDENTIALITY. All Confidential Information disclosed
heretofore or hereafter by either Party to this Agreement to the other Party
to this Agreement shall be kept confidential by such other Party and shall
not be used by such other Party otherwise than as herein contemplated, except
to the extent that (a) it is necessary or appropriate to disclose to the Bank
or the Company or as may otherwise be required by Rule (any disclosure of
Confidential Information to a Governmental Entity shall be accompanied by a
request that such Governmental Entity preserve the confidentiality of such
Confidential Information); or (b) to the extent such duty as to
confidentiality is waived by the other Party. Such obligation as to
confidentiality and nonuse shall survive the termination of this Agreement
pursuant to Article XIV. In the event of such termination and on request of
the other Party, such Party shall use all reasonable efforts to (y) return to
the other Party all documents (and reproductions thereof) received from such
other Party that contain Confidential Information (and, in the case of
reproductions, all such reproductions made by the receiving Party); and (z)
destroy the originals and all copies of any analyses, computations, studies
or other documents prepared for the internal use of such Party that include
Confidential Information, unless otherwise advised by counsel in connection
with any controversy under the Agreement.
15.2 PUBLICITY. The Parties shall coordinate all publicity
relating to the transactions contemplated by this Agreement, and no Party
shall issue any
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press release, publicity statement, shareholder communication or other public
notice relating to this Agreement or any of the transactions contemplated
hereby without obtaining the prior consent of the other Party except to the
extent that independent legal counsel to the Party, as the case may be, shall
deliver a written opinion to the Party that a particular action is required
by applicable Rules. The Parties hereby agree that all public statements
after the initial press release announcing this Agreement referring to the
Bank shall be made by Mr. James B. Jaqua, and all public statements made
after the initial press release announcing this Agreement referring to the
Company shall be made by Mr. E. Lynn Caswell, and both Parties agree that all
public statements shall be made by mutual agreement.
15.3 INDEMNIFICATION.
(a) The Bank agrees to defend, indemnify and hold harmless the
Company, its officers and directors, attorneys, accountants and each person
who controls the Company within the meaning of the Securities Act from and
against any costs, damages, liabilities and expenses of any nature, insofar
as any such costs, damages, liabilities and expenses arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in the Proxy Statement, the Company's Offering disclosure
documents or any amendments or supplements thereto, or arise out of or are
based solely upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading based upon information with respect to the
Bank furnished to the Company by or on behalf of the Bank specifically for
use therein; provided, however, that the Bank shall not be liable in any such
case to the extent that any such cost, damage, liability or expense arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in the Proxy Statement, the Company's
Offering disclosure documents or amendments or supplements thereto, in
reliance upon and in conformity with information with respect to the Company
furnished to the Bank by or on behalf of the Company specifically for use
therein.
(b) The Company agrees to defend indemnify and hold harmless
the Bank, its officers and directors, attorneys, accountants and each person
who controls the Bank within the meaning of the Securities Act from and
against any costs, damages, liabilities and expenses of any nature, insofar
as any such costs, damages, liabilities or expenses arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Proxy Statement, the Company's Offering disclosure documents
or any amendments or supplements thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make statements therein not misleading
based solely upon information with respect to the Company and its
subsidiaries furnished to the Bank by or on behalf of the Company and its
subsidiaries specifically for use therein; provided, however, that the
Company shall not be liable in any such case to the extent that any such
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cost, damage, liability or expense arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
the Proxy Statement, the Company's Offering disclosure documents or
amendments or supplements thereto, in reliance upon and in conformity with
information with respect to the Bank furnished to the Company by or on behalf
of the Bank specifically for use therein.
(c) Promptly after receipt by the Party to be indemnified
pursuant to this section ("Indemnified Party") of notice of (i) any claim or
(ii) the commencement of any action or proceeding, Indemnified Party will
give the other Party "(Indemnifying Party") written notice of such claim or
the commencement of such action or proceeding. Indemnifying Party shall have
the right, at its option, to compromise or defend, by its own counsel, any
such matter involving Indemnified Party's asserted liability, at the expense
of the Indemnifying Party. In the event that Indemnifying Party shall
undertake to compromise or defend any such asserted liability, it shall
promptly notify Indemnified Party of its intention to do so, and Indemnified
Party agrees to cooperate fully with Indemnifying Party and its counsel in
the compromise of, or defense against, any such asserted liability. In any
event, Indemnifying Party shall have the right to participate in the defense
of such asserted liability. In any event Indemnifying Party shall have the
right to participate in the defense of such asserted liability.
15.4 NOTICES. All notices, demands or other communications
hereunder shall be in writing and be made by (a) hand delivery; (b) overnight
mail; (c) United States mail, first class, certified or registered, postage
prepaid; or (d) facsimile transmission, and shall be deemed to have been duly
given (i) on the date of service if delivered by hand or facsimile
transmission (provided that telecopied notices are also mailed by United
States mail, first class, certified or registered, postage prepaid); (ii) on
the next day if delivered by overnight mail or delivery service; or (iii) 72
hours after mailing if mailed by United States mail, first class, certified
or registered, postage prepaid, and properly addressed as follows:
(a) If to the Bank:
James B. Jaqua, President and Chief Executive Officer
The Bank of Hemet
3715 Sunnyside Drive
Riverside, California 92506
Telecopier No.: (909) 784-5791
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With a copy to:
Gary S. Findley, Esq.
Gary Steven Findley & Associates
1470 North Hundley Street
Anaheim, California 92806
Telecopier No.: (714) 630-7910
(b) If to the Company:
Mr. E. Lynn Caswell, Chairman and CEO
Pacific Community Banking Group
23332 Mill Creek Drive, Suite 230
Laguna Hills, California 92653
Telecopier No.: (949) 458-2086
With a copy to:
Loren P. Hansen, Esquire
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, California 92660
Telecopier No.: (949) 851-1732
The persons or addresses to which mailings or deliveries shall be made may
change from time to time by notice given pursuant to the provisions of this
Section 15.4.
15.5 SUCCESSORS AND ASSIGNS. Subject to Section 7.12 and 15.3,
all terms and provisions of this Agreement shall be binding upon and inure to
the benefit of the Parties hereto and their respective transferees,
successors and assigns; provided, however, that, except as otherwise
contemplated herein, this Agreement and all rights, privileges, duties and
obligations of the Parties hereto may not be assigned or delegated by any
party hereto without the prior written consent of the other Party to this
Agreement and any purported assignment in violation of this Section 15.5
shall be null and void.
15.6 THIRD PARTY BENEFICIARIES. Except as provided in Section
7.12, each party hereto intends that this Agreement shall not benefit, or
create any right or cause of action in or on behalf of, any Person other than
the Parties hereto.
15.7 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which taken together shall constitute one
instrument.
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15.8 GOVERNING LAW. This Agreement is made and entered into in
the State of California and the laws of the State of California shall govern
the validity and interpretation hereof and the performance of the parties
hereto of their respective duties and obligations hereunder.
15.9 CAPTIONS. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement.
15.10 WAIVER AND MODIFICATION. No waiver of any term, provision
or condition of this Agreement, whether by conduct or otherwise, in any one
or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such term, provision or condition of this Agreement.
This Agreement and the Agreement of Merger, when executed and delivered, may
be modified or amended by action of the Board of Directors of the Company and
the Bank without action by their respective shareholders to the extent
permitted by law. This Agreement may be modified or amended only by an
instrument of equal formality signed by the Parties of their duly authorized
agents.
15.11 ATTORNEYS' FEES. In the event either of the Parties to
this Agreement brings an action or suit against the other Party by reason of
any breach of any covenant, agreement, representation, warranty or other
provision hereof, or any breach of any duty or obligation created hereunder
by such other Party, the prevailing Party, as determined by the court or
other body having jurisdiction, shall be entitled to have and recover of and
from the losing Party, as determined by the court or other body have
jurisdiction, all reasonable costs and expenses incurred or sustained by such
prevailing Party in connection with such suit or action, including, without
limitation, legal fees and court costs (whether or not taxable as such).
15.12 ENTIRE AGREEMENT. The making, execution and delivery of
this Agreement by the Parties hereto have not been induced by any
representations, statements, warranties or agreements other than those herein
expressed. This Agreement embodies the entire understanding of the Parties
and there are no further or other agreements or understandings, written or
oral, in effect between the Parties relating to the subject matter hereof,
unless expressly referred to by reference herein.
15.13 SEVERABILITY. Whenever possible, each provision of this
Agreement and every related document shall be interpreted in such manner as
to be valid under applicable law. However, if any provision of any of the
foregoing shall be invalid or prohibited under said applicable law, it shall
be construed, interpreted and limited to effectuate its purpose to the
maximum legally permissible extent. If it cannot be so construed and
interpreted so as to be valid under such law, such provision shall be
ineffective to the extent of such invalidity or prohibition without
invalidating the remainder of such provision or the remaining provisions of
this Agreement, and this Agreement shall be construed to the maximum extent
possible
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to carry out its terms without such invalid or unenforceable provision or
portion thereof.
15.14 EFFECT OF DISCLOSURE. Any list, statement, document,
writing or other information set forth in, referenced to or attached to any
schedule or exhibit delivered pursuant to any provision of this Agreement
shall be deemed to constitute disclosure for purposes of any other schedule
or exhibit required to be delivered pursuant to any other provision of this
Agreement.
15.15 KNOWLEDGE. Whenever any statement herein or in any
schedule, exhibit, certificate or other documents delivered to any Party
pursuant to this Agreement is made "to the knowledge" or "to the best
knowledge" of any Party or other person, such Party or other person, who
shall be an officer of a Party, shall make such statement only after
conducting an investigation which such person determines in good faith to be
reasonable under the circumstances of the subject matter thereof, and each
such statement shall constitute a representation that such investigation has
been conducted.
15.16 TERMINATION OF REPRESENTATION, WARRANTIES AND COVENANTS.
The representations, warranties and covenants of each Party contained herein
or in any certificate or other writing delivered by such Party pursuant
hereto or in connection herewith shall not survive the Merger other than
those provided for in Sections 7.12, 13.1, 14.1(e), 15.1, 15.3, and 15.11
which shall survive a termination.
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IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement on the day and year first above written.
PACIFIC COMMUNITY BANKING GROUP
By: /s/ E. LYNN CASWELL
------------------------------------
E. Lynn Caswell, Chairman of the
Board and Chief Executive Officer
THE BANK OF HEMET
By: /s/ John J. McDonough
------------------------------------
John J. McDonough
Chairman of the Board
By: /s/ James Jaqua
------------------------------------
James Jaqua, President and
Chief Executive Officer
By: /s/ John B. Brudin
------------------------------------
John B. Brudin, Director
By: /s/ Jack E. Gosch
------------------------------------
Jack E. Gosch, Director
By: /s/ E. Kenneth Hyatt
------------------------------------
E. Kenneth Hyatt, Director
By: /s/ Joseph D. Pehl
------------------------------------
Joseph D. Pehl, Director
By: /s/ Clayton A. Record, Jr.,
------------------------------------
Clayton A. Record, Jr., Director
82
<PAGE>
EXHIBIT A AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER is made and entered into as of
this day of , 1999, by and between PCBG Merger Corporation
("PCBG"), a California corporation, The Bank of Hemet ("BOH"), a California
corporation, and Pacific Community Banking Group (the "Company"), a
California corporation, with reference to the following facts:
RECITALS
1. PCBG is a California corporation duly organized, validly
existing and in good standing under the laws of the State of California, with
authorized capital of 1,000,000 shares of no par value common stock of which, on
the date hereof, there are 100 shares issued and outstanding ("PCBG Common
Stock") owned by the Company.
2. BOH is a banking corporation duly organized, validly
existing and in good standing under the laws of the State of California and is
authorized by the California Commissioner of Financial Institutions to conduct a
general banking business, with authorized capital of 20,000,000 shares of no par
value common stock, of which, on the date hereof, there are 844,278 shares
issued and outstanding ("BOH Common Stock"), and 10,000,000 shares of Preferred
Stock of which on the date hereof there are no shares issued and outstanding.
3. The Company is a California corporation duly organized,
validly existing and in good standing under the laws of the State of California,
with authorized capital of 100,000,000 shares of no par value common stock, of
which, on the date hereof, there are 2,500 shares issued and outstanding
("Company Common Stock"), and 100,000,000 shares of Preferred Stock of which on
the date hereof there are shares issued and outstanding.
4. The respective Boards of Directors of PCBG and BOH deem it
desirable and in the best interest of their respective corporations and
stockholders that PCBG be merged (the "Merger") with and into BOH as provided in
this Agreement of Merger pursuant to the laws of the State of California and
that BOH be the surviving corporation ("Surviving Corporation").
5. In connection with the Merger, the Company and BOH have
entered into the First Restatement of Agreement and Plan of Reorganization,
dated as of January 5, 1999, as amended on 1999 and 1999 (the
"Reorganization Agreement").
1
<PAGE>
NOW THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein set forth and for the purpose of
prescribing the terms and conditions of such Merger, the parties hereto agree as
follows:
ARTICLE I
THE MERGER
Upon consummation of the Merger at the Effective Time (as
defined in Article IX hereof), PCBG shall be merged with and into BOH which
shall thereupon be the Surviving Corporation, and the separate corporate
existence of PCBG shall cease.
ARTICLE II
NAME
The name of the Surviving Corporation shall remain "The Bank
of Hemet."
ARTICLE III
ARTICLES OF INCORPORATION
The Articles of Incorporation of BOH as in effect immediately
prior to the Effective Time shall, at and after the Effective Time, continue to
be the Articles of Incorporation of the Surviving Corporation.
ARTICLE IV
BYLAWS
The Bylaws of BOH as in effect immediately prior to the
Effective Time shall, at and after the Effective Time, continue to be the Bylaws
of the Surviving Corporation.
ARTICLE V
DIRECTORS
The Board of Directors and officers of BOH at the Effective
Time shall serve as the Board of Directors and officers of the Surviving
Corporation until such time as their successors have been elected and qualified
as provided for by the Bylaws of BOH.
ARTICLE VI
RIGHTS AND DUTIES OF SURVIVING CORPORATION
At and after the Effective Time, all rights, privileges,
powers and franchises and property and assets of every kind and description of
PCBG and BOH
2
<PAGE>
shall be vested in and be held and enjoyed by the Surviving Corporation, without
further act or deed, and all the estates and interests of every kind of PCBG and
BOH, including all debts due to either of them, shall be as effectively the
property of the Surviving Corporation as they were of PCBG and BOH, and the
title to any real estate vested by deed or otherwise in either PCBG or BOH shall
not revert or be in any way impaired by reason of the Merger; and all rights of
creditors and liens upon any property of PCBG and BOH shall be preserved
unimpaired and all debts, liabilities and duties of PCBG and BOH shall be debts,
liabilities and duties of the Surviving Corporation and may be enforced against
it to the same extent as if said debts, liabilities and duties had been incurred
or contracted by it.
ARTICLE VII
CONVERSION OF SHARES
In and by virtue of the Merger and at the Effective Time,
pursuant to this Agreement of Merger, the shares of PCBG Stock and BOH Stock
outstanding at the Effective Time shall be converted as follows:
(a) EFFECT ON PCBG STOCK. Each share of PCBG Stock
issued and outstanding immediately prior to the Effective Time shall for all
purposes be deemed to represent, one share of common stock of the Surviving
Corporation.
(b) EFFECT ON BOH STOCK. Each share of BOH Common
Stock issued and outstanding immediately prior to the Effective Time, except for
shares as to which dissenters' rights are perfected pursuant to Section 1300 ET
SEQ. of the California Corporations Code ("Perfected Dissenting Shares") shall
be automatically cancelled and cease to be an issued and outstanding share of
BOH Stock and shall be converted into the right to receive 3.4 shares of Company
Stock, and a Warrant exercisable into one share of Company Stock. The Company
will pay or cause to be paid cash in lieu of fractional shares of BOH Stock in
an amount proportionate to the fair value of a whole share as determined by the
board of directors of the Company which would otherwise be issuable as provided
above.
ARTICLE VIII
SHAREHOLDER APPROVAL
This Agreement shall be approved by the affirmative vote of
the holders of a least a majority of the capital stock of BOH, PCBG and the
Company at meetings duly held on the call of the directors or otherwise in
accordance with law, and the Merger shall become effective on the Effective
Time.
3
<PAGE>
ARTICLE IX
FURTHER ACTION
The parties hereto shall execute and deliver, or cause to be
executed and delivered, all such deeds and other instruments, and will take or
cause to be taken all further or other action as they may deem necessary or
desirable, in order to vest in and confirm to the Surviving Corporation title to
and possession of all of BOH's and PCBG's property, rights, privileges, powers
and franchises hereunder, and otherwise to carry out the intent and purposes of
this Agreement of Merger.
ARTICLE X
EFFECTIVE TIME
The Merger will become effective upon the filing of a copy of
this Agreement of Merger and all other requisite accompanying certificates in
the office of the Secretary of State of the State of California. The date and
time of such filing with the Secretary of State of the State of California is
referred to herein as the "Effective Time".
ARTICLE XI
SUCCESSORS AND ASSIGNS
This Agreement of Merger shall be binding upon and enforceable
by the parties hereto and their respective successors, assigns and transferees,
but this Agreement of Merger may not be assigned by either party without the
written consent of the other.
ARTICLE XII
GOVERNING LAW
This Agreement of Merger has been executed in the State of
California, and the laws of the State of California shall govern the validity
and interpretation hereof and the performance by the parties hereto.
ARTICLE XIII
TERMINATION
This Agreement of Merger may, by the mutual consent and action
of the Boards of Directors of BOH and PCBG, be abandoned at any time before or
after approval thereof by the shareholders of PCBG and BOH, but not later than
the filing of this Agreement of Merger with the Secretary of State of the State
of California.
4
<PAGE>
ARTICLE XIV
SATISFACTION OF OBLIGATIONS AND CONDITIONS
(a) The obligations of BOH to proceed with the
Closing are subject to the satisfaction at or prior to the Closing of all of the
conditions to the obligations of PCBG and BOH under the Reorganization
Agreement, any one or more of which, to the extent it is or they are waivable,
may be waived, in whole or in part, by BOH.
(b) The obligations of PCBG to proceed with the
Closing are subject to the satisfaction at or prior to the Closing of all of the
conditions to the obligations of Pacific Community Banking Group and BOH under
the Reorganization Agreement, any one or more of which, to the extent it is or
they are waivable, may be waived, in whole or in party, by PCBG.
5
<PAGE>
IN WITNESS WHEREOF, BOH and PCBG, pursuant to the approval and
authority duly given by resolution of their respective Board of Directors, have
caused this Agreement of Merger to be signed by their respective officers on the
day and year first above written.
THE BANK OF HEMET
By:
--------------------------------------
James B Jaqua, President
By:
--------------------------------------
-------------------------, Secretary
PCBG MERGER CORPORATION
By:
--------------------------------------
E. Lynn Caswell
Chairman of the Board
By:
--------------------------------------
Alfred Jannard, Secretary
PACIFIC COMMUNITY BANKING GROUP
By:
--------------------------------------
E. Lynn Caswell
Chairman of the Board
By:
--------------------------------------
Alfred Jannard, Secretary
6
<PAGE>
EXHIBIT B DIRECTORS AGREEMENT
This Agreement ("Agreement") is made and entered into this 30th day
of July 1998 by and between Pacific Community Banking Group, a California
corporation ("Company"), and each of the other persons executing this
Agreement (each such person is referred to individually as a "Bank Director"
and collectively as "Bank Directors" with reference to the following facts:
A. The Bank of Hemet, a California banking corporation ("Bank"),
and the Company have entered into that certain Agreement and Plan of
Reorganization dated as of July 30, 1998 ("Reorganization Agreement"),
pursuant to which the Bank will acquire a subsidiary of the Company by means
of a Merger, and the Company will exchange cash to the shareholders of the
Bank for their shares of the Bank, as those terms are defined in the
Reorganization Agreement ("Acquisition").
B. In order to facilitate Company and Bank entering into the
Reorganization Agreement, the Bank Directors (comprising the entire Board of
Directors of Bank) desire to enter into this Agreement. The execution of
this Agreement shall be a condition precedent to the execution of the
Reorganization Agreement.
NOW, THEREFORE, in consideration of the promises and of the
respective representations, warranties and covenants, agreements and
conditions contained herein and in the Reorganization Agreement, the parties
hereto agree as follows:
1. AGREEMENTS OF BANK DIRECTORS.
1.1 AGREEMENT TO VOTE. At any meeting of shareholders of
Bank or in connection with any solicitation of the written consent of
shareholders of Bank to approve the Reorganization Agreement and the
transactions contemplated thereby, each of the Bank Directors shall vote or
cause to be voted all shares of Common Stock of Bank ("Bank Stock") owned by
each such Bank Directors and any other shares of Bank Stock hereafter
acquired by each such Bank Director in favor of, and to approve, the
principal terms of the Acquisition and any other matter contemplated by the
Reorganization Agreement which requires the approval of the shareholders of
Bank, including but not limited to the "Merger," as those terms are defined
in the Reorganization Agreement.
1.2 AGREEMENT TO RECOMMEND. Each Bank Director shall
recommend to the shareholders of Bank to vote in favor of, and to approve,
the principal terms of the Acquisition and any other matter contemplated by
the Reorganization Agreement.
1
<PAGE>
1.3 RESTRICTIONS ON DISPOSITIONS. Each Bank Director agrees
that, except (i) with the prior written consent of Company, or (ii) pursuant
to the Acquisition, such Bank Director will not pledge nor otherwise
encumber, sell, assign or otherwise dispose of any shares of Bank Stock
currently owned, or acquired after the date of this Agreement, by such Bank
Director.
1.4 COOPERATION. Each Bank Director agrees to cooperate
fully with Company in connection with the Acquisition. Each Bank Director
agrees that he or she will not, directly or indirectly, solicit any inquiries
or proposals from, or enter into, or continue any discussions, negotiations
or agreements relating to, or vote in favor of any proposal or transaction
for disposition of the business or assets of Bank or any subsidiary thereof,
or the acquisition of Bank's or any subsidiary of Bank's voting securities or
any business combination with, any person entity other than Company.
2. REPRESENTATIONS AND WARRANTIES OF BANK DIRECTORS.
Each of the Bank Directors represents and warrants to and agrees
with Company as follows:
2.1 CAPACITY. Each such Bank Director has all the requisite
capacity and authority to enter into and perform such Bank Director's
obligations under this Agreement.
2.2 BINDING AGREEMENT. This Agreement constitutes the valid
and legally binding obligation of each such Bank Director.
2.3 NON-CONTRAVENTION. The execution and delivery of this
Agreement by each such Bank Director does not, and the performance by such
Bank Director of such Bank Director's obligations hereunder will not, violate
or conflict with or constitute a default under any agreement, instrument,
contract or other obligation or any order, arbitration award, judgment or
decree to which such Bank Director is a party or by which such Bank Director
is bound, or any statute, rule or regulation to which such Bank Director or
any of such Bank Director's property is subject.
2.4 OWNERSHIP OF SHARES. SCHEDULE 1 hereto correctly sets
forth the number of shares of Bank Stock owned by each Bank Director, or with
respect to which each Bank Director has voting power or beneficial ownership,
as of the date indicated on such schedule. Each Bank Director has good title
to all of the shares of Bank Stock indicated as owned by such Bank Director
in the capacity set forth on SCHEDULE 1 as of the date indicated on such
SCHEDULE 1, and such shares of Bank Stock are so owned free and clear of any
liens, security interests, charges or other encumbrances, except as set forth
in such SCHEDULE 1.
2
<PAGE>
3. TERMINATION.
3.1 TERMINATION DATE. Except for the terms of Section 1.4,
this Agreement shall terminate and be of no further force and effect
immediately upon the earlier of: (a) consummation of the Acquisition or (b)
termination of the Reorganization Agreement in accordance with the terms
thereof.
3.2 EFFECT OF TERMINATION. Upon the termination of this
Agreement in accordance with Section 3.1 hereof, the respective obligations
of the parties hereto shall immediately become void and have no further force
or effect except that the termination of this Agreement shall not excuse or
forgive any breach hereof.
4. SPECIFIC PERFORMANCE. The parties hereto recognize and agree
that monetary damages will not compensate adequately the parties hereto for
nonperformance. Accordingly, each party agrees that such party's obligations
shall be enforceable by court order requiring specific performance.
5. MISCELLANEOUS.
5.1 EXPENSES. Each party hereto shall pay its own costs and
expenses, including, without limitation, those of its attorneys and
accountants, in connection with this Agreement and transactions covered and
contemplated hereby.
5.2 NOTICES. All notices, demands or other communications
hereunder shall be in writing and be made by (a) hand delivery; (b) overnight
mail; (c) United States mail, first class, certified or registered, postage
prepaid; or (d) facsimile transmission, and shall be deemed to have been duly
given (i) on the date of service if delivered by hand or facsimile
transmission (provided that telecopied notices are also mailed by United
States mail, first class, certified or registered, postage prepaid); (ii) on
the next day if delivered by overnight mail; or first-class, certified or
registered, postage prepaid, and properly addressed as follows:
(a) If to Company:
Pacific Community Banking Group
23332 Mill Creek Drive, Suite 230
Laguna Hills, California 92653
Attention: E. Lynn Caswell, President
Telecopier: (714) 460-4501
3
<PAGE>
With copies to:
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, CA 92660
Attention: Loren P. Hansen, Esq.
Telecopier: (714) 851-1732
(b) If to a Bank Director:
to the Bank Director and address noted on page
7 hereof
With copies to:
Gary Steven Findley & Associates
1470 North Hundley Street
Anaheim, California 92806
Attention: Gary S. Findley, Esq.
Telecopier: (714) 630-7910
The persons or addresses to which mailings or deliveries shall be made may
change from time to time by notice given pursuant to the provisions of this
SECTION 5.2.
5.3 SUCCESSORS AND ASSIGNS. Subject to Section 5.4 herein,
all terms and provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective transferees,
successors and assigns; provided, however, that, except as otherwise
contemplated herein, this Agreement and all rights, privileges, duties and
obligations of the parties hereto may not be assigned or delegated by any
Bank Director without the prior written consent of Company and any purported
assignment in violation of this Section 5.3 shall be null and void.
5.4 THIRD PARTY BENEFICIARIES. Each party hereto intends
that this Agreement shall not benefit, or create any right or cause of action
in or on behalf of, any person other than the parties hereto. As used in
this Agreement, the term "party" or "parties" shall refer only to Company and
the Bank Directors or any of them.
5.5 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one instrument.
4
<PAGE>
5.6 GOVERNING LAW. This Agreement is made and entered into
in the State of California and the laws of the State of California shall
govern the validity and interpretation hereof and the performance of the
parties hereto of their respective duties and obligations hereunder except as
specifically provided in SECTION 5.9 hereof.
5.7 CAPTIONS. The captions contained in this Agreement are
for convenience of reference only and do not form a part of this Agreement.
5.8 WAIVER AND MODIFICATION. No waiver of any term,
provision or condition of this Agreement, whether by conduct or otherwise, in
any one or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such term, provision or condition of this Agreement.
This Agreement may be modified or amended only by an instrument of equal
formality signed by the parties or their duly authorized agents.
5.9 ATTORNEYS' FEES. In the event a Bank Director or Company
brings an action or suit against the other party by reason of any breach of
any covenant, agreement, representation, warranty or other provision hereof,
or any breach of any duty or obligation created hereunder by such other
party, the prevailing party, as determined by the court or other body having
jurisdiction, shall be entitled to have and recover of and from the losing
party, as determined by the court or other body having jurisdiction, all
reasonable costs and expenses incurred or sustained by such prevailing party
in connection with such action or suit, including, without limitation, legal
fees and court costs (whether or not taxable as such). In an action or suit
brought by a Bank Director or Company to enforce any provision hereof, or for
damages for the breach hereof, such action or suit shall be commenced and
maintained exclusively in the state court sitting in Orange County,
California.
5.10 ENTIRE AGREEMENT. The making, execution and delivery of
this Agreement by the parties hereto have not been induced by any
representation, statements, warranties or agreements other than those
expressed herein. This Agreement, in addition to the applicable provisions
of the Reorganization Agreement, embodies the entire understanding of the
parties and there are no further or other agreements or understandings,
written or oral, in effect between the parties relating to the subject matter
hereof, unless expressly referred to by reference herein.
5.11 SEVERABILITY. Whenever possible, each provision of this
Agreement and every related document shall be interpreted in such manner as
to be valid under applicable law. However, if any provision of any of the
foregoing shall be invalid or prohibited under said applicable law, it shall
be construed, interpreted and limited to effectuate its purpose to the
maximum legally permissible extent. If it cannot be so construed and
interpreted so as to be valid under such law, such provision shall be
ineffective to the extent of such invalidity or prohibition without
invalidating the remainder of such provision or the remaining provisions of
this
5
<PAGE>
Agreement, and this Agreement shall be construed to the maximum extent
possible to carry out its terms without such invalid or unenforceable
provision or portion thereof.
5.12 SEVERAL OBLIGATIONS. All duties and obligations of each
party to this Agreement shall be several and not joint.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date first above written.
Pacific Community Banking Group
By: /s/ E. Lynn Caswell
---------------------------
E. Lynn Caswell, Chairman
6
<PAGE>
"Bank Director"
and address
/s/ Clayton A. Record., Jr. /s/ Jack E. Gosch
- --------------------------- ---------------------------
890 N. Lyon Ave. 150 Carriage Circle
San Jacinto, CA 92582 Hemet, CA 92545
/s/ John B. Brudin /s/ James Jaqua
- --------------------------- ---------------------------
26680 Rio Vista Dr. 440 Emerald Bay
Hemet, CA 92546 Laguna Beach, CA 92651
/s/ E. Kenneth Hyatt /s/ John J. McDonough
- --------------------------- ---------------------------
38122 Stone Meadow Dr. 27265 Hemet St.
Murrieta, CA 92562 Hemet, CA 92544
7
<PAGE>
Schedule 1
as of ______________, 1998
<TABLE>
<CAPTION>
Owned Bank Common Shares
- ----- ------------------
<S> <C>
_________________________
_________________________
_________________________
_________________________
_________________________
_________________________
_________________________
_________________________
</TABLE>
8
<PAGE>
Exhibit C
TBOH WARRANT AGREEMENT
THIS WARRANT AGREEMENT, dated as of , 1999, is made between PACIFIC
COMMUNITY BANKING GROUP, a California corporation (the "Company"), and each
person to whom a warrant is issued or provided herein (the "Holder").
RECITALS
A. The Company proposes to issue warrants as hereinafter described (the
"Warrants") to each Holder to purchase shares of its Common Stock, no par value
per share (the "Common Stock"), in connection with the acquisition of The Bank
of Hemet (the "Bank") by the Company in which at the Effective Time of the
Merger, the Bank would become a wholly-owned subsidiary of the Company, and all
of the issued and outstanding shares of The Bank of Hemet Stock ("Bank Stock"),
except for shares of Bank Stock held by Dissenting Shareholders, shall be
converted into and exchanged for cash and a warrant exercisable into shares of
Company Stock, under the terms and conditions contained in the First Restatement
of the Agreement and Plan of Reorganization dated January 5, 1999, as amended in
which each warrant (the "Warrant") entitling the holder thereof to purchase
shares of Common Stock of the Company (the "Warrant Shares").
B. In consideration of the foregoing and for the purpose of defining
the terms and provisions of the Warrants and the respective rights and
obligations thereunder of the Company and the Holder, the Company and the Holder
hereby agree as follows:
SECTION 1. GRANT OF WARRANT. The Company hereby grants to the Holder,
as of the date hereof, Warrants to purchase all or any part of the number of
shares of the Company's Common Stock set forth in the Warrant, subject to the
terms, conditions and adjustment provisions as provided in this Agreement.
SECTION 2. TERM OF WARRANTS; EXERCISE OF WARRANTS.
2.1 TERM OF EXERCISE OF WARRANTS. The Warrants are
exercisable for a ten-year period commencing upon the date of issuance (the
"Issuance Date"). Subject to the terms of this Agreement, each Holder shall have
the right, which may be exercised at any time until ten years from the original
date of issuance (the "Expiration Date") to purchase from the Company that
number of shares of Common Stock of the Company specified in Section 1 at the
warrant prices specified in Section 9. Upon such purchase, the shares of Common
Stock of the Company will be fully paid and nonassessable to which the Holder
may at the time be entitled to purchase upon exercise of such Warrants.
2.2 EXERCISE OF WARRANTS. A Warrant may be exercised upon
surrender to the Company at its principal office of the certificate or
certificates evidencing the Warrants to be exercised, together with the form of
election to purchase on the reverse thereof duly
1
<PAGE>
filled in and signed, (and upon payment to the Company for the account of the
Company in accordance with the provisions of Sections 9 and 10 hereof), for the
number of shares of Common Stock in respect of which such Warrants are then
exercised. Payment of the aggregate Warrant Price shall be made by check,
Cashier's Check, money order, or any combination thereof.
Subject to Section 6 hereof, upon such surrender of
Warrants and payment of the Warrant Price as aforesaid, the Company shall issue
and cause to be delivered with all reasonable dispatch to or upon the written
order of the Holder and in such name or names as the Holder may designate, a
certificate or certificates for the number of full shares of Common Stock so
purchased upon the exercise of such Warrants, together with cash, as provided in
Section 11 hereof, in respect of any fractional shares of Common Stock otherwise
issuable upon such surrender. Such certificate or certificates shall be deemed
to have been issued and any person so designated to be named therein shall be
deemed to have become a holder of record of such Common Stock as of the date of
the surrender of such Warrants and payment of the Warrant Price, as aforesaid;
provided, however, that if, at the date of surrender of such Warrants and
payment of the Warrant Price, the transfer books for the Common Stock or other
class of stock purchasable upon the exercise of such Warrants shall be closed,
the certificates for the Common Stock in respect of which such Warrants are then
exercised shall be issuable as of the date on which such books shall next be
opened (whether before or after the Expiration Date) and until such date the
Company shall be under no duty to deliver any certificate for such Common Stock;
provided further, however, that the transfer books of record, unless otherwise
required by law, shall not be closed at any one time for a period longer than
twenty days. The rights of purchase represented by the Warrants shall be
exercisable, at the election of the Holders thereof, either in full or from time
to time in part and, in the event that a certificate evidencing Warrants is
exercised in respect of less than all of the Common Stock purchasable on such
exercise at any time prior to the date of expiration of the Warrants, a new
certificate evidencing the remaining Warrant or Warrants will be issued.
SECTION 3. REGISTRATION. Transferability. Issuance and Form of Warrant.
3.1 REGISTRATION. The Warrants shall be numbered and shall
be registered in a Warrant Register as they are issued. The Company shall be
entitled to treat the Holder of any Warrant as the owner in fact thereof for all
purposes and shall not be bound to recognize any equitable or other claim to or
interest in such Warrant on the part of any other person, and shall not be
liable for any registration of transfer of Warrants which are registered or to
be registered in the name of a fiduciary or the nominee of a fiduciary unless
made with the actual knowledge that a fiduciary or nominee is committing a
breach of trust in requesting such registration of transfer, or with such
knowledge of such facts that its participation therein amounts to bad faith.
3.2 TRANSFER. The Common Stock and the Warrants received
from the Company pursuant to the Agreement will be separately transferable from
the date of
2
<PAGE>
issuance. The Warrants shall be transferable on the books of the Company
maintained at the principal office of the Company upon delivery thereof duly
endorsed by the Holder or by his duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment or authority to
transfer, with signatures properly guaranteed. In all cases of transfer by an
attorney, the original power of attorney, duly approved, or an official copy
thereof, duly certified, shall be deposited and remain with the Company. In case
of transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited and remain with the Company in its
discretion. Upon any registration of transfer, the Company shall execute and
deliver a new Warrant or Warrants to the persons entitled thereto. The Warrants
may be exchanged at the option of the Holder thereof, when surrendered at the
principal office of the Company for another Warrant or Warrants to the persons
entitled thereto. The Warrants may be exchanged at the option of the Holder
thereof, when surrendered at the principal office of the Company for another
Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Warrant
Shares. The Company shall not be required to effect any registration of transfer
or exchange which will result in the issuance of a Warrant Certificate for a
fraction of a Warrant. The Holder understands that the Warrants and the
securities exercisable hereunder are intended to be registered pursuant to the
Securities Act of 1933, as amended, upon issuance, and such securities are
intended to be transferable once the registration has been completed.
3.3 ISSUANCE. Warrant certificates shall be issued and
delivered by the Company as evidence of the Warrants sold by the Company as a
part of the Offering (the "Warrant Certificates"). Each Warrant Certificate
shall evidence the right, subject to the provisions of this Agreement and of the
Warrant Certificate itself, for the registered holder thereof or his assigns to
purchase the number of shares of Common Stock of the Company stated therein.
3.4 FORM OF WARRANT. The Form of Election to Purchase
shares of Common Stock shall be substantially as set forth in EXHIBIT "A"
attached hereto. The price per share of Common Stock and the number of shares of
Common Stock issuable upon the exercise of Warrants are subject to adjustment
upon the occurrence of certain events, all as hereinafter provided. The Warrants
shall be executed on behalf of the Company by its Chairman of the Board or Chief
Executive Officer or one of its Vice Presidents, under its corporate seal
reproduced thereon attested by its Secretary or an Assistant Secretary. The
signature of any of such officers on the Warrants may be manual or facsimile.
Warrants bearing the manual or facsimile signatures
of individuals who were at any time the proper officers of the Company shall
bind the Company, notwithstanding that such individuals or any one of them shall
have ceased to hold such offices prior to the delivery of such Warrants or did
not hold such offices on the date of this Agreement.
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Warrants shall be dated as of the date of signature
thereof by the Company either upon initial issuance or upon division, exchange,
substitution or transfer.
SECTION 4. SIGNATURE OF WARRANTS. The Warrants shall be signed by the
Company (or any successor to the Company) and shall not be valid for any purpose
unless so signed. Warrants may be signed, however, by the Company and may be
delivered by the Company, notwithstanding that the persons whose manual or
facsimile signatures appear thereon as proper officers of the Company shall have
ceased to be such officers at the time of such signature, issuance or delivery.
SECTION 5. EXCHANGE OF WARRANT CERTIFICATES. Each Warrant certificate
may be exchanged for another certificate or certificates entitling the Holder
thereof to purchase a like aggregate number of shares of Common Stock as the
certificate or certificates to be so exchanged. Thereupon, the Company shall
execute and deliver to the person entitled thereto a new Warrant certificate or
certificates, as the case may be, as so requested.
SECTION 6. PAYMENT OF TAXES. The Company will pay all documentary stamp
taxes, if any, attributable to the initial issuance of shares of Common Stock
upon the exercise of Warrants; provided, however, that the Company shall not be
required to pay any tax or taxes which may be payable in respect of any transfer
involved in the issuance or delivery of any Warrants or certificate for shares
of Common Stock in a name other than that of the registered Holder of Warrants
in respect of which such shares of Common Stock are issued, and in such case the
Company shall not be required to issue or deliver any certificate for shares of
Common Stock or any Warrant until the person requesting the same has paid to the
Company the amount of such tax or has established to the Company's satisfaction
that such tax has been paid.
SECTION 7. MUTILATED OR MISSING WARRANTS. In case of any of the
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company may, in its discretion, execute, issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant
certificate, or in lieu of and substitution for the Warrant certificate lost,
stolen or destroyed, a new Warrant certificate of like tenor and representing an
equivalent right or interest; but only upon receipt of evidence satisfactory to
the Company of such loss, theft or destruction of such Warrant and indemnity, if
requested, also satisfactory to them. An applicant for such substitute Warrant
certificate shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Company may prescribe.
SECTION 8. RESERVATION OF SHARES: PURCHASE OF WARRANTS.
8.1 RESERVATION OF WARRANT SHARES. There will be reserved,
and thereafter the Company shall at all times keep reserved, out of its
authorized Common Stock, a number of shares of Common Stock sufficient to
provide for the exercise of the rights of purchase represented by the
outstanding Warrants. The Transfer Agent for the Common Stock and
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every subsequent transfer agent for any shares of the Company's capital stock
issuable upon the exercise of any rights of purchase aforesaid will be
irrevocably authorized and directed at all times to reserve such number of
authorized shares as shall be requisite for such purposes. The Company will keep
a copy of this Agreement on file with the Transfer Agent for the Common Stock
and with every subsequent transfer agent for any shares of the Company's capital
stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Company will supply such Transfer Agent with duly executed stock
certificates for such purposes and will provide or otherwise make available any
cash which may be payable as provided in Section 11 hereof. All Warrants
surrendered in the exercise of the rights thereby evidenced shall be canceled by
the Company.
8.2 PURCHASE OF WARRANTS BY THE COMPANY. The Company shall
have the right, except as limited by law, other agreement or herein, to purchase
or otherwise acquire Warrants at such times, in such manner and for such
consideration as it may deem appropriate.
8.3 CANCELLATION OF WARRANTS. In the event the Company
shall purchase or otherwise acquire Warrants, the same shall thereupon be
canceled by the Company and retired. The Company shall cancel any Warrant
surrendered for exchange, substitution, transfer or exercise in whole or in
part.
SECTION 9. WARRANT EXERCISE PRICE. The price per share at which
shares of Common Stock shall be purchasable upon exercise of Warrants (the
"Warrant Price") shall be $ per share from the date of issuance to on or
before the end of the tenth year after the date of issuance of the Warrant,
subject to the adjustment pursuant to Section 10 hereof.
SECTION 10. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The
number and kind of securities purchasable upon the exercise of each Warrant and
the Warrant Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as hereinafter defined.
10.1 MECHANICAL ADJUSTMENTS. The number of Warrant Shares
purchasable upon the exercise of each Warrant and the Warrant price shall be
subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock into a greater number of
shares, (iii) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock or (iv) issue a reclassification of its shares
of Common Stock or capital reorganization of other securities of the Company,
the number of Warrant Shares purchasable upon exercise of each Warrant
immediately prior thereto shall be adjusted so that the Holder of each Warrant
shall be entitled to receive the kind and number of Warrant Shares or other
securities of the Company which he would have owned or have been entitled to
receive after the occurrence of any of
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the events described above, had such Warrant been exercised immediately prior to
the happening of such event or any record date with respect thereto. An
adjustment made pursuant to this paragraph (a) shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(b) In case, at any time or from time to time
after issuance of the Warrant and while the Warrant remains outstanding and
has not been exercised, the Company shall issue or sell any warrants or
options, other than options granted under the Company's 1999 Stock Option
Plan, as it may be amended from time to time, or any similar plan hereafter
adopted by the Company or any of its subsidiaries, for the purchase of the
Company's Common Stock with a price per share at which shares of Common Stock
shall be purchasable upon exercise of such warrants or options that is less
than the Warrant Price in effect immediately prior to such issue or sale,
then forthwith upon such issue or sale the Warrant Price shall be immediately
reduced to such price per share. No adjustment of the Warrant Price shall be
made as a result of the Company's issuance or sale of Common Stock or other
securities of the Company, regardless of the price at which such shares or
other securities are issued, including, without limitation, the Company's
issuance or sale of stock options under the Company's 1999 Stock Option Plan,
as it may be amended from time to time, or any similar plan hereafter adopted
by the Company or any of its subsidiaries, with an exercise price less than
the Warrant Price. In addition, no adjustment of the Warrant Price shall be
made if the adjustment would otherwise be for an amount less then $.25 per
share, but any such nonadjustment shall be carried forward and shall be made
at the time of and together with the next subsequent adjustment which,
together with any adjustments so carried forward, shall amount to $.25 per
share or more. Further, no adjustment shall be made in the case of an
issuance or sale of warrants with respect to fewer than 10% of the
then-outstanding shares of the Company's Common Stock in any 24 month period.
(c) Whenever the number of Warrant Shares purchasable
upon the exercise of each Warrant is adjusted, as herein provided, the Warrant
Price payable upon exercise of each Warrant shall be adjusted by multiplying
such Warrant Price immediately prior to such adjustment by a fraction, of which
the numerator shall be the number of Warrant Shares purchasable upon the
exercise of each Warrant immediately prior to such adjustment, and of which the
denominator shall be the number of Warrant Shares so purchasable immediately
thereafter.
(d) For the purpose of this subsection 10. 1, the
term "shares of Common Stock" shall mean (i) the class of stock designated as
the Common Stock of the Company at the date of this Agreement, or (ii) any other
class of stock resulting from successive changes or reclassifications of such
shares consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value. In the event that at any time, as a
result of an adjustment made pursuant to paragraph (a) above, the Holders shall
become entitled to purchase any shares of the Company other than shares so
purchasable upon exercise of each Warrant and the Warrant Price of such shares
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as
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practicable to the provisions with respect to the shares of Common Stock
contained in paragraphs (a) and (b), inclusive, above, and the provisions of
Section 5 and subsections 10.2 through 10.4, inclusive, with respect to the
shares of Common Stock shall apply on like terms to any such other shares.
10.2 NOTICE OF ADJUSTMENT. Whenever the number of shares of
Common Stock purchasable upon the exercise of each Warrant or the Warrant Price
of such shares of Common Stock is adjusted, as herein provided, the Company,
within thirty (30) days thereafter, shall cause to be mailed promptly by first
class mail, postage prepaid, to each Holder notice of such adjustment or
adjustments and the Warrant Price of such shares of Common Stock after such
adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
A firm of independent public accountants selected by the Board of Directors of
the Company (who may be the regular accountants employed by the Company) may
make any computation required under this Section 10.2.
10.3 NO ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS. Except as
provided in subsection 10.1, no adjustment in respect of any dividends or
distributions shall be made during the term of a Warrant or upon the exercise of
a Warrant.
10.4 PRESERVATION OF PURCHASE RIGHTS UPON CONSOLIDATION,
MERGER. ETC. In case of any consolidation of the Company with, or merger of the
Company into, another corporation, or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
corporation, as the case may be, shall execute an agreement that each Holder
shall have the right thereafter upon payment of the Warrant price in effect
immediately prior to such action to purchase upon the exercise of each Warrant
the kind and amount of shares and other securities and property (including cash)
which he would have owned or have been entitled to receive after the occurrence
of such consolidation, merger, sale or conveyance had such Warrant been
exercised immediately prior to such action. The Company shall mail by first
class mail, postage prepaid, to each Holder, notice of the execution of any such
agreement. Such agreement shall provide for adjustments, which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Section 10. The provisions of this subsection 10.4 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
10.5 STATEMENTS ON WARRANTS. Irrespective of any adjustments
in the Warrant Price or the number or kind of shares purchasable upon the
exercise of the Warrants, Warrants theretofore or thereafter issued may continue
to express the same price and number and kind of shares as are stated in the
Warrants initially issuable pursuant to this Agreement.
SECTION 11. FRACTIONAL INTERESTS. The Company shall not be required to
issue fractional shares of Common Stock on the exercise of Warrants. If more
than one Warrant shall be presented for exercise of shares of Common Stock in
full at the same time by the
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same Holder, the number of full shares of Common Stock which shall be issuable
upon the exercise thereof shall be computed on the basis of the aggregate number
of shares of Common Stock purchasable upon exercise of the Warrants so
presented. If any fraction of a share of Common Stock would, except for the
provisions of this Section 11, be issuable on the exercise of any Warrant (or
specified portion thereof), the Company shall pay an amount in cash equal to the
difference between the then current book value price per share of Common Stock
and the exercise price of the Warrant, multiplied by such fraction.
SECTION 12. NO RIGHTS AS STOCKHOLDERS: NOTICES TO HOLDERS. Nothing
contained in this Agreement or in any of the Warrants shall be construed as
conferring upon the Holders or their transferees the right to vote or to receive
dividends or to consent or to receive notice as stockholders in respect of any
meeting of stockholders for the election of directors of the Company or any
other matter, or any rights whatsoever as stockholders of the Company. If,
however, at any time after 60 days before the Exercise Date, and prior to the
expiration of the Warrants and prior to their exercise, any of the following
events shall occur:
(a) the Company shall declare any dividend or
distribution payable in any securities upon its shares of Common Stock to the
Holders of its shares of Common Stock; or
(b) The Company shall offer to the holders of its
shares of Common Stock any additional shares of Common Stock or securities
convertible into shares of common stock or any right to subscribe thereto; or
(c) A dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation, merger, or sale of all
or substantially all of its property, assets, and business as an entirety) shall
be proposed;
then in any one or more of said events, the Company shall give notice in writing
of such event to the Holders as provided in Section 13 hereof, such giving of
notice to be completed at least 20 days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, or subscription rights, or
for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of any action taken in connection with such dividend,
distribution or subscription rights, or proposed dissolution, liquidation or
winding up.
SECTION 13. NOTICES. Any notice pursuant to this Agreement be any
Holder to the Company shall be in writing and shall be mailed first class,
postage prepaid, or delivered (a) to the Company, at its office at 23332 Mill
Creek Drive, Suite 230, Laguna Hills, California 92653, with copies to
Knecht & Hansen, 1301 Dove Street, Suite 900, Newport Beach, California
92660. Each party hereto may from time to time change the address to which
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notices to it are to be delivered or mailed hereunder by notice in writing to
the other party. Any notice mailed pursuant to this Agreement by the Company to
the Holders shall be in writing and shall be mailed first class, postage
prepaid, or delivered to such Holders at their respective addresses on the books
of the Company.
SECTION 14. SUPPLEMENTS AND AMENDMENTS. The Company may not supplement
or amend this Agreement without the approval of any Holder, in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Holder may deem necessary or desirable and which shall not be
inconsistent with the provisions of the Warrants.
SECTION 15. SUCCESSORS. All covenants and provisions of this Agreement
by or for the benefit of the Company or the Holder shall bind and inure to the
benefit of their respective successors and assigns hereunder.
SECTION 16. APPLICABLE LAW. This Agreement and Warrant issued hereunder
shall be governed by and construed in accordance with the laws of the State of
California, without giving effect to principles of conflict of laws.
SECTION 17. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company and the
Holders any legal or equitable right, remedy or claim under this Agreement; but
this Agreement shall be for the sole and exclusive benefit of the Company and
the Holders of the Warrants.
SECTION 18. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
SECTION 19. CAPTIONS. The captions of the Sections and subsections of
this Agreement have been inserted for convenience only and shall have no
substantive effect.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first written.
PACIFIC COMMUNITY BANKING GROUP
By:
-------------------------------------
E. Lynn Caswell
Chairman and Chief Executive Officer
By:
-------------------------------------
Secretary
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Exhibit 2.2
FIRST AMENDMENT TO
FIRST RESTATEMENT OF AGREEMENT
AND PLAN OF REORGANIZATION
This FIRST AMENDMENT TO FIRST RESTATEMENT OF AGREEMENT AND
PLAN OF REORGANIZATION (the "First Amendment") is dated as of February _, 1999
and entered into by and between The Bank of Hemet (the "Bank") and Pacific
Community Banking Group (the "Company").
WHEREAS, the Bank and the Company entered into a First
Restatement of Agreement and Plan of Reorganization dated as of January 5, 1999
(the "Agreement"); and
WHEREAS, the parties hereto desire to amend the Agreement as
provided in this First Amendment as provided herein.
NOW, THEREFORE, in consideration of the premises and mutual
promises of the parties set forth below, the parties hereto agree as follows:
1. Capitalized terms used herein and not otherwise defined
shall have the same meaning as set forth in the Agreement.
2. The first sentence of Section 5.2 of the Agreement is
hereby amended to read in its entirety as follows:
"The authorized capital stock of the Company consists of
100,000,000 shares of Common Stock, no par value, of which 10,000 shares are
outstanding on the date hereof, all validly issued, fully paid and
nonassessable, and 100,000,000 shares of Preferred Stock, of which not more than
2 million shares have been issued or are to be issued before the Closing Date."
3. Section 7.2(ii) of the Agreement is hereby amended to read
in its entirety as follows
"(ii) refrain from amending its Charter Documents except to
the extent as may be required or contemplated by this Agreement, and except as
the Company proposes to amend its articles of incorporation and bylaws as
attached to this Agreement as EXHIBIT 7.2(II)."
4. This First Amendment may be entered into in one or more
counterparts, all of which shall be considered one in the same instrument, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
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5. Except as herein amended, the Agreement shall remain in
full force and effect.
6. This First Amendment shall be governed by and construed in
accordance with the laws of the State of California.
7. The execution and delivery of this First Amendment by the
officers executing the First Amendment have been duly authorized by the Boards
of Directors of the Bank and the Company, and this First Amendment constitutes a
legal, valid and binding agreement of the parties in accordance with its
respective terms.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
PACIFIC COMMUNITY BANKING GROUP
By:
--------------------------------------
E. Lynn Caswell
Chairman and Chief Executive Officer
THE BANK OF HEMET
By:
--------------------------------------
John J. McDonough
Chairman of the Board
By:
--------------------------------------
James B. Jaqua
President and Chief Executive Officer
By:
--------------------------------------
Secretary
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Exhibit 2.3
SECOND AMENDMENT TO
FIRST RESTATEMENT OF AGREEMENT AND
PLAN OF REORGANIZATION
This SECOND AMENDMENT TO FIRST RESTATEMENT OF AGREEMENT AND
PLAN OF REORGANIZATION (the "Second Amendment") is dated as of ________ 1999
and entered into by and between The Bank of Hemet (the "Bank") and Pacific
Community Banking Group (the "Company").
WHEREAS, the Bank and the Company entered into a First
Restatement of Agreement and Plan of Reorganization dated as of January 5, 1999
(the "Agreement"); and a First Amendment to the Agreement dated as of March 24,
1999.
WHEREAS, the parties hereto desire to amend the Agreement and
the First Amendment as provided in this Second Amendment.
NOW, THEREFORE, in consideration of the premises and mutual
promises of the parties set forth below, the parties hereto agree as follows:
1. Capitalized terms used herein and not otherwise defined
shall have the same meaning as set forth in the Agreement.
2. Recital C of the Agreement is hereby amended to read in its
entirety as follows:
"C. At the Effective Time (hereinafter defined below) of the
Merger, all of the issued and outstanding shares of Bank Stock, except for
shares of Bank Stock held by Dissenting Shareholders (as hereinafter defined
below), shall be converted into and exchanged for a combination of shares of
Company Stock and Warrants exercisable into shares of Company Stock, all upon
the terms and subject to the conditions hereinafter set forth;"
3. Recital I is hereby added to read in its entirety as
follows:
"i. For federal income tax purposes, it is intended that the
Merger shall qualify as a "reorganization" within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code"), and the Bank, the
Company and PCBG Merger Corporation will each be "a party to a reorganization,"
within the meaning of Section 368(b) of the Code, with respect to the Merger;"
4. The definition of Bank Shareholder is hereby added to read
in its entirety as follow:
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"'Bank Shareholder' shall mean any holder of Bank Stock or an
option to purchase Bank Stock immediately prior to the Merger."
5. The definition of Expected Net Proceeds is hereby deleted.
6. The definition of "Offering" is hereby amended to read in
its entirety as follows:
"'Offering' shall mean a public offering underwritten by the
Underwriters (as defined below), as determined by the Company in its sole
discretion, of a certain number of shares of Company Stock as determined by the
Company in its sole discretion, of shares of the Company held by shareholders of
the Bank and Valley Bank and newly issued shares, at a gross offering price of
not less than $15.00 per share, as described in Section 7.14."
7. The definition of "S-l" is hereby amended in its entirety
as follows:
"'S-1' means the registration statement on Form S-1 to be
filed with the SEC relating to the registration under the Securities Act of the
shares of Company Stock held by shareholders of the Bank and Valley Bank to be
sold, and shares of Company Stock to be issued, in the Offering."
8. The definition of "Selling Shareholder" is hereby added to
read in its entirety as follows:
"'Selling Shareholder' shall mean any Bank shareholder or
holder of a Bank stock option who elects to sell his or her shares of Bank Stock
or to exchange his or her options and sell the Company Stock received in
exchange therefore in the Offering."
9. The definition of "Total Acquisition Costs" is hereby
deleted.
10. The definition of "Undesignated Shares" is hereby added to
read in its entirety as follows:
"'Undesignated Shares' shall have the meaning given such term
in Section 2.10."
11. A second sentence is hereby added to Section 2.1(b), which
will read in its entirety as follows:
"Holders of Bank Stock shall have a right to sell in the
Offering all the shares of Company Stock received in exchange for Bank Stock as
they so elect, as
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provided in Section 2.10, provided that if more than 88% or less than 75% of the
shares of Company Stock received by the Bank Shareholders (including, for this
purpose, holders of Bank stock options, as provided in Section 2.8) is elected
to be sold in the Offering, the shares sold in the Offering by each Selling
Shareholder shall be adjusted. If more than 88% of the shares of Company Stock
received by the Bank Shareholders (including, for this purpose, holders of Bank
stock options, as provided in Section 2.8) is elected to be sold in the
Offering, the shares sold in the Offering by each Selling Shareholder shall be
decreased ratably in proportion to the number of shares requested to be sold, so
that the total number of shares retained (i.e., not sold in the Offering) by the
Bank Shareholders in the aggregate is equal to at least 12% of the Company Stock
received by the Bank Shareholders. If less than 75% of the shares of Company
Stock received by the Bank Shareholders (including, for this purpose, holders of
Bank stock options, as provided in Section 2.8) is elected to be sold in the
Offering, the shares sold in the Offering by each Selling Shareholder so
electing shall be increased ratably in proportion to the number of shares
requested to be sold, so that the total number of shares retained (i.e., not
sold in the Offering) by the Bank Shareholders in the aggregate is equal to no
more than 25% of the Company Stock received by the Bank Shareholders. If, after
such proration, the number of shares to be retained by all Bank Shareholders in
the aggregate remains more than 25%, then each of the Directors hereby agrees to
decrease the number of shares retained by them, ratably in proportion to their
total shareholdings, to the extent necessary to aggregate retention of 25%. The
Selling Shareholder shall receive, for each share of Company Stock sold in the
Offering, the price at which shares are sold in the Offering, without reduction
for expenses or commissions of the Offering, it being understood that the
Company shall bear such expenses and commissions."
12. Section 2.1(e) is hereby amended to read in its entirety
as follows:
(e) COMPANY CORPORATE GOVERNANCE CHANGES. The Charter
Documents of the Company as in effect immediately prior to the Effective Time
shall continue in effect after the Merger until thereafter amended in accordance
with applicable law and the members of the Board of Directors and the Executive
Officers of the Company immediately prior to the Merger shall continue in their
respective positions after the Merger and be the Board of Directors and the
Executive Officers of the Company, except that the Company shall have taken
prior to the Effective Time all necessary steps so that, (i) two (2) individuals
from the Board of Directors or executive staff of the Bank, which are intended
to be Mr. Jaqua and Mr. Harold Williams, shall be appointed to the Board of
Directors of the Company, shall be renominated by the Board of Directors for
election at the Company's yearly annual meetings for a minimum of (3) three
years;(ii) two (2) individuals from the Board of Directors of Valley Bank shall
be appointed to the Board of Directors of the Company; and (iii) the
individuals elected to fill such four (4) directorships shall be
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annual appointments as selected in the sole discretion of the Company; (clauses
(i)-(iii) being hereinafter collectively referred to as the "Company Corporate
Governance Changes")."
13. Section 2.4 is hereby amended to read in its entirety as
follows:
"2.4 THE AGGREGATE PURCHASE CONSIDERATION AND PER SHARE
CONSIDERATION. The Aggregate Purchase Consideration shall be equal to the sum of
(i) the product of 844,278 and the Per Share Consideration and (ii) the
Aggregate Option Price. The Per Share Consideration shall be equal to 3.4 shares
of Company Stock for each share of Bank Stock, plus one (1) Warrant."
14. Section 2.5 is hereby amended to read in its entirety as
follows:
"2.5 DELIVERY OF CONSIDERATION. At the Closing, the Company
will deliver to the Exchange Agent an amount of Company Stock and Warrants equal
to the Aggregate Purchase Consideration, plus any cash payment for a fractional
share of Company Stock. In the case of shares of Company Stock to be sold in the
Offering, as provided in Section 2.1(b), the Exchange Agent shall deliver such
shares to, or pursuant to the direction of, the Underwriters. In the case of all
other shares of Company Stock, and the cash and Warrants, the Exchange Agent
shall deliver the same to the Selling Shareholders, provided that share
certificates formerly evidencing Bank Stock (duly executed and in proper form
for transfer, or a lost certificate affidavit acceptable to the Company) shall
have been delivered to the Exchange Agent in accordance with this Section 2.5,
Section 2.10 and an agreement to be entered into between the Company and the
Exchange Agent."
15. Section 2.8 is hereby amended to read in its entirety as
follows:
"2.8 STOCK OPTIONS. Immediately prior to the Effective Time of
the Merger, all stock options will be fully vested and each holder of a Bank
Option will be given the opportunity to, in whole or in part, cancel such option
and receive Company Stock equal to the number of shares of Bank Stock covered by
such option multiplied by the number obtained by subtracting the exercise price
of such option from the Per Share Consideration in effect on the Closing Date
(i.e., shares subject to option times ($51.00 minus exercise price of option),
all divided by $15.00) (the total of sum of such payments for all Bank Options
so cancelled shall be defined as the "Aggregate Option Price"). Holders of Bank
Options who elect to cancel their options in exchange for Company Stock (and
Warrants, as provided in the next sentence) will have their Bank Options
cancelled immediately prior to the Effective Time. For each 3.4 shares of
Company Stock paid by the Company in exchange for options on Bank Stock as
provided in the previous two sentences, each holder of a bank option will also
receive one (1) Warrant. Such payment may be made either by the Bank, the
Company or a combination of both as determined
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in the sole discretion of the Company. Each such option holder shall be afforded
an election to have the shares so received in the Offering, upon substantially
identical terms as the Selling Shareholders, and subject to proration together
with and on the same terms as the Selling Shareholders. All remaining Bank
Options which are entitled to participate in the Aggregate Option Price but the
holder of a Bank Option elects not to participate in the Aggregate Option Price
shall be cancelled immediately prior to the Effective Time of the Merger."
16. Section 2.9 is hereby amended to read in its entirety as
follows:
"2.9 DIRECTORS' AGREEMENTS. The Directors' Agreements
previously entered into by each of the Directors of the Bank continue to be in
full force and effect, and shall apply to the Agreement as amended pursuant to
this Second Amendment. By signing this Second Amendment, each of the Directors
of the Bank so agrees."
17. Section 2.10 is hereby amended to read in its entirety as
follows:
"2.10 (a) TRANSMITTAL LETTER. On or about the mailing date of
the Joint Proxy Statement/Prospectus, the Company, the Bank or the Company's
Exchange Agent shall mail appropriate transmittal materials to the stockholders
of Bank Stock, in form acceptable to the Company. The transmittal materials
shall include documentation by which stockholders may indicate their election
regarding the sale of shares in the Offering, subject to the possible adjustment
as provided in Section 2.1(b), and shall provide that sale in the Offering will
be contingent on the completion of the Offering. The transmittal letter shall
also contain a power of attorney authorizing an authorized representative of the
Company to exchange the Bank's shares for Company shares, and then immediately
deliver the Company shares to the Underwriter for sale in the Offering. The
transmittal letter shall also require a signature guarantee, from a bank or
brokerage with medallion capability. The holder of Bank Stock shall be
instructed to send to the Company, or to the entity designated by the Company
(which may be the Bank or the Exchange Agent), the holder's Bank Stock
certificates with the properly completed letter of transmittal. The transmittal
letter shall contain an election box and other appropriate and customary
transmittal materials (which shall specify that delivery shall be effected, and
risk of loss and title to the certificates theretofore representing shares of
Bank Stock shall pass, only upon proper delivery of such certificates to the
Exchange Agent in such form as Company requires). The transmittal materials
shall identify the Election Deadline established by the Company, which shall not
be less than 30 days from the date of mailing of such transmittal letter to the
holder (or such shorter time as the Bank may approve), and shall state that any
share of Bank Stock (other than Dissenting Common Stock) with respect to which
the holder (or the Beneficial Owner, as the case may be)
5
<PAGE>
shall not have submitted an effective, properly completed letter of transmittal
together with the Bank Stock certificates (or customary affidavits and
indemnification regarding the loss or destruction of such certificates or the
guaranteed delivery of such certificates) prior to the Election Deadline shall
be deemed to be "Undesignated Shares" hereunder, and shall not sell Company
Stock in the Offering. The Bank shall provide to the Exchange Agent all
information reasonably necessary for it to perform its obligations as specified
herein.
(b) PROPER AND TIMELY ELECTION. Any Election shall have been
properly made and effective only if the Company or its designee shall have
actually received a properly completed letter of transmittal by the date and
time established by the Company and specified in the transmittal materials, as
such date and time may be extended by the Company in its discretion (the
"Election Deadline"). A letter of transmittal shall be deemed properly completed
only if an Election is indicated for each share of Bank Stock covered by such
letter of transmittal and if accompanied by one or more certificates (or
customary affidavits and indemnification regarding the loss or destruction of
such certificates or the guaranteed delivery of such certificates) representing
all shares of Bank Stock owned by the holder of Bank Stock, together with duly
executed transmittal materials included in or required by the letter of
transmittal. Any Election may be revoked or changed by the person submitting a
revised, properly completed letter of transmittal at or prior to the Election
Deadline. In the event a letter of transmittal is revoked prior to the Election
Deadline, the shares of Bank Stock represented by such Election shall
automatically become Undesignated Shares unless and until a new Election is
properly made with respect to such shares on or before the Election Deadline,
and the Company shall cause the certificates representing such shares of Bank
Stock to be promptly returned without charge to the person submitting the
revoked Election upon written request to that effect from the holder who
submitted such Election Form. Subject to the terms of this Agreement and of the
Election, the Company or the Exchange Agent shall have reasonable discretion to
determine whether any election, revocation or change has been properly or timely
made and to disregard immaterial defects in the letter of transmittal, and any
decisions of the Company and Bank required by the Exchange Agent and made in
good faith in determining such matters shall be binding and conclusive. Neither
the Company nor the Exchange Agent shall be liable for the failure to notify any
person of any defect in an Election or the letter of transmittal, provided that
the Company uses its reasonable best efforts promptly to notify (or to cause the
Exchange Agent promptly to notify) any holder of Bank Stock of any defect in an
Election or the Letter of Transmittal.
(c) If the aggregate number of shares of Bank Stock as to
which Elections to sell shall have effectively been submitted would, absent
proration, result in the sale in the Offering of more or less shares than
are permitted pursuant to Section 2.1(b), then the sales in the Offering shall
be increased or reduced pro
6
<PAGE>
rata as provided in Section 2.1(b) in order to ensure that the shares sold by
Selling Shareholders in the Offering do not exceed or are not less than the
amounts provided in Section 2.1(b).
(d) CALCULATIONS. The calculations required by this Section
2.10 shall be prepared by the Company prior to the Effective Time and shall be
set forth in a certificate executed by the Chief Financial Officer or Chief
Executive Officer of the Company and furnished to the Bank at least two Business
Days prior to the Closing Date showing the manner of calculation in reasonable
detail. Any cash payment shall be rounded to the nearest cent.
(e) NO FRACTIONAL SHARES OR WARRANTS. Notwithstanding any
other provisions of this Agreement, each holder of shares of Bank Stock
exchanged pursuant to the Merger who would otherwise have been entitled to
receive a fraction of a share of Company Stock (after taking into account all
certificates delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to such fractional part of a share of
Company Stock multiplied by $15.00. Notwithstanding any other provision of this
Agreement, no fractional warrants shall be issued, and no cash or other
consideration shall be paid in lieu of fractional warrants. No holder will be
entitled to dividends, voting rights or any other rights as a shareholder in
respect of any fractional share of Company Stock."
18. Section 3.4 is hereby deleted, and Sections 3.4, 3.5, 3.6
and 3.7 are hereby amended in full as follows:
"3.4 EXCHANGE PROCEDURES.
(a) EXCHANGE AGENT. Prior to the Effective Time, the
Company shall deposit with the Exchange Agent shares of Company Stock and
Warrants to be issued to selling shareholders of the Bank, such shares being
the number of shares of Company Stock equal to the Aggregate Purchase
Consideration issuable in the Merger. The Exchange Agent shall deliver or cause
to be delivered to the Underwriter those of such shares to be sold in the
Offering. Upon completion of the Offering, the Underwriter will deposit with
the Exchange Agent the gross proceeds of the sale of shares by selling
shareholders in the Offering. The Exchange Agent shall distribute to each
selling shareholder the cash proceeds, shares of Company Stock and Warrants to
which such selling shareholder is entitled, provided that the selling
shareholder shall have delivered the requisite letter of transmittal and Bank
share certificates (or customary affidavits and indemnification regarding the
loss or destruction of such certificates or the guaranteed delivery of such
certificates). The Exchange Agent shall not be entitled to vote or exercise any
rights of ownership with respect to Company Stock held by it from time to time
hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares for the account
7
<PAGE>
of the persons entitled thereto.
(b) EXCHANGE OF CERTIFICATES. Each holder of a
certificate formerly representing Bank Stock (other than Dissenting Common
Stock) who surrenders or has surrendered such certificate (or customary
affidavits and indemnification regarding the loss or destruction of such
certificate), together with duly executed transmittal materials required by
Section 2.10, to the Exchange Agent shall, upon acceptance thereof, be entitled
to the Per Share Consideration of a certificate representing Company Stock or
the proceeds of the sale of such stock in the Offering and Warrants into which
the shares of Bank Stock shall have been converted pursuant hereto, as well as
cash in lieu of any fractional shares of Company Stock to which such holder
would otherwise be entitled. The Exchange Agent shall accept such Bank
certificate upon compliance with such reasonable and customary terms and
conditions as the Exchange Agent may impose to effect an orderly exchange
thereof in accordance with normal practices. Until surrendered as contemplated
by this Section 3.4, each certificate representing Bank Stock shall be deemed
from and after the Effective Time to evidence only the right to receive the Per
Share Consideration Company Stock and a Warrant, as the case may be, upon such
surrender. The Company shall not be obligated to deliver the consideration to
which any former holder of Bank Stock is entitled as a result of the Merger
until such holder surrenders his certificate or certificates representing
shares of Bank Stock for exchange as provided in this Article III. If any
certificate for shares of Company Stock, or any check representing declared but
unpaid dividends, is to be issued in a name other than that in which a
certificate surrendered for exchange is issued, the certificate so surrendered
shall be properly endorsed and otherwise in proper form for transfer and the
person requesting such exchange shall affix any requisite stock transfer tax
stamps to the certificate surrendered or provide funds for their purchase or
establish to the satisfaction of the Exchange Agent that such taxes are not
payable.
(c) PAYMENT TO HOLDERS OF A BANK OPTION. Each holder of
a Bank Option who presents a demand for cancellation and payment of such Bank
Option as provided in Section 2.8 of the Agreement to the Exchange Agent prior
to the Closing shall, upon acceptance thereof, be entitled to the per share
equivalent of the Aggregate Option Price. Upon receipt of the Aggregate Purchase
Consideration and as soon as reasonably possible after the Closing, the Exchange
Agent shall deliver to each former holder of a Bank Option the consideration due
each such holder under Section 2.8 of the Agreement, in the form of shares of
Company Stock and Warrants as provided therein, or in the form of cash, if the
shares received in exchange for the cancellation of the Bank Option were
submitted for sale in the Offering as provided in Section 7.14(b). The Exchange
Agent shall be entitled to rely upon the records of the Bank and the information
provided in such demand for cancellation documentation provided by any such
holder of a Bank Option, as verified by the Company as to the method and means
of payment and
8
<PAGE>
disposition of such consideration.
(d) AFFILIATES. Certificates surrendered for exchange
by any person constituting an "affiliate" of Bank for purposes of Rule 144(a)
under the Securities Act shall not be exchanged for certificates representing
whole shares of Company Stock until the Company has received a written
agreement from such person as provided in Section 6.25.
3.5 VOTING AND DIVIDENDS. Former shareholders of record of
Bank shall not be entitled to vote after the Effective Time at any meeting of
Company shareholders the number of whole shares of Company Stock into which
their respective shares of Bank Stock are converted, until such holders have
exchanged their certificates representing Bank Stock for certificates
representing Company Stock in accordance with the provisions of this Agreement.
Until surrendered for exchange in accordance with the provisions of Sections
2.10 and 3.4 of this Agreement, each certificate theretofore representing shares
of Bank Stock (other than shares to be canceled pursuant to Section 2.1 of this
Agreement) shall from and after the Effective Time represent for all purposes
only the right to receive the Per Share Consideration consisting of shares of
Company Stock and a Warrant, and cash in lieu of fractional shares, as set forth
in this Agreement. No dividends or other distributions declared or made after
the Effective Time with respect to Company Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered certificate of
Bank Stock with respect to the shares of Company Stock represented thereby,
until the holder of such certificate of Common Stock shall surrender such
certificate. Subject to the effect of applicable laws, following surrender of
any such certificates of Bank Stock for which shares of Company Stock are to be
issued, there shall be paid to the holder of the certificates, without interest,
(i) the amount of any cash payable with respect to a fractional share of Company
Stock to which such holder is entitled pursuant to Section 2.1 and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Company Stock, and (ii) at
the appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to surrender and a payment
date subsequent to surrender payable with respect to such whole shares of
Company Stock."
3.6 NO LIABILITY. Neither the Company, the Bank nor the
Exchange Agent shall be liable to any holder of shares of Bank Stock for any
shares of Company Stock (or dividends or distributions with respect thereto) or
cash delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
3.7 WITHHOLDING RIGHTS. The Company or the Exchange Agent
shall
9
<PAGE>
be entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Company Stock such amounts
as the Company or the Exchange Agent is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of state,
local or foreign tax law. To the extent that amounts are so withheld by the
Company or the Exchange Agent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the shares of
Bank Stock in respect of which such deduction and withholding was made by the
Company or the Exchange Agent."
19. Section 5.18 is hereby amended to read in its entirety as
follows:
"5.18 CAPITAL OF COMPANY, OFFERING AND COMMITMENTS. The
Company intends to use its best efforts to conduct the Offering in order to
permit stockholders of the Bank and Valley Bank, to sell shares of Company Stock
and to provide capital for expenses, growth and operations of the Company. As of
the date of this Agreement, the Company and Sutro have entered into the
Engagement Agreement, a copy of which has been provided to the Bank and which
has not been terminated or materially altered, except that the Company can
change its relationship with Sutro, or increase or decrease the number of
underwriters or co-mangers of the Offering, in the Company's sole discretion.
The Company shall not impose any cost or expense of the Offering, including
Underwriter costs and expenses, on any selling shareholder."
20. The first sentence of Section 6.8 is hereby amended to
read in its entirety as follows:
"As soon as practicable, the Company and the Bank shall
prepare the S-4 and the proxy statement ("Proxy Statement") and take all action
necessary in accordance with applicable Rules and its Charter Documents to
submit the Agreement and the transactions contemplated hereby to its
shareholders for approval by June 21, 1999, or as otherwise reasonably directed
by the Company."
21. Section 7.14 is hereby amended to read in its entirety as
follows:
"7.14 THE OFFERING.
(a) The Company intends to conduct the Offering in order
to permit stockholders of the Bank and Valley Bank, to sell shares of Company
Stock and to provide capital for expenses, growth and operations of the Company.
All shareholders of the Bank will be given the opportunity to sell shares of the
Company (whether in exchange for Bank Stock or Bank Options) in the Offering,
10
<PAGE>
subject to proration as provided in Section 2.1(b). Shares of Company Stock sold
by the selling shareholders will not incur any cost and expenses of the
Offering, and that pursuant to the terms of this Section 7.14, the amount of
cash from the Offering to be received by a Selling Shareholder will not be less
than $15.00 per share.
(b) All holders of Bank Options who exchange their options for
shares Company Stock and elect to sell the shares of Company Stock so received
may do so without having to first exercise such options. Such option holders
wishing to sell shares of Company Stock underlying their options to be received
in exchange for the Bank Options may do so by depositing with the Exchange Agent
the options with respect to the shares of Bank Stock to be exchanged prior to
the Offering, together with appropriate Letters of Transmittal properly
completed and executed. At the time of the Merger, the Bank Options will be
deemed exchanged for the number of shares of Company Stock and Warrants as
provided in Section 2.8, and, upon completion of the Offering, the Exchange
Agent will distribute to each former option holder (a) the proceeds of sale of
those of such shares that are sold in the Offering, and (b) the shares and cash
to which the former option holder is entitled.
(c) All Directors and officers of the Company and the
Surviving Bank have undertaken in writing with the Underwriters not to sell any
Warrants or shares of Company Stock held by them for a period of six months
following the completion of the Offering unless specifically granted permission
to do so by the Underwriters, such undertaking is in full force and effect. It
is understood that the Underwriters will (a) reduce the period from six months
to ninety (90) days, and (b) exclude from the effect of these undertakings those
shares sold in the Offering.
(d) Simultaneously with, and upon the condition of, the
consummation of the acquisition of the Bank, the Company through the
Underwriters intends to consummate the Offering at a gross public offering price
of at least $15.00 per share. If the Offering cannot be consummated at a gross
public offering price of at least $15.00 per share, the Company will not be
obligated to proceed with the Offering and the acquisition of the Bank and
Valley Bank."
22. Section 9.4 is hereby amended to read in its entirety as
follows:
"9.4 STOCK OFFERING. An election to sell shares in the
Offering shall have been made, and proper documentation submitted, with respect
to not less than 75% of the shares of Company Stock received by holders of Bank
Stock. The Company shall have entered into a firm commitment underwriting
agreement for the Offering, and all conditions to the consummation of the
Offering, other than the completion of the mergers of PCBG Merger Corporation
with the Bank and of Interim Valley Bank with Valley Bank, shall have been
satisfied or waived."
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<PAGE>
23. Section 9.8 is hereby added to read in its entirety as
follows:
"9.8 TAX OPINION. The Company shall have received from its
accountants an opinion for the benefit of the holders of Bank Stock reasonably
satisfactory to the Company and the Bank to the effect that the Merger shall not
result in the recognition of gain or loss for federal income tax purposes to the
Company or the Bank, the issuance of Company Stock or Warrants shall not result
in the recognition of gain or loss by the holders of Bank Stock who receive
Company Stock and Warrants in connection with the Merger, and shall state that
the holding period for Company Stock, for purposes of capital gains taxation,
shall include the period during which Bank Stock was held. This opinion shall be
dated prior to the date the Proxy Statement is first mailed to the shareholders
of the Company and the Bank and such opinions shall not have been withdrawn or
modified in any respect."
24. Section 11.18 is hereby amended to read in its entirety as
follows:
11.18 PROFESSIONAL FEES. The Bank's costs and expenses for
professional expenses in connection with the transaction contemplated by this
Agreement, including investment banking, accounting, attorney and any related
costs and expenses, shall not exceed the amount that would be reasonable and
customary for a transaction as described in this Agreement. Investment banking
fees are as set forth in Exhibit 4.14. The accounting and attorney fees, and
related costs and expenses thereto, of the Bank shall not exceed $200,000 in the
aggregate. The Company agrees that it will promptly reimburse the Bank at the
close or termination for the first $75,000 of legal and attorney fees and
expenses incurred by the Bank since November 15, 1998 directly related to this
transaction with the Company, and the Bank shall pay for any additional
accounting and attorney fees and expenses incurred by the Bank thereafter. The
Company also consents to the Bank paying at the close up to $25,000 to William
Cockrum for his investment banking services to the Bank related to this
transaction with the Company.
25. Section 14.1(a)(vi) is hereby amended to read in its
entirety as follows:
"(vi) by the Company or the Bank by June 28, 1999, unless
regulatory approvals and/or completion of the Offering is relatively imminent
and is expected to be completed in the near future, in which case the date in
this subsection shall be automatically extended for up to an additional 30
days."
26. Section 14.1(e)(iv) is hereby added to read in its
entirety as follows:
"(iv) If this Agreement is terminated by the Company before
the
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<PAGE>
Closing as a result of a default by the Company in the performance of Sections
5.18 and 7.14, no costs, expenses, fees or other liability or damages will be
accrued or incurred by the Company or any of its representatives or agents."
27. This Second Amendment may be entered into in one or more
counterparts, all of which shall be considered one in the same instrument, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
28. Except as herein amended, the Agreement and the First
Amendment shall remain in full force and effect.
29. This Second Amendment shall be governed by and construed
in accordance with the laws of the State of California.
30. The execution and delivery of this Second Amendment by the
directors and officers executing the Second Amendment have been duly authorized
by the Boards of Directors of the Bank and the Company, and this Second
Amendment constitutes a legal, valid and binding agreement of the parties in
accordance with its respective terms.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
PACIFIC COMMUNITY BANKING GROUP
By:
--------------------------------------
E. Lynn Caswell
Chairman and Chief Executive Officer
By:
--------------------------------------
Alfred Jannard
Secretary
THE BANK OF HEMET
By:
--------------------------------------
John J. McDonough
By:
--------------------------------------
James B. Jaqua
By:
--------------------------------------
John B. Brudin
By:
--------------------------------------
Jack E. Gosch
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<PAGE>
By:
--------------------------------------
E. Kenneth Hyatt
By:
--------------------------------------
Joseph D. Pehl
By:
--------------------------------------
Clayton A. Record, Jr.
15
<PAGE>
EXHIBIT 2.4
First Restatement of
Agreement and Plan of Reorganization
by and between
Pacific Community Banking Group
and
Valley Bank
dated
January 5, 1999
<PAGE>
FIRST RESTATEMENT OF
AGREEMENT AND PLAN OF REORGANIZATION
by and between
PACIFIC COMMUNITY BANKING GROUP
AND
VALLEY BANK
Dated: January 5, 1999
<PAGE>
FIRST RESTATEMENT OF
AGREEMENT AND PLAN OF REORGANIZATION
THIS FIRST RESTATEMENT OF AGREEMENT AND PLAN OF REORGANIZATION
(hereinafter referred to as the "Agreement") is made and entered into as of
January 5, 1999, by and between VALLEY BANK (the "Bank"), a California banking
corporation, and PACIFIC COMMUNITY BANKING GROUP (the "Company"), a California
corporation.
R E C I T A L S
A. The Bank is a California banking corporation duly organized
and existing under the laws of the State of California with its principal office
in the City of Moreno Valley, County of Riverside, State of California. The
Company is a proposed bank holding company duly organized and existing under the
laws of the State of California with its principal office in the City of Laguna
Hills, County of Orange, State of California;
B. The parties desire to provide for the acquisition by the
Company of all of the outstanding shares of the common stock, $5.00 par value of
the Bank ("Bank Stock") pursuant to the Merger (as defined below), subject to
the terms and conditions specified herein, as follows:
(a) The Company will establish PCBG Valley Corporation (as
defined below) as a wholly-owned subsidiary; and
(b) The Bank and PCBG Valley Corporation will enter into an
Agreement of Merger (as defined below) providing for the merger of PCBG Valley
Corporation and the Bank under the state charter of the Bank;
C. At the Effective Time (hereinafter defined below) of the
Merger, all of the issued and outstanding shares of Bank Stock, except for
shares of Bank Stock held by Dissenting Shareholders (as hereinafter defined
below), shall be converted into and exchanged for a combination of cash, shares
of Company Stock, and Warrants exercisable into shares of Company Stock, all
upon the terms and subject to the conditions hereinafter set forth;
D. The Merger requires certain shareholder and regulatory
approvals and may be effected only after the necessary approvals have been
obtained;
E. For federal income tax purposes, it is intended that the
Merger shall qualify as a "reorganization" within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code");
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<PAGE>
F. The parties desire to make certain representations, warranties
and agreements in connection with the Merger and also to prescribe certain
conditions to the Merger; and
G. Subject to any specific provisions of this Agreement, it is
the intent of the parties that the Company by reason of this Agreement shall not
(until consummation of the Merger) control, and shall not be deemed to control
the Bank or any of its subsidiaries, directly or indirectly, and shall not
exercise or be deemed to exercise, directly or indirectly, a controlling
influence over the management or policies of the Bank or any of its
subsidiaries.
H. The Company and the Bank desire that this First Restatement of
the Agreement and Plan of Reorganization now govern the rights and obligations
of the Parties in place of that certain Agreement and Plan of Reorganization
dated July 30, 1998.
Accordingly, to consummate the transactions set forth above and in
consideration of the mutual covenants, agreements, representations and
warranties contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. Capitalized terms used in this Agreement shall
have the meanings set forth below unless the context otherwise requires:
"Affiliate" means any Person (as defined below) that directly, or
through one or more intermediaries controls, or is controlled by, or is under
common control with, the Person specified.
"Aggregate Option Price" shall have the meaning given such term in
Section 2.8.
"Aggregate Purchase Consideration" shall have the meaning given such
term in Section 2.4.
"Agreement of Merger" shall mean the Agreement of Merger to be
entered into by and between PCBG Valley Corporation and the Bank substantially
in the form of EXHIBIT "A" hereto, but subject to any changes that may be
necessary to conform to any requirements of any Governmental Entity having
authority over the Merger.
"Alternative Transaction" shall have the meaning given such term in
Section 6.5.
2
<PAGE>
"Audited Bank Financial Statements" shall have the meaning given
such term in Section 4.4.
"BHC Act" shall mean the Bank Holding Company Act of 1956, as
amended.
"Bank" shall mean Valley Bank.
"Bank Corporate Governance Changes" shall have the meaning given
such term in Section 2.1 (d).
"Bank Dissenting Shares" means shares of Bank Stock held by
"Dissenting Shareholders" within the meaning of Chapter 13 of the CGCL.
"Bank Employment Agreements" shall mean any employment agreement,
severance agreement, "golden parachute" agreement or any other agreement which
provides for payments to employees of the Bank upon termination of employment,
including termination after a change in control.
"Bank Filings" shall have the meaning given such term in Section
4.18.
"Bank Incentive Compensation Plan" shall mean the Valley Bank
Employee Stock Ownership Plan, the Valley Bank 401(k) Plan and the Valley Bank
Profit Sharing Plan.
"Bank Options" shall mean options to purchase Bank Stock (as defined
below) pursuant to the Bank Stock Option Plan (as defined below).
"Bank Perfected Dissenting Shares" means Dissenting Shares which the
holders thereof have not withdrawn or caused to lose their status as Bank
Dissenting Shares.
"Bank Representatives" shall have the meaning given such term in
Section 7.3.
"Bank Stock" shall mean the meaning given such term in Recital B.
"Bank Stock Option Plan" shall mean Valley Bank 1992 Stock Option
Plan, and the Valley Bank 1993 Directors Stock Option Plan.
"Baxter" shall mean Baxter, Fentriss and Company, who shall serve as
the financial advisor to the Bank.
"Benefit Arrangement" means any plan or arrangement maintained or
contributed to by a Party, including an "employee benefit plan" within the
meaning of ERISA (as defined below), (but exclusive of base salary and base
wages) which
3
<PAGE>
provides for any form of current or deferred compensation, bonus, stock
option, profit sharing, benefit, retirement, incentive, stock purchase plan,
group health or insurance, welfare or similar plan or arrangement for the
benefit of any employee or class of employee, whether active or retired, of a
Party.
"Business Day" shall mean any day other than a Saturday, Sunday or
day on which commercial banks in California are authorized or required to be
closed.
"Cash Election" shall have the meaning given such term in Section
2.11.
"Caswell" shall mean Mr. E. Lynn Caswell, Chairman of the Board and
Chief Executive Officer of the Company.
"CERCLA" shall have the meaning given such term in the definition of
Environmental Law.
"CFC" means the California Financial Code.
"CGCL" means the California General Corporations Law.
"Charter Documents" shall mean, with respect to any business
organization, any certificate or articles of incorporation or association, any
bylaws, any partnership agreement and any other similar documents that regulate
the basic organization of the business organization and its internal relations.
"Classified Credit" shall have the meaning given such term in
Section 6.6.
"Closing" shall mean the consummation of the transactions
contemplated by this Agreement on the Closing Date (as defined below) at the law
offices of Knecht & Hansen, 1301 Dove Street, Suite 900, Newport Beach,
California 92660, or at such other place as the Parties (as defined below) may
agree upon.
"Closing Date" shall mean, unless the Parties (as defined below)
agree on another date, the first Friday or as soon as possible following the
Determination Date, and in no case more than 30 days following the receipt of
the approvals and consents and expiration of the waiting periods specified in
Section 9.1 have occurred and/or have been obtained, the receipt of the
necessary cash capital by the Company in order to complete the transaction as
contemplated by this Agreement, satisfaction of the remaining conditions to the
transaction as contemplated by this Agreement, and no less than four (4)
business days after the occurrence of the Election Deadline, or at such other
time as may be determined in good faith by the Parties in order to assure an
orderly transition process.
4
<PAGE>
"Code" shall mean the United States Internal Revenue Code of 1986,
as amended, and all regulations thereunder.
"Combination Election" shall have the meaning given such term in
Section 2.11.
"Commissioner" shall mean the California Commissioner of Financial
Institutions.
"Company" shall mean Pacific Community Banking Group, a California
corporation.
"Company Corporate Governance Changes" shall have the meaning given
such term in Section 2.1(e).
"Company Filings" shall have the meaning given such term in Section
5.16.
"Company Representatives" shall have the meaning given such term in
Section 6.3.
"Company Stock Option Plan" shall mean the proposed Pacific
Community Banking Group 1998 Stock Option Plan.
"Company Financial Statements" shall have the meaning given such
term in Section 5.4.
"Company Stock" shall mean the common stock, no par value, of the
Company.
"Confidential Information" shall mean all information exchanged
heretofore or hereafter between the Company, its affiliates and agents, on the
one hand, and the Bank, its affiliates and agents, on the other hand, which is
information related to the business, financial position or operations of the
Person responsible for furnishing the information or an Affiliate of such Person
(such information to include, by way of example only and not of limitation,
client lists, pricing information, company manuals, internal memoranda,
strategic plans, budgets, forecasts, projections, computer models, marketing
plans, files relating to loans originated by such Person, loans and loan
participation purchased by such Person from others, investments, deposits,
leases, contracts, employment records, minutes of board meetings (and committees
thereof) and stockholder meetings, legal proceedings, reports of examination by
any Governmental Entity, and such other records or documents such Person may
supply to the other Party pursuant to the terms of this Agreement or as
contemplated hereby). Notwithstanding the foregoing, "Confidential Information"
shall not include any information that (i) at the time of disclosure or
thereafter is generally available to and known by the public (other than as a
result of
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an improper disclosure directly or indirectly by the Company or the Bank, as
the case may be, or any of their officers, directors, employees or other
representatives), (ii) was available to the recipients on a non-confidential
basis from a source other than from the Persons responsible for furnishing
the information, provided that such source learned the information
independently and is not and was not bound by a confidentiality agreement
with respect to the information, or (iii) has been independently acquired or
developed by the recipients without violating any obligations under this
Agreement.
"Consents" shall mean every consent, approval, absence of
disapproval, waiver or authorization from, or notice to, or registration or
filing with, any Person (as defined below).
"CRA" shall mean the Community Reinvestment Act.
"Deposit" shall mean any deposit as defined in Section 3(l) of the
Federal Deposit Insurance Act, as amended, to July 30, 1998 (12 USC Section
1813(l)).
"Determination Date" shall mean the last day of the month preceding
the Closing Date.
"Directors' Agreement" shall mean an agreement, substantially in the
form of EXHIBIT "B" hereto, pursuant to which each signatory shall agree to vote
or cause to be voted all shares of Bank Stock with respect to which such Person
has voting power on the date hereof or hereafter acquires to approve the
Agreement and the transactions contemplated hereby and all requisite matters
related thereto.
"DPC Property" shall mean voting securities, other personal property
and real property acquired by foreclosure or otherwise, in the ordinary course
of collecting a debt previously contracted in good faith, retained with the
object of sale for a period not longer than any applicable statutory holding
period, and recorded in the holder's business records as such.
"Effective Day" shall mean the day on which the Effective Time
occurs.
"Effective Time" shall mean the date and time of the filing of the
Agreement of Merger with the Secretary of State (as defined below).
"Employee Plan" shall have the meaning given such term in Section
4.11(c).
"Encumbrance" shall mean any option, pledge, security interest,
lien, mechanic's lien, charge, encumbrance or restriction (whether on voting,
disposition or otherwise), whether imposed by agreement, understanding, law or
otherwise.
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"Environmental Law" shall mean any federal, state, provincial or
local statute, law, ordinance, rule, regulation, order, consent, decree,
judicial or administrative decision or directive of the United States or other
applicable jurisdiction whether now existing or as hereinafter promulgated,
issued or enacted relating to: (A) pollution or protection of the environment,
including natural resources; (B) exposure of persons, including employees, to
Hazardous Substances (as defined below) or other products, materials or
chemicals; (C) protection of the public health or welfare from the effects of
products, by-products, wastes, emissions, discharges or releases of chemical or
other substances from industrial or commercial activities; or (D) regulation of
the manufacture, use or introduction into commerce of substances, including,
without limitation, their manufacture, formulation, packaging, labeling,
distribution, transportation, handling, storage and disposal. For the purposes
of this definition the term "Environmental Law" shall include, without limiting
the foregoing, the following statutes, as amended from time to time: (1) the
Clean Air Act, as amended, 42 U.S.C. Section 7401 ET SEQ.; (2) the Federal Water
Pollution Control Act, as amended, 33 U.S.C. Section 1251 ET SEQ.; (3) the
Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. Section
6901 ET SEQ., (4) the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (including the Superfund Amendments and
Reauthorization Act of 1986), 42 U.S.C Section 9601 ET SEQ.("CERCLA"); (5) the
Toxic Substances Control Act, as amended, 15 U.S.C. Section 2601 ET SEQ.; (6)
the Occupational Safety and Health Act, as amended, 29 U.S.C. Section 65; (7)
the Emergency Planning and Community Right-To-Know Act of 1986, 42 U.S.C.
Section 11001 ET SEQ.; (8) the Mine Safety and Health Act of 1977, as amended,
30 U.S.C. Section 801 ET SEQ.; (9) the Safe Drinking Water Act, 42 U.S.C.
Section 300f ET SEQ.; (10) the Federal Water Pollution Control Act, as amended
(33 U.S.C. 1251, ET SEQ.; and (11) all comparable state and local laws, laws of
other applicable jurisdictions or orders and regulations including, but not
limited to, the Carpenter-Presley- Tanner Hazardous Substance Account Act, Cal.
Health & Safety Code Section 25300 ET SEQ., the Porter-Cologne Water Quality
Control Action, 25140, 25501(j) and (k); 255501.1.25281 and 25250.1 of the
California Health and Safety Code and/or Article I or Title 22 of the California
Code of Regulations, Division 4, Chapter 30 (the "State Acts").
"Equity Securities" shall mean the capital stock of Bank or any
options, rights, warrants or other rights to subscribe for or purchase, or any
plans, contracts or commitments that are exercisable in, such capital stock or
that provide for the issuance of, or grant the right to acquire, or are
convertible into, or exchangeable for, such capital stock.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and all regulations thereunder.
"ESOP" shall mean the Valley Bank Employee Stock Ownership Plan.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and all rules and regulations thereunder.
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"Exchange Agent" shall mean U. S. Stock Transfer Corporation, or,
subject to the reasonable approval of the Bank, any other financial institution
or company appointed by the Company to effect the exchange contemplated by
Section 2.5.
"Executive Officer" shall mean a natural person who participates or
has the authority to participate (other than in the capacity of a director) in
major policy making functions of the Company or the Bank, whether or not such
person has a title or is serving with salary or other compensation.
"Expected Net Proceeds" shall mean $52.6 million.
"Expenses" shall have the meaning given such term in Section 13.1.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"FRB" shall mean the Board of Governors of the Federal Reserve
System.
"GAAP" shall mean Generally Accepted Accounting Principles,
consistently applied from period to period, applicable to banks and bank holding
companies, as appropriate, for the period in question.
"Governmental Entity" shall mean any court or tribunal in any
jurisdiction or any United States federal, state, municipal, domestic, foreign
or other administrative agency, department, commission, board, bureau or other
regulatory or governmental authority or instrumentality.
"Hazardous Substances" shall mean (1) any "hazardous waste" as
defined by CERCLA and the State Acts, as such acts are in effect on the date
hereof, and any and all regulations promulgated thereunder; (2) any "hazardous
substance" as such term is defined by CERCLA; (3) any "regulated substance" as
defined by the State Acts; (4) asbestos requiring abatement, removal or
encapsulation pursuant to the requirements of any Governmental Entity; (5)
polychlorinated biphenyls; (6) petroleum products; (7) "hazardous chemicals" or
"extremely hazardous substances" in quantities sufficient to require reporting,
registration, notification and/or optional treatment or handling under the
Emergency Planning and Community Right to Know Act of 1986; (8) any "hazardous
chemical" in levels that would result in exposure greater than is allowed by
permissible exposure limits established pursuant to the Occupational Safety and
Health Act of 1970; (9) any substance that requires reporting, registration,
notification, removal, abatement and/or special treatment, storage, handling or
disposal, under Section 6, 7 and 8 of the Toxic Substance Control Act (15 U.S.C.
Section 2601); (10) any toxic or hazardous chemical described in 29 C.F.R.
1910.1000-1047 in levels that would result in exposure greater than those
allowed by the permissible exposure limits pursuant to such regulations; and
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(11) any (A) "hazardous waste", (B) "solid waste" capable of causing a "release
or threatened release" that present an "imminent and substantial endangerment"
to the public health and safety of the environment, (C) "solid waste" that is
capable of causing a "hazardous substance incident" (D) "solid waste" with
respect to which special requirements are imposed by any applicable Governmental
Entity upon the generation and transportation thereof as such terms are defined
and used within the meaning of the State Acts, or (E) any "pollutant" or "toxic
pollutant" as such term is defined in the Federal Clean Water Act, 33 U.S.C.
Section 1251-1376, as amended, by Publc Law 100-4, February 4, 1987, and the
regulations promulgated thereunder, including 40 C.F.R. Sections 122.1 and
122.26.
"Managing Underwriter" shall mean Sutro (as defined below).
"Managing Underwriters" shall mean the Managing Underwriter and such
other firm or firms as the Company and the Managing Underwriter shall agree.
"Material Adverse Change" shall have the meaning given such term in
Sections 4.17 and 5.12.
"Material Contract" shall have the meaning given such term in
Section 4.12.
"Merger" shall mean the merger of the PCBG Valley Corporation with
and into the Bank.
"Offering" shall mean a public offering underwritten by the
Underwriters (as defined below), as determined by the Company in its sole
discretion, and based upon current market conditions and assumptions, of
sufficient shares of the Company Stock at a gross offering price to be
determined by the Company and its underwriters, in order to fund the cash
portion of the acquisition of the Bank by the Company, to provide new capital
for growth of the Company following the acquisition of the Bank by the Company,
and the payment of any necessary expenses of the Company as provided herein, as
determined by the Company in its sole discretion.
"Offering Price" shall mean the gross offering price per share of
Company Stock in the Offering.
"OREO" shall have the meaning given such term in Section 6.2(xx).
"Party" shall mean either the Company or the Bank and "Parties"
shall mean both the Company and Bank.
"Per Share Cash Consideration" shall have the meaning given such
term in Section 2.1.
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"Per Share Consideration" shall have the meaning given such term in
Section 2.4.
"Permit" shall mean any United States federal, foreign, state, local
or other license, permit, franchise, certificate of authority, order or approval
necessary or appropriate under any applicable Rule (as defined below).
"Person" shall mean any natural person, corporation, trust,
association, unincorporated body, partnership, joint venture, Governmental
Entity, statutorily or regulatory sanctioned unit or any other person or
organization.
"Profit Sharing Plan" shall mean the Valley Bank 401(k) Profit
Sharing Plan.
"Proxy Statement" shall have the meaning given such term in Section
6.8.
"RAP" shall mean regulatory accounting principles, if any,
applicable to a particular Person.
"Real Property" shall have the meaning given such term in subsection
(a) of Section 4.6.
"Representatives" shall have the meaning given such term in
subsection (a) of Section 6.3.
"Rule" shall mean any statute or law or any judgment, decree,
injunction, order, regulation or rule of any Governmental Entity with applicable
jurisdiction, including, without limitation, those relating to disclosure,
usury, equal credit opportunity, equal employment, fair credit reporting and
anticompetitive activities.
"S-1" means the registration statement on Form S-1 to be filed with
the SEC relating to the registration under the Securities Act of the shares of
Company Stock to be issued in the Offering.
"S-4" means the registration statement on Form S-4, and such
amendments thereto, that is filed with the SEC to register the shares of Company
Stock to be issued in the Merger under the Securities Act and to clear use of
the Proxy Statement in connection with the Company Shareholders' Meeting and the
Bank Shareholders' Meeting pursuant to the regulations promulgated under the
Exchange Act.
"SEC" means the Securities and Exchange Commission.
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"SEC Reports" shall mean all reports filed by a Party hereto
pursuant to the Exchange Act with the SEC or the FDIC.
"Secretary of State" shall mean the Secretary of State of the State
of California.
"Section 1300" shall mean Section 1300 ET SEQ. of the California
Corporations Code.
"Securities Act" shall mean the Securities Act of 1933, as amended,
and all rules and regulations thereunder.
"State Acts" shall have the meaning given such term in the
definition of "Environmental Law."
"Surviving Bank" shall mean the bank surviving the Merger.
"Surviving Bank Stock" shall mean the common stock, $5.00 par value,
of the Surviving Bank.
"Sutro" shall mean Sutro & Company who may also act as a financial
advisor to the Company and as an underwriter in the Offering.
"Tax Filings" shall have the meaning given such term in Section 4.8.
"Third Party Consent" shall have the meaning given such term in
Sections 6.17 and 7.8.
"To the knowledge" and "to the best knowledge" shall have the
meanings given such terms in Section 15.15.
"Total Acquisition Costs" shall mean the sum of the Aggregate
Purchase Consideration for the Bank and The Bank of Hemet.
"Unaudited Bank Financial Statements" shall have the meaning given
such term in Section 4.4.
"Understanding" shall have the meaning given such term in Section
4.12.
"Undesignated Shares" shall have the meaning given such term in
Section 2.11.
"Underwriter" shall mean a group of broker/dealers that include the
Managing Underwriters as assembled by the Managing Underwriter with the consent
of the Company.
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"Warrant" shall mean a warrant issuable by the Company at the
Closing exercisable into one (1) share of the Company for a ten year period from
the Closing Date with an exercise price equal to 122% of the Offering Price.
"Warrant Agreement" shall mean the warrant agreement attached hereto
as EXHIBIT "C."
ARTICLE II
THE MERGER AND RELATED MATTERS
2.1 THE MERGER. The Company agrees that it will use its best
efforts, with all necessary cooperation of the Bank, to perfect the organization
of PCBG Valley Corporation in accordance with the CGCL prior to the Closing
Date. The directors and officers of PCBG Valley Corporation, and the Articles
of Incorporation and Bylaws of PCBG Valley Corporation, shall be determined by
the Company. Subject to the provisions of this Agreement, the Parties agree to
request that the approval of the Merger to be issued by the Commissioner, the
FDIC, the FRB and any other necessary regulatory agency on or prior to the
Closing Date shall provide that the Merger shall become effective (the
"Effective Time") as of the Closing Date. The Bank shall cause its officers to
execute the Agreement of Merger, as well as all other necessary documents, in
order to effect the Merger in accordance with the terms hereof as requested by
the Company. At the Effective Time of the Merger, the following transactions
will occur simultaneously:
(a) MERGER OF THE BANK AND PCBG VALLEY CORPORATION. The Bank and
PCBG Valley Corporation shall be merged under the certificate of authority of
the Bank, with the Bank being the Surviving Bank pursuant to the provisions of,
and with the effect provided in, the CGCL and the CFC, and shall continue its
corporate existence under the laws of the State of California. The name of the
Surviving Bank shall be "Valley Bank." Upon the consummation of the Merger, the
separate corporate existence of PCBG Valley Corporation shall cease.
(b) EFFECT ON BANK STOCK. Subject to Section 2.3, each share of
Bank Stock issued and outstanding immediately prior to the Effective Time of the
Merger shall, on and at the Effective Time of the Merger, pursuant to the
Agreement of Merger and without any further action on the part of the Bank or
the holders of Bank Stock, be automatically cancelled and cease to be an issued
and outstanding share of Bank Stock, and shall be exchanged for and converted
into the right to receive the Per Share Consideration. Subject to proration by
the Company in its absolute and sole discretion to ensure that the cash portion
of the Aggregate Purchase Consideration does not exceed 55% of the Aggregate
Purchase Consideration, or such lesser percentage that will allow the Company's
accountants to opine that the Merger will qualify as a "reorganization" within
the meaning of Section 368 of the Code, holders of Bank Stock will be given the
opportunity to receive, in exchange for
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each share for the Bank, in lieu of the Per Share Consideration, at the
election of the holder thereof as provided in Section 2.11, the Warrant plus
either (i) Company Stock having a value of $10.00, with the number of shares
to be received equal to the quotient of $10.00 and the Offering Price, or
(ii) cash equal to $10.00.
(c) EFFECT ON PCBG VALLEY CORPORATION STOCK. Each share of PCBG
Valley Corporation Stock issued and outstanding immediately prior to the
Effective Time of the Merger shall, on and at the Effective Time of the Merger,
pursuant to the Agreement of Merger and without any further action on the part
of the Bank or the holder of the PCBG Valley Corporation Stock be converted
into, and shall for all purposes be deemed to represent, one share of Surviving
Bank Stock, and one certificate representing one share of the Surviving Bank
Stock will be issued to the Company.
(d) BANK CORPORATE GOVERNANCE CHANGES. The Charter Document of
the Bank as in effect immediately prior to the Effective Time shall continue in
effect after the Merger until thereafter amended in accordance with applicable
law and the operations of the Bank shall continue in effect after the Merger;
except that the Bank shall have taken prior to the Effective Time all necessary
steps so that at the Effective Time (i) at the request of the Company, Mr. N.
Douglas Mills, President and Chief Executive Officer of the Bank, shall resign
from his positions (but not as an employee of the Bank), in form and substance
satisfactory to the Company, either during the pendency of this transaction or
following the consummation of this transaction, without incurring any liability
on the part of any Party, except that (a) the Bank and Mr. Mills will enter into
the Second Amendment to Mr. Mills' Employment Agreement originally dated
September 26, 1996 and amended October 30, 1997, upon the Bank's payment on the
Closing Date to Mr. Mills of the compensation described in revised Section 2.3
of the Second Amendment to Mr. Mills' Employment Agreement with the Bank in the
form attached hereto as Exhibit 2.1(d)(i)(a), (b) Mr. Mills will remain a
director of the Bank unless and until a successor is appointed by the Company,
and (c) the Board and/or the Company will not become liable for any obligations
under Mr. Mills' Salary Continuation Agreement dated October 19, 1995, as
amended October 30, 1997, nor, unless accelerated earlier by the Company in its
sole discretion, will such Salary Continuation Agreement accelerate, until
termination of Mr. Mills' employment with the Company or a subsidiary of the
Company pursuant to the Second Amendment to Mr. Mills' Employment Agreement;
(ii) Caswell shall have been appointed Chairman of the Board and Chief Executive
Officer of the Bank; (iii) except for the persons set forth on Exhibit 2.1(d),
which Exhibit shall be delivered by the Company to the Bank within sixty (60)
days of the date of the Agreement, each of the directors of the Bank shall have
tendered his resignation as a director of the Bank, in form and substance
satisfactory to the Company, without incurring any liability on the part of any
Party; (iv) the number of authorized directors, and the specific members of the
Board of Directors, of the Bank shall be changed as determined in the sole
discretion of the Company; (v) the Company shall name additional directors in
its sole discretion who shall be duly elected and appointed to the Board of
Directors of the Bank (or if any such persons is unable to serve, such
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other person designated by the Company) and shall serve until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified; (vi) the remaining members of the Board of Directors
of the Bank will agree to support any and all expense reductions,
consolidations, mergers, transfer of headquarters, sale of assets, FRB
membership, closure of branches, or any other corporate changes as requested
by the Company, consistent with their fiduciary duties; and (vii) the Company
will assume the obligations of the employment agreements for Bonnie Parrott,
Mark A. Nugent, Marvin Lentini and Dianna Williams, and the Company will
assume the obligations of Bank under that "Employment Compensation Agreement"
dated March 12, 1970 by and between Bank and Walter M. Wachtel in favor of
Willow Wachtel Decker (clauses (i)-(vii) being hereinafter collectively
referred to as the "Bank Corporate Governance Changes.").
(e) The Charter Documents of the Company as in effect immediately
prior to the Effective Time shall continue in effect after the Merger until
thereafter amended in accordance with applicable law and the members of the
Board of Directors and the Executive Officers of the Company immediately prior
to the Merger shall continue in their respective positions after the Merger and
be the Board of Directors and the Executive Officers of the Company, except that
the Company shall have taken prior to the Effective Time all necessary steps so
that, (i) the Company's Charter Documents shall be amended to provide for a
range of directors of between five (5) to nine (9), and at least four (4)
individuals, excluding Caswell who is currently the sole director and who shall
remain a director, shall be appointed to the Board of Directors of the Company
in the sole discretion of the Company; and (ii) the Company shall appoint at the
Effective Time, and the Company shall continue to propose for election at each
successive Company annual shareholder meeting thereafter, the ratio of that
number of directors from the Bank's Board of Directors bears to the total number
of directors to be elected, compared to the ratio of the number of former Bank's
shares bears to the total number of shares of the Company, with a minimum of two
to be appointed or elected from the Bank's Board of Directors, subject to the
approval of the Company (clauses (i) and (ii) being hereinafter collectively
referred to as the "Company Corporate Governance Changes").
2.2 EFFECT OF THE MERGER. At the Effective Time of the Merger,
the corporate existence of PCBG Valley Corporation and the Bank shall be merged
into and continued in the Surviving Bank, and the Surviving Bank shall be deemed
the same corporation as each corporation participating in the Merger. All
rights, franchises, and interests of PCBG Valley Corporation and Bank in and to
every type of property (real, personal and mixed) and choses in action shall be
transferred to and vested in the Surviving Bank by virtue of the Merger without
any deed or other transfer and the Surviving Bank shall hold and enjoy all
rights of property, franchises and interests, in the same manner and to the same
extent as such rights, franchises and interests were held or enjoyed by any one
of the consolidating corporations at the Effective Time of the Merger.
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2.3 DISSENTING SHAREHOLDERS. (a) Any Bank Perfected Dissenting
Shares shall not be converted into the right to receive the Per Share
Consideration, but the holders thereof shall be entitled only to such rights as
are granted them by Section 1300. Each dissenting shareholder who is entitled to
payment for his shares of Bank Stock under Section 1300 shall receive such
payment in an amount as determined pursuant to Section 1300.
(b) If any shareholder of the Bank shall fail to perfect, or shall
effectively withdraw or lose, his or her rights under Section 1300, the Bank
Dissenting Shares of such holder shall be treated for purposes of this Article
II as any other shares of outstanding Bank Stock. If any holder of Bank Stock
shall fail to perfect, or shall effectively withdraw or lose, his or her right
to appraisal of and payment for his or her Bank Dissenting Shares under Section
1300, each share of Bank Dissenting Shares shall be converted into the right to
receive the Per Share Consideration.
2.4 THE AGGREGATE PURCHASE CONSIDERATION AND PER SHARE
CONSIDERATION. The Aggregate Purchase Consideration shall be equal to the sum
of (i) the product of 1,171,906 and the Per Share Consideration, and (ii) the
Aggregate Option Price. The Per Share Consideration shall be equal to the sum
of (i) $5.00 in cash; and (ii) a fraction of a share of Company Stock having a
value equal to $5.00, with the amount of the fraction of a share of Company
Stock equal to the quotient of $5.00 and the Offering Price. One third (1/3) of
a Warrant shall be added to the Per Share Consideration. The cash and the
Company Stock portion of the Per Share Consideration will be increased (the
"Increase in Per Share Consideration"), up to a maximum value of $12.50 per
share, calculated as follows: the quotient of (a) the ratio of the Aggregate
Purchase Consideration to the Total Acquisition Costs, multiplied by the
difference between the net proceeds received in the Offering and the Expected
Net Proceeds in the Offering, and (b) the sum of the total number of issued and
outstanding shares of Bank Stock and the number of Bank Options outstanding as
of July 30, 1998. The Increase in Per Share Consideration shall be allocated
equally between cash and the shares of Company Stock. An illustration of such
calculation is attached as Exhibit 2.4(a). In the event of such increase in the
Per Share Consideration, the number of Warrants per share of Bank Stock shall be
reduced and shall be calculated as follows: the amount of the reduction of the
Warrants per share of Bank Stock shall be equal to the Increase in Per Share
Consideration divided by $18.00. An illustration of such calculation is
attached as Exhibit 2.4(b).
2.5 DELIVERY OF CONSIDERATION. At the Closing, the Company will
deliver to the Exchange Agent an amount of cash and shares of Company Stock
equal to the Aggregate Purchase Consideration, and the aggregate number of
Warrants plus cash payment for any fractional shares of Company Stock. Delivery
to such holders of the cash, Company Stock and Warrants to which they are
entitled will subsequently be made by the Exchange Agent against delivery of
share certificates formerly evidencing Bank Stock (duly executed and in proper
form for transfer) to the
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Exchange Agent in accordance with this Section 2.5 and an agreement to be
entered into between the Company and the Exchange Agent consistent with this
Agreement.
2.6 NAME OF SURVIVING BANK. The name of the Surviving Bank shall
be "Valley Bank," unless the Company proposes to change such name following the
Closing Date, and the Board of Directors of the Bank hereby agrees to support
such name changes.
2.7 (Reserved)
2.8 STOCK OPTIONS. Immediately prior to the Effective Time of the
Merger, each holder of a Bank Option will be given the opportunity to, in whole
or in part, cancel such option and receive at the Closing an amount in cash,
shares of Company Stock and Warrants payable on, and allocated on the same basis
as, the number of shares of Bank Stock covered by such option multiplied by the
number obtained by subtracting the exercise price of such option from the Per
Share Consideration in effect on the Closing Date (the total of sum of such
payments for all Bank Options so cancelled shall be defined as the "Aggregate
Option Price"). A holder of a Bank Option shall not be entitled to the election
provided in Section 2.11. The cash payment portion may be made either by the
Bank, the Company, or a combination of both as determined in the sole discretion
of the Company. All remaining Bank Options which are entitled to participate in
the Aggregate Option Price, but where the holder of such Bank Option elects not
to participate in the Aggregate Option Price, shall be cancelled immediately
prior to the Effective Time of the Merger.
2.9 DIRECTORS' AGREEMENTS. The Bank has caused each of its
directors to enter into the Directors' Agreement attached hereto as EXHIBIT "B."
2.10 TRANSMITTAL LETTER. Immediately after the Effective Time of
the Merger, the Company shall instruct the Exchange Agent to mail appropriate
transmittal materials to the former holders of Bank Stock, and the form of such
transmittal letter shall be subject to the reasonable approval of the Bank.
2.11 ELECTION AND PRORATION PROCEDURES.
(a) ELECTION FORMS AND TYPES OF ELECTIONS. An election form and
other appropriate and customary transmittal materials (which shall specify that
delivery shall be effected, and risk of loss and title to the certificates
theretofore representing shares of Bank Stock shall pass, only upon proper
delivery of such certificates to the Exchange Agent in such form as Company and
Bank shall mutually agree ("Election Form"), shall be mailed no less than
thirty-five (35) days prior to the Closing Date or on such other date as the
Bank and the Company shall mutually agree ("Mailing Date") to each holder of
record of Bank Stock as of five (5) Business Days prior to the Mailing Date
("Election Form Record Date"). The Company shall make
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available one or more Election Forms as may be reasonably requested by all
persons who become holders (or beneficial owners) of Bank Stock after the
Election Form Record Date and prior to the Election Deadline (as defined
herein), and Bank shall provide to the Exchange Agent all information
reasonably necessary for it to perform its obligations as specified herein.
Each Election Form shall permit the holder (or the Beneficial Owner through
appropriate and customary documentation and instructions) to elect (an
"Election") to receive the Warrant plus either (i) 100% Company Stock (a
"Stock Election") with respect to all of such holder's Bank Stock, or (ii)
100% cash (a "Cash Election") with respect to all of such holder's Bank
Stock. Any share of Bank Stock (other than Dissenting Common Stock) with
respect to which the holder (or the Beneficial Owner, as the case may be)
shall not have submitted to the Exchange Agent, an effective, properly
completed Election Form received prior to the Election Deadline shall be
deemed to be "Undesignated Shares" hereunder, and shall receive the Per Share
Consideration. Holders of Bank Stock selecting either (i) or (ii) shall be
subject to proration as provided in Section 2.1(b).
b. PROPER AND TIMELY ELECTION. Any Election shall have been
properly made and effective only if the Exchange Agent shall have actually
received a properly completed Election Form by 5:00 P.M. on the later of the
30th day following the Mailing Date or the 31st day following the mailing of any
notice required by Section 1301 of the GCL (or such other time and date as the
Company and the Bank may mutually agree) (the "Election Deadline"). An Election
Form shall be deemed properly completed only if an Election is indicated for
each share of Bank Stock covered by such Election Form and if accompanied by one
or more certificates (or customary affidavits and indemnification regarding the
loss or destruction of such certificates or the guaranteed delivery of such
certificates) representing all shares of Bank Stock covered by such Election
Form, together with duly executed transmittal materials included in or required
by the Election Form. Any Election Form may be revoked or changed by the person
submitting such Election Form at or prior to the Election Deadline. In the
event an Election Form is revoked prior to the Election Deadline, the shares of
Bank Stock represented by such Election Form shall automatically become
Undesignated Shares unless and until a new Election is properly made with
respect to such shares on or before the Election Deadline, and the Company shall
cause the certificates representing such shares of Bank Stock to be promptly
returned without charge to the person submitting the revoked Election Form upon
written request to that effect from the holder who submitted such Election Form.
Subject to the terms of this Agreement and of the Election Form, the Exchange
Agent shall have reasonable discretion to determine whether any election,
revocation or change has been properly or timely made and to disregard
immaterial defects in the Election Forms, and any decisions of the Company and
Bank required by the Exchange Agent and made in good faith in determining such
matters shall be binding and conclusive. Neither the Company nor the exchange
Agent shall be under any obligation to notify any person of any defect in an
Election Form.
(c) If the aggregate number of shares of Bank Stock as to which
Stock Elections and Cash Elections shall have effectively been made results in
the
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issuance of cash pursuant to the Merger that would be more than the cash that
may be paid pursuant to Section 2.1(b) of the aggregate value of the total
consideration paid ("Aggregate Purchase Consideration") in exchange for
shares of Bank Stock, then such all cash elections shall be reduced pro rata
in order to ensure that the Aggregate Purchase Consideration will consist of
maximum cash as permitted in Section 2.1(b).
(d) Notwithstanding any other provision of this Agreement, if the
aggregate value of cash that would be issued pursuant to the Merger is more than
the cash that may be paid pursuant to Section 2.1(b) of the aggregate value of
the total consideration to be paid in exchange for Bank Stock, the Company shall
be authorized to reallocate, in good faith and in such a manner as it reasonably
determines to be fair and equitable, shares of Company Stock and cash among the
holders of Bank Stock, in a manner such that the amount of cash to be issued in
the Merger shall not be more than the cash that may be paid pursuant to Section
2.1(b).
(e) CALCULATIONS. The calculations required by this Section 2.1
shall be prepared by the Company prior to the Effective Time and shall be set
forth in a certificate executed by the Chief Financial Officer or Chief
Executive Officer of the Company and furnished to the Bank at least two Business
Days prior to the Closing Date showing the manner of calculation in reasonable
detail. Any calculation of a portion of a share of the Company Stock shall be
rounded to the nearest ten-thousandth of a share, and any cash payment shall be
rounded to the nearest cent.
(f) NO FRACTIONAL SHARES. Notwithstanding any other provisions of
this Agreement, each holder of shares of Bank Stock exchanged pursuant to the
Merger who would otherwise have been entitled to receive a fraction of a share
of Company Stock (after taking into account all certificates delivered by such
holder) shall receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional part of a share of Company Stock multiplied by the Per
Share Consideration (as defined in Section 2.1). In addition, such holder of
Bank Stock exchanged pursuant to the Merger who would otherwise have been
entitled to receive a fraction of a Warrant (after taking into account all
Warrants delivered by such holder) shall receive, in lieu thereof, cash (without
interest) in an amount equal to such fractional Warrant multiplied by the
product of 0.4 and the Offering Price. No holder will be entitled to dividends,
voting rights or any other rights as a shareholder in respect of any fractional
share of Company Stock.
ARTICLE III
THE CLOSING
3.1 CLOSING DATE. Consummation of the transactions contemplated
by this Agreement shall take place at the office of the Bank, 24010 Sunnymead
Boulevard, Moreno Valley, California, or such other location as may be agreed
upon
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by the parties, on the Closing Date. The Effective Time shall occur
following the last to occur of (i) the receipt of all approvals and consents
specified in this Agreement and the expiration of the applicable waiting
periods specified in Article IX, and (ii) satisfaction of the conditions
precedent set forth in Articles IX, X and XI or written waiver of such
conditions as provided herein (the "Closing Date", "Effective Time of the
Merger" or "Effective Time").
3.2 EXECUTION OF AGREEMENT OF MERGER. Prior to the Closing Date,
and as soon as practicable after the organization of PCBG Valley Corporation,
the Agreement of Merger (as amended, if necessary, to conform to any
requirements of any Governmental Entity having authority over the Merger) shall
be executed by Bank and PCBG Valley Corporation. On the Closing Date, the Merger
shall become effective in accordance with the approvals granted by the
Commissioner, the FDIC and the FRB, and the Agreement of Merger, together with
all requisite certificates, shall be duly filed with the California Secretary of
State.
3.3 DOCUMENTS TO BE DELIVERED. At the Closing the Parties shall
deliver, or cause to be delivered, such documents or certificates as may be
necessary in the reasonable opinion of counsel for any of the parties, to
effectuate the transactions called for in this Agreement. If, at any time after
the Effective Time of the Merger, the Company or its successors or assigns shall
determine that any further conveyance, assignment or other documents or any
further action is necessary or desirable to further effectuate the transactions
set forth herein or contemplated hereby, the officers and directors of the
Parties hereto shall execute and deliver, or cause to be executed and delivered,
all such documents as may be reasonably required to effectuate such
transactions.
3.4 EXCHANGE PROCEDURES.
(a) EXCHANGE AGENT. Promptly following the Effective Time,
the Company shall deposit with the Exchange Agent the amount of cash and number
of shares of Company Stock equal to the Aggregate Purchase Consideration and the
Warrants issuable in the Merger. The Exchange Agent shall not be entitled to
vote or exercise any rights of ownership with respect to Company Stock held by
it from time to time hereunder, except that it shall receive and hold all
dividends or other distributions paid or distributed with respect to such shares
for the account of the persons entitled thereto.
(b) EXCHANGE OF CERTIFICATES. Each holder of a certificate
formerly representing Bank Stock (other than Dissenting Common Stock) who
surrenders or has surrendered such certificate (or customary affidavits and
indemnification regarding the loss or destruction of such certificate), together
with duly executed transmittal materials included in or required by the Election
Form, to the Exchange Agent shall, upon acceptance thereof, be entitled to the
Per Share Consideration of cash, a certificate representing Company Stock and a
Warrant into which the shares of Bank Stock shall have been converted pursuant
hereto, as well
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as cash in lieu of any fractional shares of Company Stock to which such
holder would otherwise be entitled. The Exchange Agent shall accept such
Bank certificate upon compliance with such reasonable and customary terms and
conditions as the Exchange Agent may impose to effect an orderly exchange
thereof in accordance with normal practices. Until surrendered as
contemplated by this Section 3.4, each certificate representing Bank Stock
shall be deemed from and after the Effective Time to evidence only the right
to receive the Per Share Consideration of cash, Company Stock and a Warrant,
as the case may be, upon such surrender. The Company shall not be obligated
to deliver the consideration to which any former holder of Bank Stock is
entitled as a result of the Merger until such holder surrenders his
certificate or certificates representing shares of Bank Stock for exchange as
provided in this Article III. If any certificate for shares of Company Stock,
or any check representing declared but unpaid dividends, is to be issued in a
name other than that in which a certificate surrendered for exchange is
issued, the certificate so surrendered shall be properly endorsed and
otherwise in proper form for transfer and the person requesting such exchange
shall affix any requisite stock transfer tax stamps to the certificate
surrendered or provide funds for their purchase or establish to the
satisfaction of the Exchange Agent that such axes are not payable.
(c) PAYMENT TO HOLDERS OF A BANK OPTION. Each holder of a
Bank Option who presents a demand for cancellation and payment of such Bank
Option as provided in Section 2.8 of the Agreement to the Exchange Agent prior
to the Closing shall, upon acceptance thereof, be entitled to the per share
equivalent of the Aggregate Option Price. Upon receipt of the Aggregate
Purchase Consideration and as soon as reasonably possible after the Closing, the
Exchange Agent shall deliver to each holder of a Bank Option the consideration
due each such holder under Section 2.8 of the Agreement, in the form of cash,
shares of Company Stock and Warrants as provided therein. The Exchange Agent
shall be entitled to rely upon the records of the Bank and the information
provided in such demand for cancellation documentation provided by any such
holder of a Bank Option, as verified by the Company as to the method and means
of payment and disposition of such consideration.
(d) AFFILIATES. Certificates surrendered for exchange by
any person constituting an "affiliate" of Bank for purposes of Rule 144(a) under
the Securities Act shall not be exchanged for certificates representing whole
shares of Bank Stock until the Company has received a written agreement from
such person as provided in Section 6.25.
3.5 VOTING AND DIVIDENDS. Former shareholders of record of Bank
shall not be entitled to vote after the Effective Time at any meeting of Company
shareholders the number of whole shares of Company Stock into which their
respective shares of Bank Stock are converted, until such holders have exchanged
their certificates representing Bank Stock for certificates representing Company
Stock in accordance with the provisions of this Agreement. Until surrendered
for exchange in accordance with the provisions of Section 3.4 of this Agreement,
each certificate
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theretofore representing shares of Bank Stock (other than shares to be
canceled pursuant to Section 2.1 of this Agreement) shall from and after the
Effective Time represent for all purposes only the right to receive the Per
Share Consideration consisting of cash, shares of Company Stock and a
Warrant, and cash in lieu of fractional shares, as set forth in this
Agreement. No dividends or other distributions declared or made after the
Effective Time with respect to Company Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered certificate
of Bank Stock with respect to the shares of Company Stock represented
thereby, until the holder of such certificate of Common Stock shall surrender
such certificate. Subject to the effect of applicable laws, following
surrender of any such certificates of Bank Stock for which shares of Company
Stock are to be issued, there shall be paid to the holder of the
certificates, without interest, (i) the amount of any cash payable with
respect to a fractional share of Company Stock to which such holder is
entitled pursuant to Section 2.1 and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of Company Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with
a record date after the Effective Time but prior to surrender and a payment
date subsequent to surrender payable with respect to suh whole shares of
Company Stock.
3.6 NO LIABILITY. Neither the Company, the Bank nor the Exchange
Agent shall be liable to any holder of shares of Bank Stock for any shares of
Company Stock (or dividends or distributions with respect thereto) or cash
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
3.7 WITHHOLDING RIGHTS. The Company or the Exchange Agent shall
be entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Company Stock such amounts
as the Company or the Exchange Agent is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of state,
local or foreign tax law. To the extent that amounts are so withheld by the
Company or the Exchange Agent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the shares of
Bank Stock in respect of which such deduction and withholding was made by the
Company or the Exchange Agent.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BANK
The Bank represents and warrants to the Company as of July 30, 1998
as follows:
4.1 ORGANIZATION AND GOOD STANDING. The Bank is a California
banking corporation duly organized and validly existing in good standing under
the laws of the State of California and it has the corporate power and authority
to carry on its business as presently conducted, and is authorized to transact
business as a bank.
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The Bank is a not a member of the Federal Reserve System and its deposits are
insured by the FDIC in the manner and to the extent provided by law. The
Bank has all requisite corporate power and authority to own, lease and
operate its properties and assets and to carry on its business as presently
conducted. The nature of its operations and the business transacted by it as
of the date hereof make licensing and qualification in any other state or
jurisdiction unnecessary. The Bank has delivered to the Company true and
correct copies of its Articles of Incorporation and Bylaws, as amended and in
effect as of the date hereof,
4.2 CAPITALIZATION. The authorized capital stock of Bank consists
of 2,400,000 shares of Common Stock, $5.00 par value, of which 1,171,906 shares
are outstanding on the date hereof, and except for 7,872 shares issued on
November 26, 1997 to Kenneth Ray, are all validly issued, fully paid and
nonassessable, and all 1,171,906 shares will be validly issued, fully paid and
nonassessable on the Closing Date. Except for stock options covering 262,914
shares of Bank Stock granted pursuant to the Bank Stock Option Plan, and except
as to preemptive rights of Valley Bank shareholders, no unissued shares of Bank
Stock or any other securities of the Bank are subject to any warrants, options,
rights or commitments of any character, kind or nature and the Bank is not
obligated to issue or repurchase any shares of Bank Stock or any other security
to or from any person except in accordance with the terms of the Bank Stock
Option Plan and Agreements pursuant thereto, and true and correct copies, as
amended and in effect as of the date hereof have been delivered to the Company.
Exhibit 4.2 sets forth the name of each holder of a Bank Option, the number of
shares of Bank Stock covered by each such holder's option, the date of grant of
each such holder's option, the exercise price per share, the vesting schedule
for each such holder's option, and the expiration date of each such holder's
option.
4.3 SUBSIDIARIES. Except as indicated in Exhibit 4.3, the Bank
does not own, directly or indirectly (except as pledgee pursuant to loans which
are not in default), any equity position or other voting interest in any
corporation, partnership, joint venture or other entity.
4.4 FINANCIAL STATEMENTS. The Bank has delivered to the Company
copies of the audited Balance Sheets of the Bank as of December 31, 1997 and
1996; Statements of Income, Stockholders' Equity and Cash Flows for each of the
years ended December 31, 1997, 1996 and 1995, and the related notes and related
opinions thereon of McGladrey & Pullen, certified public accountants, with
respect to such financial statements (the "Audited Bank Financial Statements").
The Bank has delivered to the Company copies of the unaudited Balance Sheet of
the Bank as of September 30, 1998; Statement of Income, Stockholders' Equity and
Cash Flows for each of the nine months ended September 30, 1998, and the related
notes thereon (the "Unaudited Bank Financial Statements). The Bank has
furnished the Company with true and correct copies of each management letter or
other letter delivered to the Bank by McGladrey & Pullen in connection with the
Audited Bank Financial Statements or relating to any review of the internal
controls of the Bank by
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McGladrey & Pullen since January 1, 1996. The Audited Bank Financial
Statements and the Unaudited Bank Financial Statements: (i) present fairly
the financial condition and results of operations of the Bank as of and for
the dates or periods covered thereby in accordance with GAAP and RAP
consistently applied throughout the periods involved; (ii) are based on the
books and records of the Bank; (iii) contain and reflect reserves for all
material accrued liabilities and for all reasonably anticipated losses, and
set forth adequate reserves for loan losses and other contingencies to the
extent required by GAAP and RAP; and (iv) none of the Audited Bank Financial
Statements or Unaudited Bank Financial Statements contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements contained therein not misleading under GAAP or
RAP. The books and records of the Bank have been, and are being, maintained
in all material respects in accordance with GAAP and RAP and other applicable
legal and accounting requirements and reflect only actual transactions.
4.5 BOOKS AND RECORDS.
(a) The minute books of the Bank which have been made available to
the Company contain (i) true, accurate and complete records of all meetings and
actions taken by the Board of Directors, Board committees and shareholders of
the Bank, and (ii) true and complete copies of its Charter Documents.
(b) The Bank has records which accurately and validly reflect, in
all material respects, its transactions and accounting controls sufficient to
insure that such transactions are (i) in all material respects, executed in
accordance with management's general or specific authorization, and (ii)
recorded in conformity with GAAP or RAP; such records, to the extent they
contain important information pertaining to the Bank which is not easily and
readily available elsewhere, have been duplicated, and such duplicates are
stored safely and securely pursuant to procedures and techniques reasonably
adequate for companies of the size of the Bank and in the businesses in which
the Bank is engaged; and the data processing equipment and software used by the
Bank in the operation of its businesses (including any disaster recovery
facility) to generate and retrieve such records are reasonably adequate for
companies of the size of the Bank and in the businesses in which the Bank is
engaged.
4.6 PROPERTY AND ASSETS. (a) Exhibit 4.6(a) sets forth a general
description (including the character of the ownership of the Bank) of all real
property of the Bank, including fees, leaseholds and all other interest in real
property (including real property that is DPC Property) ("Real Property").
Except as set forth on Exhibit 4.6(a), (i) the Bank has good and marketable
title, free and clear of any encumbrance, lien or charge of any kind or nature
(except liens for taxes not yet due) to all of the property, real, mixed or
intangible, reflected on the Audited Bank Financial Statements, except as
reflected therein or in the notes thereto (except property sold or transferred
or Encumbrances incurred in the ordinary course of business since the date
thereof) and except (a) Encumbrances in the aggregate which do not materially
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detract from the value, interfere with the use, or restrict the sale, transfer
or disposition, of such properties and assets or otherwise materially and
adversely affect the Bank; (b) any lien for taxes not yet due; and (c) any
Encumbrances arising under the document that created the interest in the Real
Property (other than Encumbrances arising as a result of any breach or default
of the Bank); (ii) all leasehold interests for Real Property and any material
personal property used by the Bank in its business are held pursuant to lease
agreements which are valid and enforceable, except as the enforceability thereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
or other laws of general application relating to or affecting enforcement of
creditors rights and the application of equitable principles in any action,
legal or equitable in accordance with their terms; (iii) all such properties
comply in all material respects with all applicable private agreements, zoning
requirements and other governmental laws and regulations relating thereto and
there are no condemnation proceedings pending or, to the knowledge of the Bank,
threatened with respect to such properties; (iv) the Bank has valid title or
other ownership rights under licenses to all material intangible personal or
intellectual property used by the Bank in its business, free and clear of any
claim, defense or right of any other person or entity which is material to such
property, subject only to rights of the licensors pursuant to applicable license
agreements, which rights do not materially adversely interfere with the use of
such property; and (v) all material insurable properties owned or held by the
Bank are adequately insured in such amounts and against such risks as is
customary with banks of similar size. The Bank has furnished the Company with
true and correct copies of all leases included on Exhibit 4.6(a) delivered as of
the date of July 30, 1998, all title insurance policies relating to the Real
Property and all documents evidencing recordation of all recordable interest in
the Real Property.
(b) CONDITION OF PROPERTIES. All tangible properties of the Bank
that are material to the business, financial condition, or results of operations
of the Bank are in a good state of maintenance and repair, except for ordinary
wear and tear, and are adequate for the conduct of the business of the Bank as
presently conducted, and comply with all applicable Rules related thereto.
Except as set forth in Exhibit 4.6(b), (i) the execution of this Agreement, the
performance of the obligations of the Bank hereunder and the consummation of the
transactions contemplated herein, including the Merger, does not conflict with
and will not result in a breach or default under any lease, agreement or
contract described in Exhibit 4.6(b), or give any other party thereto a right to
terminate or modify any term thereof; (ii) the Bank has no obligation to improve
any Real Property; (iii) each lease and agreement under which the Bank is a
lessor is in full force and effect and is a valid and legally binding obligation
of the Bank, and, to the best knowledge of the Bank, each other party thereto;
and (iv) the Bank, and to the best knowledge of the Bank, each other party to
any such lease or agreement have performed in all material respects all the
obligations required to be performed by them to date under such lease or
agreement and are not in default in any material respect under any such lease or
agreement and there is no pending or, to the best knowledge of the Bank,
threatened proceeding, or proceeding which the
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Bank has reason to believe may be threatened, with respect to such property
or any such lease.
4.7 LITIGATION PROCEEDINGS AND AGREEMENTS WITH GOVERNMENTAL
ENTITIES.
(a) The Bank is not engaged as a defendant in any legal or other
proceedings before any court, administrative agency or other Governmental Entity
except as is shown on Exhibit 4.7. Except as set forth on Exhibit 4.7, the Bank
is not aware of any "threatened or pending litigation" (within the meaning of
Paragraph 5 of the American Bar Association Statement of Policy Regarding
Lawyers' Responses to Auditors' Requests for Information adopted December 8,
1975) against the Bank. The Bank is not subject to any agreement, order, writ,
injunction or decree of any federal, state or local court, out of a proceeding
involving the Bank or any of its business or properties except as described in
Exhibit 4.7. The Bank has not been served with notice of, nor, to best of
Bank's knowledge is it currently under investigation with respect to, any
violation of federal, state or local law or administrative regulation. Except
as set forth on Exhibit 4.7, there is no (i) outstanding judgment, order, writ,
injunction or decree, stipulation or award of any Governmental Entity or by
arbitration, against, or to the knowledge of the Bank, affecting the Bank or its
assets or business that (a) has had or may have a material adverse effect on the
assets, liabilities, business, financial condition or results of operations of
the Bank, (b) requires any payment by, or excuses a material obligation of a
third party to make any payment to, the Bank, or (c) has the effect of
prohibiting any business practice of, or the acquisition, retention or
disposition of property by, the Bank; or (ii) legal, administrative,
arbitration, investigatory or other proceeding pending or, to the best knowledge
of the Bank that has been threatened, or which the Bank has reason to believe
may be threatened, against or affecting any director, officer, employee, agent
or representative of the Bank, in connection with which any such person has or
may have rights to be indemnified by the Bank.
(b) Except as set forth in Exhibit 4.7, the Bank is not a party
to, or otherwise subject to, any agreement or memorandum of understanding with
or order of any Governmental Entity charged with the supervision or regulation
of banks or engaged in the insurance of bank deposits, that restricts the
conduct of its business, or in any manner relates to its capital adequacy, its
credit or investment policies or its management.
4.8 TAXES AND ASSESSMENTS. The Bank has timely filed all federal
income and state franchise tax returns and all tax reports or returns which it
is required to file with applicable federal, state, county or local authorities
and agencies except (a) where the failure to make any such filing would not have
any materially adverse effect on the business, financial condition or results of
operations of the Bank taken as a whole, and (b) where the required filing date
has been lawfully extended, and the Bank has paid all taxes provided for and to
be due in such returns and reports ("Tax Filings"). The Bank's Tax Filings have
never been examined by a Governmental Entity, except for the pending audit for
tax year 1997. As of December 31, 1997,
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to the extent required by GAAP, the Bank had paid, or set up adequate
accruals for the payment of, all taxes, penalties and assessments for which
it was liable as of such date, whether or not disputed, with respect to any
and all United Sates federal, foreign, state, local, environmental (including
under any Environmental Law) and other taxes for the periods covered by the
financial statements of the Bank and for all prior and subsequent periods.
Except as set forth in Exhibit 4.8 the Bank has no knowledge of any
deficiency proposed to be assessed against it. The Bank has paid all
assessments made by the FDIC and the Commissioner required to be paid prior
the date hereof. There is currently no federal or state income tax audit or
investigation in process or to the best knowledge of the Bank any other
pending investigation by any authorized body of the taxes paid or to be paid
by the Bank, and the Bank has not been informed that any such audit or
investigation is proposed, except for the pending tax audit for 1997.
4.9 COMPLIANCE WITH LAWS AND REGULATIONS.
(a) Except as set forth in Exhibit 4.9, the Bank is not in default
under or in breach of any law, ordinance, rule, regulation, order, judgment or
decree applicable to it promulgated by any Governmental Entity having authority
over it, where such default or breach would have a material adverse effect on
its financial condition, results of operations, or business.
(b) The Bank has conducted in all material respects its businesses
in accordance with all applicable federal, foreign, state and local laws,
regulations and orders, including without limitation disclosure, usury, equal
credit opportunity, equal employment, fair credit reporting, antitrust,
licensing and other laws, regulations and orders, and the forms, procedures and
practices used by the Bank are in compliance with such laws, regulations, and
orders, except for such violations or noncompliance as will not have a material
adverse effect on the financial condition, results of operations, or business of
the Bank.
4.10 PERFORMANCE OF OBLIGATIONS. Except as set forth in Exhibit
4.10, the Bank has performed in all respects all of the obligations required to
be performed by it to date and is not in default under or in breach of any term
or provision of any covenant, contract, lease, indenture or any other agreement
to which the Bank is a party or is subject or is otherwise bound, and no event
has occurred which, with the giving of notice or the passage of time or both,
would constitute such default or breach, where such default or breach would have
a material adverse effect on the financial condition, results of operations, or
business of the Bank. Except for loans of the Bank in default on July 30,
1998, no party with whom the Bank has an agreement which is material to the
financial condition, results of operations or business of the Bank is in default
thereunder.
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4.11 EMPLOYEES.
(a) Except as set forth in Exhibit 4.11(a), there are no
understandings for the employment of any officer or employee of the Bank which
are not terminable by the Bank without liability on not more than 30 days'
notice. Except as set forth in Exhibit 4.11(a), the Bank is not a party to an
oral or written consultant agreement not terminable upon 60 days' or less notice
or involving the payment of more than $10,000 per annum. Except as set forth in
Exhibit 4.11(a), there are no material controversies pending or threatened
between the Bank and any of its employees. Except as disclosed in the Audited
Bank Financial Statements, the Unaudited Bank Financial Statement or in Exhibit
4.11(a), all material sums due for employee compensation and benefits have been
duly and adequately paid or provided, and all deferred compensation obligations
are fully funded. The Bank is not a party to any collective bargaining
agreement with respect to any of its employees or any labor organization to
which its employees or any of them belong. Except as set forth in Exhibit
4.11(a), no director, officer or employee of the Bank is entitled to receive any
payment of any amount under any employment agreement, severance plan or other
benefit plan as a result of the consummation of any transaction contemplated by
this Agreement.
(b) Except as disclosed in Exhibit 4.11(b), (i) the Bank is and
has been in material compliance with all applicable laws respecting employment
and employment practices, terms and conditions of employment and wages and
hours, including, without limitation, any such laws respecting employment
discrimination and occupational safety and health requirements, and in any
unfair labor practice; (ii) there is no material unfair labor practice complaint
against the Bank pending or, to the knowledge of the Bank, threatened before the
National Labor Relations Board; (iii) there is no labor dispute, strike,
slowdown or stoppage actually pending or, to the knowledge of the Bank,
threatened against or directly affecting the Bank; and (iv) the Bank has not
experienced any material work stoppage or other material labor difficulty during
the past five years, except in each case which would not result in a Material
Adverse Change.
(c) Except as disclosed in Exhibit 4.11(c), the Bank does not
maintain, contribute to or participate in or have any material liability under
any employee benefit plans, as defined in ERISA, or any nonqualified employee
benefit plans or deferred compensation, bonus, stock or incentive plans, or
other employee benefit or fringe benefit programs for the benefit of former or
current employees of the Bank (the "Employee Plans"). To the best knowledge of
the Bank, no present or former employee of the Bank has been charged with
breaching nor has breached a fiduciary duty under any of the Employee Plans.
The Bank does not participate in, nor has it in the past five years participated
in, nor has it any present or future obligation or liability under, any
multiemployer plan (as defined at Section 3(37) of ERISA). Except as may be
separately disclosed in Exhibit 4.11(c), the Bank does not maintain, contribute
to, or participate in, any plan that provides health, major medical, disability
or life insurance benefits to former employees of the Bank.
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(d) Exhibit 4.11 (d) sets forth and describes all Employee Plans
in which the Bank participates, or by which it is bound, including, without
limitation; (i) any profit sharing, deferred compensation, bonus, stock option,
stock purchase, pension, retainer, consulting, retirement, welfare or incentive
plan or agreement whether legally binding or not; (ii) any plan providing for
"fringe benefits" to its employees, including but not limited to vacation, sick
leave, medical, hospitalization, life insurance and other insurance plans, and
related benefits; (iii) any written employment agreement and any other
employment agreement not terminable at will; or (iv) any other "employee benefit
plan" (within the meaning of Section 3(3) of ERISA) (collectively, the "Employee
Plans"). Except as set forth in Exhibit 4.11(d)(i), there are no negotiations,
demands or proposals that are pending or threatened that concern matters now
covered, or that would be covered, by any employment agreements or Employee Plan
other than amendments to plans qualified under Section 401 of the Code that are
required by the Tax Reform Act of 1986 and later legislation; (ii) the Bank is
in compliance with the material reporting and disclosure requirements of Part 1
of Subtitle IB of ERISA and the corresponding provisions of the Code to the
extent applicable to all such Employee Plans; (iii) the Bank has substantially
performed all of its obligations under all such Employee Plans and employment
agreements required to be performed heretofore; and (iv) there are no actions,
suits or claims (other than routine claims for benefits) pending or, to the best
knowledge of the Bank, threatened against any such Employee Plans and employment
agreements or the assets of such plans, and to the best knowledge of the Bank,
no facts exist which could give rise to any actions, suits or claims (other than
routine claims for benefits) against such plans or the assets of such plans.
(e) The "Employee Plans" (within the meaning of Section 3(2) of
ERISA) described on Exhibit 4.11(d) have been duly authorized by the Board of
Directors of the Bank. Except as set forth in Exhibit 4.11(d), each such plan
and associated trust intended to be qualified under Section 401(a) and to be
exempt from tax under Section 501(a) of the Code, respectively, has either
received a favorable determination letter from the Internal Revenue Service (the
"IRS"), has applied for such a determination letter or will apply for such a
determination letter before the expiration of the remedial amendment period set
forth in Section 401(b) of the Code, as the IRS may extend such period, and to
the best knowledge of the Bank, no event has occurred that will or could give
rise to disqualification of any such plan which is intended to be qualified
under Section 401(a) of the Code or loss of the exemption from tax of any such
trust which is intended to be exempt from tax under Section 501(a) of the Code.
No event has occurred that will or could subject any such plans to tax under
Section 511 of the Code. None of such plans has engaged in a merger or
consolidation with any other plan or transferred assets or liabilities from any
other plan. To the best of the Bank's knowledge, no prohibited transaction
(within the meaning of Section 409 or 502(i) of ERISA or Section 4975 of the
Code) or party-in-interest transaction (within the meaning of Section 406 of
ERISA) has occurred with respect to any of such plans which could subject the
Bank to an excise tax or penalty. To the best knowledge of the Bank, no employee
of the Bank has
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engaged in any transactions which could subject the Bank to indemnify such
person against liability. All costs of plans have been provided for on the
basis of consistent methods in accordance with sound actuarial assumptions
and practices. No Employee Plan has incurred any "accumulated funding
deficiency" (as defined in Section 302(2) of ERISA), whether or not waived,
taking into account contributions made within the period described in Section
412(c)(10) of the Code; nor are there any unfunded amounts under any Employee
Plan which is required to be funded under Part 3 of Subtitle IB of ERISA and
Section 412 of the Code); nor has the Bank failed to make any contributions
or pay any amount due and owing as required by law or the terms of any
Employee Plan or employment agreement. Subject to amendments that are
required by the Tax Reform Act of 1986 and later legislation, since the last
valuation date for each Employee Plan, there has been no amendment or change
to such plan that would increase the amount of benefits thereunder.
(f) The Bank does not sponsor or participate in, or has not
sponsored or participated in, any employee benefit pension plan to which Section
4021 of ERISA applies that would create a liability under Title IV of ERISA.
(g) The Bank does not sponsor or participate in, or has not
sponsored or participated in, any Employee Plan that is a "multi-employer plan"
(within the meaning of Section 3(37) of ERISA) that would subject such Person to
any liability with respect to any such plan.
(h) All group health plans of the Bank (including any plans of
Affiliates of the Bank that must be taken into account under Section 162(i) or
(k) of the Code as in effect immediately prior to the Technical and
Miscellaneous Revenue Act of 1988 and Section 4980B of the Code) have been
operated in compliance with the group health plan continuation coverage
requirements of Section 4980B of the Code to the extent such requirements are
applicable.
(i) There have been no acts or omissions by the Bank that have
given rise to or may give rise to fines, penalties, taxes, or related charges
under Sections 502(c) or (i) or 4071 of ERISA or Chapter 43 of the Code which
could be imposed on the Bank.
(j) Except as described in Section 4.11(j), the Bank does not
maintain any Employee Plan or employment agreement pursuant to which any
Employee Plan or other payment will be required to be made by the Bank or
pursuant to which any other benefit will accrue or vest in any director, officer
or employee the Bank, in either case as a result of the consummation of the
transactions contemplated by the Agreement.
(k) No "reportable event," as defined in ERISA, has occurred with
respect to any of the Employee Plans.
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(l) All amendments required to bring each of the employee benefit
plans into conformity with all of the provisions of ERISA and the Code and all
other applicable laws, rules and regulations have been made, or will be made
before the expiration of the remedial amendment period set forth under Section
401(b) of the Code, as such period may be extended by the IRS.
(m) Exhibit 4.11(m) sets forth the name of each director, officer,
employee, agent or representative of the Bank and every other person entitled to
receive any benefit or any payment of any amount under any existing employment
agreement, severance plan or other benefit plan or Understanding as defined in
Section 4.12 as a result of the consummation of any transaction contemplated in
this Agreement, and with respect to each such person, the nature of such benefit
or the amount of such payment, the event triggering the benefit or payment, and
the date of, and parties to, such employment agreement, severance or other
benefit plan or Understanding. The Bank has furnished the Company with true and
correct copies of all documents with respect to the plans and agreements
referred to in Exhibit 4.11(d) delivered as of July 30, 1998, including all
amendments and supplements thereto, and all related summary plan descriptions.
For each of the employee pension benefit plans of the Bank referred to in
Exhibit 4.11(d) delivered as of July 30, 1998, the Bank has furnished the
Company with true and correct copies of (i) the Form 5500 which was filed in
each of the three most recent plan years, including without limitation, all
schedules thereto and all financial statements with attached opinions of
independent accountants to the extent required; (ii) the most recent
determination letter from the IRS; (iii) the statement of assets and liabilities
as of the most recent valuation date; and (iv) the statement of changes in fund
balance and in financial position or the statement of changes in net assets
available for benefits under each of said plans for the most recently ended plan
year. The documents referred to in subdivisions (iii) and (iv) fairly present
the financial condition of each of said plans as of and at such dates and the
results of operations of each of said plans, all in accordance with GAAP or on
the cash method of accounting applied on a consistent basis.
4.12 CONTRACTS AND AGREEMENTS. Except as listed in Exhibit 4.12,
the Bank is not a party to any oral or written agreement, commitment, or
obligation (hereinafter referred to as an "Understanding") which individually,
or with all other similar Understandings relating to the same or similar subject
matter, falls within any of the following classifications (hereinafter referred
to as a "Material Contract"):
(i) any Understanding dealing with advertising, brokerage,
licensing, dealership, representative or agency relationship;
(ii) any Understanding with any labor or collective
bargaining organization or association;
(iii) any mortgage, pledge, conditional sales contract,
security agreement, or any other similar Understanding with respect to any real
or personal
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property in an amount in excess of $25,000, under which the Bank is a debtor
or to which any of its property is subject;
(iv) any profit sharing, group insurance, bonus, deferred
compensation, stock option, severance pay, pension, retirement, or any other
similar Understanding which might provide benefits to the employees, officers or
directors of the Bank;
(v) any Understanding for the future purchase of
materials, supplies, services, merchandise or equipment, the price of which
exceeds $10,000 and which will not be terminable without liability as to future
purchases as of the Effective Time; it being understood that materials,
supplies, service, merchandise or equipment shall not be deemed to include
loans, repurchase or reverse repurchase agreements, securities or other
financial transactions incurred by the Bank in the ordinary course of its
banking business;
(vi) any Understanding for the sale of any of its assets,
or for the grant of any right to purchase any of its assets, properties or
rights, or which requires the consent of any third party to the transfer and
assignment of any of its assets, properties or rights; it being understood that
the foregoing shall not be deemed to include any Understanding for the sale of
mortgage loans, repurchase or reverse repurchase agreements, securities or other
financial transactions incurred by the Bank in the ordinary course of its
banking business;
(vii) any guarantee, subordination or other similar or
related types of Understanding except where the Bank is a beneficiary;
(viii) any Understanding for the borrowing of any money by
the Bank (other than time savings or demand deposits) or for a line of credit to
it;
(ix) any Understanding for any one capital expenditure or
series of related capital expenditures in excess of $5,000 individually or
$10,000 in the aggregate;
(x) any real property lease, whether as lessor or lessee;
or any personal property lease, whether as lessor or lessee, involving payments
in excess of $500 per month;
(xi) any Understanding to make or participate in a loan
(not yet fully disbursed or funded) to any borrower or related group of
borrowers, which undisbursed or unfunded amount would exceed $50,000 unsecured
or $100,000 secured, except government agency guaranteed loans, which are
covered herein only if the unguaranteed portion would exceed $250,000;
(xii) any Understanding of any kind (other than contracts
relating to demand or time deposits or otherwise made in the ordinary course of
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business) with any director or officer of the Bank or with any member of the
immediate family of any such director of officer or with any partnership,
corporation, associate or entity of which any such person is an Affiliate;
(xiii) any Understanding for insurance of any type described
in Section 4.13 below; or
(xiv) any Understanding, the purpose or effect of which
could encompass (a) merging with any person or bank or bank holding company
other than with the Company (b) the selling of any of its assets (except in the
ordinary course of business) or stock to any person, (c) recommending to any of
its shareholders that their Bank Stock be sold to any person or bank other than
the Company, or causing any other person to make such recommendations or
acquiescing in any such recommendations made by any other person, or (d) in any
other way transferring, directly or indirectly, control of the Bank.
Except as stated in Exhibit 4.12, true and correct copies of all
documents relating to the foregoing Understandings have been delivered by the
Bank prior to July 30, 1998 .
As used in this Section 4.12, "immediate family" of a person shall
mean his or her spouse, parents, children, and siblings.
4.13 INSURANCE. The Bank has and at all times within three years
of July 30, 1998 has had, in full force and effect policies of insurance and
bonds (including without limitation Bankers' blanket bond, fidelity coverage,
director and officer liability, fire, third party liability, use and occupancy)
with respect to its assets and business and against such casualties and
contingencies and of such amounts, types and forms which are customary in the
banking industry and are adequate or appropriate to cover its assets and
businesses as set forth in Exhibit 4.13. Set forth in Exhibit 4.13 is a
schedule of all policies of insurance (other than employee benefit, title or
credit insurance) carried and owned by the Bank, showing the name of the
insurance or bonding company, a summary of the coverage, the amounts, the
deductible features, the annual premiums and the expiration dates. If any such
policy or bond is materially changed, terminated or modified following July 30,
1998 , such termination, change or modification shall be promptly disclosed to
the Company in writing. The Bank is not in default under any such policy of
insurance or bond such that it could be canceled, and all material claims
thereunder have been filed in a timely fashion. The Bank has filed claims with
or given notice of claim to its insurers or bonding companies with respect to
all material matters and occurrences for which it believes it has coverage, in
excess of the applicable deductible.
4.14 BROKERS. Except as indicated in Exhibit 4.14, no agent,
broker, investment banker, person or firm acting on behalf or under authority of
the Bank (except for any payments for fairness opinions as required in Section
10.9) is or will be entitled to any broker's or finder's fee or any other
commission or similar fee
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directly or indirectly in connection with any of the transactions
contemplated by this Agreement.
4.15 AUTHORIZATION. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of the Bank. Assuming due and proper
execution and delivery of this Agreement by the Company, this Agreement
constitutes a legal, valid and binding agreement of the Bank in accordance with
its respective terms, except as the enforceability hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of
general application relating to or affecting enforcement of creditors rights and
the application of equitable principles in any action, legal or equitable, and
by Section 8(b) 6(D) of the Federal Deposit Insurance Act, 12 U.S.C. Section
1818(b)(6)(D). Subject to obtaining the requisite approval of this Agreement by
the shareholders of the Bank, the Bank has full corporate power and authority to
perform its obligations under this Agreement and the transactions contemplated
hereby.
4.16 NO CONFLICTS; DEFAULTS. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, and compliance by the Bank with any
provision hereof and thereof will not (a) conflict with or result in a breach
of, or default or loss of any benefit under, any provision of its Charter
Documents or, except as set forth in Exhibit 4.16 any material agreement,
instrument or obligation to which it is a party or by which the property of the
Bank is bound or give any other party to any such agreement, instrument or
obligation the right to terminate or modify any term thereof; (b) except for the
prior approval of the FRB, Commissioner, any other required Governmental Entity
and as set forth in Exhibit 4.16, require any Consents; or (c) result in the
creation or imposition of any Encumbrance on any of the properties or assets of
the Bank; or (d) violate the Charter Documents or any Rules to which the Bank is
subject.
4.17 MATERIAL ADVERSE CHANGES. Except as specifically required,
permitted or effected by this Agreement, and except as set forth on Exhibit
4.17, since December 31, 1997 there has not been, occurred or arisen any of the
following (whether or not in the ordinary course of business unless otherwise
indicated) ("Material Adverse Changes"):
(a) Any materially adverse change in any of the assets,
liabilities, permits, methods of accounting or accounting practice, or manner of
conducting business, of the Bank or any other event or development that has had
or may reasonably be expected, when taken as a whole, to have a material adverse
effect on the assets, liabilities, Permits, business, financial condition, or
results of operations of the Bank or which should be disclosed in order to make
the Audited Bank Financial Statements not misleading;
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(b) Any damage, destruction or other casualty loss (whether or not
covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, business, financial
condition, or results of operations of the Bank or that may involve a loss of
more than $50,000 in excess of applicable insurance coverage;
(c) Any amendment, modification or termination of any existing, or
entry into any new Material Contract or Permit that has had or may reasonably be
expected to have a material adverse effect on the assets, liabilities, business,
financial condition, or results of operations of the Bank;
(d) Any disposition by the Bank of an asset the lack of which has
had or may reasonably be expected to have a material adverse effect on the
business, financial condition, or results of operations of the Bank;
(e) Any direct or indirect redemption, purchase or other
acquisition by the Bank of any Equity Securities or any declaration, setting
aside or payment of any dividend or other distribution on or in respect of Bank
Stock whether consisting of money, other personal property, real property or
other things of value;
(f) Any changes by the Bank in accounting principles or methods or
tax methods, except as required or permitted by, the Financial Accounting
Standards Board or by any Governmental Entity having jurisdiction over the Bank;
(g) A reduction in the Bank's CAMELS rating;
(h) A reduction in the Bank's CRA rating to less than
satisfactory;
(i) A reduction in shareholders' equity to less than 100% of the
Bank's shareholders' equity at December 31, 1997 as determined in accordance
with GAAP or RAP; and/or a material reduction in the Bank's projected earnings
except as to the transaction expenses related to this Agreement, as reduced for
any cash dividends as authorized by Section 6.2(vii);
(j) Any event of which the Bank obtains knowledge which may
materially and adversely affect the business, financial condition, results of
operations or prospects of the Bank; or
(k) Any event, development or circumstance that, to the best
knowledge of the Bank, will or, with the passage of time or the giving of notice
or both, is reasonably expected to result in the loss to the Bank of the
services of any Executive Officers of the Bank.
4.18 REPORTS AND FILINGS. Since January 1, 1995, the Bank has
filed all reports, returns, registrations and statements (such reports and
filings referred to as "Bank Filings"), together with any amendments required
to be made with respect
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thereto, that were required to be filed with (a) the FDIC, (b) the
Commissioner and (c) any other applicable Governmental Entity, including
taxing authorities, except where the failure to file such reports, returns,
registrations and statements has not had and is not reasonably expected to
have a material adverse effect on the business, financial condition, or
results of operations of the Bank. No administrative actions have been taken
or orders issued in connection with such Bank Filings. As of their respective
dates, each of such Bank Filings complied in all material respects with all
Rules enforced or promulgated by the Governmental Entity with which it was
filed (or was amended so as to be so promptly following discovery of any such
noncompliance). Any financial statement contained in any of such Bank
Filings that was intended to present the financial position of Bank fairly
and was prepared in accordance with GAAP or RAP consistently applied, except
as stated therein, during the periods involved. The Bank has furnished the
Company with true and correct copies of all Bank Filings filed by the Bank
since January 1, 1995.
4.19 INFORMATION REGARDING LOANS. The Bank has provided the
Company access to all of the information in its possession concerning its loans,
and such information was true and correct in all material respects as of the
date access was provided. Except as may be disclosed in Exhibit 4.19, (i) all
loans and discounts shown on the Audited Bank Financial Statements at December
31, 1997 or which were entered into after December 31, 1997, but before the
Closing Date, were and will be made in all material respects for good, valuable
and adequate consideration in the ordinary course of the business of the Bank,
in accordance in all material respects with the Bank's lending practices, and
are not subject to any material known defenses, setoffs or counterclaims,
including without limitation any such as are afforded by usury or truth in
lending laws, except as may be provided by bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
enforcement of creditor rights and the application of equitable principles in
any action, legal or equitable; (ii) the notes or other evidences of
indebtedness evidencing such loans and all forms of pledges, mortgages and other
collateral documents and security agreements constituting the Bank's loan
portfolio, taken as a whole, are and will be, in all material respects,
enforceable except as the enforceability hereof and thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of
general application relating to or affecting enforcement of creditors rights and
the application of equitable principles; and (iii) the Bank has complied in all
material respects, and will prior to the Closing Date comply with all laws and
regulations relating to such loans, or to the extent there has not been such
compliance, such failure to comply will not materially interfere with the
collection of any such loan. All loans and loan commitments extended by the
Bank and any extensions, renewals or continuations of such loans and loan
commitments that are on the Bank's books were made in accordance with customary
lending standards of the Bank in the ordinary course of business. Such loans
are evidenced by documentation based upon customary and ordinary past practices
of the Bank. Prior to the date hereof, the Bank has provided the Company with a
schedule which sets forth a description as of June 30, 1998 (a) by type and
classification, if any, of each loan, lease other extension of credit and
commitment to extend credit; (b) by type
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and classification, if any, of all loans, leases, other extensions of credit
and commitments to extend credit that have been classified by any
Governmental Entity or auditors (external or internal) as "Watch List,"
"Substandard," "Doubtful," "Loss" or any comparable classification; and (c)
all consumer loans as to which any payment of principal, interest or other
amount is 90 days or more past due.
(b) The allowance for loan and lease losses for the Bank is
adequate and substantially in accordance with GAAP and RAP.
4.20 COMPLIANCE WITH CRA To the best knowledge of the Bank, the
Bank's compliance under the CRA should not constitute grounds for either the
denial by any Governmental Entity of any application to consummate the
transactions contemplated by this Agreement or the imposition of a materially
burdensome condition in connection with the approval of any such application.
4.21 CERTAIN INTERESTS. Except as described in Exhibit 4.12(xii),
Exhibit 4.21 sets forth a description of each instance in which an officer or
director of the Bank (a) has any material interest in any property, real or
personal, tangible or intangible, used by or in connection with the business of
the Bank; (b) is indebted to the Bank except for normal business expense
advances; or (c) is a creditor (other than as a Deposit holder) of the Bank
except for amounts due under normal salary and related benefits or reimbursement
of ordinary business expenses. Except as set forth in Exhibit 4.21, all such
arrangements are arm's length transactions pursuant to normal commercial terms
and conditions.
4.22 BRANCHES. Exhibit 4.22 hereto sets forth the common name and
location of each office of the Bank, an indication of whether such office is a
branch, service center, or other place of business, whether such premises are
owned or leased, the basic terms of such leases, the common name and location of
each approved but unopened office, and a description of each application for
additional offices of the Bank, and the status of each such application. The
Bank has received appropriate and effective permits and governmental authority
where any Permit, approval or notice was required by law or regulation prior to
the establishment and operation of each such office now in operation. Except
for the offices described on Exhibit 4.22, the Bank does not operate or conduct
business out of any other location and the Bank does not have any current
application for, and the Bank has not received permission to open, any other
branch or to operate out of any other location.
4.23 UNDISCLOSED LIABILITY. The Bank has no liabilities or
obligations, either accrued or contingent, which are in excess of Ten Thousand
Dollars ($10,000) individually or in the aggregate, which have not been:
(i) reflected or disclosed in the Audited Bank Financial
Statements or Unaudited Bank Financial Statements;
(ii) incurred subsequent to December 31, 1997, in the
ordinary
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course of business; or
(iii) disclosed on Exhibit 4.23 or any other exhibit to this
Agreement.
To the best of the Bank's knowledge and the knowledge of their
officers and directors, after due investigation, there is no basis for the
assertion against the Bank of any liability, obligation or claim that is
likely to result in or cause any material adverse change in the business or
financial condition of the Bank, taken as a whole, which is not fairly
reflected in the Audited Bank Financial Statements, the Unaudited Bank
Financial Statements or otherwise disclosed on Exhibit 4.23 hereto.
4.24 ACCURACY OF INFORMATION FURNISHED. Except as to any
statements or information which shall include projections or forecasts, none
of the statements or information made or contained in any of the covenants,
representations or warranties of the Bank set forth in this Agreement or in
any of the schedules, exhibits, lists, certificates or other documents
furnished herewith taken as a whole contains any untrue statement of a
material fact required to be stated herein or therein or necessary to make
the statements or information contained herein or therein, in light of the
circumstances in which they were made, not misleading. As to any such
information or statements which include projections or forecast, such
information or statements are based upon assumptions believed by the Bank to
be reasonable.
4.25 ENVIRONMENTAL LAWS. Except as may be disclosed in Exhibit
4.25, to the best of the Bank's knowledge (and without conducting any site
investigation or other analysis for the purpose of making this representation),
neither the conduct nor operation of the Bank nor any condition of any Real
Property presently or previously owned, leased or operated by the Bank violates
or violated Environmental Laws in any respect material to the business of Bank
taken as a whole and no condition or event has occurred with respect to the Bank
or any Real Property that, with notice or the passage of time, or both, would
constitute a violation material to the business of the Bank taken as a whole of
Environmental Laws or obligate (or potentially obligate) the Bank to remedy,
stabilize, neutralize or otherwise alter the environmental condition of any such
Real Property where the aggregate cost of such actions would be material to the
Bank taken as a whole. Except as may be disclosed in Exhibit 4.25, the Bank has
not received any notice from any person or entity that the Bank or the operation
or condition of any Real Property ever owned, leased or operated by the Bank is
or was in violation of any Environmental Laws or that the Bank is responsible
(or potentially responsible) for remedying, or the cleanup of, any pollutants,
contaminants, or hazardous or toxic wastes, substances or materials at, on or
beneath any such Real Property.
4.26 COMMISSIONER AND FDIC EXAMINATIONS. (a) The Commissioner has
completed an examination of the Bank as of December 31, 1997, and (i) the
Commissioner believes the Bank's allowance for loan losses is adequate and the
Commissioner required no material adjustments, and (ii) the Bank's CAMELS rating
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did not adversely change and the Bank's financial condition is deemed by the
Commissioner to be less than satisfactory; however, the Bank has made all
necessary adjustments and has followed the recommendations of the Commissioner.
(b) The FDIC has completed an examination of the Bank as of
December 31, 1997, and (i) the FDIC believes the Bank's allowance for loan
losses is adequate and the FDIC required no material adjustments, and (ii) the
Bank's CAMELS rating did not adversely change and the Bank's financial condition
is deemed by the FDIC to be less than satisfactory; however, the Bank has made
all necessary adjustments and has followed the recommendations of the FDIC.
(c) The FDIC has completed an examination of the Bank for
compliance with Year 2000 safety and soundness issues as of June 9, 1998, and
the FDIC has rated the Bank "needs to improve" regarding the Bank's progress in
addressing Year 2000 Safety and Soundness Progress Standards established by the
FDIC.
4.27 INSIDER LOANS; OTHER TRANSACTIONS. The Bank has previously
provided the Company with a listing, current as of November 30, 1998, of all
extensions of credit made to the Bank and each of its Executive Officers and
directors and their related interests (all as defined under Federal Reserve
Board Regulation "O"), all of which have been made in compliance with Regulation
O, which listing is true, correct and complete in all material respects. The
Bank does not owe any amount to, nor does it have any contract or lease with or
commitment to, any of the present Executive Officers or directors of the Bank
(other than for compensation for current services not yet due and payable, and
reimbursement of expenses arising in the ordinary course of business).
4.28 DERIVATIVE TRANSACTIONS. The Bank is not a party to a
transaction in or involving forwards, futures, options on futures, swaps or
other derivative instruments.
4.29 TRUST ADMINISTRATION. The Bank presently does not exercise
trust powers, including, but not limited to, trust administration, and has not
exercised such trust powers for a period of at least 3 years prior to the date
hereof. The term "trusts" as used in this Section 4.29 includes (i) any and all
common law or other trusts between an individual, corporation or other entities
and the Bank, as trustee or co-trustee, including, without limitation, pension
or other qualified or nonqualified employee benefit plans, compensation,
testamentary, intervivos, and charitable trust indentures; (ii) any and all
decedents' estates where the Bank is serving or has served as a co-executor or
sole executor, personal representative or administrator, administrator de bonis
non, administrator de bonis non with will annexed, or in any similar fiduciary
capacity; (iii) any and all guardianships, conservatorships or similar positions
where the Bank is serving or has served as a co-grantor or a sole grantor or a
conservator or a co-conservator of the estate, or any similar fiduciary
capacity; and (iv) any and all agency and/or custodial accounts and/or similar
arrangements,
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including plan administrator for employee benefit accounts, under which the
Bank is serving or has served as an agent or custodian for the owner or other
party establishing the account with or without investment authority.
4.30 STATEMENTS TRUE AND CORRECT. None of the information supplied
or to be supplied by the Bank for inclusion in the S-1, the S-4 or the Proxy
Statement, or incorporated by reference therein, or any other document to be
filed with any Governmental Entity in connection with the transactions
contemplated hereby will, in the case of the S-1, the S-4 and the Proxy
Statement, when it is first mailed to the shareholders of the Bank, contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in light of the circumstances
under which such statements are made, not misleading or, in the case of the S-1
and the S-4, when it becomes effective, be false or misleading with respect to
any material fact, or omit to state any material fact necessary in order to make
the statements therein not misleading, or, in the case of the S-1, the S-4 and
Proxy Statement or any amendment thereof or supplement thereto, at the time of
the meeting of shareholders of the Bank, be false or misleading with respect to
any material fact or omit to state any material fact necessary to correct any
statement or remedy any omission in any earlier communication with respect to
the solicitation of any proxy for the Bank shareholders' meeting.
4.31 ACCURATE DISCLOSURE. The Bank agrees that through the
Effective Time of the Merger, each of its reports, and other filings required to
be filed with any applicable Governmental Entity will comply in all material
respects with all of the applicable statutes, Rules and regulations enforced or
promulgated by the Governmental Entity with which it will be filed and none will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they will be made, not misleading. Any
financial statement contained in any such report, or other filing that is
intended to present the financial position of the Bank, will fairly present the
financial position of the Bank in all material respects and will be prepared in
accordance with GAAP or RAP consistently applied during the periods involved.
Notwithstanding anything to the contrary set forth in this Section 4.31, the
Bank makes no representation or warranty with respect to any information
supplied by the Company, or contained in any of the Company's Reports.
4.32 YEAR 2000. The Bank has formed a Year 2000 management
committee to identify potential problems associated with the Year 2000 issues
and to develop resolution to any problems. The Bank is making satisfactory
progress toward compliance with Year 2000 safety and soundness issues affecting
the Bank's existing computer systems, and any related vendor or customer system.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Bank as follows:
5.1 ORGANIZATION AND GOOD STANDING. The Company is a California
corporation duly organized and validly existing in good standing under the laws
of the State of California, is proposed to be registered with the FRB to become
a bank holding company and it has the corporate power and authority to carry on
its business as presently conducted. The Company has all requisite corporate
power and authority to own, lease and operate its properties and assets and to
carry on its business as presently conducted. The nature of its operations and
the business transacted by it as of the date hereof make licensing and
qualification in any other state or jurisdiction unnecessary. The Company has
delivered to the Bank true and correct copies of its Articles of Incorporation
and Bylaws, as amended and in effect as of the date hereof.
5.2 CAPITALIZATION. The authorized capital stock of the Company
consists of 100,000,000 shares of Common Stock, no par value, of which 10,000
shares are outstanding on the date hereof, all validly issued, fully paid and
nonassessable, and 100,000,000 shares of Preferred Stock, none of which are
outstanding. Except as provided in Exhibit 5.2, no unissued shares of Company
Stock or any other securities of the Company are subject to any warrants,
options, rights or commitments of any character, kind or nature and the Company
is not obligated to issue or repurchase any shares of Company Stock or any other
security to or from any person except in accordance with the terms of the
proposed Company Stock Option Plan and Agreements pursuant thereto. Exhibit 5.2
sets forth the name of each holder of a Company stock option, the number of
shares of Company Stock covered by each such holder's option, the date of grant
of each such holder's option, the exercise price per share, the vesting schedule
for each such holder's option and the expiration date of each such holder's
option.
5.3 SUBSIDIARIES. The Company does not own, directly or
indirectly (except as pledgee pursuant to loans which are not in default), any
equity position or other voting interest in any corporation, partnership, joint
venture or other entity.
5.4 FINANCIAL STATEMENTS. The Company has delivered, or will
deliver when available, to the Bank copies of the unaudited Statements of
Financial Condition of the Company as of December 31, 1997 and September 30,
1998 (the "Company Financial Statements"). The Company Financial Statements: (i)
present fairly the financial condition and results of operations of the Company
as of and for the dates or periods covered thereby in accordance with GAAP
consistently applied throughout the periods involved; (ii) are based on the
books and records of the Company; (iii) contain and reflect reserves for all
material accrued liabilities and for all reasonably anticipated losses, and set
forth adequate reserves loan losses and other
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contingencies to the extent required by GAAP; and (iv) none of the Company
Financial Statements contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements contained
therein not misleading under GAAP. The books and records of the Company have
been, and are being, maintained in all material respects in accordance with
GAAP and other applicable legal and accounting requirements and reflect any
actual transactions. Since the Company was recently incorporated, there are
no audited financial statements of the Company for December 31, 1997 or
previous years.
5.5 BOOKS AND RECORDS.
(a) The minute books of the Company which have been made available
to the Bank contain (i) true, accurate and complete records of all meetings and
actions taken by the Board of Directors, Board committees and shareholders of
the Company, and (ii) true and complete copies of its Charter Documents.
(b) The Company has records which accurately and validly reflect,
in all material respects, its transactions and accounting controls sufficient to
insure that such transactions are (i) in all material respects, executed in
accordance with management's general or specific authorization, and (ii)
recorded in conformity with GAAP; such records, to the extent they contain
important information pertaining to the Company which is not easily and readily
available elsewhere, have been duplicated, and such duplicates are stored safely
and securely pursuant to procedures and techniques reasonably adequate for
companies of the size of the Company and in the businesses in which the Company
is engaged; and the data processing equipment and software used by the Company
in the operation of its businesses (including any disaster recovery facility) to
generate and retrieve such records are reasonably adequate for companies of the
size of the Company and in the businesses in which the Company is engaged.
5.6 PROPERTY AND ASSETS. (a) Exhibit 5.6(a) sets forth a general
description (including the character of the ownership of the Company) of all
real property of the Company, including fees, leaseholds and all other interest
in real property (including real property that is DPC Property) ("Real
Property"). Except as set forth on Exhibit 5.6(a), (i) the Company has good and
marketable title, free and clear of any encumbrance, lien or charge of any kind
or nature (except liens for taxes not yet due) to all of the property, real,
mixed or intangible, reflected on the Company's Financial Statements as of
December 31, 1997, except as reflected therein or in the notes thereto (except
property sold or transferred or Encumbrances incurred in the ordinary course of
business since the date thereof except (a) Encumbrances in the aggregate which
do not materially detract from the value, interfere with the use, or restrict
the sale, transfer or disposition, of such properties and assets or otherwise
materially and adversely affect the Company; (b) any lien for taxes not yet due;
and (c) any Encumbrances arising under the document that created the interest in
the real property (other than Encumbrances arising as a result of any breach or
default of the Company); (ii) all leasehold interests for real property and any
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material personal property used by the Company in its business are held
pursuant to lease agreements which are valid and enforceable, except as the
enforceability hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other laws of general application relating to
or affecting enforcement of creditors rights and the application of equitable
principles in any action, legal or equitable in accordance with their terms;
(iii) all such properties comply in all material respects with all applicable
private agreements, zoning requirements and other governmental laws and
regulations relating thereto and there are no condemnation proceedings
pending or, to the knowledge of the Company, threatened with respect to such
properties; (iv) the Company has valid title or other ownership rights under
licenses to all material intangible personal or intellectual property used by
the Company in its business, free and clear of any claim, defense or right of
any other person or entity which is material to such property, subject only
to rights of the licensors pursuant to applicable license agreements, which
rights do not materially adversely interfere with the use of such property;
and (v) all material insurable properties owned or held by the Company are
adequately insured in such amounts and against such risks as is customary with
banks of similar size. The Company has furnished the Bank with true and
correct copies of all leases included on Exhibit 5.6(a) delivered as of July
30, 1998, all title insurance policies relating to the Real Property and all
documents evidencing recordation of all recordable interest in the Real
Property.
(b) CONDITION OF PROPERTIES. All tangible properties of the
Company that are material to the business, financial condition, or results of
operations of the Company are in a good state of maintenance and repair, except
for ordinary wear and tear, and are adequate for the conduct of the business of
the Company as presently conducted. Except as set forth in Exhibit 5.6(b), (i)
the execution of this Agreement, the performance of the obligations of the
Company hereunder and the consummation of the transactions contemplated herein,
including the Merger, does not conflict with and will not result in a breach or
default under any lease, agreement or contract described in Exhibit 5.6(b), or
give any other party thereto a right to terminate or modify any term thereof;
(ii) the Company has no obligation to improve any Real Property; (iii) each
lease and agreement under which the Company is a lessor is in full force and
effect and is a valid and legally binding obligation of the Company, and, to the
best knowledge of the Company, each other party thereto; and (iv) the Company,
and to the best knowledge of the Company, each other party to any such lease or
agreement have performed in all material respects all the obligations required
to be performed by them to date under such lease or agreement and are not in
default in any material respect under any such lease or agreement and there is,
to the best knowledge of the Company, no pending or threatened proceeding, or
proceeding which the Company has reason to believe may be threatened, with
respect to such property or any such lease.
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5.7 LITIGATION PROCEEDINGS AND AGREEMENTS WITH GOVERNMENTAL
ENTITIES.
(a) The Company is not engaged as a defendant in any legal or
other proceedings before any court, administrative agency or other Governmental
Entity except as is shown on Exhibit 5.7. Except as set forth on Exhibit 5.7,
the Company is not aware of any "threatened or pending litigation" (within the
meaning of Paragraph 5 of the American Bar Association Statement of Policy
Regarding Lawyers' Responses to Auditors' Requests for Information adopted
December 8, 1975) against the Company. The Company is not subject to any
agreement, order, writ, injunction or decree of any federal, state or local
court, out of a proceeding involving the Company or any of its business or
properties except as described in Exhibit 5.7. The Company has not been served
with notice of, nor, to best of the Company's knowledge is it currently under
investigation with respect to, any violation of federal, state or local law or
administrative regulation. Except as set forth on Exhibit 5.7, there is no (i)
outstanding judgment, order, writ, injunction or decree, stipulation or award of
any Governmental Entity or by arbitration, against, or to the knowledge of the
Company, affecting the Company or its assets or business that (a) has had or may
have a material adverse effect on the assets, liabilities, business, financial
condition or results of operations of the Company, (b) requires any payment by,
or excuses a material obligation of a third party to make any payment to, the
Company, or (c) has the effect of prohibiting any business practice of, or the
acquisition, retention or disposition of property by, the Company; or (ii)
legal, administrative, arbitration, investigatory or other proceeding pending
or, to the best knowledge of the Company that has been threatened, or which the
Company has reason to believe may be threatened, against or affecting any
director, officer, employee, agent or representative of the Company, in
connection with which any such person has or may have rights to be indemnified
by the Company.
(b) Except as set forth in Exhibit 5.7, the Company is not a party
to, or otherwise subject to, any agreement or memorandum of understanding with
or order of any Governmental Entity charged with the supervision or regulation
of bank holding companies or banks or engaged in the insurance of bank deposits,
that restricts the conduct of its business, or in any manner relates to its
capital adequacy, its credit or investment policies or its management.
5.8 PERFORMANCE OF OBLIGATIONS. Except as set forth in Exhibit
5.8, the Company has performed in all respects all of obligations required to be
performed by it to date and is not in default under or in breach of any term or
provision of any covenant, contract, lease, indenture or any other agreement to
which the Company is a party or is subject or is otherwise bound, and no event
has occurred which, with the giving of notice or the passage of time or both,
would constitute such default or breach, where such default or breach would have
a material adverse effect on the financial condition, results of operations, or
business of the Company. No party with whom the Company has an agreement which
is material to the financial condition, results of operations or business of the
Company is in default thereunder.
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5.9 BROKERS. Except as indicated in Exhibit 5.9, no agent,
broker, investment banker, person or firm acting on behalf or under authority of
the Company (except for any payments for fairness opinions as required in
Section 11.14) is or will be entitled to any broker's or finder's fee or any
other commission or similar fee directly or indirectly in connection with any of
the transactions contemplated by this Agreement.
5.10 INSURANCE. The Company has in full force and effect policies
of insurance and bonds with respect to its assets and business and against such
casualties and contingencies and of such amounts, types and forms which in the
judgment of the Company are adequate or appropriate to cover its assets and
businesses as set forth in Exhibit 5.10. Set forth in Exhibit 5.10 is a
schedule of all policies of insurance (other than title or credit insurance)
carried and owned by the Company, showing the name of the insurance or bonding
company, a summary of the coverage, the amounts, the deductible features, the
annual premiums and the expiration dates. If any such policy or bond is
changed, terminated or modified followingJuly 30, 1998, such termination, change
or modification shall be promptly disclosed to the Bank in writing. The Company
is not in default under any such policy of insurance or bond such that it could
be canceled, and all material claims thereunder have been filed in a timely
fashion. The Company has filed claims with or given notice of claim to its
insurers or bonding companies with respect to all material matters and
occurrences for which it believes it has coverage.
5.11 TAXES AND ASSESSMENTS. The Company has timely filed all
federal income and state franchise tax returns and all tax reports or returns
which it is required to file with applicable federal, state, county or local
authorities and agencies except (a) where the failure to make any such filing
would not have any materially adverse effect on the business, financial
condition or results of operations of the Company taken as a whole, and (b)
where the required filing date has been lawfully extended, and the Company has
paid all taxes provided for and to be due in such returns and reports ("Tax
Filings"). The Company's Tax Filings have never been examined by a Governmental
Entity. As of December 31, 1997, to the extent required by GAAP, the Company
had paid, or set up adequate accruals for the payment of, all taxes, penalties
and assessments for which it was liable as of such date, whether or not
disputed, with respect to any and all United Sates federal, foreign, state,
local, environmental (including under any Environmental Law) and other taxes for
the periods covered by the financial statements of the Company and for all prior
and subsequent periods. Except as set forth in Exhibit 5.11 the Company has no
knowledge of any deficiency proposed to be assessed against it. The Company has
paid all assessments made by the FDIC and the Commissioner required to be paid
prior the date hereof. There is currently no federal or state income tax audit
or investigation in process or to the best knowledge of the Company any other
pending investigation by any authorized body of the taxes paid or to be paid by
the Company, and the Company has not been informed that any such audit or
investigation is proposed.
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5.12 MATERIAL ADVERSE CHANGES. Except as specifically required,
permitted or effected by this Agreement, and except as set forth on Exhibit 5.12
since December 31, 1997 there has not been, occurred or arisen any of the
following (whether or not in the ordinary course of business unless otherwise
indicated)("Material Adverse Changes"):
(a) Any materially adverse change in any of the assets,
liabilities, permits, methods of accounting or accounting practice, or manner of
conducting business, of the Company or any other event or development that has
had or may reasonably be expected to have a material adverse effect on the
assets, liabilities, Permits, business, financial condition, or results of
operations of the Company or which should be disclosed in order to make the
Company Financial Statements not misleading;
(b) Any damage, destruction or other casualty loss (whether or not
covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, business, financial
condition, or results of operations of the Company or that may involve a loss of
more than $10,000 in excess of applicable insurance coverage;
(c) Any amendment, modification or termination of any existing, or
entry into any new, Material Contract or Permit that has had or may reasonably
be expected to have a material adverse effect on the assets, liabilities,
business, financial condition, or results of operations of the Company;
(d) Any disposition by the Company of an asset the lack of which
has had or may reasonably be expected to have a material adverse effect on the
business, financial condition, or results of operations of the Company; or
(e) Any direct or indirect redemption, purchase or other
acquisition by the Company of any Equity Securities or any declaration, setting
aside or payment of any dividend or other distribution on or in respect of the
Company Stock whether consisting of money, other personal property, real
property or other things of value.
(f) Any event of which the Company obtains knowledge which may
materially and adversely affect the business, financial condition, results of
operations or prospects of the Company.
(g) Any event, development or circumstance that, to the best
knowledge of the Company, will or, with the passage of time or the giving of
notice or both, is reasonably expected to result in the loss to the Company of
the services of any Executive Officer of the Company.
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5.13 COMPLIANCE WITH LAWS AND REGULATIONS.
(a) Except as set forth in Exhibit 5.13, the Company is not in
default under or in breach of any law, ordinance, rule, regulation, order,
judgment or decree applicable to it promulgated by any Governmental Entity
having authority over it, where such default or breach would have a material
adverse effect on its financial condition, results of operations, or business.
(b) To the best of its knowledge, the Company has conducted in all
material respects its businesses in accordance with all applicable federal,
foreign, state and local laws, regulations and orders, including without
limitation disclosure, usury, equal credit opportunity, equal employment, fair
credit reporting, antitrust, licensing and other laws, regulations and orders,
and the forms, procedures and practices used by the Company are in compliance
with such laws, regulations, and orders, except for such violations or
noncompliance as will not have a material adverse effect on the financial
condition, results of operations, or business of the Company.
5.14 AUTHORIZATION. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of the Company. Assuming due and proper
execution and delivery of this Agreement by the Bank, this Agreement constitutes
a legal, valid and binding agreement of the Company in accordance with its
respective terms, except as the enforceability hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of
general application relating to or affecting enforcement of creditors rights and
the application of equitable principles in any action, legal or equitable.
Subject to obtaining requisite approval of this Agreement by the shareholders of
the Company, if required, the Company has full corporate power and authority to
perform its obligations under this Agreement and the transactions contemplated
hereby.
5.15 NO CONFLICTS; DEFAULTS. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, and compliance by the Company with
any provision hereof will not (a) conflict with or result in a breach of, or
default or loss of any benefit under, any provision of its Charter Documents or,
except as set forth in Exhibit 5.15 any material agreement, instrument or
obligation to which it is a party or by which the property of the Company is
bound or give any other party to any such agreement, instrument or obligation
the right to terminate or modify any term thereof; (b) except for the prior
approval of the FRB, the Commissioner and any other required Governmental
Entity, and as set forth in Exhibit 5.15, require any Consents; (c) result in
the creation or imposition of any Encumbrance on any of the properties or assets
or the Company; or (d) violate the Charter Documents or any Rules to which the
Company is subject.
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5.16 REPORTS AND FILINGS. Since inception, the Company has filed
all reports, returns, registrations and statements (such reports and filings
referred to as "the Company Filings"), together with any amendments required to
be made with respect thereto, that were required to be filed with (a) the FRB,
(b) the Commissioner and (c) any other applicable Governmental Entity, including
taxing authorities, except where the failure to file such reports, returns,
registrations and statements has not had and is not reasonably expected to have
a material adverse effect on the business, financial condition, or results of
operations of the Company. No administrative actions have been taken or orders
issued in connection with the Company Filings. As of their respective dates,
each of the Company Filings complied in all material respects with all Rules
enforced or promulgated by the Governmental Entity with which it was filed (or
was amended so as to be so promptly following discovery of any such
noncompliance). Any financial statement contained in any of the Company Filings
that was intended to present the financial position of the Company fairly and
was prepared in accordance with GAAP or RAP consistently applied, except as
stated therein, during the periods involved.
5.17 ASSETS OF THE COMPANY. The assets of the Company upon the
execution of this Agreement consist of the following: (i) no material adverse
change in the Company's equity capital as of December 31, 1997; (ii) the
experienced bank holding company management services of Caswell; (iii) an
engagement agreement with experienced investment banking firms, the
Underwriters, providing for financial advisory services for the identification
of possible acquisition candidates, the negotiation of acquisition agreements
and the firm commitment underwriting of the Company Stock in the Offering in
order to accomplish the transactions (the "Engagement Agreement"), and (iv) an
agreement to employ Caswell.
5.18 UNDISCLOSED LIABILITY. The Company has no liabilities or
obligations, either accrued or contingent, which are in excess of Ten Thousand
Dollars ($10,000) individually or in the aggregate, which have not been:
(i) reflected or disclosed in the Company Financial
Statements;
(ii) incurred since inception, in the ordinary course of
business; or
(iii) disclosed on Exhibit 5.18 or any other exhibit to this
Agreement.
To the best of the Company's knowledge and the knowledge of its
officers and directors, after due investigation, there is no basis for the
assertion against the Company of any liability, obligation or claim that is
likely to result in or cause any material adverse change in the business or
financial condition of the Company, taken as a whole, which is not fairly
reflected in the Company Financial Statements, or otherwise disclosed on Exhibit
5.18 hereto.
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5.19 ACCURACY OF INFORMATION FURNISHED. Except as to any
statements or information which shall include projections or forecasts, none of
the statements or information made or contained in any of the covenants,
representations or warranties of the Company set forth in this Agreement or in
any of the schedules, exhibits, lists, certificates or other documents furnished
herewith taken as a whole contains any untrue statement of a material fact
required to be stated herein or therein or necessary to make the statements or
information contained herein or therein, in light of the circumstances in which
they were made, not misleading. As to any such information or statements which
include projections or forecast, such information or statements are based upon
assumptions believed by the Company to be reasonable.
5.20 AUTHORITY OF PCBG VALLEY CORPORATION. The execution and
delivery by PCBG Valley Corporation of the Agreement of Merger and, subject to
the requisite approval of the shareholder of PCBG Valley Corporation, the
consummation of the transactions completed thereby will be duly and validly
authorized by all necessary corporation action on the part of PCBG Valley
Corporation, and the Agreement of Merger will be, upon execution by the parties
thereto, a valid and binding obligation of PCBG Valley Corporation, enforceable
in accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the rights of creditors generally, by general equitable principles. The Company
agrees to take any and all actions reasonably necessary to ensure that PCBG
Valley Corporation consummates the transactions contemplated hereby. Except as
set forth in Exhibit 5.20, neither the execution and delivery by PCBG Valley
Corporation of the Agreement of Merger, nor the consummation of the transaction
contemplated therein, nor compliance by PCBG Valley Corporation with any of the
provisions thereof will (a) conflict with or result in a breach of any provision
of its Charter Documents; (b) except for approval by the shareholder of PCBG
Valley Corporation and the prior approval of the Commissioner or the FRB,
require any Consents; (c) result in the creation or imposition of any
Encumbrance on any of the properties or assets of PCBG Valley Corporation; or
(d) subject to obtaining the Consents referred to in subsection (b) of this
Section 5.20, and the expiration of any waiting period, violate any Rules to
which PCBG Valley Corporation is subject.
5.21 CAPITAL OF COMPANY, OFFERING AND COMMITMENTS. As of the date
of this Agreement, the Company does not have sufficient capital to consummate
the transactions contemplated by this Agreement. The Company intends to conduct
the Offering in order to raise sufficient cash capital to carry out the
acquisition of the Bank, provide capital for growth and operations of the
Company, and the other transactions contemplated by this Agreement. As of the
date of this Agreement, the Company and Sutro have entered into the Engagement
Agreement described in Section 5.17(iii), a copy of which has been provided to
the Bank and which has not been terminated or materially altered, except that
the Company can change its relationship with Sutro, or increase or decrease the
number of underwriters or co-mangers of the Offering, in the Company's sole
discretion.
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5.22 REGULATORY APPROVALS. To the best knowledge of the Company,
except as described in Exhibit 5.22, the Company has no reason to believe that
it would not receive all required approvals from any Governmental Entity of any
application to consummate the transactions contemplated by this Agreement
without the imposition of a materially burdensome condition in connection with
the approval of any such application.
5.23 STATEMENTS TRUE AND CORRECT. None of the information supplied
or to be supplied by the Company for inclusion in the S-1, S-4 or the Proxy
Statement, or incorporated by reference therein, or any other document to be
filed with any Governmental Entity in connection with the transactions
contemplated hereby will, in the case of the S-1, S-4 and the Proxy Statement
(or incorporated by reference therein), contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which such
statements are made, not misleading, or, in the case of the S-1 and S-4, when it
becomes effective, be false or misleading with respect to any material fact, or
omit to state any material fact necessary in order to make the statements
therein not misleading.
5.24 ACCURATE DISCLOSURE. The Company agrees that through the
Effective Time of the Merger, each of its reports, and other filings required to
be filed with any applicable Governmental Entity will comply in all material
respects with all of the applicable statutes, Rules and regulations enforced or
promulgated by the Governmental Entity with which it will be filed and none will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they will be made, not misleading. Any
financial statement contained in any such report, or other filing that is
intended to present the financial position of the Company will fairly present
the financial position of the Company and will be prepared in accordance with
GAAP or RAP consistently applied during the periods involved. Notwithstanding
anything to the contrary set forth in this Section 5.24, the Company makes no
representation or warranty with respect to any information supplied by the Bank.
5.25 OTHER TRANSACTIONS. The Company has informed the Bank of all
other acquisition transactions that the Company is contemplating or reviewing as
of the date of this Agreement.
5.26 DUE DILIGENCE. The Company and its representatives have had
the opportunity to conduct a due diligence of the Bank, and such due diligence
has been shared with the Managing Underwriter.
5.27 EMPLOYEES.
(a) Except as set forth in Exhibit 5.27(a), there are no
understandings for the employment of any officer or employee of the Company
which are not
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terminable by the Company without liability on not more than 30 days' notice.
Except as set forth in Exhibit 5.27(a), the Company is not a party to an
oral or written consultant agreement not terminable upon 60 days or less
notice or involving the payment of more than $10,000 per annum. Except as
set forth in Exhibit 5.27(a), there are no material controversies pending or
threatened between the Company and any of its employees. Except as disclosed
in the Company Financial Statements or in Exhibit 5.27(a), all material sums
due for employee compensation and benefits have been duly and adequately paid
or provided for, and all deferred compensation obligations are fully funded.
The Company is not a party to any collective bargaining agreement with
respect to any of its employees or any labor organization to which its
employees or any of them belong. Except as set forth in Exhibit 5.27(a), no
director, officer or employee of the Company is entitled to receive any
payment of any amount under any Employment Agreement, severance plan or other
benefit plan as a result of the consummation of any transaction contemplated
by this Agreement. The Bank has been provided with a complete and accurate
listing of the names and current annual salary rates of all persons employed
by the Company, showing for each such person the amounts paid or payable as
salary, bonus payments and any indirect compensation through September 30,
1998, the current pay rate as of September 30, 1998, the names of all of the
directors and officers of the Company, and the names of all persons, if any,
holding tax and other powers of attorney for the Company.
(b) Except as disclosed in Exhibit 5.27(b), (i) the Company is and
has been in material compliance with all applicable laws respecting employment
and employment practices, terms and conditions of employment and wages and
hours, including, without limitation, any such laws respecting employment
discrimination and occupational safety and health requirements, and in any
unfair labor practice; (ii) there is no material unfair labor practice complaint
against the Company pending or, to the knowledge of the Company, threatened
before the National Labor Relations Board; (iii) there is no labor dispute,
strike, slowdown or stoppage actually pending or, to the knowledge of the
Company, threatened against or directly affecting the Company; and (iv) the
Company has not experienced any material work stoppage or other material labor
difficulty during the past five years, except in each case which would not
result in a Material Adverse Change.
(c) Except as disclosed in Exhibit 5.27(c), the Company does not
maintain, contribute to or participate in or have any material liability under
any employee benefit plans, as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or any
nonqualified employee benefit plans or deferred compensation, bonus, stock or
incentive plans, or other employee benefit or fringe benefit programs for the
benefit of former or current employees of the Company (the "Employee Plans").
No present or former employee of the Company has been charged with breaching nor
has breached a fiduciary duty under any of the Employee Plans. The Company does
not participate in, nor has it in the past five years participated in, nor has
it any present or future obligation or liability under, any multiemployer plan
(as defined at Section 3(37) of ERISA). Except as may
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be separately disclosed in Exhibit 5.27(c), the Company does not maintain,
contribute to, or participate in, any plan that provides health, major
medical, disability or life insurance benefits to former employees of the
Company.
(d) Exhibit 5.27(d) sets forth and describes all employee benefit
plans in which the Company participates, or by which it is bound, including,
without limitation; (i) any profit sharing, deferred compensation, bonus, stock
option, stock purchase, pension, retainer, consulting, retirement, welfare or
incentive plan or agreement whether legally binding or not; (ii) any plan
providing for "fringe benefits" to its employees, including but not limited to
vacation, sick leave, medical, hospitalization, life insurance and other
insurance plans, and related benefits; (iii) any written employment agreement
and any other employment agreement not terminable at will; or (iv) any other
"employee benefit plan" (within the meaning of Section 3(3) of ERISA)
(collectively, the "Company Employee Plans"). Except as set forth in Exhibit
5.27(d), there are no negotiations, demands or proposals that are pending or
threatened that concern matters now covered, or that would be covered, by any
employment agreements or employee benefit plans other than amendments to plans
qualified under Section 401 of the Code that are required by the Tax Reform Act
of 1986 and later legislation; (ii) the Company is in compliance with the
material reporting and disclosure requirements of Part 1 of Subtitle IB of ERISA
and the corresponding provisions of the Code to the extent applicable to all
such Employee Plans; (iii) the Company has substantially performed all of its
obligations under all such employee benefit plans and employment agreements
required to be performed heretofore; and (iv) there are no actions, suits or
claims (other than routine claims for benefits) pending or, to the best
knowledge of the Company, threatened against any such employee benefit plans and
employment agreements or the assets of such plans, and to the best knowledge of
the Company, no facts exist which could give rise to any actions, suits or
claims (other than routine claims for benefits) against such plans or the assets
of such plans.
(e) The "employee pension benefit plans" (within the meaning of
Section 3(2) of ERISA) described on Exhibit 5.27(d) have been duly authorized by
the Board of Directors of the Company. Except as set forth in Exhibit 5.27(d),
each such plan and associated trust intended to be qualified under Section
401(a) and to be exempt from tax under Section 501(a) of the Code, respectively,
has either received a favorable determination letter from the Internal Revenue
Service (the "IRS"), has applied for such a determination letter or will apply
for such a determination letter before the expiration of the remedial amendment
period set forth in Section 401(b) of the Code, as the IRS may extend such
period, and to the best knowledge of the Company, no event has occurred that
will or could give rise to disqualification of any such plan which is intended
to be qualified under Section 401(a) of the Code or loss of the exemption from
tax of any such trust which is intended to be exempt from tax under Section
501(a) of the Code. No event has occurred that will or could subject any such
plans to tax under Section 511 of the Code. None of such plans has engaged in a
merger or consolidation with any other plan or transferred assets or liabilities
from any other plan. To the best of the their knowledge, no prohibited
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transaction (within the meaning of Section 409 or 502(i) of ERISA or Section
4975 of the Code) or party-in-interest transaction (within the meaning of
Section 406 of ERISA) has occurred with respect to any of such plans which could
subject the Company to an excise tax or penalty. To the best knowledge of the
Company, no employee of the Company has engaged in any transactions which could
subject the Company to indemnify such person against liability. All costs of
plans have been provided for on the basis of consistent methods in accordance
with sound actuarial assumptions and practices. No employee benefit plan has
incurred any "accumulated funding deficiency" (as defined in Section 302(2) of
ERISA), whether or not waived, taking into account contributions made within the
period described in Section 412(c)(10) of the Code; nor are there any unfunded
amounts under any employee benefit plan which is required to be funded under
Part 3 of Subtitle IB of ERISA and Section 412 of the Code); nor has the Company
failed to make any contributions or pay any amount due and owing as required by
law or the terms of any employee benefit plan or employment agreement. Subject
to amendments that are required by the Tax Reform Act of 1986 and later
legislation, since the last valuation date for each employee pension benefit
plan, there has been no amendment or change to such plan that would increase the
amount of benefits thereunder.
(f) The Company does not sponsor or participate in, or has not
sponsored or participated in, any employee benefit pension plan to which Section
4021 of ERISA applies that would create a liability under Title IV of ERISA.
(g) The Company does not sponsor or participate in, or has not
sponsored or participated in, any employee benefit plan that is a
"multi-employer plan" (within the meaning of Section 3(37) of ERISA) that would
subject such Person to any liability with respect to any such plan.
(h) All group health plans of the Company (including any plans of
Affiliates of the Company that must be taken into account under Section 162(i)
or (k) of the Code as in effect immediately prior to the Technical and
Miscellaneous Revenue Act of 1988 and Section 4980B of the Code) have been
operated in compliance with the group health plan continuation coverage
requirements of Section 4980B of the Code to the extent such requirements are
applicable.
(i) There have been no acts or omissions by the Company that have
given rise to or may give rise to fines, penalties, taxes, or related charges
under Sections 502(c) or (i) or 4071 of ERISA or Chapter 43 of the Code which
could be imposed on the Company.
(j) Except as described in Section 5.27(j), the Company does not
maintain any employee benefit plan or employment agreement pursuant to which any
Employee Plan or other payment will be required to be made by the Company or
pursuant to which any other benefit will accrue or vest in any director, officer
or employee the Company, in either case as a result of the consummation of the
transactions contemplated by the Agreement.
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(k) No "reportable event," as defined in ERISA, has occurred with
respect to any of the employee benefit plans.
(l) All amendments required to bring each of the employee benefit
plans into conformity with all of the provisions of ERISA and the Code and all
other applicable laws, rules and regulations have been made, or will be made
before the expiration of the remedial amendment period set forth under Section
401(b) of the Code, as such period may be extended by the IRS.
(m) Exhibit 5.27(d) sets forth the name of each director, officer,
employee, agent or representative of the Company and every other person entitled
to receive any benefit or any payment of any amount under any existing
employment agreement, severance plan or other benefit plan or Understanding as a
result of the consummation of any transaction contemplated in this Agreement,
and with respect to each such person, the nature of such benefit or the amount
of such payment, the event triggering the benefit or payment, and the date of,
and parties to, such employment agreement, severance or other benefit plan or
Understanding. The Company has furnished the Bank with true and correct copies
of all documents with respect to the plans and agreements referred to in Exhibit
5.27(d) delivered as of the date of the Agreement, including all amendments and
supplements thereto, and all related summary plan descriptions. For each of the
employee pension benefit plans of the Company referred to in Exhibit 5.27(d)
delivered as of the date of the Agreement, the Company has furnished the Bank
with true and correct copies of (i) the Form 5500 which was filed in each of the
three most recent plan years, including without limitation, all schedules
thereto and all financial statements with attached opinions of independent
accountants to the extent required; (ii) the most recent determination letter
from the IRS; (iii) the statement of assets and liabilities as of the most
recent valuation date; and (iv) the statement of changes in fund balance and in
financial position or the statement of changes in net assets available for
benefits under each of said plans for the most recently ended plan year. The
documents referred to in subdivisions (iii) and (iv) fairly present the
financial condition of each of said plans as of and at such dates and the
results of operations of each of said plans, all in accordance with generally
accepted accounting principles or on the cash method of accounting applied on a
consistent basis.
5.28 CONTRACTS AND AGREEMENTS. Except as listed in Exhibit 5.28,
the Company is not a party to any oral or written agreement, commitment, or
obligation (hereinafter referred to as an "Understanding" or "Material
Contract") which individually, or with all other similar Understandings relating
to the same or similar subject matter, falls within any of the following
classifications:
(i) any Understanding dealing with advertising, brokerage,
licensing, dealership, representative or agency relationship;
(ii) any Understanding with any labor or collective
bargaining
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organization or association;
(iii) any mortgage, pledge, conditional sales contract,
security agreement, or any other similar Understanding with respect to any real
or personal property in an amount in excess of $25,000, under which the Company
is a debtor or to which any of its property is subject;
(iv) any profit sharing, group insurance, bonus, deferred
compensation, stock option, severance pay, pension, retirement, or any other
similar Understanding which might provide benefits to the employees, officers or
directors of the Company;
(v) any Understanding for the future purchase of
materials, supplies, services, merchandise or equipment, the price of which
exceeds $5,000 and which will not be terminable without liability as to future
purchases as of the Effective Time; it being understood that materials,
supplies, service, merchandise or equipment shall not be deemed to include
loans, repurchase or reverse repurchase agreements, securities or other
financial transactions incurred by the Company in the ordinary course of its
banking business;
(vi) any Understanding for the sale of any of its assets,
or for the grant of any right to purchase any of its assets, properties or
rights, or which requires the consent of any third party to the transfer and
assignment of any of its assets, properties or rights; it being understood that
the foregoing shall not be deemed to include any Understanding for the sale of
mortgage loans, repurchase or reverse repurchase agreements, securities or other
financial transactions incurred by the Company in the ordinary course of its
banking business;
(vii) any guarantee, subordination or other similar or
related types of Understanding except where the Company is a beneficiary;
(viii) any Understanding for the borrowing of any money by
the Company (other than time savings or demand deposits) or for a line of credit
to it;
(ix) any Understanding for any one capital expenditure or
series of related capital expenditures in excess of $5,000 individually or
$10,000 in the aggregate;
(x) any real property lease, whether as lessor or lessee;
or any personal property lease, whether as lessor or lessee, involving payments
in excess of $500 per month;
(xi) any Understanding to make or participate in a loan
(not yet fully disbursed or funded) to any borrower or related group of
borrowers, which undisbursed or unfunded amount would exceed $50,000 unsecured
or secured;
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(xii) any Understanding of any kind (other than contracts
relating to demand or time deposits or otherwise made in the ordinary course of
business) with any director or officer of the Company or with any member of the
immediate family of any such director of officer or with any partnership,
corporation, associate or entity of which any such person is an Affiliate;
(xiii) any Understanding for insurance of any type described
in Section 5.10 above; or
(xiv) any Understanding, the purpose or effect of which
could encompass (a) merging with any person or bank or bank holding company
other than with the Company (b) the selling of any of its assets (except in the
ordinary course of business) or stock to any person, (c) recommending to any of
its shareholders that their Company Common Stock be sold to any person or bank
other than the person, or (d) in any other way transferring, directly or
indirectly, control of the Company.
Except as stated in Exhibit 5.28, true and correct copies of all
documents relating to the foregoing Understandings have been delivered by the
Company to the Bank prior to the date hereof.
As used in this Section 5.28, "immediate family" of a person shall
mean his or her spouse, parents, children, and siblings.
ARTICLE VI
COVENANTS OF THE BANK
The Bank covenants and agrees with the Company as follows:
6.1 BEST EFFORTS. The Bank shall use its best efforts to bring
about the satisfaction of the conditions specified in Articles IX and XI hereof.
6.2 CONDUCT OF BUSINESS. Unless the Company shall give its prior
consent, which consent will not be unreasonably withheld, or unless otherwise
indicated, until the Effective Time, the Bank will:
(i) conduct its affairs and business in the usual and
ordinary course, generally consistent with past practice, and in accordance with
safe and sound practices;
(ii) refrain from (a) creating, incurring, or suffering to
exist, any encumbrance or restriction of any kind against or in respect of any
property or right of the Bank except for such which are not material in amount
or nature to the financial condition or results of operations of the Bank,
except for a pledge or security interest given in connection with the acceptance
of government or public deposits; it being understood that the foregoing shall
not be deemed to preclude loans,
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repurchase or reverse repurchase agreements, securities or other financial
transactions incurred in the ordinary course of the Bank's banking business,
and (b) borrowing or agreeing to borrow any amount of funds except in the
ordinary course of business, or directly or indirectly guaranteeing or
agreeing to guarantee any obligations of others except for such which are not
material in amount or nature to the financial condition or results of
operations of the Bank;
(iii) refrain from making or becoming a party to any
Material Contract or material commitment, or renewing, extending, amending or
modifying any such contract or commitment except for loan and deposit
transactions, in the usual and ordinary course of business, consistent with past
practice, and refrain from making any loan or other extension of credit, or
entering into any commitment to make any loan or other extension of credit, to
any Bank director, officer or employee or 5% or more shareholder, except in
accordance with existing practice or policy;
(iv) refrain from making any capital expenditures, except
for ordinary repairs and replacements not exceeding $10,000 for any one item;
(v) refrain from paying or agreeing to pay any bonus,
extra compensation, pension or severance pay, under any pension plan or
otherwise, or increasing the rate of compensation paid by the Bank at June 30,
1998, to any officer, director, agent, consultant, or employee (except for
raises and bonuses consistent with past practices accrued and paid prior to the
end of the month prior to the Closing Date and except as contemplated by this
Agreement), and any such amounts shall be accrued and paid prior to the
Determination Date; or agreeing to enter into any employment agreements or hire
any officer level staff where such agreements or arrangements cannot be
terminated without any liability upon not more than 90 days notice;
(vi) maintain its assets and properties in good condition
and repair (ordinary wear and tear excepted) and refrain from selling or
otherwise disposing of any of its assets or properties, except in the usual and
ordinary course, consistent with prior customary practice, and in accordance
with safe and sound practices, and maintain the Bank's present branch operations
unless changed by mutual agreement;
(vii) refrain from declaring or paying any dividend on or
making any other distribution upon, or purchasing or redeeming, any shares of
the Bank Stock;
(viii) refrain from (a) issuing or selling or obligating
itself to issue or sell any shares of the Bank Stock or any other securities or
any warrants, rights or options to acquire Bank Stock or other securities, (b)
effecting a reclassification, recapitalization, split-up, exchange of shares,
readjustment or other similar change in or to any capital stock or otherwise
reorganize or recapitalize, except pursuant to Section 6.5;
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(ix) refrain from directly or indirectly redeeming,
purchasing or otherwise acquiring any Bank Stock or stock of any corporation or
any interest in any business enterprise except as it relates to a foreclosure in
the usual and ordinary course of its business, or pursuant to the Bank's ESOP;
(x) refrain from amending its Charter Documents except to
the extent as may be required or contemplated by this Agreement;
(xi) use its best efforts to preserve its business
organization intact and to retain its present officers and employees in a manner
consistent with the Bank's other obligations under this Agreement;
(xii) use its best efforts to preserve the goodwill of its
depositors, customers and those having business relations with it, refrain from
materially changing the make-up of the Bank's deposit structure, refrain from
amending, modifying, terminating or failing to renew or preserve its business
organization, material rights, franchises, Permits, and refrain from taking any
action which would jeopardize the continuance of the goodwill of its customers
where such action would have a material adverse effect on the financial
condition, or results of operations of the Bank in a manner consistent with the
Bank's other obligations under this Agreement;
(xiii) use its best efforts to maintain insurance and bond
coverage at least equal to that now in effect on all its properties and all
properties for which it is responsible and on its business operations, and carry
the same coverage for public liability, personal injury and property damage that
is now in effect, except if such insurance and coverage (a) is not available
except at extraordinary rates, or (b) is not available except under materially
different terms which are inconsistent with those in effect as of July 30, 1998;
(xiv) meet its material contractual obligations and not
become in default in any material respect on any thereof;
(xv) duly observe and conform to lawful requirements
applicable to its business in all material respects;
(xvi) duly and timely file all reports and returns required
to be filed with any federal, state or local Governmental Entity unless any
extensions have been duly granted by such authorities;
(xvii) refrain from commencing, and cease any previously
commenced proceeding except for such proceedings with the Company, any
proceeding to merge, consolidate or liquidate or dissolve (except as
contemplated by this Agreement) or obligating itself to do so, subject to
Sections 6.5 and 14.1;;
(xviii) maintain its books of account and records in the
regular
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manner substantially in accordance with all applicable statutory and
regulatory requirements applied on a consistent basis;
(xix) except for instituting actions against borrowers of
the Bank to collect loans in default, refrain from instituting, settling, or
agreeing to any material claim, action or proceeding before any court or
Governmental Entity unless not instituting, settling or agreeing to any material
claim, action or proceeding would result in a Material Adverse Change to the
Bank;
(xx) refrain from making its credit underwriting policies,
standards or practices applicable to all loans relating to the making of loans
and other extensions of credit, or commitments to make loans and other
extensions of credit, less stringent than those in effect on the date hereof.
The Bank shall not grant or commit to grant, without receiving the Company's
Consent, (i) any loan or other extension of credit, including renewals, to an
existing customer of the Bank, if such loan or other extension of credit,
together with all other credit then outstanding to the same Person and all
Affiliates of such Person, would exceed $50,000, irrespective of any plans or
intentions to sell or participate all or a portion of such loans, on an
unsecured basis, or exceed $100,000 secured by a lien on real estate, cash or
readily marketable collateral, as that term is used in section 1220 ET SEQ. of
the CFC, except loans guaranteed by a government agency, which are prohibited
only if the unguaranteed portion of which would exceed $250,000, (ii) any
participation loans purchased or sold, or (iii) any renewals or other extensions
of credit to any borrower whose loans or other extensions of credit have been
classified by any Governmental Entity. In addition, Bank shall not take any
property into Other Real Estate Owned ("OREO"), or sell any OREO property,
without receiving the Company's Consent. Consent shall be deemed granted if
within three Business Days of written notice received by the Company's designee,
notice of objection in writing is not received by Bank;
(xxi) refrain from making special or extraordinary material
payments to any Person other than as contemplated and as disclosed in this
Agreement as of the date hereof;
(xxii) except for transactions in accordance with safe and
sound banking practices, refrain from making any material investments, by
purchase of stock or securities, contributions to capital, property transfers,
purchases of any property or assets or otherwise, in any other individual,
corporation or other entity;
(xxiii) advise the Company promptly in writing of any Material
Adverse Change known to the Bank in the capital structure, financial condition,
results of operations or of any event or condition which with the passage of
time is reasonably likely to result in a Material Adverse Change to the Bank, or
of any other materially adverse change known to the Bank respecting the business
and operations of the Bank, or in the event the Bank determines that the Merger
will not be consummated because of any inability to meet the conditions to the
performance of
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the Company set forth in Article XI or of any matter which would make the
representations and warranties set forth in Article IV hereof not true and
correct in any material respect at the Closing;
(xxiv) promptly advise the Company in writing of any event or
any other transaction within the Bank's knowledge whereby any person or related
group of persons acquires, directly or indirectly, record or beneficial
ownership (as defined in Rule 13d3 promulgated by the Exchange Act or control of
5% or more of the outstanding shares of Bank Stock prior to the record date
fixed for the Bank shareholders' meeting or any adjourned meeting thereof to
approve the transactions contemplated herein;
(xxv) charge-off all loans, receivables and other assets, or
portions thereof, deemed uncollectible in accordance with GAAP or RAP,
applicable law or regulation, or classified as "loss" or as directed by any
Governmental Entity; and maintain the allowance for loan losses of the Bank at a
level which in the reasonable opinion of the Bank's management is adequate to
provide for all known and estimated credit losses on loans and leases
outstanding and other inherent risks in the Bank's loan portfolio, but in no
case less than the level which is the reasonable opinion of the Bank's
management is adequate to provide for all known and reasonably expected losses
on assets outstanding in accordance with GAAP and RAP;
(xxvi) furnish to the Company, as soon as practicable, and in
any event within ten (10) days after it is prepared (except for the reports
submitted to the Board of Directors of the Bank, as described in clause (i)
below, which shall be furnished to the Company within ten (10) days after the
Bank's Board of Directors has reviewed the report), (i) a copy of any report
submitted to the Board of Directors of the Bank and access to the working papers
related thereto and copies of other operating or financial reports prepared for
management of any of their businesses and access to the working papers thereto,
provided, however, that the Bank need not furnish the Company communications of
the Bank's legal counsel regarding the Bank's rights against and obligations to
the Company or its Affiliates under this Agreement, (ii) to the extent permitted
by law, copies of all reports, renewals, filings, certificates, statements and
other documents filed with or received from the FDIC and/or the Commissioner or
any other Governmental Entity, (iii) monthly unaudited average statements of
condition and statements of operations for the Bank, and quarterly unaudited
statements of condition and statements of operations for the Bank and statements
of changes in stockholders' equity for the Bank, in each case prepared in a
manner consistent with past practice, and (iv) such other reports as the Company
may reasonably request relating to the Bank. Each of the financial statements
delivered pursuant to this Section 6.2(xxvi), except as stated therein, shall be
prepared in accordance with the Bank's normal practices;
(xxvii) consistent with the standards set forth in this
subsection 6.2 (xxvii), the Bank agrees that through the Effective Time of the
Merger, as of their
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respective dates, (i) each of the Bank Filings will be true and complete in
all material respects; and (ii) each of the Bank Filings will comply in all
material respects with all of the statutes, rules and regulations enforced or
promulgated by the Governmental Entity with which it will be filed and none
will contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they will be
made, not misleading. Any financial statement contained in any of such Bank
Filings that is intended to present the financial position of the Bank will
be prepared in accordance with GAAP or RAP consistently applied, except as
stated therein, during the periods involved;
(xxviii) maintain reserves for contingent liabilities in
accordance with GAAP and RAP;
(xxix) promptly notify the Company of the filing of any
material litigation, governmental or regulatory action, or similar proceeding or
notice of any claims against the Bank or any of its assets;
(xxx) conduct good faith settlement negotiations, and, with
the written consent of the Company, settle when deemed prudent by the Parties,
of all existing or threatened litigation as specified in Exhibits 4.7, or for
any new litigation filed or threatened from the date hereof to the Closing Date;
(xxxi) except in the ordinary course of business, refrain
from canceling or accelerating any material indebtedness owing to the Bank or
any claims which the Bank may possess or waive any material rights of
substantial value;
(xxxii) refrain from selling or otherwise disposing of any
Real Property or any material amount of any tangible or intangible personal
property other than properties acquired in foreclosure or otherwise in the
ordinary collection of indebtedness to the Bank;
(xxxiii) refrain from foreclosing upon or otherwise taking
title to or possession or control of any real property without first obtaining a
phase one environmental report thereon which indicates that the property is free
of pollutants, contaminants or hazardous or toxic waste materials; provided,
however, that the Bank shall not be required to obtain such a report with
respect to single family, non-agricultural residential property of one acre or
less to be foreclosed upon unless it has reason to believe that such property
might contain any such waste materials or otherwise might be contaminated;
(xxxiv) refrain from committing any act or failing to do any
act which will cause a breach of any agreement, contract or commitment and which
will have a material adverse effect on the Bank's business, financial condition,
or results of operations; and
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(xxxv) duly observe and conform to all applicable compliance
requirements for Year 2000 safety and soundness issues.
For purposes of this Section 6.2, the Company shall be deemed to
have given its consent to any action which is contrary to any specified covenant
set forth in this Section if, within five (5) Business Days, or three (3)
Business Days for loans, after actual receipt by the Company of written notice
from the Bank of the Bank's intention to act contrary to any of the specified
covenants set forth in this Section, the Company shall not have delivered to the
Bank written objection to any such action.
6.3 ACCESS TO INFORMATION. (a) As long as the transaction
contemplated herein has not been terminated, the Bank will afford the Company,
its representatives, counsel, accountants, agents and employees including the
underwriter selected to assist in the issuance of the common stock contemplated
in Section 9.1(iii) and its counsel (collectively "Company Representatives"),
access during normal business hours to all of its business, operations,
properties, personnel books, files and records and will do everything reasonably
necessary to enable the Company and the Company Representatives to make a
complete examination of the financial statements, books, records, loans and
leases, operating reports, audit reports, contracts and documents, and all other
information with respect to assets and properties of the Bank and the condition
thereof, and to update such examination at such intervals as the Company shall
deem appropriate. Such access shall include reasonable access by the Company
and the Company Representatives to auditors' work papers with respect to the
business and properties of the Bank, other than (i) books, records and documents
covered by the attorney-client privilege, or which are attorneys' work product,
and (ii) books, records and documents that the Bank is legally obligated to keep
confidential. Such examination shall be conducted in cooperation with the
officers of the Bank and in such a manner as to minimize, to the extent possible
consistent with the conducting of a comprehensive examination, any disruption
of, or interference with, the normal business operations of the Bank. No such
examination, however, shall constitute a waiver or relinquishment on the part of
the Company to rely upon the representations and warranties made by the Bank
herein or pursuant hereto; provided, that the Company shall promptly disclose in
writing to the Bank any fact or circumstance it may discover which it believes
renders any representation or warranty made by the Bank hereunder incorrect in
any respect. The Company will hold in strict confidence all documents and
information concerning the Bank so obtained (except to the extent that such
documents or information are a matter of public record or require disclosure in
the Proxy Statement or as may be necessary for the accomplishment of the
purposes of such examination) and, if the transactions contemplated herein are
not consummated, such confidence shall be maintained and all such documents
including all copies shall be returned to the Bank.
(b) As long as the transaction contemplated hereunder has not been
terminated, (i) one Company Representative, selected by the Company in its sole
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discretion, shall be invited by the Bank to attend all regular and special Board
of Directors' and Loan Committee meetings of the Bank from the date hereof until
the Effective Time of the Merger, and (ii) one representative of Sutro shall be
invited by the Bank to attend all regular and special Board of Directors
meetings of the Bank from the date hereof until the Effective Time of the Merger
for the purpose of discussing the condition of the market for the Offering and
any possible Increase in Per Share Consideration. The Bank shall inform the
Company of such Board of Director meeting at least five (5) days in advance of
such meeting; provided, however, that the attendance of such Company
Representative shall not be permitted at any meeting, or portion thereof, for
the sole purpose of discussing the transactions contemplated by this Agreement
on the obligations of the Bank under this Agreement.
6.4 FINANCIAL STATEMENTS. In the event the following have not
been previously delivered prior to the date hereof, the Bank will deliver to the
Company a copy of the audited Statements of Financial Condition of the Bank as
of December 31, 1998; Statements of Earnings, Stockholders' Equity and Cash
Flows for the year ended December 31, 1998, the related notes and related
opinions thereon of McGladrey & Pullen, certified public accountants, with
respect to such financial statements (the "1998 Audited Bank Financial
Statements"). The Bank will furnish the Company with a true and correct copy
of the management letter or other letter delivered to the Bank by McGladrey &
Pullen in connection with the 1998 Audited Bank Financial Statements relating to
any review of the internal controls of the Bank by McGladrey & Pullen. The 1998
Audited Bank Financial Statements will: (i) present fairly the financial
condition and results of operations of the Bank as of and for the dates or
periods covered thereby in accordance with generally accepted accounting
principles consistently applied throughout the periods involved; (ii) be based
on the books and records of the Bank; (iii) contain and reflect reserves for all
material accrued liabilities and for all reasonably anticipated losses, and set
forth adequate reserves for loan losses and other contingencies, to the extent
required by GAAP; and (iv) none of the 1998 Audited Bank Financial Statements
will contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements contained therein not misleading
under GAAP.
6.5 NO SOLICITATION.
(a) The Bank shall not, and will cause each of its officers,
directors, employees, agents, legal and financial advisors and Affiliates not
to, directly or indirectly, make, solicit, encourage, initiate or, except as
permitted in this Section 6.5, enter into any agreement or agreement in
principle, or announce any intention to do any of the foregoing, concerning the
acquisition of the Bank, or substantially all of the Bank's business and
properties or a majority of Bank Stock or debt securities, whether by purchase,
merger (other than by the Company), purchase of assets, tender offer or
otherwise (an "Alternative Transaction").
(b) The Bank shall not, and will cause each of its officers,
directors, legal and financial advisors, agents and Affiliates not to, directly
or indirectly,
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participate in any negotiations or discussions regarding, or furnish any
information with respect to, or otherwise cooperate in any way in connection
with, or assist or participate in, facilitate or encourage, any effort or
attempt to effect or seek to effect, any Alternative Transaction with or
involving any Person other than the Company, unless the Bank shall have
received an unsolicited written offer from a Person other than the Company to
effect an Alternative Transaction and the Board of Directors of the Bank is
advised in writing by outside legal counsel that in the exercise of the
fiduciary obligations of the Bank's Board of Directors such information
should be provided to or such discussions or negotiations undertaken with the
Person submitting such unsolicited written offer.
(c) The Bank will promptly communicate to the Company the receipt
of any proposal with respect to any Alternative Transaction, and will keep the
Company informed as to the status of any such proposal; PROVIDED, HOWEVER, that
the Bank shall not be required to disclose any matters which, in the written
opinion of outside legal counsel, may not be disclosed in the exercise of the
fiduciary obligations of the Bank's Board of Directors.
6.6 CERTAIN LOANS AND OTHER EXTENSIONS OF CREDIT. The Bank will
promptly inform the Company of the amounts and categories of any loans, leases
or other extensions of credit that have been criticized special mention or
classified by any bank regulatory authority or deemed by the Bank to require
special attention pursuant to its internal policies (collectively "Classified
Credits"). In addition, the Bank will furnish to the Company, as soon as
practicable, and in any event within seven days after receipt by the Bank's
Board of Directors, schedules including the following: (a) Classified Credits;
(b) nonaccrual credits; (c) accrual exception credits that are delinquent 90 or
more days and have not been placed on nonaccrual status; (d) participating loans
and leases, stating, with respect to each, whether it is purchased or sold, the
loan or lease type, and the originating unit; (e) loans or leases (including any
commitments) by the Bank to any director, officer or shareholder holding 5% or
more of the capital stock of such party; (f) letters of credit; (g) loans or
leases charged-off during the previous month; (h) loans or leases written down
during the previous month; and (i) OREO or assets owned, stating with respect to
each its type.
6.7 BREACHES. The Bank shall, in event it becomes aware of the
impending or threatened occurrence of any material event or condition which
would cause or constitute a breach (or would have caused or constituted a breach
had such event occurred or been known prior to the date hereof) of any of its
representations or agreements contained or referred to herein, give prompt
written notice thereof to the Company and, without limiting the Company's rights
under paragraph 14.1(a)(ii), the Bank shall use its best efforts to prevent or
promptly remedy the same.
6.8 SHAREHOLDER APPROVAL. As soon as practicable, the Company and
the Bank shall prepare the S-4 and the proxy statement ("Proxy Statement") and
take all action necessary in accordance with applicable Rules and its Charter
Documents
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to submit the Agreement and the transactions contemplated hereby to its
shareholders for approval by April 1, 1999, unless otherwise agreed between
the Company and the Bank. In connection with such submission, subject to its
fiduciary obligations specified in Section 6.5(b) the Bank's Board of
Directors shall recommend shareholder approval of all the matters referred to
in this Section 6.8 and the Bank shall use its best efforts to obtain such
shareholder approval.
6.9 COMPLIANCE WITH RULES. The Bank shall materially comply with
the requirements of all applicable Rules, the noncompliance with which would
materially and adversely affect the assets, liabilities, business, financial
condition, results of operations or prospects of the Bank.
6.10 TERMINATION OF THE BANK STOCK OPTION PLAN AND AGREEMENTS. The
Bank will take all steps necessary to cause the Bank Stock Option Plan to be
terminated as of or prior to the Effective Time of the Merger, will grant no
additional options under said plan prior to the Effective Time of the Merger,
and the Bank will not permit any options to be exercised as of or prior to the
Effective Time of the Merger, without any liability to any Party. The Bank will
also terminate all Stock Option Agreements following the payment of the
Aggregate Option Price, without any liability to any Party.
6.11 OFFICERS AND EMPLOYEES. Following the Closing Date, the
Company and the Bank will agree to consolidate and/or reduce certain back office
and administrative functions, and other overhead, of the Bank in order to reduce
Bank expense. Other than officers with employment contracts, each officer and
employee of the Bank has indicated in writing to the Bank that such officers and
employees agree to the Bank's Personnel Policy Manual and acknowledged his or
her at-will employment status while employed by the Bank, in the form attached
as EXHIBIT 6.11(a). The Company also will honor all Bank Employment Agreements
specified in EXHIBIT 4.11(a).
6.12 TERMINATION OF CONTRACTS AND ACCRUAL OF LIABILITIES. Upon
determination by the Company, the Bank shall obtain the termination of any
contracts, commitments or Understandings as defined in Section 4.12(v), and pay
any termination fees, for the future purchase of materials, supplies, services,
merchandise or equipment, the price of which exceeds $10,000 prior to the
Closing Date. Before the end of the month prior to the Closing Date, the Bank
shall have paid, or set-up adequate accruals for the payment of, all material
expenses that the Bank shall be liable for up to the Closing Date, including,
but not limited to, all accounting, attorney fees and data processing costs and
related costs in connection with this Agreement.
6.13 EXECUTION OF AGREEMENT OF MERGER. As soon as possible after
organization of PCBG Valley Corporation, subject to receipt of any and all
necessary approvals and Permits by any Governmental Entity and approval by the
Bank's shareholders, the Bank shall execute the Agreement of Merger and any and
all related documents.
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6.14 ACCOUNTANTS. Promptly upon request of the Company, the Bank
will ask its accountants to permit the Company or the Company Representatives to
review and examine the work papers relating to the Audited Bank Financial
Statements for the years ended December 31, 1995, 1996, 1997 and 1998, and the
Bank will permit such accountants to discuss with the Company any matter
relating to the audits of the Bank. In addition, the Bank will make available
to the Company copies of each management letter or other letter delivered to the
Bank by its accountants in connection with such financial statements or relating
to any review by its accountants of the internal controls of the Bank since
January 1, 1995, unless previously provided to the Company and the Bank has
instructed its accountants to make available for inspection by the Company or
the Company Representatives all reports and working papers produced or developed
by its accountants in connection with their examination of such financial
statements, as well as all such reports and working papers for any periods for
which any tax of the party has not been finally determined or barred by
applicable statutes of limitation.
6.15 CORPORATE ACTION. The Bank shall take or cause to be taken
all necessary corporate action required to carry out the transactions
contemplated in this Agreement.
6.16 REGULATORY APPROVALS. Promptly following execution of this
Agreement, the parties hereto shall prepare, submit and file, or cause to be
prepared, submitted and filed, all applications for approvals and consents as
may be required of any of them, respectively, by applicable law and regulations
with respect to the transactions contemplated by this Agreement, including
without limitation any and all applications required to be filed with the
Commissioner, the FRB, the FDIC and such other Governmental Entity as the
Company or the Bank may reasonably believe necessary. Each party shall
cooperate with the other in the preparation of all of such applications and will
furnish promptly upon request all documents, information, financial statements
or other materials as may be required in order to complete such applications.
Each party shall afford the other a reasonable opportunity to review all such
applications (except confidential portions thereof) and all amendments and
supplements thereto before filing. The Company and the Bank each covenant and
agree that any and all information furnished by it to the other for inclusion in
such applications will not contain any untrue statement of a material fact and
will not omit to state any material fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
6.17 NECESSARY CONSENTS. In addition to the regulatory approvals
referred to in Section 6.16, the parties hereto shall each apply for and
diligently seek to obtain all other third party consents or approvals which may
be necessary for the consummation of the Merger, including, without limitation,
the written consent of any lessors of real and personal property which property
cannot be assigned without the written consent of the other such lessors ("Third
Party Consent").
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6.18 FURTHER ASSURANCES. The parties agree that from time to time,
whether prior to, at or after the Effective Time of the Merger, they will
execute and deliver such further instruments of conveyance and transfer and take
such other action as may reasonably be expected to consummate the transactions
contemplated hereby. The Company and the Bank each agrees to take such further
action as may reasonably be requested by the other in order to consummate the
transactions contemplated by this Agreement and that are not inconsistent with
the other provisions hereof, including compliance with all of the terms of
Article II.
6.19 BANK EMPLOYEE BENEFITS. Prior to or at the Effective Time of
the Merger, the Bank will terminate the Bank Stock Option Plan and the ESOP.
Upon the agreement of the Company and the Bank, the Bank shall cause all
Employee Plans of the Bank to be terminated except as otherwise provided by
applicable labor laws.
6.20 ENVIRONMENTAL REPORTS. Except as otherwise agreed to in
writing by the Company, the Bank shall provide to the Company, as soon as
reasonably practical, but not later than 45 days after the date hereof, a report
of a phase one environmental investigation on all Real Property owned, leased or
operated by Bank as of the date hereof (other than space in retail and similar
establishments leased by the Bank for automatic teller machines) and within ten
days after the acquisition or lease of any Real Property acquired or leased by
the Bank after the date hereof (other than space in retail and similar
establishments leased or operated by the Bank for automatic teller machines),
except as otherwise provided in Section 6.2(xxxiii). If required by the phase
one investigation in the Company's reasonable opinion, the Bank shall provide to
the Company a report of a phase two investigation on the Real Property or Real
Properties requiring such additional study. The Company shall have 15 business
days from the receipt of any such phase two investigation report to notify the
Bank of any objection to the contents of such report. Should the cost of taking
all remedial and corrective actions and measures (i) required by applicable law,
or (ii) recommended or suggested by such report or reports or prudent in light
of serious life, health or safety concerns, in the aggregate, exceed the sum of
Twenty-Five Thousand Dollars ($25,000) as reasonably estimated by an
environmental expert retained for such purpose by the Company and reasonably
acceptable to the Bank, or if the cost of such actions and measures cannot be so
reasonably estimated by such expert to be $25,000 or less with any reasonable
degree of certainty, the Company shall have the right to terminate the Agreement
pursuant to Article IV, Section 14.1(e) hereof, for a period of 10 business days
following receipt of such estimate or indication of the cost of such actions and
measures.
6.21 NO CONFLICTS; DEFAULTS. The execution, delivery and
performance of the Agreement of Merger and the consummation of the transactions
contemplated therein, and compliance by the Bank with any provision thereof will
not (a) conflict with or result in a breach of, or default or loss of any
benefit under, any provision of its Charter Documents or, except as set forth in
Exhibit 6.21 any material agreement, instrument or obligation to which the
Surviving Bank will become a party or by which
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the property of the Surviving Bank will become bound or give any other party
to any such agreement, instrument or obligation the right to terminate or
modify any term thereof; (b) except for the prior approval of the FRB, the
FDIC and the Commissioner and as set forth in Exhibit 6.21, require any
Consents; (c) result in the creation or imposition of any Encumbrance on any
of the properties or assets of the Surviving Bank; or (d) violate the Charter
Documents or any Rules to which the Surviving Bank is subject.
6.22 THE OFFERING. The Bank will assist the Company in connection
with the preparation of the offering materials for the issuance of the Company
Stock contemplated by this Agreement, and such assistance will include, but not
necessarily be limited to, the preparation or provision, as appropriate, of
information concerning the business, properties and personnel of the Bank needed
in connection with the issuance of the Company Stock and the closing of the
Offering, as well as any and all comfort letters from McGladrey & Pullen or
other legal counsel of the Bank, and any and all necessary opinions from Aldrich
& Bonnefin or other legal counsel of the Bank, with respect to the Offering as
reasonably required and specified by the Underwriters. Such information to be
supplied by the Bank will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not intentionally misleading.
6.23 S-4, PROXY STATEMENT AND THE OFFERING. The Company and the
Bank will prepare the S-4 and the Proxy Statement, and the Bank will assist the
Company in connection with preparation of the Registration Statement for the
Offering, contemplated by this Agreement, and such preparation and assistance
will include, but not necessarily be limited to, the preparation or provision,
as appropriate, of information concerning the business, properties and personnel
of the Bank needed in connection with the issuance of the Company Stock, the S-4
and the Proxy Statement and the closing of the Merger. Such information to be
prepared or supplied by the Bank including any and all information furnished by
the Bank for inclusion in all applications and statements filed with the
appropriate regulatory authorities for approval of, or consent to, the Merger
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
6.24 PUBLICITY. The initial press release announcing this
Agreement shall be a joint press release and thereafter the Company and the Bank
shall consult with each other in issuing any press releases or otherwise making
public statements with respect to the transactions contemplated hereby and in
making any filings with any Governmental Entity or with any national securities
exchange with respect thereto. If any party hereto, on the advice of counsel,
determines that a disclosure is required by law, it may make such disclosure
without the consent of the other parties, but only after affording the other
party a reasonable opportunity to review and comment upon the disclosure. The
parties hereby agree that all public
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statements after the initial press release announcing this Agreement
referring to the Bank shall be made by Mr. N. Douglas Mills, and all public
statements made after the initial press release announcing this Agreement
referring to the Company shall be made by Mr. E. Lynn Caswell, and both
parties agree that all public statements shall be made by mutual agreement
with consultation with the Managing Underwriter.
6.25 AFFILIATES AND FIVE PERCENT SHAREHOLDER AGREEMENTS. Within
thirty (30) days of the execution of this Agreement, (a) the Bank shall deliver
to the Company a letter identifying all persons who are then "affiliates" of the
Bank for purposes of Rule 145 under the Securities Act and (b) the Bank shall
advise the persons identified in such letter of the resale restrictions imposed
by applicable securities laws and shall use reasonable efforts to obtain from
each person identified in such letter a written agreement substantially in the
form attached hereto as Exhibit 6.25. The Bank shall use reasonable efforts to
obtain from any person who becomes an affiliate of the Bank after the Bank's
delivery of the letter referred to above, and on or prior to the date of the
Bank's Shareholders' Meeting to approve this Agreement, a written agreement
substantially in the form attached as Exhibit 6.25 hereto as soon as practicable
after obtaining such status. At least 10 Business Days prior to the issuance of
the opinion required by Section 9.8, the Bank shall use its best efforts to
cause each person or group of persons who holds more than five percent (5%) of
Bank Stock (regardless of whether such person is an "affiliate" under Rule 145)
to deliver to the Company's accountants and Knecht & Hansen, a letter stating
that such shareholder(s) has no present plan or intention to dispose of Bank
Stock and committing that such shareholder(s) will not dispose of Bank Stock in
a manner to cause a violation of the "continuity of shareholder interest"
requirements of Treasury Regulation 1.368-1.
ARTICLE VII
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Bank as follows:
7.1 BEST EFFORTS. The Company shall use its best efforts to bring
about the satisfaction of the conditions specified in Articles IX and X hereof.
7.2 CONDUCT OF BUSINESS. Unless the Bank shall give its prior
consent, which consent will not be unreasonably withheld, or unless otherwise
indicated, until the Effective Time, the Company will:
(i) conduct its affairs and business in the usual and
ordinary course, generally consistent with past practice, and in accordance with
safe and sound practices;
(ii) refrain from amending its Charter Documents except to
the extent as may be required or contemplated by this Agreement;
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(iii) use its best efforts to preserve its business
organization intact and to retain its present officers and employees in a manner
consistent with the Company's other obligations under this Agreement;
(iv) use its best efforts to preserve the goodwill of those
having business relations with the Company, refrain from amending, modifying,
terminating or failing to renew or preserve its business organization, material
rights, franchises, Permits, and refrain from taking any action which would
jeopardize the continuance of the goodwill of its customers where such action
would have, taken as a whole, a material adverse effect on the financial
condition, or results of operations of the Company in a manner consistent with
the Company's other obligations under this Agreement;
(v) duly and timely file all reports and returns required
to be filed with any federal, state or local Governmental Entity unless any
extensions have been duly granted by such authorities;
(vi) maintain its books of account and records in the
regular manner substantially in accordance with all applicable statutory and
regulatory requirements applied on a consistent basis;
(vii) advise the Bank promptly in writing of any material
adverse change known to the Company in the capital structure, financial
condition, results of operations, or of any event or condition which with the
passage of time is reasonably likely to result in a material adverse change in
the capital structure, financial condition or results of operations of the
Company, or in the event the Company determines that the Merger will not be
consummated because of any inability to meet the conditions to the performance
of the Bank set forth in Article X or of any matter which would make the
representations and warranties set forth in Article V hereof not true and
correct in any material respect at the Closing;
(viii) the Company agrees that through the Effective Time of
the Merger, as of their respective dates, (i) each of the Company Filings will
be true and complete in all material respects; and (ii) each of the filings with
any regulatory agency will comply in all material respects with all of the
statutes, rules and regulations enforced or promulgated by the Governmental
Entity with which it will be filed and none will contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they will be made, not misleading. Any financial statement contained in
any of such Company Filings that is intended to present the financial position
of the entities or entity to which it relates will fairly present the financial
position of such entities or entity and will be prepared in accordance with GAAP
or RAP consistently applied, except as stated therein, during the periods
involved;
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For purposes of this Section 7.2, the Bank shall be deemed to have
given its consent to any action which is contrary to any specified covenant set
forth in this Section if, within five (5) Business Days, after actual receipt by
the Bank of written notice from the Company of the Company's intention to act
contrary to any of the specified covenants set forth in this Section, the Bank
shall not have delivered to the Company written objection to any such action.
7.3 ACCESS TO INFORMATION. The Company will afford the Bank, its
representatives, counsel, accountants, agents and employees (collectively "Bank
Representatives"), access during normal business hours to all of its business,
operations, properties, books, files and records and will do everything
reasonably necessary to enable the Bank and the Bank Representatives to make a
complete examination of the financial statements, books, records, loans and
leases, operating reports, audit reports, contracts and documents, and all other
information with respect to assets and properties of the Company and the
condition thereof, and to update such examination at such intervals as the Bank
shall deem appropriate. Such access shall include reasonable access by the Bank
and the Bank Representatives to auditors' work papers with respect to the
business and properties of the Company, other than (i) books, records and
documents covered by the attorney-client privilege, or which are attorneys' work
product, and (ii) books, records and documents that the Company is legally
obligated to keep confidential. Such examination shall be conducted in
cooperation with the officers of the Company and in such a manner as to
minimize, to the extent possible consistent with the conducting of a
comprehensive examination, any disruption of, or interference with, the normal
business operations of the Company. No such examination, however, shall
constitute a waiver or relinquishment on the part of the Bank to rely upon the
representations and warranties made by the Company herein or pursuant hereto;
provided, that the Bank shall promptly disclose in writing to the Company any
fact or circumstance it may discover which it believes renders any
representation or warranty made by the Company hereunder incorrect in any
respect. The Bank will hold in strict confidence all documents and information
concerning the Company so obtained (except to the extent that such documents or
information are a matter of public record or require disclosure in the Proxy
Statement or as may be necessary for the accomplishment of the purposes of such
examination) and, if the transactions contemplated herein are not consummated,
such confidence shall be maintained and all such documents including all copies
shall be returned to the Company.
7.4 BREACHES. The Company shall, in event it becomes aware of the
impending or threatened occurrence of any event or condition which would cause
or constitute a breach (or would have caused or constituted a breach had such
event occurred or been known prior to the date hereof) of any of its
representations or agreements contained or referred to herein, given prompt
written notice thereof to the Bank and, without limiting the Bank's rights under
paragraph 14.1(a)(ii), the Company shall use its best efforts to prevent or
promptly remedy the same.
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7.5 COMPLIANCE WITH RULES. The Company shall comply with the
requirements of all applicable Rules, the noncompliance with which would
materially and adversely affect the assets, liabilities, business, financial
condition, or results of operations of the Company taken as a whole. The
Company shall also comply with all securities statutes, rules and regulations,
whether federal or state, in connection with the Offering. Except for
information supplied by the Bank pursuant to Section 6.22, the information
contained in the Offering disclosure documents shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
7.6 CORPORATE ACTION. The Company shall take or cause to be taken
all necessary corporate action required to carry out the transactions
contemplated in this Agreement and the Agreement of Merger, including without
limitation, all necessary action required to organize and fund PCBG Valley
Corporation.
7.7 REGULATORY APPROVALS. Promptly following execution of this
Agreement, the parties hereto shall prepare, submit and file, or cause to be
prepared, submitted and filed, all applications for approvals and consents as
may be required of any of them, respectively, by applicable law and regulations
with respect to the transactions contemplated by this Agreement, including
without limitation any and all applications required to be filed with the
Commissioner, the FRB, the FDIC and such other Governmental Entity as the
Company or the Bank may reasonably believe necessary. Each party shall
cooperate with the other in the preparation of all of such applications and will
furnish promptly upon request all documents, information, financial statements
or other materials as may be required in order to complete such applications.
Each party shall afford the other a reasonable opportunity to review all such
applications (except confidential portions thereof) and all amendments and
supplements thereto before filing. The Company and the Bank each covenant and
agree that any and all information furnished by it to the other for inclusion in
such applications will not contain any untrue statement of a material fact and
will not omit to state any material fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
7.8 NECESSARY CONSENTS. In addition to the regulatory approvals
referred to in Section 7.7, the parties hereto shall each apply for and
diligently seek to obtain all other third party consents or approvals which may
be necessary for the consummation of the Merger, including, without limitation,
the written consent of any lessors of real and personal property which property
cannot be assigned without the written consent of the other such lessors ("Third
Party Consent").
7.9 FURTHER ASSURANCES. The parties agree that from time to time,
whether prior to, at or after the Effective Time of the Merger, they will
execute and deliver such further instruments of conveyance and transfer and take
such other action as may reasonably be expected to consummate the transactions
contemplated
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hereby. The Company and the Bank each agree to take such further action as
may reasonably be requested by the other in order to consummate the
transactions contemplated by this Agreement and that are not inconsistent
with the other provisions hereof, including compliance with the terms of
Article II.
7.10 (reserved).
7.11 (reserved).
7.12 INDEMNIFICATION AND INSURANCE.
(a) The Company will cause the Bank to maintain in effect policies
of directors' and officers' liability insurance (with such coverage, terms and
conditions as are no less advantageous than the insurance presently maintained
by the Bank with respect to the present and former officers and directors,
specifically including a "piece of mind" coverage endorsement or policy covering
current Bank directors not to exceed $16,000) with respect to all matters
arising from facts or events which occurred before the Effective Time of the
Merger for which the Bank would have had an obligation to indemnify its
directors and officers.
(b) If the Company or any of its successors or assigns (i) shall
consolidate with or merge into any other corporation or entity and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) shall transfer all or substantially all of its properties and
assets to any individual, corporation or other entity, then and in each such
case, the Company shall take no action to impair the rights provided in this
Section 7.12.
7.13 EXECUTION OF AGREEMENT OF MERGER. As soon as practicable
after the organization of PCBG Valley Corporation, the Company as the sole
shareholder of PCBG Valley Corporation, shall approve the Merger and shall cause
PCBG Valley Corporation to execute the Agreement of Merger and take any and all
other actions reasonably necessary to consummate the transactions contemplated
herein.
7.14 THE OFFERING.
(a) The Company intends to conduct the Offering in order to raise
sufficient cash capital to complete the acquisition of the Bank, provide capital
for growth and operations of the Company, and to otherwise carry out the
transaction contemplated by this Agreement.
(b) All Directors and officers of the Company and the Bank will
undertake in writing with the Underwriters not to sell any Warrants or shares of
Company Stock held by them for a period of six months following the completion
of the Offering unless specifically granted permission to do so by the
Underwriters.
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(c) Simultaneously with, and upon the condition of, the
consummation of the acquisition of the Bank, the Company through the
Underwriters intends to consummate the Offering at a gross public offering
price to be determined by the Company and the Underwriters. Based upon
current market conditions and assumptions, the Offering will consist of
sufficient shares of Company Stock offered to the public at a gross offering
price to be determined by the Company and the Managing Underwriter. The
shares constituting the Offering will be comprised of newly issued shares of
Company Stock to fund the cash portion of the acquisition of the Bank and to
provide the Company with new capital for growth and operations of the Company
following the acquisition of the Bank and the consummation of the Offering.
(d) The Managing Underwriter has entered into an Engagement
Agreement with the Company which has not terminated and has not withdrawn the
letter expressing their degree of confidence, and the Managing Underwriter will
promptly notify the parties if such withdrawal should occur.
7.15 AUTHORIZATION. The execution and delivery of the Agreement of
Merger and the consummation of the transactions contemplated thereby will have
been duly authorized by the Board of Directors of PCBG Valley Corporation. The
Agreement of Merger will constitute a legal, valid and binding agreement of PCBG
Valley Corporation in accordance with its respective terms, except as the
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other laws of general application relating to or
affecting enforcement of creditors rights and the application of equitable
principles in any action, legal or equitable. PCBG Valley Corporation will have
full corporate power and authority to perform its obligations under the
Agreement of Merger and the transactions contemplated thereby.
7.16 NO CONFLICTS; DEFAULTS. The execution, delivery and
performance of the Agreement of Merger and the consummation of the transactions
contemplated therein, and compliance by PCBG Valley Corporation with any
provision thereof will not (a) conflict with or result in a breach of, or
default or loss of any benefit under, any provision of its Charter Documents or,
except as set forth in Exhibit 7.16 any material agreement, instrument or
obligation to which PCBG Valley Corporation will become a party or by which the
property of PCBG Valley Corporation will become bound or give any other party to
any such agreement, instrument or obligation the right to terminate or modify
any term thereof; (b) except for the prior approval of the FRB, the FDIC and the
Commissioner and as set forth in Exhibit 7.16, require any Consents; (c) result
in the creation or imposition of any Encumbrance on any of the properties or
assets of PCBG Valley Corporation; or (d) violate the Charter Documents or any
Rules to which PCBG Valley Corporation is subject.
7.17 ACCURACY OF INFORMATION FURNISHED. Except as to any
statements or information which shall include projections or forecasts, none of
the statements or information made or contained in any of the covenants,
representations or warranties
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of the Company set forth in this Agreement or in any of the schedules,
exhibits, lists, certificates or other documents furnished herewith contains
any untrue statement of a material fact required to be stated herein or
therein or necessary to make the statements or information contained herein
or therein, in light of the circumstances in which they were made, not
misleading. As to any such information or statements which include
projections or forecast, such information or statements are based upon
assumptions believed by the Company to be reasonable. The Company shall
further amend or supplement the schedules as of the Closing Date if necessary
to reflect any additional changes in the status of the Company.
7.18 1999 STOCK OPTION PLAN. Prior to or following the completion
of the transactions contemplated herein, the Company will use its best efforts
to establish the Company's 1999 Stock Option Plan for the benefit of directors,
officers and key employees of the Company and the Bank.
7.19 FURTHER ASSURANCES. The Company knows of no reason that the
transaction would not consummate. Without the prior approval of the Bank, the
Company will not enter into any further agreements to acquire another financial
institution that would adversely affect the transaction consummated by this
Agreement.
7.20 FINANCIAL STATEMENTS. In the event the following have not
been previously delivered prior to the date hereof, the Company will deliver to
the Bank a copy of the audited Statements of Financial Condition of the Company
as of December 31, 1998; Statements of Earnings, Stockholders' Equity and Cash
Flows for the year ended December 31, 1998, the related notes and related
opinions thereon of Arthur Andersen LLP certified public accountants, with
respect to such financial statements (the "1998 Audited Company Financial
Statements"). The Company will furnish the Bank with a true and correct copy of
the management letter or other letter delivered to the Company by Arthur
Andersen LLP in connection with the 1998 Audited Company Financial Statements
relating to any review of the internal controls of the Company by Arthur
Andersen LLP. The 1998 Audited Company Financial Statements will: (i) present
fairly the financial condition and results of operations of the Company as of
and for the dates or periods covered thereby in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved; (ii) be based on the books and records of the Company; (iii) contain
and reflect reserves for all material accrued liabilities and for all reasonably
anticipated losses, and set forth adequate reserves for loan losses and other
contingencies, to the extent required by GAAP; and (iv) none of the 1998 Audited
Company Financial Statements will contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
contained therein not misleading under GAAP.
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ARTICLE VIII
FURTHER COVENANTS OF THE COMPANY AND THE BANK
The parties covenant and agree as follows:
8.1 S-4, PROXY STATEMENT AND REGISTRATION STATEMENT FOR THE
OFFERING.
(a) As promptly as practicable, the Company and the Bank shall use
their best efforts to prepare and file the S-4 in which the Proxy Statement will
be included as a prospectus, and the Registration Statement for the Offering
with the SEC and any other applicable Governmental Entity. The Bank agrees to
provide the information necessary for inclusion in the S-4, the Proxy Statement
and the Registration Statement for the Offering. The Company will use its best
effort to have the S-4 and the Proxy Statement declared effective under the
Securities Act as promptly as practicable after it is filed and to satisfy the
requirements of the SEC and any other Governmental Entity.
(b) After the date of the filing of the S-4 and the Registration
Statement for the Offering with the SEC and any other Governmental Entity, each
of the Parties agrees to promptly notify the other of and to correct any
information furnished by such party that shall have become false or misleading
in any material respect and to cooperate with the other to take all steps
necessary to file with the SEC and any other Governmental Entity and have
declared effective or cleared by the Commissioner and any other Governmental
Entity any amendment or supplement to the S-4 and the Registration Statement for
the Offering so as to correct such information and to cause the S-4 and the
Registration Statement for the Offering as so corrected to be disseminated to
the shareholders of the Company and the Bank to the extent required by
applicable Rules. All documents that the Company files with the SEC or any
other Governmental Entity in connection with this Agreement will comply as to
form in all material respects with the provisions of applicable Rules.
(c) The Company shall take all required action with appropriate
Governmental Entities under state securities or blue sky laws in connection with
the issuance of Company Stock and Warrants pursuant to this Agreement.
(d) The Bank and the Company, through their respective Board of
Directors, will recommend that its shareholders approve the transactions
contemplated hereby, and both parties will use their best efforts to obtain the
affirmative votes of the holders of the largest possible percentage of its
outstanding Common Stock, so long as it is consistent with its fiduciary
obligation to do so.
8.2 SECURITIES LAWS. In obtaining the consent of its shareholders
of the matters described in Section 8.1 hereof, the Company, the Bank and their
respective officers, directors and controlling shareholders will, in all
respects, comply with the Rules and regulations of the SEC and any other
Governmental Entity
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applicable to commercial banks, other applicable provisions of the United
States Code, the Rules and regulations of the SEC and the securities laws of
all states in which shareholders of the parties reside as applicable.
Without in any way limiting the generality of the foregoing, the
Company and the Bank agree that the Notice of Meeting, Proxy Statement submitted
in connection therewith, form of Proxy and other solicitation materials that
will be used in soliciting the aforesaid shareholder approvals and
authorizations and the Registration Statement for the offering:
(i) will be filed with, and not be used before the same
are cleared for use by the SEC, other Governmental Entities having jurisdiction
over the Company and the Bank, and this transaction, and the securities
administrators of all states in which their respective shareholders reside as
applicable;
(ii) will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, except that neither
party warrants the accuracy or completeness of any information contained therein
which is furnished to it by the other relating to the business, assets,
properties, financial condition or management of the other or any corporation or
person affiliated or contractually obligated to become affiliated therewith,
whether by merger, acquisition of assets or otherwise;
(iii) the Company and the Bank will use their best efforts
to obtain clearance by all appropriate Governmental Entities for the use of its
Notice of Meeting, Proxy Statement, form of Proxy and other solicitation
materials. Each party will consult and cooperate with the other in the
preparation of all such proxy solicitation materials for the Bank Shareholders'
Meeting and the Company's Shareholders Meeting, and the Bank and the Company
agree not to transmit any proxy materials without the prior consent of the other
party and its counsel; and
(iv) the Company and the Bank shall each covenant and agree
and each pay their own expenses in connection with the preparation and filing,
including attorney fees, of the Notice of Meeting, Proxy Statement, form of
Proxy and other solicitation materials.
8.3 MAILING OF PROXY STATEMENT. The Bank and the Company each
covenant and agree that they will use their best efforts and shall cooperate
with each other in the preparation, filing and mailing of the Proxy Statement as
soon as it is reasonably practicable and is permitted under applicable law; it
being the intention of the Company and the Bank to include their December 31,
1998 financial statements and information, and any necessary quarterly financial
statements and information, in the financial disclosures contained in the Proxy
Statement.
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8.4 MATERIALS TO BE FURNISHED PRIOR TO MAILING DATES. On or prior
to the mailing date of the Proxy Statement ("Bank Mailing Date"), the Bank (a)
shall use its best efforts to cause an appropriate firm that shall be selected
by the Bank in its discretion, subject to the reasonable approval of the
Company, to deliver to the Company a copy of any letter to the Board of
Directors of Bank, dated as of a date not more than five days prior to such
mailing date, in form and substance satisfactory to the Company to the effect
set forth in Section 10.4 hereof, (b) shall have received a letter by a date not
more than five days prior to the Bank Mailing Date, to the effect that the
consideration to be received by the shareholders of the Bank in the Merger is
fair from a financial point of view, and (c) shall have received a letter by a
date not more than five days prior to the Bank Mailing Date, of the valuation of
dissenters rights shares as described in Section 1300.
8.5 REGULATORY APPROVALS. The Bank and the Company each agree to
use their best efforts to provide promptly such information and reasonable
assistance as may be requested by the other party to this Agreement and to take
promptly such other actions as shall be necessary or appropriate in order to
consummate the transactions contemplated hereby. Without limiting the
foregoing, the Bank and the Company will each (a) prepare, submit and file, or
cause to be prepared, submitted and filed, all applications for all
authorizations, consents, orders and approvals of federal, state, local and
other Governmental Entities and officials necessary under applicable law for the
performance of its obligations pursuant to this Agreement and the consummation
of the transactions contemplated hereby, (b) use their best efforts to obtain
all such authorizations, consents, orders and approvals as expeditiously as
possible in accordance with the terms of this Agreement, and (c) cooperate fully
with each other in promptly seeking to obtain such authorizations, consents,
orders and approvals, including without limitation, in each case, the approval
of the FRB, the FDIC and the Commissioner. The Bank and the Company each agree
to promptly provide the other with copies of all applications referred to in
clause (a) above and copies of all written communications, letters, reports or
other documents delivered to or received from any Governmental Entity, and
copies of all memoranda relating to discussions with such Governmental Entity,
if any, with respect to the Merger, except that the Company and the Bank shall
not be required to provide the other with any of the foregoing documents
submitted or received on a confidential or privileged basis or which incorporate
confidential information relating to other financial institutions. The Parties
agree that through the Effective Time of the Merger, each of its reports,
registration, statements and other filings required to be filed with any
applicable Governmental Entity will comply in all material respects with the
aplicable statutes, rules and regulations enforced or promulgated by the
Governmental Entity with which it will be filed and none will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Any financial
statement contained in any such report, registration statement or other filing
that is intended to represent the financial position of the Party to which it
relates will fairly present the financial position of such Party and will
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be prepared in accordance with GAAP or RAP consistently applied during the
periods involved.
8.6 CORPORATE GOVERNANCE.
(a) Prior to the Effective Time, the Bank shall take all
necessary steps to effect the Bank Corporate Governance Changes at the Effective
Time.
(b) Prior to the Effective Time, the Company shall take
all necessary steps to effect the Company Corporate Governance Changes at the
Effective Time.
8.7 NASDAQ. Prior to or at the Effective Time, the Company shall
take all necessary steps to list the Company's Stock on the Nasdaq National
Market System at the Effective Time of the Merger.
ARTICLE IX
CONDITIONS PRECEDENT TO THE CONTEMPLATED TRANSACTIONS
The obligations of the Parties to consummate the transactions as
provided for herein are subject to the fulfillment, at or prior to the Effective
Time, of the following conditions:
9.1 PERMITS AND APPROVALS. Appropriate permits or approvals from
the Commissioner, the FRB, the FDIC and/or any other Governmental Entities which
are necessary to carry out the transactions contemplated in this Agreement,
shall have been received, the United States Department of Justice shall not have
taken any adverse action within the period allowed under 12 U.S.C. Section
1828(c)(6), and all other statutory or regulatory requirements for the valid
completion of the transactions contemplated hereby shall have been satisfied.
Said permits and approvals shall include, but shall not be limited to, the
following:
(i) prior written approval from the Commissioner pursuant
to the CFC, the FDIC pursuant to 12 U.S.C. Section 1828(c)(2) and the FRB
pursuant to the Federal Reserve Act and the BHC Act;
(ii) to the extent required by applicable Rule, all
Consents of any Governmental Entity, including, without limitation, those of the
FRB, the FDIC and the Commissioner, shall have been obtained, granted or waived
for organization of PCBG Valley Corporation and the Merger, and all applicable
waiting periods under all rules shall have expired; and
(iii) all approvals, orders and/or permits necessary for the
Offering and any other necessary regulatory approvals and the issuance of
approvals or assurances from the Commissioner, the FRB, the FDIC, the SEC, any
blue sky
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authority and any other necessary Governmental Entity having authority over
the Merger that the approval of the Merger will be forthcoming that are
satisfactory to the Company, that would allow the Company to commence the
marketing of the Offering by the Company to complete the Merger as described
in this Agreement.
9.2 ABSENCE OF LITIGATION. On the Closing Date and at the
Effective Time: (i) there shall be no action pending before any court of
competent jurisdiction in which any injunction is sought by any Governmental
Entity against the transactions contemplated hereby; and (ii) there shall be in
effect no order, writ, injunction or decree of any court or Governmental Entity
prohibiting the consummation of any of the transactions contemplated hereby.
9.3 SHAREHOLDER APPROVAL. The Agreement, the Merger, and the
other transactions contemplated hereby, shall have been approved by the holders
of at least two-thirds (2/3) of the issued and outstanding shares of Bank Stock
entitled to vote and the requisite approval of the Company as the sole
shareholder of PCBG Valley Corporation as soon as practicable. Any and all
other action required by the shareholders of the Bank or the Company to
authorize or effect the transactions called for herein shall have been duly and
validly taken.
9.4 STOCK OFFERING. The Company shall have closed the Offering as
soon as is reasonably possible, the Company shall have received the amount of
cash necessary to complete the Merger as provided in Section 2.5, and to carry
out the transactions contemplated hereby.
9.5 S-1, S-4 AND PROXY STATEMENT. The S-4, Proxy Statement and
the S-1 shall have been declared effective by the SEC, the Commissioner, and any
other Governmental Entity, as appropriate, and shall not be the subject of any
stop order or proceeding seeking or threatening a stop order. The Company shall
have received all state securities or "Blue Sky" permits and other authorization
necessary to issue the Company Stock in the Offering and the S-4 in order to
consummate the Merger.
9.6 NASDAQ. The Company's Common Stock will be listed on the
Nasdaq National Market System at the Effective Time.
9.7 SEVERANCE POLICY. The Bank and the Company have agreed to a
severance policy as set forth on Exhibit 9.7.
9.8 TAX OPINION. The Company shall have received from its
accountants an opinion reasonably satisfactory to the Company to the effect that
the Merger shall not result in the recognition of gain or loss for federal
income tax purposes to the Company or the Bank, nor shall the issuance of
Company Stock result in the recognition of gain or loss by the holders of Bank
Stock who receive Company Stock in connection with the Merger, dated prior to
the date of the Proxy Statement is first mailed to the shareholders of the
Company and the Bank and such opinions shall not have been withdrawn or modified
in any respect.
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ARTICLE X
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE BANK
All of the obligations of the Bank to consummate the transactions
contemplated herein shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions, or their waiver by resolution of the
Board of Directors of the Bank:
10.1 LEGAL OPINION. The Bank shall have received the opinion of
Knecht & Hansen, acting as counsel for the Company, dated as of the Closing
Date, in substantially the form of EXHIBIT 10.1.
10.2 CERTIFICATE OF NO DEFAULT. All covenants, terms and
conditions of this Agreement to be complied with and performed by the Company at
or before the Closing Date shall have been complied with and performed in all
material respects and the representations and warranties of the Company
contained in Article V hereof shall have been true and correct in all material
respects as of the Effective Time, with the same effect as though such
representations and warranties had been made on and as of the Effective Time,
except as otherwise specified in, or permitted or contemplated by, this
Agreement. The Company shall have delivered to the Bank, a certificate dated
the Closing Date, signed by the President, certifying the fulfillment of this
condition.
10.3 CLOSING DOCUMENTS. The Company shall have delivered to the
Bank all items required by the Bank pursuant to Section 3.3, all of which
documents shall be properly executed and, if required by the Bank, acknowledged
before a notary.
10.4 EFFECTIVE S-4 AND PROXY STATEMENT. The S-4 and the Proxy
Statement shall have been approved or otherwise become effective and no stop
order suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by any Governmental Entity at the
Closing Date.
10.5 REGULATORY APPROVALS AND RELATED CONDITIONS. Any and all
governmental and regulatory approvals and Consents referred to in Article IX and
any other section of this Agreement shall have been granted without the
imposition of conditions, or with conditions subject to the approval of the
Company and the Bank, that are or would have become applicable to the Company or
the Surviving Bank, and that the Company reasonably and in good faith concludes
would materially adversely affect the financial condition or operations of the
Company or the Surviving Bank, or otherwise would be materially burdensome;
provided, however, that conditions or requirements which are imposed on
purchasers or acquired institutions by Governmental Entities in comparable
transactions shall not be deemed to be a basis for excuse of performance under
this Agreement. All actions necessary to authorize
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the execution, delivery and performance of the Agreement by the Company and
consummation of the Merger by the Company and PCBG Valley Corporation shall
have been duly and validly taken by the Board of Directors of the Company and
the PCBG Valley Corporation.
10.6 THIRD PARTY CONSENTS. The Company shall have obtained all
consents of other parties to the Company's material mortgages, notes, leases,
franchises, agreements, licenses and permits as may be necessary to permit the
transactions contemplated herein to be consummated, without default,
acceleration, breach or loss of rights or benefits thereunder.
10.7 ABSENCE OF CERTAIN CHANGES. As of the Closing Date there
shall not exist any of the following:
(i) any change(s) in the financial condition or results of
operation of the Company since inception which individually is or in the
aggregate are materially adverse to the Company; or
(ii) any damage, destruction, loss or event materially and
adversely affecting the properties, business or prospects of the Company on a
consolidated basis.
10.8 VALIDITY OF TRANSACTIONS. The validity of all transactions
herein contemplated, as well as the form and substance of all opinions,
certificates, instruments of transfer and other documents to be delivered to the
Bank hereunder, shall be subject to the approval, to be reasonably exercised, of
counsel for the Bank.
10.9 FAIRNESS OPINION. Prior to solicitation of shareholder
approval, the Bank shall have received an opinion pursuant to Section 8.4
confirming the fairness of the terms of the Merger from a financial perspective,
and such opinion shall not have been withdrawn prior to the mailing date of the
Proxy Statement.
10.10 NASDAQ LISTING. The shares of Company Stock issuable
pursuant to this transaction shall have been duly authorized for listing,
subject to notice of issuance, on the Nasdaq National Market System.
ARTICLE XI
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF THE COMPANY
All of the obligations of the Company to consummate the transactions
contemplated herein shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions, or their waiver by resolution of the
Board of Directors of the Company, as appropriate:
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11.1 LEGAL OPINION. The Company shall have received the opinion of
Aldrich & Bonnefin acting as counsel for the Bank, dated as of the Closing Date,
in substantially the form of EXHIBIT 11.1.
11.2 CERTIFICATE OF NO DEFAULT. All covenants, terms and
conditions of this Agreement to be complied with and performed by the Bank at or
before the Closing Date shall have been complied with and performed in all
material respects and the representations and warranties of the Bank contained
in Article IV hereof shall have been true and correct in all material respects
as of the Effective Time, with the same effect as though such representations
and warranties had been made on and as of the Effective Time, except as
otherwise specified in, or permitted or contemplated by, this Agreement. The
Bank shall have delivered to the Company a certificate, dated the Closing Date,
signed by the President and Chief Financial Officer of the Bank, certifying the
fulfillment of this condition.
11.3 CLOSING DOCUMENTS. The Bank shall have delivered to the
Company all items required by the Company pursuant to Section 3.3, all of which
documents shall be properly executed and, if required by the Company,
acknowledged before a notary.
11.4 EFFECTIVE S-1, S-4 AND PROXY STATEMENT. The S-1, S-4 and the
Proxy Statement shall have become effective and no stop order suspending the
effectiveness thereof shall be in effect and no proceedings therefor shall be
pending or threatened by the SEC, FDIC, the Commissioner, the FRB or any blue
sky authority at the Closing Date.
11.5 BANK DISSENTING SHAREHOLDERS AGAINST MERGER. The Bank's
shareholders voting against the Merger or the Bank's shareholders giving notice
in writing to the Bank at or before the Bank's meeting that such shareholder
dissents from the Merger, on a combined basis, shall hold not more than ten
percent (10%) of the outstanding shares of the Bank.
11.6 REGULATORY APPROVALS AND RELATED CONDITIONS. Any and all
governmental and regulatory approvals and Consents referred to in Article IX and
any other section of this Agreement shall have been granted without the
imposition of conditions, or with conditions subject to the approval of the
Company, that are or would have become applicable to the Company or the
Surviving Bank and that the Company reasonably and in good faith concludes would
materially adversely affect the financial condition or operations of the Company
or the Surviving Bank, or otherwise would be materially burdensome; provided,
however, that conditions or requirements which are imposed on purchasers or
acquired institutions by Governmental Entities in comparable transactions shall
not be deemed to be a basis for excuse of performance under this Agreement.
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11.7 THIRD PARTY CONSENTS. The Company shall have obtained all
consents of other parties to the Company's material mortgages, notes, leases,
franchises, agreements, licenses and permits as may be necessary to permit the
transactions contemplated herein to be consummated, without default,
acceleration, breach or loss of rights or benefits thereunder.
11.8 ABSENCE OF CERTAIN CHANGES. As of the Closing Date, there
shall not exist any of the following: (i) any Material Adverse Change as
defined in Section 4.17, (ii) any damage, destruction, loss or event materially
and adversely affecting the properties, business or prospects of the Bank; or
(iii) any material adverse change in the deposit structure of the Bank from July
30, 1998 to the Closing Date.
11.9 BANK STOCK OPTION PLAN; AND OFFICERS AND EMPLOYEES. The Bank
shall have caused the Bank Stock Option Plan to be terminated as of or prior to
the Effective Time of the Merger and shall have obtained the consents or
agreements specified in, and otherwise shall have complied with the terms of,
Section 6.10. Pursuant to California Law and its employment policies and
practices, the Bank shall have complied with Section 6.11 of this Agreement as
of the Effective Time of the Merger.
11.10 DIRECTOR AGREEMENTS. Pursuant to Section 2.9, concurrently
with the execution of this Agreement, each director of the Bank shall enter into
separate agreements with the Company in the form attached hereto as EXHIBIT "B".
11.11 TERMINATION OF CONTRACTS. Except as otherwise directed by the
Company, the Bank shall have terminated all contracts, commitments or
understandings as defined in Section 4.12(v) for the future purchase of
materials, supplies, services, merchandise or equipment, the price of which
exceeds $10,000, and any expense incurred in connection with such terminations
shall have been charged in full to the Bank prior the last day of the month
preceding the Closing Date which have been designated by the Company and agreed
to by the Bank. Before the Determination Date prior to the Closing Date, the
Bank shall have paid, or set-up adequate accruals for the payment of all
material expenses that the Bank shall be liable for up to the Closing Date,
including, but not limited to, all accounting and attorney fees in connection
with this Agreement.
11.12 VALIDITY OF TRANSACTIONS. The validity of all transactions
herein contemplated, as well as the form and substance of all opinions,
certificates, instruments of transfer and other documents to be delivered to the
Company hereunder, shall be subject to the approval, to be reasonably exercised,
of counsel for the Company.
11.13 EMPLOYEE BENEFIT PLANS. Upon the agreement of the Company and
the Bank, the Bank's Employee Plans, programs and arrangements, have been
terminated on terms and conditions satisfactory to the Parties, and all benefits
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payable under such plans, programs and arrangements shall be accrued prior to
the Closing Date.
11.14 FAIRNESS OPINION. Prior to commencement of the marketing of
the Offering described in Sections 9.1(iii) and 9.4, the Company in its
discretion may receive an opinion concerning the fairness of the terms of the
Merger to the shareholders of the Company from a financial point of view.
11.15 STOCK OFFERING. The Bank shall have provided such information
as deemed reasonably necessary by the Company in connection with the sale of
stock including but not limited to, certificates of its officers and directors
attesting to, among other things, the truthfulness and correctness of the
representations contained in this Agreement, opinions of legal counsel and
comfort letters from the Bank's accountants.
11.16 S-4, THE PROXY STATEMENT AND REGULATORY APPLICATIONS. The
Bank shall have provided such information as deemed reasonably necessary by the
Company in connection with the S-4 and the Proxy Statement and any other
regulatory applications including but not limited to, certificates of its
officers and directors attesting to, among other things, the truthfulness and
correctness of the representations contained in this Agreement, opinions of
legal counsel and comfort letters from the Bank's accountants.
11.17 BLUE SKY MATTERS. The issuance of the Company Stock in the
Offering and the S-4 shall have been qualified or registered with the
appropriate Governmental Entity under state securities or Blue Sky laws, and
such qualification or registrations are in effect on the Closing Date.
11.18 PROFESSIONAL FEES. The Bank's costs and expenses in
connection with the transaction contemplated by this Agreement, including
investment banker, accounting, attorney and any other costs and expenses, shall
not exceed the amount that would be reasonable and customary for a transaction
as described in this Agreement. Of these expenses, the accounting and attorney
fees and expenses, and related costs and expenses thereto incurred from May 1,
1998 through the Closing Date, of the Bank shall not exceed $175,000 in the
aggregate.
11.19 YEAR 2000. The Bank shall certify that the Bank is making
satisfactory progress for compliance with Year 2000 safety and soundness issues
with respect to its own computer systems, and the computer systems of its
vendors and customers.
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ARTICLE XII
DISSENTING SHAREHOLDERS OF BANK
Any shareholder of the Bank who lawfully dissents shall be entitled
to receive cash for the fair market value of his or her shares determined in
accordance with Section 1300.
ARTICLE XIII
EXPENSES
13.1 EXPENSES. All fees and Expenses incurred in connection with
the transactions contemplated by this Agreement shall be paid by the Party
incurring such Expenses. For the purposes of this Agreement, "Expenses" shall
include, but not be limited to, all expenses relating to such transactions
including, legal, accounting, investment banking fees and cost reimbursements,
fees and costs of consultants, costs of proxy statements and shareholder action
on the Merger, and if accrued according to GAAP as of the Determination Date by
Bank, and provided such expenses would be properly tax deductible, the net after
tax effect of severance payments and employee benefits under employment
contracts and employee benefit plans reflected in Exhibits 4.11(a), (c), (j) and
(m), including but not limited to accrual of any and all unfunded or accelerated
obligations thereunder.
ARTICLE XIV
TERMINATION
14.1 TERMINATION OF THIS AGREEMENT.
(a) Notwithstanding that this Agreement and the Agreement of
Merger may have already been approved by shareholders of one or both of
constituent corporations to the transactions contemplated by this Agreement,
this Agreement may be terminated prior to the Effective Time of the Merger:
(i) by mutual agreement of the parties, in writing;
(ii) by (A) the Company immediately upon the expiration of
30 days from the date that the Company has given notice to the Bank of a
material breach or default by the Bank in the performance of any covenant,
agreement, representation, warranty, duty or obligation hereunder or (B) the
Bank immediately upon the expiration of 30 days from the date that the Bank has
given notice to the Company of a breach or default by the Company in the
performance of any covenant, agreement, representation, warranty, duty or
obligation hereunder, except for Sections 5.18 and 7.14
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(iii) by the Company or the Bank if any Governmental Entity
denies or refuses to grant the approvals, consents or authorizations required to
be obtained, or if any Governmental Entity approves the transaction covered and
contemplated by this Agreement upon conditions not reasonably acceptable to the
Company, in order to consummate the transactions covered and contemplated by
this Agreement. If any regulatory application filed pursuant to this Agreement
hereof should be finally denied or disapproved by the respective Governmental
Entity, then this Agreement thereupon shall be deemed terminated and canceled;
provided, however, that a request for additional information or undertaking by
the Company, as a condition for approval, shall not be deemed to be a denial or
disapproval so long as the Company diligently provides the requested information
or undertaking. In the event an application is denied pending an appeal,
petition for review, or similar such act on the part of the Company (hereinafter
referred to as the "appeal") then the application will be deemed denied unless
the Company prepares and timely files such appeal and continues the appellate
process for purposes of obtaining the necessary approval within 45 days
thereafter.
(iv) by the Company or the Bank if (A) the Board of
Directors of the Bank approves a transaction (or the Bank executes a letter of
intent or other agreement) pursuant to which any person or entity or related
group of persons or entities acquires, directly or indirectly, record or
beneficial ownership (as defined in Rule 13d3 promulgated by the SEC pursuant to
the Exchange Act) or control of 25% or more of the outstanding shares of Bank
Stock or other securities of the Bank; (B) any person or entity or related group
of persons or entities seeks to acquire 25% or more of the outstanding shares of
Bank Stock by tender offer or otherwise, and the Board of Directors of the Bank
does not advise the Bank's shareholders that the Bank's Board of Directors does
not support such tender offer or acquisition and that it supports the Merger;
(C) if the Bank violates its covenant pursuant to Section 6.2 (xxiii) and
(xxiv); (D) the Merger does not receive the requisite approval of the Bank's
shareholders; or (E) the Bank engages in an Alternative Transaction pursuant to
the terms of Section 6.5;
(v) by the Company or the Bank immediately upon the
expiration of 15 days from the date that the Bank or the Company has given
notice to the other Party of a default by the Company in the performance of
Sections 5.18 and 7.14; or
(vi) by the Company or the Bank if the Closing Date has not
occurred by May 15, , 1999, unless regulatory approvals and/or completion of the
Offering is reasonably expected to occur within 30 days of May 15, , 1999, in
which case the date in this subsection shall be automatically extended for up to
an additional 30 days.
(b) Notwithstanding that this Agreement and the Agreement of
Merger may have already been approved by shareholders of one or both of the
constituent corporations to the Merger, this Agreement shall be terminated prior
to
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the Effective Time of the Merger if any conditions specified in Articles IX,
X or XI have not been satisfied or waived in writing by the party authorized to
waive such conditions unless mutually extended by the parties hereto.
(c) REGULATORY ENFORCEMENT MATTERS. In the event that Bank or the
Company or any of their respective subsidiaries shall, after July 30, 1998,
become a party or subject to any new or amended written agreement, memorandum of
understanding, cease and desist order, imposition of civil money penalties or
other regulatory enforcement action or proceeding with any federal or state
agency charged with the supervision or regulation of banks or bank holding
companies which is material to the Bank or the Company and their respective
subsidiaries taken as a whole, then either the Company or the Bank may terminate
this Agreement.
(d) (reserved)
(e) Notwithstanding anything to the contrary contained herein:
(i) If this Agreement is terminated by the Bank before the
Closing Date pursuant to Sections 14.1(a)(ii)(B), (not including Sections 5.18
or 7.14) hereof, the Company shall pay to the Bank, as reasonable and full
liquidated damages and reasonable compensation for the loss sustained thereby
and not as a penalty or forfeiture, the direct expenses incurred by the Bank in
connection with the transaction contemplated by this Agreement, plus 50% of such
expenses, up to a maximum of $500,000, within ten (10) business days of such
termination;
(ii) If this Agreement is terminated by the Company before
the Closing Date pursuant to Sections 14.1(a)(ii)(A) hereof, the Bank shall pay
to the Company, as reasonable and full liquidated damages and reasonable
compensation for the loss sustained thereby, and not as a penalty or forfeiture,
the direct expenses incurred by the Company in connection with the transaction
contemplated by this Agreement, plus 50% of such expenses, up to a maximum of
$500,000 within ten (10) business days of such termination; and
(iii) If this Agreement is terminated by the Company before
the Closing pursuant to Section 14.1(a)(iv)(C) or (D) hereof, the Bank will pay
to the Company, as reasonable and full liquidated damages and reasonable
compensation for the loss sustained thereby, and not as a penalty or forfeiture,
the direct expenses incurred by the Company in connection with the transaction
contemplated by this Agreement, plus 50% of such expenses, within ten (10)
business days of such termination, except that if the Agreement is terminated by
the Company pursuant to Section 14.1(a)(iv)(A), (B) or (E) hereof, the Bank will
pay to the Company, as reasonable and full liquidated damages and reasonable
compensation for the loss sustained thereby, and not as a penalty or forfeiture,
$1,750,000 within ten (10) business days of such termination.
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ARTICLE XV
GENERAL PROVISIONS
15.1 CONFIDENTIALITY. All Confidential Information disclosed
heretofore or hereafter by either Party to this Agreement to the other Party to
this Agreement shall be kept confidential by such other Party and shall not be
used by such other Party otherwise than as herein contemplated, except to the
extent that (a) it is necessary or appropriate to disclose to the Bank or the
Company or as may otherwise be required by Rule (any disclosure of Confidential
Information to a Governmental Entity shall be accompanied by a request that such
Governmental Entity preserve the confidentiality of such Confidential
Information); or (b) to the extent such duty as to confidentiality is waived by
the other Party. Such obligation as to confidentiality and nonuse shall survive
the termination of this Agreement pursuant to Article XIV. In the event of such
termination and on request of the other Party, such Party shall use all
reasonable efforts to (y) return to the other Party all documents (and
reproductions thereof) received from such other Party that contain Confidential
Information (and, in the case of reproductions, all such reproductions made by
the receiving Party); and (z) destroy the originals and all copies of any
analyses, computations, studies or other documents prepared for the internal use
of such Party that include Confidential Information, unless otherwise advised by
counsel in connection with any controversy under the Agreement.
15.2 PUBLICITY. The Parties shall coordinate all publicity
relating to the transactions contemplated by this Agreement, and no Party shall
issue any press release, publicity statement, shareholder communication or other
public notice relating to this Agreement or any of the transactions contemplated
hereby without obtaining the prior consent of the other Party except to the
extent that independent legal counsel to the Party, as the case may be, shall
deliver a written opinion to the Party that a particular action is required by
applicable Rules. The Parties hereby agree that all public statements after the
initial press release announcing this Agreement referring to the Bank shall be
made by Mr. N. Douglas Mills, and all public statements made after the initial
press release announcing this Agreement referring to the Company shall be made
by Mr. E. Lynn Caswell, and both Parties agree that all public statements shall
be made by mutual agreement.
15.3 INDEMNIFICATION.
(a) The Bank agrees to defend, indemnify and hold harmless the
Company, its officers and directors, attorneys, accountants and each person who
controls the Company within the meaning of the Securities Act from and against
any costs, damages, liabilities and expenses of any nature, insofar as any such
costs, damages, liabilities and expenses arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Proxy Statement, the Company's Offering disclosure documents or any
amendments or supplements thereto, or arise out of or are based solely upon the
omission or alleged omission to
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state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading based upon information with
respect to the Bank furnished to the Company by or on behalf of the Bank
specifically for use therein; provided, however, that the Bank shall not be
liable in any such case to the extent that any such cost, damage, liability
or expense arises out of or is based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in the Proxy Statement,
the Company's Offering disclosure documents or amendments or supplements
thereto, in reliance upon and in conformity with information with respect to
the Company furnished to the Bank by or on behalf of the Company specifically
for use therein.
(b) The Company agrees to defend indemnify and hold harmless
the Bank, its officers and directors, attorneys, accountants and each person
who controls the Bank within the meaning of the Securities Act from and
against any costs, damages, liabilities and expenses of any nature, insofar
as any such costs, damages, liabilities or expenses arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Proxy Statement, the Company's Offering disclosure documents
or any amendments or supplements thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make statements therein not misleading
based solely upon information with respect to the Company and its
subsidiaries furnished to the Bank by or on behalf of the Company and its
subsidiaries specifically for use therein; provided, however, that the
Company shall not be liable in any such case to the extent that any such
cost, damage, liability or expense arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
the Proxy Statement, the Company's Offering disclosure documents or
amendments or supplements thereto, in reliance upon and in conformity with
information with respect to the Bank furnished to the Company by or on behalf
of the Bank specifically for use therein.
(c) Promptly after receipt by the Party to be indemnified
pursuant to this section ("Indemnified Party") of notice of (i) any claim or
(ii) the commencement of any action or proceeding, Indemnified Party will
give the other Party "(Indemnifying Party") written notice of such claim or
the commencement of such action or proceeding. Indemnifying Party shall have
the right, at its option, to compromise or defend, by its own counsel, any
such matter involving Indemnified Party's asserted liability, at the expense
of the Indemnifying Party. In the event that Indemnifying Party shall
undertake to compromise or defend any such asserted liability, it shall
promptly notify Indemnified Party of its intention to do so, and Indemnified
Party agrees to cooperate fully with Indemnifying Party and its counsel in
the compromise of, or defense against, any such asserted liability. In any
event, Indemnifying Party shall have the right to participate in the defense
of such asserted liability. In any event Indemnifying Party shall have the
right to participate in the defense of such asserted liability.
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15.4 NOTICES. All notices, demands or other communications
hereunder shall be in writing and be made by (a) hand delivery; (b) overnight
mail; (c) United States mail, first class, certified or registered, postage
prepaid; or (d) facsimile transmission, and shall be deemed to have been duly
given (i) on the date of service if delivered by hand or facsimile
transmission (provided that facsimile notices are also mailed by United
States mail, first class, certified or registered, postage prepaid); (ii) on
the next day if delivered by overnight mail or delivery service; or (iii) 72
hours after mailing if mailed by United States mail, first class, certified
or registered, postage prepaid, and properly addressed as follows:
(a) If to the Bank:
N. Douglas Mills, President and Chief Executive Officer
Valley Bank
24010 Sunnymead Drive
Moreno Valley, California 92555-0188
Telecopier No.: (909) 242-1903
With a copy to:
Mark E. Aldrich, Esq.
Aldrich & Bonnefin
18200 Von Karman Avenue, Suite 730
Irvine, California 92612-1029
Telecopier No.: (949) 474-0617
(b) If to the Company:
Mr. E. Lynn Caswell, Chairman and CEO
Pacific Community Banking Group
23332 Mill Creek Drive, Suite 230
Laguna Hills, California 92653
Telecopier No.: (949) 458-2086
With a copy to:
Loren P. Hansen, Esquire
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, California 92660
Telecopier No.: (949) 851-1732
The persons or addresses to which mailings or deliveries shall be made may
change from time to time by notice given pursuant to the provisions of this
Section 15.4.
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15.5 SUCCESSORS AND ASSIGNS. Subject to Section 7.12 and 15.3,
all terms and provisions of this Agreement shall be binding upon and inure to
the benefit of the Parties hereto and their respective transferees,
successors and assigns; provided, however, that, except as otherwise
contemplated herein, this Agreement and all rights, privileges, duties and
obligations of the Parties hereto may not be assigned or delegated by any
party hereto without the prior written consent of the other Party to this
Agreement and any purported assignment in violation of this Section 15.5
shall be null and void.
15.6 THIRD PARTY BENEFICIARIES. Except as provided in Section
7.12, each party hereto intends that this Agreement shall not benefit, or
create any right or cause of action in or on behalf of, any Person other than
the Parties hereto.
15.7 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which taken together shall constitute one
instrument.
15.8 GOVERNING LAW. This Agreement is made and entered into in
the State of California and the laws of the State of California shall govern
the validity and interpretation hereof and the performance of the parties
hereto of their respective duties and obligations hereunder.
15.9 CAPTIONS. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement.
15.10 WAIVER AND MODIFICATION. No waiver of any term, provision
or condition of this Agreement, whether by conduct or otherwise, in any one
or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such term, provision or condition of this Agreement.
This Agreement and the Agreement of Merger, when executed and delivered, may
be modified or amended by action of the Board of Directors of the Company and
the Bank without action by their respective shareholders to the extent
permitted by law. This Agreement may be modified or amended only by an
instrument of equal formality signed by the Parties of their duly authorized
agents.
15.11 ATTORNEYS' FEES. In the event either of the Parties to
this Agreement brings an action or suit against the other Party by reason of
any breach of any covenant, agreement, representation, warranty or other
provision hereof, or any breach of any duty or obligation created hereunder
by such other Party, the prevailing Party, as determined by the court or
other body having jurisdiction, shall be entitled to have and recover of and
from the losing Party, as determined by the court or other body have
jurisdiction, all reasonable costs and expenses incurred or sustained by such
prevailing Party in connection with such suit or action, including, without
limitation, legal fees and court costs (whether or not taxable as such).
15.12 ENTIRE AGREEMENT. The making, execution and delivery of this
Agreement by the Parties hereto have not been induced by any representations,
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statements, warranties or agreements other than those herein expressed. This
Agreement embodies the entire understanding of the Parties and there are no
further or other agreements or understandings, written or oral, in effect
between the Parties relating to the subject matter hereof, unless expressly
referred to by reference herein.
15.13 SEVERABILITY. Whenever possible, each provision of this
Agreement and every related document shall be interpreted in such manner as
to be valid under applicable law. However, if any provision of any of the
foregoing shall be invalid or prohibited under said applicable law, it shall
be construed, interpreted and limited to effectuate its purpose to the
maximum legally permissible extent. If it cannot be so construed and
interpreted so as to be valid under such law, such provision shall be
ineffective to the extent of such invalidity or prohibition without
invalidating the remainder of such provision or the remaining provisions of
this Agreement, and this Agreement shall be construed to the maximum extent
possible to carry out its terms without such invalid or unenforceable
provision or portion thereof.
15.14 EFFECT OF DISCLOSURE. Any list, statement, document,
writing or other information set forth in, referenced to or attached to any
schedule or exhibit delivered pursuant to any provision of this Agreement
shall be deemed to constitute disclosure for purposes of any other schedule
or exhibit required to be delivered pursuant to any other provision of this
Agreement.
15.15 KNOWLEDGE. Whenever any statement herein or in any
schedule, exhibit, certificate or other documents delivered to any Party
pursuant to this Agreement is made "to the knowledge" or "to the best
knowledge" of any Party or other person, such Party or other person, who
shall be an officer of a Party, shall make such statement only after
conducting an investigation which such person determines in good faith to be
reasonable under the circumstances of the subject matter thereof, and each
such statement shall constitute a representation that such investigation has
been conducted.
15.16 TERMINATION OF REPRESENTATION, WARRANTIES AND COVENANTS.
The representations, warranties and covenants of each Party contained herein
or in any certificate or other writing delivered by such Party pursuant
hereto or in connection herewith shall not survive the Merger other than
those provided for in Sections 2.1(b), 2.1(c), 7.12, 13.1, 14.1(e), 15.1,
15.3, 15.11 and 15.12 which shall survive a termination.
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IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement on the day and year first above written.
PACIFIC COMMUNITY BANKING GROUP
By: /s/ E. LYNN CASWELL
--------------------------------
E. Lynn Caswell, Chairman of the
Board and Chief Executive Officer
VALLEY BANK
By: /s/ Marion V. Ashley
--------------------------------
Marion V. Ashley
Chairman of the Board
By: /s/ N. Douglas Mills
--------------------------------
N. Douglas Mills
President and Chief Executive Officer
By: /s/ Willow I. Wachtel Decker
--------------------------------
Willow I. Wachtel Decker
Director
By: /s/ Juan P. Renteria
--------------------------------
Juan P. Renteria
Director
By: /s/ Jesse Washington
--------------------------------
Jesse Washington
Director
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By: /s/ George E. Wilson
--------------------------------
George E. Wilson
Director
By: /s/ Helga Wolf
--------------------------------
Helga Wolf
Director
By: /s/ Eugene H. Wood
--------------------------------
Eugene H. Wood
Director
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EXHIBIT A AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER is made and entered into as of
this day of , 1999, by and between Interim Valley Bank
(referred to herein as "Interim Bank"), a California corporation, and Valley
Bank ("VB"), a California corporation, and Pacific Community Banking Group
(the "Company"), a California corporation, with reference to the following
facts:
RECITALS
1. Interim Bank is a California corporation duly organized,
validly existing and in good standing under the laws of the State of California,
with authorized capital of 1,000,000 shares of no par value common stock of
which, on the date hereof, there are 100 shares issued and outstanding ("Interim
Bank Common Stock") owned by the Company.
2. VB is a banking corporation duly organized, validly
existing and in good standing under the laws of the State of California and is
authorized by the California Commissioner of Financial Institutions to conduct a
general banking business, with authorized capital of 2,400,000 shares of the
$5.00 par value common stock, of which, on the date hereof, there are 1,171,906
shares issued and outstanding ("VB Common Stock").
3. The Company is a California corporation duly organized,
validly existing and in good standing under the laws of the State of California,
with authorized capital of 100,000,000 shares of no par value common stock, of
which, on the date hereof, there are 2,500 shares issued and outstanding
("Company Common Stock"), and 100,000,000 shares of Preferred Stock of which on
the date hereof there are shares issued and outstanding.
4. The respective Boards of Directors of Interim Bank and VB
deem it desirable and in the best interest of their respective corporations and
stockholders that VB be merged (the "Merger") with and into Interim Bank as
provided in this Agreement of Merger pursuant to the laws of the State of
California and that Interim Bank be the surviving corporation ("Surviving
Corporation").
5. In connection with the Merger, the Company and VB have
entered into a First Restatement of Agreement and Plan of Reorganization, dated
as of January 5, 1999, as amended on March 4, 1999 and March _, 1999 (the
"Reorganization Agreement").
NOW THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein set forth and for the purpose of
prescribing the terms and conditions of such Merger, the parties hereto agree as
follows:
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ARTICLE I
THE MERGER
Upon consummation of the Merger at the Effective Time (as
defined in Article IX hereof), VB shall be merged with and into Interim Bank
which shall thereupon be the Surviving Corporation, and the separate corporate
existence of VB shall cease.
ARTICLE II
NAME
The name of the Surviving Corporation shall be changed to
"Valley Bank."
ARTICLE III
ARTICLES OF INCORPORATION
The Articles of Incorporation of Interim Bank as in effect
immediately prior to the Effective Time shall, at and after the Effective Time,
continue to be the Articles of Incorporation of the Surviving Corporation.
ARTICLE IV
BYLAWS
The Bylaws of Interim Bank as in effect immediately prior to
the Effective Time shall, at and after the Effective Time, continue to be the
Bylaws of the Surviving Corporation.
ARTICLE V
DIRECTORS
The Board of Directors and officers of Interim Bank and VB at
the Effective Time shall serve as the Board of Directors and officers of the
Surviving Corporation until such time as their successors have been elected and
qualified as provided for by the Bylaws of Interim Bank.
ARTICLE VI
RIGHTS AND DUTIES OF SURVIVING CORPORATION
At and after the Effective Time, all rights, privileges,
powers and franchises and property and assets of every kind and description of
Interim Bank and VB shall be vested in and be held and enjoyed by the Surviving
Corporation, without further act or deed, and all the estates and interests of
every kind of Interim Bank and VB, including all debts due to either of them,
shall be as effectively the property of the
2
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Surviving Corporation as they were of Interim Bank and VB, and the title to any
real estate vested by deed or otherwise in either Interim Bank or VB shall not
revert or be in any way impaired by reason of the Merger; and all rights of
creditors and liens upon any property of Interim Bank and VB shall be preserved
unimpaired and all debts, liabilities and duties of Interim Bank and VB shall be
debts, liabilities and duties of the Surviving Corporation and may be enforced
against it to the same extent as if said debts, liabilities and duties had been
incurred or contracted by it.
ARTICLE VII
CONVERSION OF SHARES
In and by virtue of the Merger and at the Effective Time,
pursuant to this Agreement of Merger, the shares of Interim Bank Stock and VB
Stock outstanding at the Effective Time shall be converted as follows:
(a) EFFECT ON INTERIM BANK STOCK. Each share of
Interim Bank Stock issued and outstanding immediately prior to the Effective
Time shall for all purposes be deemed to represent, one share of common stock of
the Surviving Corporation.
(b) EFFECT ON VB STOCK. Each share of VB Common Stock
issued and outstanding immediately prior to the Effective Time, except for
shares as to which dissenters' rights are perfected pursuant to Section 1300 ET
SEQ. of the California Corporations Code ("Perfected Dissenting Shares") shall
be automatically cancelled and cease to be an issued and outstanding share of VB
Stock and shall be converted into the right to receive two-thirds (2/3) share of
Company Stock, and a Warrant exercisable into one-third share of Company Stock.
The Company will pay or cause to be paid cash in lieu of fractional shares of VB
Stock in an amount proportionate to the fair value of a whole share as
determined by the board of directors of The Company which would otherwise be
issuable as provided above.
ARTICLE VIII
SHAREHOLDER APPROVAL
This Agreement shall be APPROVED by the
affirmative vote of the holders of a least a majority of the capital stock of
PCBG and the Company, and by the affirmative vote of the holders of at least
two-thirds of the capital stock of VB, at meetings duly held on the call of the
directors or otherwise in accordance with law, and the Merger shall become
effective on the Effective Time.
ARTICLE IX
FURTHER ACTION
The parties hereto shall execute and deliver, or cause to be
executed and delivered, all such deeds and other instruments, and will take or
cause to be taken all
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further or other action as they may deem necessary or desirable, in order to
vest in and confirm to the Surviving Corporation title to and possession of all
of VB's and Interim Bank's property, rights, privileges, powers and franchises
hereunder, and otherwise to carry out the intent and purposes of this Agreement
of Merger.
ARTICLE X
EFFECTIVE TIME
The Merger will become effective upon the ENDORSEMENT of a
copy of this Agreement of Merger (bearing the certification of the Secretary of
State of the State of California) and all other requisite accompanying
certificates BY THE California Commissioner of Financial Institutions PURSUANT
TO SECTION 4887(B) of THE CALIFORNIA FINANCIAL CODE. The date and time of such
ENDORSEMENT with the California Commissioner of Financial Institutions is
referred to herein as the "Effective Time".
ARTICLE XI
SUCCESSORS AND ASSIGNS
This Agreement of Merger shall be binding upon and enforceable
by the parties hereto and their respective successors, assigns and transferees,
but this Agreement of Merger may not be assigned by either party without the
written consent of the other.
ARTICLE XII
GOVERNING LAW
This Agreement of Merger has been executed in the State of
California, and the laws of the State of California shall govern the validity
and interpretation hereof and the performance by the parties hereto.
ARTICLE XIII
TERMINATION
This Agreement of Merger may, by the mutual consent and action
of the Boards of Directors of VB and Interim Bank, be abandoned at any time
before or after approval thereof by the shareholders of Interim Bank and VB, but
not later than the filing of this Agreement of Merger with the Secretary of
State of the State of California.
ARTICLE XIV
SATISFACTION OF OBLIGATIONS AND CONDITIONS
(a) The obligations of VB to proceed with the Closing
are subject to the satisfaction at or prior to the Closing of all of the
conditions to the obligations
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of Interim Bank under the Reorganization Agreement, any one or more of which, to
the extent it is or they are waivable, may be waived, in whole or in part, by
VB.
(b) The obligations of Interim Bank to proceed with
the Closing are subject to the satisfaction at or prior to the Closing of all of
the conditions to the obligations of Pacific Community Banking Group and VB
under the Reorganization Agreement, any one or more of which, to the extent it
is or they are waivable, may be waived, in whole or in party, by Interim Bank.
5
<PAGE>
IN WITNESS WHEREOF, VB and Interim Bank, pursuant to the
approval and authority duly given by resolution of their respective Board of
Directors, have caused this Agreement of Merger to be signed by their respective
officers on the day and year first above written.
VALLEY BANK
By:
-------------------------------------
N. Douglas Mills, President
By:
-------------------------------------
----------------------, Secretary
INTERIM VALLEY BANK
By:
-------------------------------------
E. Lynn Caswell
Chairman of the Board
By:
-------------------------------------
Alfred Jannard, Secretary
PACIFIC COMMUNITY BANKING GROUP
By:
-------------------------------------
E. Lynn Caswell
Chairman of the Board
By:
-------------------------------------
Alfred Jannard, Secretary
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EXHIBIT B DIRECTORS AGREEMENT
This Agreement ("Agreement") is made and entered into this 30th day
of July, 1998 by and between Pacific Community Banking Group, a California
corporation ("Company"), and each of the other persons executing this
Agreement (each such person is referred to individually as a "Bank Director"
and collectively as "Bank Directors" with reference to the following facts:
A. Valley Bank, a California banking corporation ("Bank"), and
the Company have entered into that certain Agreement and Plan of
Reorganization dated as of July 30, 1998 ("Reorganization Agreement"),
pursuant to which the Bank will acquire a subsidiary of the Company by means
of a Merger, and the Company will exchange cash to the shareholders of the
Bank for their shares of the Bank, as those terms are defined in the
Reorganization Agreement ("Acquisition").
B. In order to facilitate Company and Bank entering into the
Reorganization Agreement, the Bank Directors (comprising the entire Board of
Directors of Bank) desire to enter into this Agreement. The execution of
this Agreement shall be a condition precedent to the execution of the
Reorganization Agreement.
NOW, THEREFORE, in consideration of the promises and of the
respective representations, warranties and covenants, agreements and
conditions contained herein and in the Reorganization Agreement, the parties
hereto agree as follows:
1. AGREEMENTS OF BANK DIRECTORS.
1.1 AGREEMENT TO VOTE. Except in the case of an Alternative
Transaction permitted by Section 6.5(b) of the Reorganization Agreement, at
any meeting of shareholders of Bank or in connection with any solicitation of
the written consent of shareholders of Bank to approve the Reorganization
Agreement and the transactions contemplated thereby, each of the Bank
Directors shall vote or cause to be voted all shares of Common Stock of Bank
("Bank Stock") owned by each such Bank Directors and any other shares of Bank
Stock hereafter acquired by each such Bank Director in favor of, and to
approve, the principal terms of the Acquisition and any other matter
contemplated by the Reorganization Agreement which requires the approval of
the shareholders of Bank, including but not limited to the "Merger," as those
terms are defined in the Reorganization Agreement.
1.2 AGREEMENT TO RECOMMEND. Except in the case of an
Alternative Transaction permitted by Section 6.5(b) of the Reorganization
Agreement, each Bank Director shall recommend to the shareholders of Bank to
vote in favor of, and to approve, the principal terms of the Acquisition and
any other matter contemplated by the Reorganization Agreement.
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1.3 RESTRICTIONS ON DISPOSITIONS. Except (i) in the case of
an Alternative Transaction permitted by Section 6.5(b) of the Reorganization
Agreement, (ii) with the prior written consent of Company, or (iii) pursuant
to the Acquisition, each Bank Director agrees that such Bank Director will
not pledge nor otherwise encumber, sell, assign or otherwise dispose of any
shares of Bank Stock currently owned, or acquired after the date of this
Agreement, by such Bank Director.
1.4 COOPERATION. Each Bank Director agrees to cooperate
fully with Company in connection with the Acquisition, except as otherwise
permitted by the Reorganization Agreement. Except in the case of an
Alternative Transaction permitted by Section 6.5(b) of the Reorganization
Agreement, each Bank Director agrees that he or she will not, directly or
indirectly, solicit any inquiries or proposals from, or enter into, or
continue any discussions, negotiations or agreements relating to, or vote in
favor of any proposal or transaction for disposition of the business or
assets of Bank or any subsidiary thereof, or the acquisition of Bank's or any
subsidiary of Bank's voting securities or any business combination with, any
person entity other than Company.
2. REPRESENTATIONS AND WARRANTIES OF BANK DIRECTORS.
Each of the Bank Directors represents and warrants to and agrees
with Company as follows:
2.1 CAPACITY. Each such Bank Director has all the requisite
capacity and authority to enter into and perform such Bank Director's
obligations under this Agreement.
2.2 BINDING AGREEMENT. This Agreement constitutes the valid
and legally binding obligation of each such Bank Director.
2.3 NON-CONTRAVENTION. The execution and delivery of this
Agreement by each such Bank Director does not, and the performance by such
Bank Director of such Bank Director's obligations hereunder will not, violate
or conflict with or constitute a default under any agreement, instrument,
contract or other obligation or any order, arbitration award, judgment or
decree to which such Bank Director is a party or by which such Bank Director
is bound, or any statute, rule or regulation to which such Bank Director or
any of such Bank Director's property is subject.
2.4 OWNERSHIP OF SHARES. SCHEDULE 1 hereto correctly sets
forth the number of shares of Bank Stock owned by each Bank Director, or with
respect to which each Bank Director has voting power or beneficial ownership,
as of the date indicated on such schedule. Each Bank Director has good title
to all of the shares of Bank Stock indicated as owned by such Bank Director
in the capacity set forth on SCHEDULE 1 as of the date indicated on such
SCHEDULE 1, and such shares of
2
<PAGE>
Bank Stock are so owned free and clear of any liens, security interests,
charges or other encumbrances, except as set forth in such SCHEDULE 1.
3. TERMINATION.
3.1 TERMINATION DATE. This Agreement shall terminate and be
of no further force and effect immediately upon the earlier of: (a)
consummation of the Acquisition or (b) termination of the Reorganization
Agreement in accordance with the terms thereof.
3.2 EFFECT OF TERMINATION. Upon the termination of this
Agreement in accordance with Section 3.1 hereof, the respective obligations
of the parties hereto shall immediately become void and have no further force
or effect except that the termination of this Agreement shall not excuse or
forgive any breach hereof.
4. SPECIFIC PERFORMANCE. The parties hereto recognize and agree
that monetary damages will not compensate adequately the parties hereto for
nonperformance. Accordingly, each party agrees that such party's obligations
shall be enforceable by court order requiring specific performance.
5. MISCELLANEOUS.
5.1 EXPENSES. Each party hereto shall pay its own costs and
expenses, including, without limitation, those of its attorneys and
accountants, in connection with this Agreement and transactions covered and
contemplated hereby.
5.2 NOTICES. All notices, demands or other communications
hereunder shall be in writing and be made by (a) hand delivery; (b) overnight
mail; (c) United States mail, first class, certified or registered, postage
prepaid; or (d) facsimile transmission, and shall be deemed to have been duly
given (i) on the date of service if delivered by hand or facsimile
transmission (provided that telecopied notices are also mailed by United
States mail, first class, certified or registered, postage prepaid); (ii) on
the next day if delivered by overnight mail; or first-class, certified or
registered, postage prepaid, and properly addressed as follows:
(a) If to Company:
Pacific Community Banking Group
23332 Mill Creek Drive, Suite 230
Laguna Hills, California 92653
Attention: E. Lynn Caswell, President
Telecopier: (949) 460-4501
3
<PAGE>
With copies to:
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, CA 92660
Attention: Loren P. Hansen, Esq.
Telecopier: (949) 851-1732
(b) If to a Bank Director:
to the Bank Director and address noted on page
7 hereof
With copies to:
Aldrich & Bonnefin
18200 Von Karman Avenue, Suite 730
Irvine, California 92612-1029
Attention: Mark E. Aldrich, Esq.
Telecopier: (949) 474-0617
The persons or addresses to which mailings or deliveries shall be made may
change from time to time by notice given pursuant to the provisions of this
SECTION 5.2.
5.3 SUCCESSORS AND ASSIGNS. Subject to Section 5.4 herein,
all terms and provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective transferees,
successors and assigns; provided, however, that, except as otherwise
contemplated herein, this Agreement and all rights, privileges, duties and
obligations of the parties hereto may not be assigned or delegated by any
Bank Director without the prior written consent of Company and any purported
assignment in violation of this Section 5.3 shall be null and void.
5.4 THIRD PARTY BENEFICIARIES. Each party hereto intends
that this Agreement shall not benefit, or create any right or cause of action
in or on behalf of, any person other than the parties hereto. As used in
this Agreement, the term "party" or "parties" shall refer only to Company and
the Bank Directors or any of them.
5.5 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one instrument.
5.6 GOVERNING LAW. This Agreement is made and entered into
in the State of California and the laws of the State of California shall
govern the
4
<PAGE>
validity and interpretation hereof and the performance of the parties hereto
of their respective duties and obligations hereunder.
5.7 CAPTIONS. The captions contained in this Agreement are
for convenience of reference only and do not form a part of this Agreement.
5.8 WAIVER AND MODIFICATION. No waiver of any term,
provision or condition of this Agreement, whether by conduct or otherwise, in
any one or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such term, provision or condition of this Agreement.
This Agreement may be modified or amended only by an instrument of equal
formality signed by the parties or their duly authorized agents.
5.9 ATTORNEYS' FEES. In the event a Bank Director or Company
brings an action or suit against the other party by reason of any breach of
any covenant, agreement, representation, warranty or other provision hereof,
or any breach of any duty or obligation created hereunder by such other
party, the prevailing party, as determined by the court or other body having
jurisdiction, shall be entitled to have and recover of and from the losing
party, as determined by the court or other body having jurisdiction, all
reasonable costs and expenses incurred or sustained by such prevailing party
in connection with such action or suit, including, without limitation, legal
fees and court costs (whether or not taxable as such). In an action or suit
brought by a Bank Director or Company to enforce any provision hereof, or for
damages for the breach hereof, such action or suit shall be commenced and
maintained exclusively in the state court sitting in Orange County,
California.
5.10 ENTIRE AGREEMENT. The making, execution and delivery of
this Agreement by the parties hereto have not been induced by any
representation, statements, warranties or agreements other than those
expressed herein. This Agreement, in addition to the applicable provisions
of the Reorganization Agreement, embodies the entire understanding of the
parties and there are no further or other agreements or understandings,
written or oral, in effect between the parties relating to the subject matter
hereof, unless expressly referred to by reference herein.
5.11 SEVERABILITY. Whenever possible, each provision of this
Agreement and every related document shall be interpreted in such manner as
to be valid under applicable law. However, if any provision of any of the
foregoing shall be invalid or prohibited under said applicable law, it shall
be construed, interpreted and limited to effectuate its purpose to the
maximum legally permissible extent. If it cannot be so construed and
interpreted so as to be valid under such law, such provision shall be
ineffective to the extent of such invalidity or prohibition without
invalidating the remainder of such provision or the remaining provisions of
this Agreement, and this Agreement shall be construed to the maximum extent
possible to carry out its terms without such invalid or unenforceable
provision or portion thereof.
5
<PAGE>
5.12 SEVERAL OBLIGATIONS. All duties and obligations of each
party to this Agreement shall be several and not joint.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date first above written.
Pacific Community Banking Group
By: /s/ E. Lynn Caswell
---------------------------
E. Lynn Caswell, Chairman
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<PAGE>
"Bank Director"
and address
/s/ Marion V. Ashley /s/ Doug Mills
- --------------------------- ---------------------------
Marion V. Ashley Doug Mills
170 Wilkerson Ave., S#B 11650 Steeplechase Drive
Perris, CA 92570 Moreno Valley, CA 92555
/s/ Juan Renteria /s/ Willow I. Decker
- --------------------------- ---------------------------
Juan Renteria Willow I. Decker
1530 Nandina Ave. 8218 Wheeler Ave.
Perris, CA 92571 Fontana, CA 92355
/s/ Jesse Washington /s/ George E. Wilson
- --------------------------- ---------------------------
Jesse Washington George E. Wilson
30506 Cinnamon Teak Dr. 27263 Pleasant Hill Drive
Canyon Lake, CA 92587 Highland, CA 92346
/s/ Helga Wolf /s/ Gene Wood
- --------------------------- ---------------------------
Helga Wolf Gene Wood
11640 Dalehurst Rd. 2349 Newpat Ave.
Moreno Valley, CA 92555 San Bernardino, CA 92404
7
<PAGE>
Schedule 1
as of July 17, 1998
<TABLE>
<CAPTION>
Owned Bank Common Shares
- ----- ------------------
<S> <C>
Marion V. Ashley 122
Doug Mills 5,002
Willow I Decker 116,424
Juan Renteria 551
Jesse Washington 2,625
George E. Wilson 6,291
Helga Wolf 4,400
Gene Wood
</TABLE>
8
<PAGE>
Exhibit C
WB WARRANT AGREEMENT
THIS WARRANT AGREEMENT, dated as of 1999, is made between PACIFIC COMMUNITY
BANKING GROUP, a California corporation (the "Company"), and each person to whom
a warrant is issued or provided herein (the "Holder").
RECITALS
A. The Company proposes to issue warrants as hereinafter described (the
"Warrants") to each Holder to purchase shares of its Common Stock, no par value
per share (the "Common Stock"), in connection with the acquisition of Valley
Bank (the "Bank") by the Company in which at the Effective Time of the Merger,
the Bank would become a wholly-owned subsidiary of the Company, and all of the
issued and outstanding shares of Valley Bank Stock ("Bank Stock"), except for
shares of Bank Stock held by Dissenting Shareholders, shall be converted into
and exchanged for cash, shares of Company Stock, and a warrant exercisable into
shares of Company Stock, under the terms and conditions contained in the First
Restatement of the Agreement and Plan of Reorganization dated January 5, 1999,
as amended in which each warrant (the "Warrant") entitling the holder thereof to
purchase shares of Common Stock of the Company (the "Warrant Shares").
B. In consideration of the foregoing and for the purpose of defining
the terms and provisions of the Warrants and the respective rights and
obligations thereunder of the Company and the Holder, the Company and the Holder
hereby agree as follows:
SECTION 1. GRANT OF WARRANT. The Company hereby grants to the Holder,
as of the date hereof, Warrants to purchase all or any part of the number of
shares of the Company's Common Stock set forth in the Warrant, subject to the
terms, conditions and adjustment provisions as provided in this Agreement.
SECTION 2. TERM OF WARRANTS; EXERCISE OF WARRANTS.
2.1 TERM OF EXERCISE OF WARRANTS. The Warrants are
exercisable for a ten-year period commencing upon the date of issuance (the
"Issuance Date"). Subject to the terms of this Agreement, each Holder shall have
the right, which may be exercised at any time until ten years from the original
date of issuance (the "Expiration Date") to purchase from the Company that
number of shares of Common Stock of the Company specified in Section 1 at the
warrant prices specified in Section 9. Upon such purchase, the shares of Common
Stock of the Company will be fully paid and nonassessable to which the Holder
may at the time be entitled to purchase upon exercise of such Warrants.
1
Exhibit C
<PAGE>
2.2 EXERCISE OF WARRANTS. A Warrant may be exercised upon
surrender to the Company at its principal office of the certificate or
certificates evidencing the Warrants to be exercised, together with the form of
election to purchase on the reverse thereof duly filled in and signed, (and upon
payment to the Company for the account of the Company in accordance with the
provisions of Sections 9 and 10 hereof), for the number of shares of Common
Stock in respect of which such Warrants are then exercised. Payment of the
aggregate Warrant Price shall be made by check, Cashier's Check, money order, or
any combination thereof.
Subject to Section 6 hereof, upon such surrender of
Warrants and payment of the Warrant Price as aforesaid, the Company shall issue
and cause to be delivered with all reasonable dispatch to or upon the written
order of the Holder and in such name or names as the Holder may designate, a
certificate or certificates for the number of full shares of Common Stock so
purchased upon the exercise of such Warrants, together with cash, as provided in
Section 11 hereof, in respect of any fractional shares of Common Stock otherwise
issuable upon such surrender. Such certificate or certificates shall be deemed
to have been issued and any person so designated to be named therein shall be
deemed to have become a holder of record of such Common Stock as of the date of
the surrender of such Warrants and payment of the Warrant Price, as aforesaid;
provided, however, that if, at the date of surrender of such Warrants and
payment of the Warrant Price, the transfer books for the Common Stock or other
class of stock purchasable upon the exercise of such Warrants shall be closed,
the certificates for the Common Stock in respect of which such Warrants are then
exercised shall be issuable as of the date on which such books shall next be
opened (whether before or after the Expiration Date) and until such date the
Company shall be under no duty to deliver any certificate for such Common Stock;
provided further, however, that the transfer books of record, unless otherwise
required by law, shall not be closed at any one time for a period longer than
twenty days. The rights of purchase represented by the Warrants shall be
exercisable, at the election of the Holders thereof, either in full or from time
to time in part and, in the event that a certificate evidencing Warrants is
exercised in respect of less than all of the Common Stock purchasable on such
exercise at any time prior to the date of expiration of the Warrants, a new
certificate evidencing the remaining Warrant or Warrants will be issued.
SECTION 3. REGISTRATION. Transferability. Issuance and Form of Warrant.
3.1 REGISTRATION. The Warrants shall be numbered and shall
be registered in a Warrant Register as they are issued. The Company shall be
entitled to treat the Holder of any Warrant as the owner in fact thereof for all
purposes and shall not be bound to recognize any equitable or other claim to or
interest in such Warrant on the part of any other person, and shall not be
liable for any registration of transfer of Warrants which are registered or to
be registered in the name of a
2
<PAGE>
fiduciary or the nominee of a fiduciary unless made with the actual knowledge
that a fiduciary or nominee is committing a breach of trust in requesting such
registration of transfer, or with such knowledge of such facts that its
participation therein amounts to bad faith.
3.2 TRANSFER. The Common Stock and the Warrants received
from the Company pursuant to the Agreement will be separately transferable from
the date of issuance. The Warrants shall be transferable on the books of the
Company maintained at the principal office of the Company upon delivery thereof
duly endorsed by the Holder or by his duly authorized attorney or
representative, or accompanied by proper evidence of succession, assignment or
authority to transfer, with signatures properly guaranteed. In all cases of
transfer by an attorney, the original power of attorney, duly approved, or an
official copy thereof, duly certified, shall be deposited and remain with the
Company. In case of transfer by executors, administrators, guardians or other
legal representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited and remain with the Company in its
discretion. Upon any registration of transfer, the Company shall execute and
deliver a new Warrant or Warrants to the persons entitled thereto. The Warrants
may be exchanged at the option of the Holder thereof, when surrendered at the
principal office of the Company for another Warrant or Warrants to the persons
entitled thereto. The Warrants may be exchanged at the option of the Holder
thereof, when surrendered at the principal office of the Company for another
Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Warrant
Shares. The Company shall not be required to effect any registration of transfer
or exchange which will result in the issuance of a Warrant Certificate for a
fraction of a Warrant. The Holder understands that the Warrants and the
securities exercisable hereunder are intended to be registered pursuant to the
Securities Act of 1933, as amended, and such securities are intended to be
transferable once the registration has been completed.
3.3 ISSUANCE. Warrant certificates shall be issued and
delivered by the Company as evidence of the Warrants sold by the Company as a
part of the Offering (the "Warrant Certificates"). Each Warrant Certificate
shall evidence the right, subject to the provisions of this Agreement and of the
Warrant Certificate itself, for the registered holder thereof or his assigns to
purchase the number of shares of Common Stock of the Company stated therein.
3.4 FORM OF WARRANT. The Form of Warrant shall be
substantially as set forth in EXHIBIT "A" attached hereto. The price per share
of Common Stock and the number of shares of Common Stock issuable upon the
exercise of Warrants are subject to adjustment upon the occurrence of certain
events, all as hereinafter provided. The Warrants shall be executed on behalf of
the Company by its Chairman of the Board or Chief Executive Officer or one of
its Vice Presidents,
3
<PAGE>
under its corporate seal reproduced thereon attested by its Secretary or an
Assistant Secretary. The signature of any of such officers on the Warrants may
be manual or facsimile.
Warrants bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any one of them shall have ceased to
hold such offices prior to the delivery of such Warrants or did not hold such
offices on the date of this Agreement.
Warrants shall be dated as of the date of signature thereof by the
Company either upon initial issuance or upon division, exchange, substitution or
transfer.
SECTION 4. SIGNATURE OF WARRANTS. The Warrants shall be signed by the
Company (or any successor to the Company) and shall not be valid for any purpose
unless so signed. Warrants may be signed, however, by the Company and may be
delivered by the Company, notwithstanding that the persons whose manual or
facsimile signatures appear thereon as proper officers of the Company shall have
ceased to be such officers at the time of such signature, issuance or delivery.
SECTION 5. EXCHANGE OF WARRANT CERTIFICATES. Each Warrant certificate
may be exchanged for another certificate or certificates entitling the Holder
thereof to purchase a like aggregate number of shares of Common Stock as the
certificate or certificates to be so exchanged. Thereupon, the Company shall
execute and deliver to the person entitled thereto a new Warrant certificate or
certificates, as the case may be, as so requested.
SECTION 6. PAYMENT OF TAXES. The Company will pay all documentary stamp
taxes, if any, attributable to the initial issuance of shares of Common Stock
upon the exercise of Warrants; provided, however, that the Company shall not be
required to pay any tax or taxes which may be payable in respect of any transfer
involved in the issuance or delivery of any Warrants or certificate for shares
of Common Stock in a name other than that of the registered Holder of Warrants
in respect of which such shares of Common Stock are issued, and in such case the
Company shall not be required to issue or deliver any certificate for shares of
Common Stock or any Warrant until the person requesting the same has paid to the
Company the amount of such tax or has established to the Company's satisfaction
that such tax has been paid.
SECTION 7. MUTILATED OR MISSING WARRANTS. In case of any of the
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company may, in its discretion, execute, issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant
certificate, or in lieu
4
<PAGE>
of and substitution for the Warrant certificate lost, stolen or destroyed, a new
Warrant certificate of like tenor and representing an equivalent right or
interest; but only upon receipt of evidence satisfactory to the Company of such
loss, theft or destruction of such Warrant and indemnity, if requested, also
satisfactory to them. An applicant for such substitute Warrant certificate shall
also comply with such other reasonable regulations and pay such other reasonable
charges as the Company may prescribe.
SECTION 8. RESERVATION OF SHARES: PURCHASE OF WARRANTS.
8.1 RESERVATION OF WARRANT SHARES. There will be reserved,
and thereafter the Company shall at all times keep reserved, out of its
authorized Common Stock, a number of shares of Common Stock sufficient to
provide for the exercise of the rights of purchase represented by the
outstanding Warrants. The Transfer Agent for the Common Stock and every
subsequent transfer agent for any shares of the Company's capital stock issuable
upon the exercise of any rights of purchase aforesaid will be irrevocably
authorized and directed at all times to reserve such number of authorized shares
as shall be requisite for such purposes. The Company will keep a copy of this
Agreement on file with the Transfer Agent for the Common Stock and with every
subsequent transfer agent for any shares of the Company's capital stock issuable
upon the exercise of the rights of purchase represented by the Warrants. The
Company will supply such Transfer Agent with duly executed stock certificates
for such purposes and will provide or otherwise make available any cash which
may be payable as provided in Section 11 hereof. All Warrants surrendered in the
exercise of the rights thereby evidenced shall be canceled by the Company.
8.2 PURCHASE OF WARRANTS BY THE COMPANY. The Company shall
have the right, except as limited by law, other agreement or herein, to purchase
or otherwise acquire Warrants at such times, in such manner and for such
consideration as it may deem appropriate, but the Holder of such warrant shall
be under no obligation to sell.
8.3 CANCELLATION OF WARRANTS. In the event the Company
shall purchase or otherwise acquire Warrants, the same shall thereupon be
canceled by the Company and retired. The Company shall cancel any Warrant
surrendered for exchange, substitution, transfer or exercise in whole or in
part.
SECTION 9. WARRANT EXERCISE PRICE. The price per share at which
shares of Common Stock shall be purchasable upon exercise of Warrants (the
"Warrant Price") shall be $ per share from the date of issuance to on or
before the end of the tenth year after the date of issuance of the Warrant,
subject to the adjustment pursuant to Section 10 hereof.
5
<PAGE>
SECTION 10. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The
number and kind of securities purchasable upon the exercise of each Warrant and
the Warrant Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as hereinafter defined.
10.1 MECHANICAL ADJUSTMENTS. The number of Warrant Shares
purchasable upon the exercise of each Warrant and the Warrant price shall be
subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock into a greater number of
shares, (iii) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock or (iv) issue a reclassification of its shares
of Common Stock or capital reorganization of other securities of the Company,
the number of Warrant Shares purchasable upon exercise of each Warrant
immediately prior thereto shall be adjusted so that the Holder of each Warrant
shall be entitled to receive the kind and number of Warrant Shares or other
securities of the Company which he would have owned or have been entitled to
receive after the occurrence of any of the events described above, had such
Warrant been exercised immediately prior to the happening of such event or any
record date with respect thereto. An adjustment made pursuant to this paragraph
(a) shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(b) In case, at any time or from time to time after
issuance of the Warrant and while the Warrant remains outstanding and has not
been exercised, the Company shall issue or sell any warrants or options, other
than options granted under the Company's 1999 Stock Option Plan, as it may be
amended from time to time, or any similar plan hereafter adopted by the Company
or any of its subsidiaries, for the purchase of the Company's Common Stock with
a price per share at which shares of Common Stock shall be purchasable upon
exercise of such warrants or options that is less than the Warrant Price in
effect immediately prior to such issue or sale, then forthwith upon such issue
or sale the Warrant Price shall be immediately reduced to such price per share.
No adjustment of the Warrant Price shall be made as a result of the Company's
issuance or sale of Common Stock or other securities of the Company, regardless
of the price at which such shares or other securities are issued, including,
without limitation, the Company's issuance or sale of stock options under the
Company's 1999 Stock Option Plan, as it may be amended from time to time, or any
similar plan hereafter adopted by the Company or any of its subsidiaries, with
an exercise price less than the Warrant Price. In addition, no adjustment of the
Warrant Price shall be made if the adjustment would otherwise be for an amount
less then $.25 per share, but any such nonadjustment shall be carried forward
and shall be made at the time of and together with the next subsequent
adjustment which, together with any
6
<PAGE>
adjustments so carried forward, shall amount to $..25 per share or more.
Further, no adjustment shall be made in the case of an issuance or sale of
warrants with respect to fewer than 10% of the then-outstanding shares of the
Company's Common Stock in any 24 month period.
(c) Whenever the number of Warrant Shares purchasable
upon the exercise of each Warrant is adjusted, as herein provided, the Warrant
Price payable upon exercise of each Warrant shall be adjusted by multiplying
such Warrant Price immediately prior to such adjustment by a fraction, of which
the numerator shall be the number of Warrant Shares purchasable upon the
exercise of each Warrant immediately prior to such adjustment, and of which the
denominator shall be the number of Warrant Shares so purchasable immediately
thereafter.
(d) For the purpose of this subsection 10. 1, the term
"shares of Common Stock" shall mean (i) the class of stock designated as the
Common Stock of the Company at the date of this Agreement, or (ii) any other
class of stock resulting from successive changes or reclassifications of such
shares consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value. In the event that at any time, as a
result of an adjustment made pursuant to paragraph (a) above, the Holders shall
become entitled to purchase any shares of the Company other than shares so
purchasable upon exercise of each Warrant and the Warrant Price of such shares
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the shares of
Common Stock contained in paragraphs (a) and (b), inclusive, above, and the
provisions of Section 5 and subsections 10.2 through 10.4, inclusive, with
respect to the shares of Common Stock shall apply on like terms to any such
other shares.
10.2 NOTICE OF ADJUSTMENT. Whenever the number of shares of
Common Stock purchasable upon the exercise of each Warrant or the Warrant Price
of such shares of Common Stock is adjusted, as herein provided, the Company,
within thirty (30) days thereafter, shall cause to be mailed promptly by first
class mail, postage prepaid, to each Holder notice of such adjustment or
adjustments and the Warrant Price of such shares of Common Stock after such
adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
A firm of independent public accountants selected by the Board of Directors of
the Company (who may be the regular accountants employed by the Company) may
make any computation required under this Section 10.2.
10.3 NO ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS. Except as
provided in subsection 10.1, no adjustment in respect of any dividends or
distributions shall be made during the term of a Warrant or upon the exercise of
a Warrant.
7
<PAGE>
10.4 PRESERVATION OF PURCHASE RIGHTS UPON CONSOLIDATION,
MERGER. ETC. In case of any consolidation of the Company with, or merger of the
Company into, another corporation, or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
corporation, as the case may be, shall execute an agreement that each Holder
shall have the right thereafter upon payment of the Warrant price in effect
immediately prior to such action to purchase upon the exercise of each Warrant
the kind and amount of shares and other securities and property (including cash)
which he would have owned or have been entitled to receive after the occurrence
of such consolidation, merger, sale or conveyance had such Warrant been
exercised immediately prior to such action. The Company shall mail by first
class mail, postage prepaid, to each Holder, notice of the execution of any such
agreement. Such agreement shall provide for adjustments, which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Section 10. The provisions of this subsection 10.4 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
10.5 STATEMENTS ON WARRANTS. Irrespective of any adjustments
in the Warrant Price or the number or kind of shares purchasable upon the
exercise of the Warrants, Warrants theretofore or thereafter issued may continue
to express the same price and number and kind of shares as are stated in the
Warrants initially issuable pursuant to this Agreement.
SECTION 11. FRACTIONAL INTERESTS. The Company shall not be required to
issue fractional shares of Common Stock on the exercise of Warrants. If more
than one Warrant shall be presented for exercise of shares of Common Stock in
full at the same time by the same Holder, the number of full shares of Common
Stock which shall be issuable upon the exercise thereof shall be computed on the
basis of the aggregate number of shares of Common Stock purchasable upon
exercise of the Warrants so presented. If any fraction of a share of Common
Stock would, except for the provisions of this Section 11, be issuable on the
exercise of any Warrant (or specified portion thereof), the Company shall pay an
amount in cash equal to the difference between the then current book value price
per share of Common Stock and the exercise price of the Warrant, multiplied by
such fraction.
SECTION 12. NO RIGHTS AS STOCKHOLDERS: NOTICES TO HOLDERS. Nothing
contained in this Agreement or in any of the Warrants shall be construed as
conferring upon the Holders or their transferees the right to vote or to receive
dividends or to consent or to receive notice as stockholders in respect of any
meeting of stockholders for the election of directors of the Company or any
other matter, or any rights whatsoever as stockholders of the Company. If,
however, at any time after 60 days before the Exercise Date, and prior to the
expiration of the Warrants and prior to their exercise, any of the following
events shall occur:
8
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(a) the Company shall declare any dividend or distribution payable
in any securities upon its shares of Common Stock to the Holders of its
shares of Common Stock; or
(b) The Company shall offer to the holders of its shares of Common
Stock any additional shares of Common Stock or securities convertible into
shares of common stock or any right to subscribe thereto; or
(c) A dissolution, liquidation or winding up of the Company (other than
in connection with a consolidation, merger, or sale of all or substantially all
of its property, assets, and business as an entirety) shall be proposed;
then in any one or more of said events, the Company shall give notice in writing
of such event to the Holders as provided in Section 13 hereof, such giving of
notice to be completed at least 20 days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, or subscription rights, or
for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of any action taken in connection with such dividend,
distribution or subscription rights, or proposed dissolution, liquidation or
winding up.
SECTION 13. NOTICES. Any notice pursuant to this Agreement be any
Holder to the Company shall be in writing and shall be mailed first class,
postage prepaid, or delivered (a) to the Company, at its office at 23332 Mill
Creek Drive, Suite 230, Laguna Hills, California 92653, with copies to Knecht &
Hansen, 1301 Dove Street, Suite 900, Newport Beach, California 92660. Each party
hereto may from time to time change the address to which notices to it are to be
delivered or mailed hereunder by notice in writing to the other party. Any
notice mailed pursuant to this Agreement by the Company to the Holders shall be
in writing and shall be mailed first class, postage prepaid, or delivered to
such Holders at their respective addresses on the books of the Company.
SECTION 14. SUPPLEMENTS AND AMENDMENTS. The Company may not supplement
or amend this Agreement without the approval of any Holder, in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Holder may deem necessary or desirable and which shall not be
inconsistent with the provisions of the Warrants.
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SECTION 15. SUCCESSORS. All covenants and provisions of this Agreement
by or for the benefit of the Company or the Holder shall bind and inure to the
benefit of their respective successors and assigns hereunder.
SECTION 16. APPLICABLE LAW. This Agreement and Warrant issued hereunder
shall be governed by and construed in accordance with the laws of the State of
California, without giving effect to principles of conflict of laws.
SECTION 17. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company and the
Holders any legal or equitable right, remedy or claim under this Agreement; but
this Agreement shall be for the sole and exclusive benefit of the Company and
the Holders of the Warrants.
SECTION 18. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
SECTION 19. CAPTIONS. The captions of the Sections and subsections of
this Agreement have been inserted for convenience only and shall have no
substantive effect.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first written.
PACIFIC COMMUNITY BANKING GROUP
By:
-------------------------------------
E. Lynn Caswell
Chairman and Chief Executive Officer
By:
-------------------------------------
-------------------------------------
Secretary
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Exhibit 2.5
FIRST AMENDMENT TO
FIRST RESTATEMENT OF AGREEMENT AND
PLAN OF REORGANIZATION
This FIRST AMENDMENT TO FIRST RESTATEMENT OF AGREEMENT AND
PLAN OF REORGANIZATION (the "First Amendment") is dated as of March 4, 1999 and
entered into by and between Valley Bank (the "Bank"), and Pacific Community
Banking Group (the "Company").
WHEREAS, the Bank and the Company entered into a First
Restatement of Agreement and Plan of Reorganization dated as of January 5, 1999
(the "Agreement"); and
WHEREAS, the parties hereto desire to amend the Agreement as
provided in this First Amendment as provided herein.
NOW, THEREFORE, in consideration of the premises and mutual
promises of the parties set forth below, the parties hereto agree as follows:
1. Capitalized terms used herein and not otherwise defined
shall have the same meaning as set forth in the Agreement.
2. Recital B.(a) and B.(b) of the Agreement is hereby amended
to read in its entirety as follows:
"(a) The Company will establish Interim Bank (as
defined below) as a wholly-owned subsidiary;
(b) Bank and Interim Bank will enter into an
Agreement of Merger (as defined below) providing for the merger of Interim Bank
and Bank under the state charter of the Interim Bank;"
3. The definition of "Agreement of Merger" in the Agreement is
hereby amended to read in its entirety as follows:
"'Agreement of Merger' shall mean the Agreement of Merger to
be entered into by and between Interim Bank (as defined below) and the Bank
substantially in the form of EXHIBIT "A" hereto, but subject to any changes that
may be necessary to conform to any requirements of any Governmental Entity
having authority over the Merger."
4. The definition of "Per Share Cash Consideration" in the
Agreement is hereby deleted.
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5. The following definitions are hereby added to the Agreement
as follows:
"'Interim Bank' shall mean the interim California banking
corporation established by Company solely for the purpose of effecting the
Merger.
'Interim Bank Stock' shall mean the common stock, no par
value, of Interim Bank."
6. The definition of "Merger" in the Agreement is hereby
amended to read in its entirety as follows:
"'Merger' shall mean the merger of the Bank with and into
Interim Bank."
7. The first and second sentences of Section 2.1 of the
Agreement are hereby amended to read in their entirety as follows:
"The Company agrees that it will use its best efforts, with
all necessary cooperation of the Bank, to perfect the organization of Interim
Bank in accordance with the CFC and the regulations promulgated thereunder prior
to the Closing Date. The directors and officers of Interim Bank, and the
Articles of Incorporation and Bylaws of Interim Bank, shall be determined by the
Company."
8. Section 2.1(a) of the Agreement is hereby amended to read
in its entirety as follows:
"(a) MERGER OF THE BANK AND INTERIM BANK. The Bank and Interim
Bank shall be merged under the certificate of authority of the Interim Bank,
with the Interim Bank being the Surviving Bank pursuant to the provisions of,
and with the effect provided in, the CGCL and the CFC, and shall continue its
corporate existence under the laws of the State of California. The name of the
Surviving Bank shall be "Valley Bank." Upon the consummation of the Merger, the
separate corporate existence of the Bank shall cease."
9. Section 2.1(c) of the Agreement is hereby amended to read
in its entirety as follows:
"(c) EFFECT ON INTERIM BANK STOCK. All shares of Interim Bank
Stock outstanding shall remain outstanding and shall be held by the Company."
10. Section 2.1(d) of the Agreement is hereby amended to read
in its entirety as follows:
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"(d) BANK CORPORATE GOVERNANCE CHANGES. The Charter Documents
of the Interim Bank as in effect immediately prior to the Effective Time shall
continue in effect after the Merger until thereafter amended in accordance with
applicable law. At the Effective Time of the Merger, the directors of Interim
Bank and the Bank shall be the directors of the Surviving Bank until their
successors have been chosen and qualified in accordance with the Articles of
Incorporation and Bylaws of the Surviving Bank. The officers of Interim Bank and
the Bank at the Effective Time of the Merger shall be the officers of the
Surviving Bank until they resign or are replaced or terminated by the Board of
Directors of the Surviving Bank or otherwise in accordance with the Surviving
Bank's Charter Documents. The obligations of the Bank shall be assumed by the
Surviving Bank, and operations including the policies and procedures of the
Bank, shall continue in effect at the Surviving Bank after the Merger; except
that the Bank and the Interim Bank shall have taken prior to the Effective Time
all necessary steps so that at the Effective Time (i) at the request of the
Company, Mr. N. Douglas Mills, President and Chief Executive Officer of the
Bank, shall resign from his positions (but not as an employee of the Bank), in
form and substance satisfactory to the Company, either during the pendency of
this transaction or following the consummation of this transaction, without
incurring any liability on the part of any Party, except that (a) the Surviving
Bank and Mr. Mills will enter into the Second Amendment to Mr. Mills' Employment
Agreement originally dated September 26, 1996 and amended October 30, 1997, upon
the Bank's payment on the Closing Date to Mr. Mills of the compensation
described in revised Section 2.3 of the Second Amendment to Mr. Mills'
Employment Agreement with the Bank in the form attached hereto as Exhibit
2.1(d)(i)(a), (b) Mr. Mills will remain a director of the Surviving Bank unless
and until a successor is appointed by the Company, and (c) the Board and/or the
Company will not become liable for any obligations under Mr. Mills' Salary
Continuation Agreement dated October 19, 1995, as amended October 30, 1997, nor,
unless accelerated earlier by the Company in its sole discretion, will such
Salary Continuation Agreement accelerate, until termination of Mr. Mills'
employment with the Company or a subsidiary of the Company pursuant to the
Second Amendment to Mr. Mills' Employment Agreement; (ii) Caswell shall have
been appointed Chairman of the Board and Chief Executive Officer of the
Surviving Bank; xiii) except for the persons set forth on Exhibit 2.1(d), which
Exhibit shall be delivered by the Company to the Bank within sixty (60) days of
the date of the Agreement, each of the directors of the Bank shall have tendered
his resignation as a director of the Bank and Surviving Bank, in form and
substance satisfactory to the Company, without incurring any liability on the
part of any Party; (iv) the number of authorized directors, and the specific
members of the Board of Directors, of the Surviving Bank shall be changed as
determined in the sole discretion of the Company; (v) the Company shall name
additional directors in its sole discretion who shall be duly elected and
appointed to the Board of Directors of the Surviving Bank (or if any such
persons is unable to serve, such other person designated by the Company) and
shall serve until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified; (vi) the remaining
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members of the Board of Directors of the Bank will agree to support any and all
expense reductions, consolidations, mergers, transfer of headquarters, sale of
assets, FRB membership, closure of branches, or any other corporate changes as
requested by the Company, consistent with their fiduciary duties; and (vii) the
Surviving Bank will assume the obligations of the employment agreements for
Bonnie Parrott, Mark A. Nugent, Marvin Lentini and Dianna Williams, and the
Surviving Bank will assume the obligations of Bank under that "Employment
Compensation Agreement" dated March 12, 1970 by and between Bank and Walter M.
Wachtel in favor of Willow Wachtel Decker (clauses (i)-(vii) being hereinafter
collectively referred to as the Bank Corporate Governance Changes.")."
11. Section 2.2 of the Agreement is hereby amended to read in
its entirety as follows:
"2.2 EFFECT OF THE MERGER. At the Effective Time of the
Merger, the corporate existence of Interim Bank and the Bank shall be merged
into and continued in the Surviving Bank, and the Surviving Bank shall be deemed
the same corporation as each corporation participating in the Merger. All
rights, franchises, and interests of Interim Bank and Bank in and to every type
of property (real, personal and mixed) and choses in action shall be transferred
to and vested in the Surviving Bank by virtue of the Merger without any deed or
other transfer and the Surviving Bank shall hold and enjoy all rights of
property, franchises and interests, in the same manner and to the same extent as
such rights, franchises and interests were held or enjoyed by any one of the
consolidating corporations at the Effective Time of the Merger."
12. The second sentence of Section 2.4 of the Agreement is
hereby amended to read in its entirety as follows:
"The Per Share Consideration shall be equal to the sum of (i)
$5.00 in cash; and (ii) a fraction of a share of Company Stock having a value
equal to $5.00, with the amount of the fraction of a share of Company Stock
equal to the quotient of $5.00 and the Offering Price, except that the Company
may, in its sole discretion, increase or decrease the amount of Company Stock
and increase or decrease the amount of cash in the Per Share Consideration in
order to attempt to accommodate the elections of the holders of Bank Stock as
provided in Sections 2.1(b) and 2.11."
13. The first sentence of Section 3.1 of the Agreement is
hereby amended to read in its entirety as follows:
"Consummation of the transactions contemplated by this
Agreement shall take place at the offices of Knecht & Hansen, 1301 Dove Street,
Suite 900, Newport Beach, California, or such other location as may be agreed
upon by the parties, on the Closing Date."
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14. Section 3.2 of the Agreement is hereby amended to read in
its entirety as follows:
"3.2 EXECUTION OF AGREEMENT OF MERGER. Prior to the Closing
Date, and as soon as practicable after approval by the Commissioner to organize
Interim Bank, the Agreement of Merger (as amended, if necessary, to conform to
any requirements of any Governmental Entity having authority over the Merger)
shall be executed by Bank and Interim Bank. On the Closing Date, the Agreement
of Merger, bearing the certification of the Secretary of State, together with
all requisite certificates shall be duly filed in the office of the Commissioner
after being filed with the California Secretary of State with the approval of
the Commissioner endorsed thereon, in accordance with the CGCL and Section 4880
et SEQ. of the CFC."
15. The first sentence of Section 5.2 of the Agreement is
hereby amended to read in its entirety as follows:
"The authorized capital stock of the Company consists of
100,000,000 shares of Common Stock, no par value, of which 10,000 shares are
outstanding on the date hereof, all validly issued, fully paid and
nonassessable, and 100,000,000 shares of Preferred Stock, of which not more than
2 million shares have been issued or are to be issued before the Closing Date."
16. Section 5.20 of the Agreement is hereby amended to read in
its entirety as follows:
"5.20 AUTHORITY OF INTERIM BANK. The execution and delivery by
Interim Bank of the Agreement of Merger and, subject to the requisite approval
of the shareholder of Interim Bank, the consummation of the transactions
completed thereby will be duly and validly authorized by all necessary
corporation action on the part of Interim Bank, and the Agreement of Merger will
be upon execution by the parties thereto a valid and binding obligation of
Interim Bank, enforceable in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting the rights of creditors generally, by general
equitable principles and by the provisions of Section 8(b)(6)(D) of the Federal
Deposit Insurance Act, 12 U.S.C. Section 1818(b)(6)(D). The Company agrees to
take any and all actions reasonably necessary to ensure that Interim Bank
consummates the transactions contemplated hereby. Except as set forth in Exhibit
5.20, neither the execution and delivery by Interim Bank of the Agreement of
Merger, nor the consummation of the transaction contemplated therein, nor
compliance by Interim Bank with any of the provisions thereof will (a) conflict
with or result in a breach of any provision of its Charter Documents, (b) except
for approval by the shareholder of Interim Bank and the prior approval of the
FRB, the Commissioner or the FDIC, require any Consents; (c) result in the
creation
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<PAGE>
or imposition of any Encumbrance on any of the properties or assets of Interim
Bank; or (d) subject to obtaining the Consents referred to in subsection (b) of
this Section 5.20, and the expiration of any waiting period, violate any Rules
to which Interim Bank is subject."
17. Section 6.13 of the Agreement is hereby amended to read in
its entirety as follows:
"6.13 EXECUTION OF AGREEMENT OF MERGER. As soon as possible
after receipt of approval of the Commissioner to organize Interim Bank, subject
to receipt of any and all necessary approvals and Permits by any Governmental
Entity and approval by the Bank's shareholders, the Bank shall execute the
Agreement of Merger and any and all related documents."
18. Section 6.19 of the Agreement is hereby amended to read in
its entirety as follows:
"6.19 BANK EMPLOYEE BENEFITS. Prior to or at the Effective
Time of the Merger, the Bank will terminate the Bank Stock Option Plan. Upon the
agreement of the Company and the Bank, the Bank shall cause all Employee Plans
of the Bank to be terminated except as otherwise provided by applicable labor
laws, or as agreed between the Bank and the Company.@
19. Section 7.2(ii) of the Agreement is hereby amended to read
in its entirety as follows
"(ii) refrain from amending its Charter Documents except to
the extent as may be required or contemplated by this Agreement, and except as
the Company proposes to amend its articles of incorporation and bylaws as
attached to this Agreement as EXHIBIT 7.2(II)."
20. Section 7.6 of the Agreement is hereby amended to read in
its entirety as follows:
"7.6 CORPORATE ACTION. The Company shall take or cause to be
taken all necessary corporate action required to carry out the transactions
contemplated in this Agreement and the Agreement of Merger, including without
limitation, all necessary action required to organize and fund Interim Bank."
21. Section 7.13 of the Agreement is hereby amended to read in
its entirety as follows:
A7.13 EXECUTION OF AGREEMENT OF MERGER. As soon as practicable
after receipt of approval of the Commissioner to organize Interim Bank, the
Company as the sole shareholder of Interim Bank, shall approve the Merger and
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<PAGE>
shall cause Interim Bank to execute the Agreement of Merger and take any and all
other actions reasonably necessary to consummate the transactions contemplated
herein."
22. Section 7.15 of the Agreement is hereby amended to read in
its entirety as follows:
"7.15 AUTHORIZATION. The execution and delivery of the
Agreement of Merger and the consummation of the transactions contemplated
thereby will have been duly authorized by the Board of Directors of Interim
Bank. The Agreement of Merger will constitute a legal, valid and binding
agreement of Interim Bank in accordance with its respective terms, except as the
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other laws of general application relating to or
affecting enforcement of creditors rights and the application of equitable
principles in any action, legal or equitable. Interim Bank will have full
corporate power and authority to perform its obligations under the Agreement of
Merger and the transactions contemplated thereby."
23. Section 7.16 of the Agreement is hereby amended to read in
its entirety as follows:
"7.16 NO CONFLICTS; DEFAULTS. The execution, delivery and
performance of the Agreement of Merger and the consummation of the transactions
contemplated therein, and compliance by Interim Bank with any provision thereof
will not (a) conflict with or result in a breach of, or default or loss of any
benefit under, any provision of its Charter Documents or, except as set forth in
Exhibit 7.16 any material agreement, instrument or obligation to which Interim
Bank will become a party or by which the property of Interim Bank will become
bound or give any other party to any such agreement, instrument or obligation
the right to terminate or modify any term thereof; (b) except for the prior
approval of the FRB, the FDIC and the Commissioner and as set forth in Exhibit
7.16, require any Consents; (c) result in the creation or imposition of any
Encumbrance on any of the properties or assets of Interim Bank; or (d) violate
the Charter Documents or any Rules to which Interim Bank is subject."
24. Section 9.1(ii) of the Agreement is hereby amended to read
in its entirety as follows:
"(ii) to the extent required by applicable Rule, all
Consents of any Governmental Entity, including, without limitation, those of the
FRB, the FDIC and the Commissioner, shall have been obtained, granted or waived
for organization of Interim Bank and the Merger, and all applicable waiting
periods under all rules shall have expired; and"
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25. Section 9.3 of the Agreement is hereby amended to read in
its entirety as follows:
"9.3 SHAREHOLDER APPROVAL. The Agreement, the Merger, and the
other transactions contemplated hereby, shall have been approved by the holders
of at least two-thirds (2/3) of the issued and outstanding shares of Bank Stock
entitled to vote and the requisite approval of the Company as the sole
shareholder of Interim Bank as soon as practicable. Any and all other action
required by the shareholders of the Bank or the Company to authorize or effect
the transactions called for herein shall have been duly and validly taken."
26. The last sentence of Section 10.5 of the Agreement is
hereby amended to read in its entirety as follows:
"All actions necessary to authorize the execution, delivery
and performance of the Agreement by the Company and consummation of the Merger
by the Company and Interim Bank shall have been duly and validly taken by the
Board of Directors of the Company and Interim Bank."
27. This First Amendment may be entered into in one or more
counterparts, all of which shall be considered one in the same instrument, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
28. Except as herein amended, the Agreement shall remain in
full force and effect.
29. This First Amendment shall be governed by and construed in
accordance with the laws of the State of California.
30. The execution and delivery of this First Amendment by the
officers executing the First Amendment have been duly authorized by the Boards
of Directors of the Bank and the Company, and this First Amendment constitutes a
legal, valid and binding agreement of the parties in accordance with its
respective terms.
31. Exhibit A (Agreement of Merger), Exhibit C (VB Warrant
Agreement and its attached Exhibit A), and Exhibit 10.1 of the Agreement are
hereby amended to read in their entirety substantially in the forms attached
hereto as Exhibit A, Exhibit C (and its attached Exhibit A) and Exhibit 10.1,
respectively.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
PACIFIC COMMUNITY BANKING GROUP
By:
--------------------------------------
E. Lynn Caswell
Chairman and Chief Executive Officer
VALLEY BANK
By:
--------------------------------------
Marion V. Ashley
Chairman of the Board
By:
--------------------------------------
N. Douglas Mills
President and Chief Executive Officer
By:
--------------------------------------
Secretary
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Exhibit 2.6
SECOND AMENDMENT TO
FIRST RESTATEMENT OF AGREEMENT AND
PLAN OF REORGANIZATION
This SECOND AMENDMENT TO FIRST RESTATEMENT OF AGREEMENT AND
PLAN OF REORGANIZATION (the "Second Amendment") is dated as of April 12, 1999
and entered into by and between Valley Bank (the "Bank") and Pacific Community
Banking Group (the "Company").
WHEREAS, the Bank and the Company entered into a First
Restatement of Agreement and Plan of Reorganization dated as of January 5, 1999
(the "Agreement"); and a First Amendment to the Agreement dated as of March 4,
1999.
WHEREAS, the parties hereto desire to amend the Agreement and
the First Amendment as provided in this Second Amendment.
NOW, THEREFORE, in consideration of the premises and mutual
promises of the parties set forth below, the parties hereto agree as follows:
1. Capitalized terms used herein and not otherwise defined
shall have the same meaning as set forth in the Agreement.
2. Recital C of the Agreement is hereby amended to read in its
entirety as follows:
"C. At the Effective Time (hereinafter defined below) of the
Merger, all of the issued and outstanding shares of Bank Stock, except for
shares of Bank Stock held by Dissenting Shareholders (as hereinafter defined
below), shall be converted into and exchanged for a combination of shares of
Company Stock and Warrants exercisable into shares of Company Stock, all upon
the terms and subject to the conditions hereinafter set forth;"
3. Recital E of the Agreement is hereby amended by the
addition, at the end thereof, of the following clause:
"and the Bank, the Company and Interim Valley Bank will each
be "a party to a reorganization," within the meaning of Section 368(b) of the
Code, with respect to the Merger;"
4. The definition of Bank Shareholder is hereby added to read
in its entirety as follow:
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"'Bank Shareholder' shall mean any holder of Bank Stock or an
option to purchase Bank Stock immediately prior to the Merger."
5. The definition of "Cash Election" is hereby deleted.
6. The definition of "Combination Election" is hereby deleted.
7. The definition of Expected Net Proceeds" is hereby deleted.
8. The definition of "Offering" is hereby amended to read in
its entirety as follows:
"'Offering' shall mean a public offering underwritten by the
Underwriters (as defined below), as determined by the Company in its sole
discretion, of a certain number of shares of Company Stock as determined by the
Company in its sole discretion, of shares of the Company held by shareholders of
the Bank and The Bank of Hemet, and newly issued shares, at a gross offering
price of not less than $15.00 per share, as described in Section 7.14."
9. The definition of "S-1" is hereby amended in its entirety
as follows:
"'S-1' means the registration statement on Form S-1 to be
filed with the SEC relating to the registration under the Securities Act of the
shares of Company Stock held by shareholders of the Bank and The Bank of Hemet
to be sold, and shares of Company Stock to be issued, in the Offering."
10. The definition of "Selling Shareholder" is hereby added to
read in its entirety as follows:
"'Selling Shareholder" shall mean any Bank shareholder or
holder of a Bank stock option who elects to sell his or her shares of Bank Stock
or to exchange his or her options and sell the Company Stock received in
exchange therefore in the Offering."
11. The definition of "Total Acquisition Costs" is hereby
deleted.
12. The definition of "Undesignated Shares" is hereby amended
to read in its entirety as follows:
"'Undesignated Shares' shall have the meaning given such term
in Section 2.10."
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13. The second sentence of Section 2.1(b) is hereby amended to
read in its entirety as follows:
"Subject to proration by the Company in its absolute and sole
discretion to ensure that the number of shares of Company Stock sold by the Bank
Shareholders of the Bank in the Offering is equal to 60% of the aggregate number
of shares of Company Stock received by the Bank Shareholders of the Bank,
holders of Bank Stock shall be provided the opportunity to sell in the Offering
all the shares of Company Stock received in exchange for Bank Stock, as provided
in Section 2.10. If more or less than 60% of the shares of Company Stock
received by the Bank Shareholders (including, for this purpose, holders of Bank
stock options, as provided in Section 2.8) of the Bank is elected to be sold in
the Offering, then the shares of Company Stock sold in the Offering by each
Selling Shareholder so electing shall be increased or decreased, ratably in
proportion to the number of shares requested to be sold, so that the total
number of shares sold in the Offering by the Bank Shareholders in the aggregate
is equal to 60% of the shares of Company Stock received by the Bank
Shareholders. The Selling Shareholders shall receive, for each share of Company
Stock sold in the Offering, the price at which shares are sold in the Offering,
without reduction for expenses or commissions of the Offering, it being
understood that the Company shall bear such expenses and commissions."
14. Section 2.1(e) is hereby amended to read in its entirety
as follows:
(e) The Charter Documents of the Company as in effect
immediately prior to the Effective Time shall continue in effect after the
Merger until thereafter amended in accordance with applicable law and the
members of the Board of Directors and the Executive Officers of the Company
immediately prior to the Merger shall continue in their respective positions
after the Merger and be the Board of Directors and the Executive Officers of the
Company, except that the Company shall have taken prior to the Effective Time
all necessary steps so that, (i) two (2) individuals from the Board of Directors
of the Bank, which are intended to be Mr. Marion Ashley and Mr. N. Douglas
Mills, shall be appointed to the Board of Directors of the Company, (ii) two (2)
individuals from the Board of Directors or executive staff of The Bank of Hemet
shall be appointed to the Board of Directors of the Company, and (iii) the
individuals elected to fill such four (4) directorships shall be annual
appointments as selected in the sole discretion of the Company, and (iv) the
Company shall appoint at the Effective Time, and the Company shall continue to
propose for election at each successive Company annual shareholder meeting
thereafter, the ratio of that number of directors from the Bank's Board of
Directors bears to the total number of directors to be elected, compared to the
ratio of the number of former Bank's shares bears to the total number of shares
of the Company, with a minimum of two to be appointed or elected from the Bank's
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Board of Directors, subject to the approval of the Company (clauses (i) - (iv)
being hereinafter collectively referred to as the "Company Corporate Governance
Changes").
15. Section 2.4 is hereby amended to read in its entirety as
follows:
"2.4 THE AGGREGATE PURCHASE CONSIDERATION AND PER SHARE
CONSIDERATION. The Aggregate Purchase Consideration shall be equal to the sum of
(i) the product of 1,171,906 and the Per Share Consideration and (ii) the
Aggregate Option Price. The Per Share Consideration shall be equal to 2/3 share
of Company Stock for each share of Bank Stock, plus one-third (1/3) Warrant."
16. Section 2.5 is hereby amended to read in its entirety as
follows:
"2.5 DELIVERY OF CONSIDERATION. At the Closing, the Company
will deliver to the Exchange Agent an amount of Company Stock and Warrants equal
to the Aggregate Purchase Consideration, plus any cash payment for a fractional
share of Company Stock. In the case of shares of Company Stock to be sold in the
Offering, as provided in Section 2.1(b), the Exchange Agent shall deliver such
shares to, or pursuant to the direction of, the Underwriters. In the case of all
other shares of Company Stock, and the cash and Warrants, the Exchange Agent
shall deliver the same to the Selling Shareholders, provided that share
certificates formerly evidencing Bank Stock (duly executed and in proper form
for transfer), or a lost certificate affidavit acceptable to the Company) shall
have been delivered to the Exchange Agent in accordance with this Section 2.5,
Section 2.10 and an agreement to be entered into between the Company and the
Exchange Agent."
17. Section 2.8 is hereby amended to read in its entirety as
follows:
"2.8 STOCK OPTIONS. Immediately prior to the Effective Time of
the Merger, all stock options will be fully vested and each holder of a Bank
Option will be given the opportunity to, in whole or in part, cancel such option
and receive Company Stock equal to the number of shares of Bank Stock covered by
such option multiplied by the number obtained by subtracting the exercise price
of such option from the Per Share Consideration in effect on the Closing Date
(i.e., shares subject to option times ($10.00 minus exercise price of option),
all divided by $15.00) (the total of sum of such payments for all Bank Options
so cancelled shall be defined as the "Aggregate Option Price"). For each 2/3
share of Company Stock paid by the Company in exchange for options on Bank Stock
as provided in the previous sentence, each holder of a bank option will also
receive one-third (1/3) Warrant. Each such option holder shall be afforded an
election to have the shares so received sold in the Offering, upon substantially
identical terms as the Selling Shareholders, and subject to proration together
with and on the same terms as the Selling Shareholders. All remaining Bank
Options which are entitled to participate
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<PAGE>
in the Aggregate Option Price but the holder of a Bank Option elects not to
participate in the Aggregate Option Price shall be cancelled immediately prior
to the Effective Time of the Merger."
18. Section 2.9 is hereby amended to read in its entirety as
follows:
"2.9 SHAREHOLDERS' AGREEMENTS. The Shareholders' Agreements
previously entered into by each of the Directors of the Bank continue to be in
full force and effect, and shall apply to the Agreement as amended pursuant to
this Second Amendment. By signing this Second Amendment, each of the Directors
of the Bank so agrees."
19. Section 2.10 is hereby amended to read in its entirety as
follows:
"2.10 (a) TRANSMITTAL LETTER. On or about the mailing date of
the Joint Proxy Statement/Prospectus, the Company, the Bank or the Company's
Exchange Agent shall mail appropriate transmittal materials to the stockholders
of Bank Stock, in form acceptable to the Company. The transmittal materials
shall include documentation by which stockholders may indicate their election
regarding the sale of shares in the Offering, subject to the possible adjustment
as provided in Section 2.1(b), and shall provide that sale in the Offering will
be contingent on the completion of the Offering. The transmittal letter shall
also contain a power of attorney authorizing an authorized representative of the
Company to exchange the Bank's shares for Company shares, and then immediately
deliver the Company shares to the Underwriter for sale in the Offering. The
transmittal letter shall also require a signature guarantee, from a bank or
brokerage with medallion capability. The holder of Bank Stock shall be
instructed to send to the Company, or to the entity designated by the Company
(which may be the Bank or the Exchange Agent), the holder's Bank Stock
certificates with the properly completed letter of transmittal. The transmittal
letter shall contain an election box which permits the holder to elect to sell
all of his or her shares of PCBG for cash or 60% of such shares (subject to
adjustment as elsewhere herein provided), and other appropriate and customary
transmittal materials (which shall specify that delivery shall be effected, and
risk of loss and title to the certificates theretofore representing shares of
Bank Stock shall pass, only upon proper delivery of such certificates to the
Exchange Agent in such form as Company requires. The transmittal materials shall
identify the Election Deadline established by the Company, which shall not be
less than 30 days from the date of mailing of such transmittal letter to the
holder (or such shorter time as the Bank may approve), and shall state that any
share of Bank Stock (other than Dissenting Common Stock) with respect to which
the holder (or the Beneficial Owner, as the case may be) shall not have
submitted an effective, properly completed letter of transmittal together with
the Bank Stock certificates (or customary affidavits and indemnification
regarding the loss or destruction of
5
<PAGE>
such certificates or the guaranteed delivery of such certificates) prior to the
Election Deadline shall be deemed to be "Undesignated Shares" hereunder, and
shall not sell Company Stock in the Offering. The Bank shall provide to the
Exchange Agent all information reasonably necessary for it to perform its
obligations as specified herein.
(b) PROPER AND TIMELY ELECTION. Any Election shall have been
properly made and effective only if the Company or its designee shall have
actually received a properly completed letter of transmittal by the date and
time established by the Company and specified in the transmittal materials, as
such date and time may be extended by the Company in its discretion (the
"Election Deadline"). A letter of transmittal shall be deemed properly completed
only if an Election is indicated for each share of Bank Stock covered by such
letter of transmittal and if accompanied by one or more certificates (or
customary affidavits and indemnification regarding the loss or destruction of
such certificates or the guaranteed delivery of such certificates) representing
all shares of Bank Stock owned by the holder of Bank Stock, together with duly
executed transmittal materials included in or required by the letter of
transmittal. Any Election may be revoked or changed by the person submitting a
revised, properly completed letter of transmittal at or prior to the Election
Deadline. In the event a letter of transmittal is revoked prior to the Election
Deadline, the shares of Bank Stock represented by such Election shall
automatically become Undesignated Shares unless and until a new Election is
properly made with respect to such shares on or before the Election Deadline,
and the Company shall cause the certificates representing such shares of Bank
Stock to be promptly returned without charge to the person submitting the
revoked Election upon written request to that effect from the holder who
submitted such Election Form. Subject to the terms of this Agreement and of the
Election, the Company or the Exchange Agent shall have reasonable discretion to
determine whether any election, revocation or change has been properly or timely
made and to disregard immaterial defects in the letter of transmittal, and any
decisions of the Company and Bank required by the Exchange Agent and made in
good faith in determining such matters shall be binding and conclusive. Neither
the Company nor the Exchange Agent shall be liable for the failure to notify any
person of any defect in an Election or the letter of transmittal, provided that
the Company uses its reasonable best efforts promptly to notify (or cause the
Exchange Agent promptly to notify) any holder of Bank Stock of any defect in an
Election or the Letter of Transmittal.
(c) If the aggregate number of shares of Bank Stock as to
which Elections to sell shall have effectively been made would, absent
proration, result in the sale in the Offering of fewer or more shares than are
permitted pursuant to Section 2.1(b), then the sales in the Offering shall be
increased or decreased pro rata as provided in Section 2.1(b) in order to ensure
that the shares sold by Selling
6
<PAGE>
Shareholders in the Offering equal 60% of all shares received by Selling
Shareholders (including, for this purpose, option holders).
(d) CALCULATIONS. The calculations required by this Section
2.1 shall be prepared by the Company prior to the Effective Time and shall be
set forth in a certificate executed by the Chief Financial Officer or Chief
Executive Officer of the Company and furnished to the Bank at least two Business
Days prior to the Closing Date showing the manner of calculation in reasonable
detail. Any cash payment shall be rounded to the nearest cent.
(e) NO FRACTIONAL SHARES OR WARRANTS. Notwithstanding any
other provisions of this Agreement, each holder of shares of Bank Stock
exchanged pursuant to the Merger who would otherwise have been entitled to
receive a fraction of a share of Company Stock (after taking into account all
certificates delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to such fractional part of a share of
Company Stock multiplied by $15.00. Notwithstanding any other provision of this
Agreement, no fractional Warrants shall be issued, and no cash or other
consideration shall be paid in lieu of fractional Warrants. No holder will be
entitled to dividends, voting rights or any other rights as a shareholder in
respect of any fractional share of Company Stock."
20. Section 2.11 is hereby deleted, and Sections 3.4 and 3.5
are hereby amended in full as follows:
"3.4 EXCHANGE PROCEDURES.
(a) EXCHANGE AGENT. Prior to the Effective Time, the
Company shall deposit with the Exchange Agent shares of Company Stock and
Warrants to be issued to selling shareholders of the Bank, such shares being the
number of shares of Company Stock equal to the Aggregate Purchase Consideration
issuable in the Merger. The Exchange Agent shall deliver or cause to be
delivered to the Underwriter those of such shares to be sold in the Offering.
Upon completion of the Offering, the Underwriter will deposit with the Exchange
Agent the proceeds of the sale of shares by selling shareholders in the
Offering. The Exchange Agent shall distribute to each selling shareholder the
cash proceeds, shares of Company Stock and Warrants to which such selling
shareholder is entitled, provided that the selling shareholder shall have
delivered the requisite letter of transmittal and Bank share certificates (or
customary affidavits and indemnification regarding the loss or destruction of
such certificates or the guaranteed delivery of such certificates). The Exchange
Agent shall not be entitled to vote or exercise any rights of ownership with
respect to Company Stock held by it from time to time hereunder, except that it
shall receive and hold all dividends or other distributions paid or distributed
with respect to such shares for the account of the persons entitled thereto.
7
<PAGE>
(b) EXCHANGE OF CERTIFICATES. Each holder of a
certificate formerly representing Bank Stock (other than Dissenting Common
Stock) who surrenders or has surrendered such certificate (or customary
affidavits and indemnification regarding the loss or destruction of such
certificate), together with duly executed transmittal materials required by
Section 2.10, to the Exchange Agent shall, upon acceptance thereof, be entitled
to the Per Share Consideration of a certificate representing Company Stock or
the proceeds of the sale of such stock in the Offering and Warrants into which
the shares of Bank Stock shall have been converted pursuant hereto, as well as
cash in lieu of any fractional shares of Company Stock to which such holder
would otherwise be entitled. The Exchange Agent shall accept such Bank
certificate upon compliance with such reasonable and customary terms and
conditions as the Exchange Agent may impose to effect an orderly exchange
thereof in accordance with normal practices. Until surrendered as contemplated
by this Section 3.4, each certificate representing Bank Stock shall be deemed
from and after the Effective Time to evidence only the right to receive the Per
Share Consideration Company Stock and a Warrant, as the case may be, upon such
surrender. The Company shall not be obligated to deliver the consideration to
which any former holder of Bank Stock is entitled as a result of the Merger
until such holder surrenders his certificate or certificates representing shares
of Bank Stock for exchange as provided in this Article III. If any certificate
for shares of Company Stock, or any check representing declared but unpaid
dividends, is to be issued in a name other than that in which a certificate
surrendered for exchange is issued, the certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer and the person
requesting such exchange shall affix any requisite stock transfer tax stamps to
the certificate surrendered or provide funds for their purchase or establish to
the satisfaction of the Exchange Agent that such taxes are not payable.
(c) PAYMENT TO HOLDERS OF A BANK OPTION. Each holder
of a Bank Option who presents a demand for cancellation and payment of such Bank
Option as provided in Section 2.8 of the Agreement to the Exchange Agent prior
to the Closing shall, upon acceptance thereof, be entitled to the per share
equivalent of the Aggregate Option Price. Upon receipt of the Aggregate Purchase
Consideration and as soon as reasonably possible after the Closing, the Exchange
Agent shall deliver to each holder of a Bank Option the consideration due each
such holder under Section 2.8, or if applicable, Section 2.10, of the Agreement,
in the form of shares of Company Stock, Cash and Warrants as provided therein.
The Exchange Agent shall be entitled to rely upon the records of the Bank and
the information provided in such demand for cancellation documentation provided
by any such holder of a Bank Option, as verified by the Company as to the method
and means of payment and disposition of such consideration.
(d) AFFILIATES. Certificates surrendered for exchange
by any
8
<PAGE>
person constituting an "affiliate" of Bank for purposes of Rule 144(a) under the
Securities Act shall not be exchanged for certificates representing whole shares
of Company Stock until the Company has received a written agreement from such
person as provided in Section 6.25.
3.5 VOTING AND DIVIDENDS. Former shareholders of record of
Bank shall not be entitled to vote after the Effective Time at any meeting of
Company shareholders the number of whole shares of Company Stock into which
their respective shares of Bank Stock are converted, until such holders have
exchanged their certificates representing Bank Stock for certificates
representing Company Stock in accordance with the provisions of this Agreement.
Until surrendered for exchange in accordance with the provisions of Sections
2.10 and 3.4 of this Agreement, each certificate theretofore representing shares
of Bank Stock shall from and after the Effective Time represent for all purposes
only the right to receive the Per Share Consideration consisting of shares of
Company Stock and a Warrant, and cash in lieu of fractional shares, as set forth
in this Agreement. No dividends or other distributions declared or made after
the Effective Time with respect to Company Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered certificate of
Bank Stock with respect to the shares of Company Stock represented thereby,
until the holder of such certificate of Common Stock shall surrender such
certificate. Subject to the effect of applicable laws, following surrender of
any such certificates of Bank Stock for which shares of Company Stock are to be
issued, there shall be paid to the holder of the certificates, without interest,
(i) the amount of any cash payable with respect to a fractional share of Company
Stock to which such holder is entitled pursuant to Section 2.1 and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Company Stock, and (ii) at
the appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to surrender and a payment
date subsequent to the Effective Time payable with respect to such whole shares
of Company Stock."
21. Section 5.21 is hereby amended to read in its entirety as
follows:
"5.21 CAPITAL OF COMPANY, OFFERING AND COMMITMENTS. The
Company intends to use its best efforts to conduct the Offering in order to
permit stockholders of the Bank and The Bank of Hemet to sell shares of Company
Stock and to provide capital for expenses, growth and operations of the Company.
As of the date of this Agreement, the Company and Sutro have entered into the
Engagement Agreement, a copy of which has been provided to the Bank and which
has not been terminated or materially altered, except that the Company can
change its relationship with Sutro, or increase or decrease the number of
underwriters or co-mangers of the Offering, in the Company's sole discretion.
The Company shall
9
<PAGE>
not impose any cost or expense of the Offering, including Underwriter costs and
expenses, on any selling shareholder."
22. The first sentence of Section 6.8 is hereby amended to
read in its entirety as follows:
"As soon as practicable, the Company and the Bank shall
prepare the S-4 and the proxy statement ("Proxy Statement") and take all action
necessary in accordance with applicable Rules and its Charter Documents to
submit the Agreement and the transactions contemplated hereby to its
shareholders for approval by June 21, 1999, or as otherwise reasonably directed
by the Company."
23. Section 7.14 is hereby amended to read in its entirety as
follows:
"7.14 THE OFFERING.
(a) The Company intends to conduct the Offering in order to
permit stockholders of the Bank and The Bank of Hemet, to sell shares of Company
Stock and to provide capital for expenses, growth and operations of the Company.
All shareholders of the Bank will be given the opportunity to sell shares of the
Company (whether in exchange for Bank Stock or Bank Options) in the Offering,
subject to proration as provided in Section 2.1(b). Shares of Company Stock sold
by the selling shareholders will not incur any cost and expenses of the
Offering, and pursuant to the terms of this Section 7.14, the net proceeds from
the Offering will not be less than $15.00 per share.
(b) All holders of Bank Options who exchange their options for
shares Company Stock and elect to sell the shares of Company Stock so received
may do so without having to first exercise such options. Such option holders
wishing to sell shares of Company Stock underlying their options to be received
in exchange for the Bank Options may do so by depositing with the Exchange Agent
the options with respect to the shares of Bank Stock to be exchanged prior to
the Offering, together with appropriate Letters of Transmittal properly
completed and executed. At the time of the Merger, the Bank Options will be
deemed exchanged for the number of shares of Company Stock and Warrants as
provided in Section 2.8, and upon completion of the Offering, the Exchange Agent
will distribute to each former option holder (a) the proceeds of sale of those
of such shares that are sold in the Offering, and (b) the shares and cash to
which the former option holder is entitled.
(c) All Directors and executive officers of the Company and
the Surviving Bank, except Willow Decker and Mark Nugent, have undertaken in
writing with the Underwriters not to sell any Warrants or shares of Company
Stock held by
10
<PAGE>
them for a period of six months following the completion of the Offering unless
specifically granted permission to do so by the Underwriters, such undertaking
is in full force and effect. It is understood that the Underwriters will (a)
reduce the period from six months to ninety (90) days and (b) exclude from the
effect of these undertakings those shares sold in the Offering. Mark Nugent will
execute similar undertakings within 15 days of the day of the Second Amendment.
The Bank will use its best efforts to have Willow Decker execute similar
undertakings.
(d) Simultaneously with, and upon the condition of, the
consummation of the acquisition of the Bank, the Company through the
Underwriters intends to consummate the Offering at a gross public offering price
of at least $15.00 per share. If the Offering cannot be consummated at a gross
public offering price of at least $15.00 per share, the Company will not be
obligated to proceed with the Offering and the acquisition of the Bank , and the
Bank shall not be obligated to consummate the Merger."
24. Section 9.4 is hereby amended to read in its entirety as
follows:
"9.4 STOCK OFFERING. An election to sell shares in the
Offering shall have been made, and proper documentation submitted, so that,
after application of the proration provisions of Section 2.1(b), if necessary,
60% of Company Stock received by holders of Bank Stock are available for sale in
the Offering. The Company shall have entered into a firm commitment underwriting
agreement for the Offering (at an offering price of at least $15.00 per share by
Selling Shareholders of 60% of the Bank Stock), and all conditions to the
consummation of the Offering contained in the Underwriting Agreement, other than
the completion of the mergers of Interim Valley Bank with the Bank and of PCBG
Merger Corporation with The Bank of Hemet, shall have been satisfied or waived,
and the Company and the Bank shall have received evidence thereof reasonably
satisfactory to them."
25. Section 9.8 is hereby amended to read in its entirety as
follows:
"9.8 TAX OPINION. The Company shall have received from its
accountants an opinion for the benefit of the holders of Bank Stock reasonably
satisfactory to the Company and the Bank to the effect that the Merger shall not
result in the recognition of gain or loss for federal income tax purposes to the
Company or the Bank, the issuance of Company Stock or Warrants, and the
subsequent sale thereof in the Offering, shall not result in the recognition of
gain or loss by the holders of Bank Stock who receive Company Stock and Warrants
in connection with the Merger and which are not sold in the Offering, and shall
state that the holding period for Company Stock, for purposes of capital gains
taxation, shall include the period during which Bank Stock was held. This
opinion shall be dated prior to the date the Proxy Statement is first mailed to
the shareholders of
11
<PAGE>
the Company and the Bank and such opinions shall not have been withdrawn or
modified in any respect."
26. Section 14.1(a)(vi) is hereby amended to read in its
entirety as follows:
"(vi) by the Company or the Bank by June 28, 1999, unless
regulatory approvals and/or completion of the Offering is relatively imminent
and is expected to be completed within 30 days of July 2, 1999, in which case
the date in this subsection shall be automatically extended for up to an
additional 30 days."
27. Section 14.1(e)(iv) is hereby added to read in its
entirety as follows:
"(iv) If this Agreement is terminated by the Company before
the Closing as a result of a default by the Company in the performance of
Sections 5.18 and 7.14, no costs, expenses, fees or other liability or damages
will be accrued or incurred by the Company."
28. This Second Amendment may be entered into in one or more
counterparts, all of which shall be considered one in the same instrument, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
29. Except as herein amended, the Agreement and the First
Amendment shall remain in full force and effect.
30. This Second Amendment shall be governed by and construed
in accordance with the laws of the State of California.
31. The execution and delivery of this Second Amendment by the
directors and officers executing the Second Amendment have been duly authorized
by the Boards of Directors of the Bank and the Company, and this Second
Amendment constitutes a legal, valid and binding agreement of the parties in
accordance with its respective terms.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
PACIFIC COMMUNITY BANKING GROUP
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<PAGE>
By:
--------------------------------------
E. Lynn Caswell
Chairman and Chief Executive Officer
By:
--------------------------------------
Alfred Jannard
Secretary
VALLEY BANK
By:
--------------------------------------
Marion V. Ashley
By:
--------------------------------------
N. Douglas Mills
By:
--------------------------------------
Juan P. Renteria
By:
--------------------------------------
Jesse Washington
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<PAGE>
By:
--------------------------------------
George E. Wilson
By:
--------------------------------------
Helga Wolf
By:
--------------------------------------
Eugene H. Wood
<PAGE>
EXHIBIT 3.1
Articles of Incorporation of
Pacific Community Banking Group
<PAGE>
ARTICLES OF INCORPORATION
OF
PACIFIC COMMUNITY BANKING GROUP
ARTICLE I - NAME
The name of this corporation is PACIFIC COMMUNITY BANKING GROUP.
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
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 100,000,000 and the number of shares
of Common Stock authorized to be issued is 100,000,000.
(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 series then outstanding)
the number of shares of such series subsequent to the issue of shares of that
series.
- 1 -
<PAGE>
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.
Dated: September 24, 1997
/s/ Loren P. Hansen
--------------------------------
Loren P. Hansen
Incorporator
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
- 2 -
<PAGE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
PACIFIC COMMUNITY BANKING GROUP
E. Lynn Caswell and Alfred Jannard certify that:
1. They are the Chairman of the Board and Secretary, respectively, of
Pacific Community Banking Group, a California corporation.
2. Article VII is hereby added to the Articles of Incorporation of this
Corporation, to read as follows:
"ARTICLE VII
MEETINGS OF SHAREHOLDERS
Meetings of shareholders may be held at such place as the
Bylaws may provide."
3. Article VIII is hereby added to the Articles of Incorporation of
this Corporation, to read as follows:
"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 approve 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 shareholders 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.
B. LISTING OF CORPORATE SHARES. The remaining provisions of this
article shall become effective only when the Corporation becomes a listed
corporation within
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<PAGE>
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. The Board of Directors of the Corporation
shall be divided into two classes of directors which shall be designated Class I
and Class II. The numbers of each class shall be elected for a term of two years
and until their successors are elected and qualified. Each class shall contain
the number of directors which cause the classes to be as nearly equal in number
as possible, and the terms of all directors in a class shall expire
simultaneously. At the 2000 annual meeting of shareholders, directors of Class I
shall be elected to hold office for a term expiring at the second succeeding
meeting thereafter. At the next annual meeting of shareholders, directors of
Class II shall be elected to hold office for a term expiring at the second
succeeding meeting thereafter. 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 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 two 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."
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<PAGE>
4. Article IX is hereby added to the Articles of Incorporation of this
Corporation, to read as follows:
"IX
APPROVAL OF CERTAIN BUSINESS COMBINATIONS
The shareholder 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 at least 66 2/3% of the outstanding
shares entitled to vote thereon (and, if any class or series of shares is
entitled to vote thereon separately, the affirmative vote of the holders of at
least 66 2/3% of the outstanding shares of each such class or series), shall be
required in order to authorize any of the following:
(a) any merger or consolidation of the Corporation
with or into a Related Person (as hereinafter defined);
(b) any sale, lease, exchange, transfer or other
disposition, including without limitation, a mortgage, or any other security
device, of all or any Substantial Part (as hereinafter defined) of the assets of
the Corporation (including without limitation any voting securities of a
subsidiary) or of a subsidiary, to a Related Person;
(c) any merger or consolidation of a Related Person
with or into the Corporation or a subsidiary of the Corporation;
(d) any sale, lease, exchange, transfer or other
disposition of all or any Substantial Part of the assets of a Related Person to
the Corporation or a subsidiary of the Corporation;
(e) the issuance of any securities of the Corporation
or a subsidiary of the Corporation to a Related Person;
(f) the acquisition by the Corporation or a
subsidiary of the Corporation of any securities of a Related Person;
(g) any reclassification of the common stock of the
Corporation, or any recapitalization involving the common stock of the
Corporation; and
3
<PAGE>
(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.
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
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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."
5. Article X is hereby added to the Articles of Incorporation of this
Corporation, to read as follows:
"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 shareholders 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 shareholders
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."
6. Article XI is hereby added to the Articles of Incorporation of this
Corporation, to read as follows:
"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 shareholders 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 shareholders called for that purpose (provided that notice of
such
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proposed adoption, repeal, alteration, amendment or rescission is included in
the notice of such meeting)."
7. The foregoing amendments to the Articles of Incorporation have been
duly approved by the Board of Directors.
8. 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 10,000 shares of
Common Stock issued and outstanding and no shares of 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: February 25, 1999
/s/ E. Lynn Caswell
----------------------------------
E.Lynn Caswell, Chairman
/s/ Alfred Jannard
----------------------------------
Alfred Jannard, Secretary
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Exhibit 3.3
AMENDED AND RESTATED
BYLAWS FOR THE REGULATION OF
PACIFIC COMMUNITY BANKING GROUP
(a California corporation)
ARTICLE I
OFFICES
Section 1.1. PRINCIPAL EXECUTIVE OFFICE. The principal
executive office of the corporation is hereby fixed and located at 23332 Mill
Creek Drive, Suite 230, Laguna Hills, California 92653. The board of directors
is hereby granted full power and authority to change said principal executive
office from one location to another, subject to all regulatory approvals. Any
such change shall be noted on the Bylaws by the Secretary, opposite this
section, or this section may be amended to state the new location.
Section 1.2. OTHER OFFICE. Other business offices may at any
time be established by the board of directors at any place or places where the
corporation is qualified to do business, subject to all regulatory approvals.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.1. PLACE OF MEETINGS. All annual or other meetings
of shareholders shall be held at the principal executive office of the
corporation, or at any other place within the State of California which may be
designated either by the board of directors or by the written consent of all
persons entitled to vote thereat and not present at the meeting, given either
before or after the meeting and filed with the Secretary of the corporation.
Section 2.2. ANNUAL MEETINGS. The annual meetings of
shareholders shall be held on the 3rd Wednesday of each May at 7:00 p.m., local
time, provided, however, that should said day fall upon a legal holiday, then
any such annual meeting of shareholders shall be held at the same time and place
on the next day thereafter ensuing which is a full business day; provided
further, that the board of directors may, by resolution adopted prior to the
date fixed herein for an annual meeting, change the time and date for any annual
meeting of the shareholders to any day which is not a legal holiday and is not
more than 15 months after the date of the preceding annual meeting of
shareholders. At such meetings, directors shall be elected, reports of the
affairs of the corporation shall be considered, and any other business may be
transacted which is within the powers of the shareholders.
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Written notice of each annual meeting shall be given to each
shareholder entitled to vote, either personally or by first class mail or other
means of written communication, charges prepaid, addressed to such shareholder
at his address appearing on the books of the corporation or given by him to the
corporation for the purpose of notice. If any notice or report addressed to the
shareholder at the address of such shareholder appearing on the books of the
corporation is returned to the corporation by the United States Postal Service
marked to indicate that the United States Postal Service is unable to deliver
the notice or report to the shareholder at such address, all future notices or
reports shall be deemed to have been duly given without further mailing if the
same shall be available for the shareholder upon written demand of the
shareholder at the principal executive office of the corporation for a period of
one year from the date of the giving of the notice or report to all other
shareholders. If a shareholder gives no address, notice shall be deemed to have
been given him if sent by mail or other means of written communication addressed
to the place where the principal executive office of the corporation is
situated, or if published at least once in some newspaper of general circulation
in the county in which said principal executive office is located.
All such notices shall be given to each shareholder entitled
thereto not less than ten (10) days nor more than sixty (60) days before each
annual meeting. Any such notice shall be deemed to have been given at the time
when delivered personally or deposited in the mail or sent by other means of
written communication. An affidavit of mailing of any such notice in accordance
with the foregoing provisions, executed by the Secretary, Assistant Secretary or
any transfer agent of the corporation shall be prima facie evidence of the
giving of the notice.
Such notices shall specify:
(a) the place, the date, and the hour of such
meeting;
(b) those matters which the board, at the time of the
mailing of the notice, intends
to present for action by the shareholders;
(c) if directors are to be elected, the names of
nominees intended at the time of the notice to be presented by management for
election and a copy of Section 2.11 of these Bylaws;
(d) the general nature of a proposal, if any, to take
action with respect to approval of, (i) a contract or other transaction with an
interested director, (ii) amendment of the articles of incorporation, (iii) a
reorganization of the corporation as defined in Section 181 of the General
Corporation Law, (iv) voluntary dissolution of the corporation, or (v) a
distribution in dissolution other than in accordance with the rights of
outstanding preferred shares, if any; and
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(e) such other matters, if any, as may be expressly
required by statute.
Any information contained in a proxy statement sent with such
notice or other soliciting material sent with the notice shall be deemed to be a
part of the notice.
Section 2.3. SPECIAL MEETINGS. Special meetings of the
shareholders, for the purpose of taking any action permitted by the shareholders
under the General Corporation Law and the articles of incorporation of this
corporation, may be called at any time by the chairman of the board or the
president, or by the board of directors, or by one or more shareholders holding
not less than ten percent (10%) of the votes at the meeting. Upon request in
writing that a special meeting of shareholders be called for any proper purpose,
directed to the chairman of the board, president, vice-president or secretary by
any person (other than the board) entitled to call a special meeting of
shareholders, the officer forthwith shall cause notice to be given to
shareholders entitled to vote that a meeting will be held at a time requested by
the person or persons calling the meeting, not less than thirty-five (35) nor
more than sixty (60) days after receipt of the request. Except in special cases
where other express provision is made by statute, notice of such special
meetings shall be given in the same manner as for annual meetings of
shareholders. In addition to the matters required by items (a); (b) if
applicable, and (c) of the preceding Section, notice of any special meeting
shall specify the general nature of the business to be transacted, and no other
business may be transacted at such meeting except such business as properly
relates to the procedural conduct of such meeting and is within the powers of
the shareholders.
Section 2.4. QUORUM. The presence in person or by proxy of the
persons entitled to vote a majority of the voting shares at any meeting shall
constitute a quorum for the transaction of business. The shareholders present at
a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 2.5. ADJOURNED MEETING AND NOTICE THEREOF. Any
shareholders' meeting, annual or special, whether or not a quorum is present,
may be adjourned from time to time by the vote of a majority of the shares, the
holders of which are either present in person or represented by proxy thereat,
but in the absence of a quorum no other business may be transacted at such
meeting, except as provided in Section 2.4 above.
When any shareholders' meeting, either annual or special, is
adjourned for forty-five days or more, or if after adjournment a new record date
is fixed for the adjourned meeting, notice of the adjourned meeting shall be
given as in the case of an
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original meeting. Except as provided above, it shall not be necessary to give
any notice of the time and place of the adjourned meeting or of the business to
be transacted thereat, other than by announcement of the time and place thereof
at the meeting at which such adjournment is taken.
Section 2.6. VOTING. Unless a record date for voting purposes
be fixed as provided in Section 5.1 of Article V of these Bylaws, then, subject
to the provisions of Sections 702 through 704 of the Corporations Code of
California (relating to voting of shares held by a fiduciary, in the name of a
corporation, or in joint ownership), only persons in whose names shares entitled
to vote stand on the stock records of the corporation at the close of business
on the business day next preceding the day on which notice of the meeting is
given or if such notice is waived, at the close of business on the business day
next preceding the day on which the meeting of shareholders is held, shall be
entitled to vote at such meeting, and such day shall be the record date for such
meeting. Such vote may be oral or by ballot; provided, however, that all
elections for directors must be by ballot upon demand made by a shareholder at
any election and before the voting begins. If a quorum is present, except with
respect to election of directors, the affirmative vote of the majority of the
shares represented at the meeting and entitled to vote on any matter shall be
the act of the shareholders, unless the vote of a greater number or voting by
classes is required by the General Corporation Law, the articles of
incorporation or the Banking Law. Subject to the requirements of the remaining
sentences of this section, and except as provided in the Articles of
Incorporation, by Statute, or these Bylaws, every shareholder entitled to vote
at any election for directors shall have the right to cumulate his votes and
give one candidate a number of votes equal to the number of directors to be
elected multiplied by the number of votes to which his shares are entitled, or
to distribute his votes on the same principal among as many candidates as he
shall think fit. No shareholder shall be entitled to cumulate votes unless the
name of the candidate or candidates for whom such votes would be cast has been
placed in nomination prior to the voting and at least one shareholder has given
notice at the meeting prior to the voting, of such shareholder's intention to
cumulate his votes.
The remaining provisions of this section shall become
effective only when the Corporation becomes a listed corporation within the
meaning of Section 310.5 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.
CLASSIFIED BOARD. The board of directors shall be classified
into two classes, the members of each class to serve for a term of two 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.
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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.
CUMULATIVE VOTING. The election of directors by the
shareholders 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.
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 Corporations Code, one-half of the directors shall be elected for a
term of two years, and one-half of the directors shall be elected for a term of
one year. If the number of directors is not divisible by two, the first extra
director shall be elected for a term of two years and a second extra director,
if any, shall be elected for a term of one year.
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 two years
thereafter.
The candidates receiving the highest number of votes of shares
entitled to be voted for them, up to the number of directors to be elected,
shall be elected.
Section 2.7. VALIDATION OF DEFECTIVELY CALLED OR NOTICED
MEETINGS. The transactions of any meeting of shareholders, either annual or
special, however called and noticed, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each of the
persons entitled to vote, not present in person or by proxy, or who, though
present, has, at the beginning of the meeting, properly objected to the
transaction of any business because the meeting was not lawfully called or
convened, or to particular matters of business legally required to be included
in the notice, but not so included, signs a waiver of notice, or a consent to
the holding of such meeting, or an approval of the minutes thereof. The waiver
of notice or consent need not specify either the business to be transacted or
the purpose of any annual or special meeting of shareholders, except that if
action is taken or proposed to be taken
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for approval of any of those matters specified in Section 2.2(d) of Article II,
the waiver of notice or consent shall state the general nature of the proposal.
All such waivers, consents or approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a
waiver of notice of that meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened, and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters not included
in the notice of the meeting if that objection is expressly made at the meeting.
Section 2.8. ACTION WITHOUT MEETING. Directors may be elected
without a meeting by a consent in writing, setting forth the action so taken,
signed by all of the persons who would be entitled to vote for the election of
directors; provided that, without notice, a director may be elected at any time
to fill a vacancy (other than one created by removal) not filled by the
directors, by the written consent of persons holding a majority of the
outstanding shares entitled to vote for the election of directors.
Any other action which, under any provision of the California
General Corporation Law, may be taken at a meeting of the shareholders, may be
taken without a meeting, and without notice except as hereinafter set forth, if
a consent in writing, setting forth the action so taken, is signed by the
holders of outstanding shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Unless the consents
of all shareholders entitled to vote have been solicited in writing:
(a) Notice of any proposed shareholder approval of,
(i) a contract or other transaction with an interested director, (ii)
indemnification of an agent of the corporation as authorized by Section 3.15, of
Article III, of these Bylaws, (iii) a reorganization of the corporation as
defined in Section 181 of the General Corporation Law, or (iv) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares, if any, without a meeting by less than unanimous written consent, shall
be given at least ten (10) days before the consummation of the action authorized
by such approval; and
(b) Prompt notice shall be given of the taking of any
other corporate action approved by shareholders without a meeting by less than
unanimous written consent, to those shareholders entitled to vote who have not
consented in writing. Such notices shall be given in the manner and shall be
deemed to have been given as provided in Section 2.2 of Article II of these
Bylaws.
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Unless, as provided in Section 5.1 of Article V of these
Bylaws, the board of directors has fixed a record date for the determination of
shareholders entitled to notice of and to give such written consent, the record
date for such determination shall be the day on which the first written consent
is given. All such written consents shall be filed with the Secretary of the
corporation.
Any shareholder giving a written consent, or the shareholder's
proxyholders, or a transferee of the shares, or a personal representative of the
shareholder, or their respective proxyholders, may revoke the consent by a
writing received by the corporation prior to the time that written consents by
the number of shares required to authorize the proposed action have been filed
with the Secretary of the corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the Secretary of the corporation.
Section 2.9. PROXIES. Every person entitled to vote shall have
the right to do so either in person or by one or more agents authorized by a
written proxy executed by such person or his duly authorized agent and filed
with the Secretary of the corporation. Any proxy duly executed is not revoked
and continues in full force and effect until, (i) an instrument revoking it or a
duly executed proxy bearing a later date is filed with the Secretary of the
corporation prior to the vote pursuant thereto, (ii) the person executing the
proxy attends the meeting and votes in person, or (iii) written notice of the
death or incapacity of the maker of such proxy is received by the corporation
before the vote pursuant thereto is counted; provided, that no such proxy shall
be valid after the expiration of eleven (11) months from the date of its
execution, unless the person executing it specifies therein the length of time
for which such proxy is to continue in force; provided further, that an
irrevocable proxy satisfying the requirements of Section 705(e) of the General
Corporations Law shall not be revoked except in accordance with its terms or if
it becomes revocable under the provisions of Section 705(e) and (f) of said
General Corporations Law.
Section 2.10. INSPECTORS OF ELECTION. In advance of any
meeting of shareholders, the board of directors may appoint any persons as
inspectors of election to act at such meeting or any adjournment thereof. If
inspectors of election be not so appointed, the chairman of any such meeting
may, and on the request of any shareholder or his proxy shall, make such
appointment at the meeting. The number of inspectors shall be either one (1) or
three (3). If appointed at a meeting on the request of one or more shareholders
or proxies, the majority of shares represented in person or by proxy shall
determine whether one (1) or three (3) inspectors are to be appointed. In case
any person appointed as inspector fails to appear or fails or refuses to act,
the vacancy may, and on the request of any shareholder or a shareholder's proxy
shall, be filled by appointment by the board of directors in advance of the
meeting, or at the meeting by the chairman of the meeting.
The duties of such inspectors shall be as prescribed in
Section 707 of the General Corporation Law and shall include: determining the
number of shares
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outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining when the polls shall close;
determining the result; and such acts as may be proper to conduct the election
or vote with fairness to all shareholders. In the determination of the validity
and effect of proxies, the dates contained on the forms of proxy shall
presumptively determine the order of execution of the proxies, regardless of the
postmark dates on the envelopes in which they are mailed. In making their
determinations, the inspectors may consider whether proxies were solicited in
accordance with applicable provisions of law.
The inspectors of election shall perform their duties
impartially, in good faith, to the best of their ability and as expeditiously as
is practical. If there are three inspectors of election, the decision, act or
certificate of a majority is effective in all respects as the decision, act or
certificate of all. Any report or certificate made by the inspectors of election
is prima facie evidence of the facts stated therein.
Section 2.11. NOMINATION OF DIRECTORS. Nominations for
election of members of the board of directors may be made by the board of
directors or by any shareholder of any outstanding class of capital stock of the
corporation entitled to vote for the election of directors. Notice of intention
to make any nominations (other than for persons named in the notice of the
meeting at which such nomination is to be made) shall be made in writing and
shall be delivered or mailed to the president of the corporation by the later of
the close of business 21 days prior to any meeting of shareholders called for
the election of directors or 10 days after the date of mailing of notice of the
meeting to shareholders. Such notification shall contain the following
information to the extent known to the notifying shareholder: (a) the name and
address of each proposed nominee; (b) the principal occupation of each proposed
nominee; (c) the number of shares of capital stock of the corporation owned by
each proposed nominee; (d) the name and residence address of the notifying
shareholder; (e) the number of shares of capital stock of the corporation owned
by the notifying shareholder; (f) with the written consent of the proposed
nominee, a copy of which shall be furnished with the notification, whether the
proposed nominee has ever been convicted of or pleaded nolo contendere to any
criminal offense involving dishonesty or breach of trust, filed a petition in
bankruptcy, or been adjudged bankrupt. The notice shall be signed by the
nominating shareholder and by the nominee. Nominations not made in accordance
herewith shall be disregarded by the chairman of the meeting, and upon his
instructions, the inspectors of election shall disregard all votes cast for each
such nominee. The restrictions set forth in this paragraph shall not apply to
nomination of a person to replace a proposed nominee who has died or otherwise
become incapacitated to serve as a director between the last day for giving
notice hereunder and the date of election of directors if the procedure called
for in this paragraph was followed with respect to the nomination of the
proposed nominee.
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ARTICLE III
DIRECTORS
Section 3.1. POWERS. Subject to limitations of the articles of
incorporation and of the California General Corporation Law as to action to be
authorized or approved by the shareholders, and subject to the duties of
directors as prescribed by the Bylaws, all corporate powers shall be exercised
by or under the authority of, and the business and affairs of the corporation
shall be controlled by, the board of directors. Without prejudice to such
general powers, but subject to the same limitations, it is hereby expressly
declared that the directors shall have the following powers, to wit:
First - To select and remove all the officers, agents and
employees of the corporation, prescribe such powers and duties for them as may
not be inconsistent with law, with the articles of incorporation or the Bylaws,
fix their compensation and require from them security for faithful service.
Second - To conduct, manage and control the affairs and
business of the corporation, and to make such rules and regulations therefor not
inconsistent with law, or with the articles of incorporation or the Bylaws, as
they may deem best.
Third - To change the principal executive office and principal
office for the transaction of the business of the corporation from one location
to another as provided in Article I, Section 1.1, hereof; to fix and locate from
time to time one or more subsidiary offices of the corporation within or without
the State of California, as provided in Article I, Section 1.2, hereof; to
designate anyplace within the State of California for the holding of any
shareholders' meeting or meetings; and to adopt, make and use a corporate seal,
and to prescribe the forms of certificates of stock, and to alter the form of
such seal and of such certificates from time to time, as in their judgment they
may deem best, provided such seal and such certificates shall at all times
comply with the provisions of law.
Fourth - To authorize the issuance of shares of stock of the
corporation from time to time, upon such terms as may be lawful.
Fifth - To borrow money and incur indebtedness for the
purposes of the corporation, and to cause to be executed and delivered therefor,
in the corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations or other evidences of debt and securities
therefor.
Sixth - By resolution adopted by a majority of the authorized
number of directors, to designate executive and other committees, each
consisting of two or more directors, to serve at the pleasure of the board, and
to prescribe the manner in which proceedings of such committees shall be
conducted. Unless the board of
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directors shall otherwise prescribe the manner of proceedings of any such
committees, meetings of such committees may be regularly scheduled in advance
and may be called at any time by the chairman or any two members thereof; unless
the board of directors otherwise prescribes, the other provisions of these
Bylaws with respect to notice and conduct of meetings of the board shall govern.
Any such committee, to the extent provided in a resolution of the board, shall
have all of the authority of the board, except with respect to:
(i) the approval of any action for which the General
Corporation Law or the articles of incorporation also require shareholder
approval;
(ii) the filling of vacancies on the board or in any
committee;
(iii) the fixing of compensation of the directors for
serving on the board or on any committee;
(iv) the adoption, amendment or repeal of the board;
(v) the amendment or repeal of any resolution of
Bylaws;
(vi) any distribution to the shareholders, except at
a rate or in a periodic amount or within a price range determined by the board;
(vii) the appointment of other committees of the
board or the members thereof; and
(viii) taking any action which requires approval of a
specified number or portion of the directors under any provision of law or
regulation applicable specifically to banks.
Section 3.2. NUMBER AND QUALIFICATION OF DIRECTORS. The
number of directors of the corporation shall not be less than five (5) nor
more than nine (9), except that effective immediately before the effective
time of the Company's initial public offering, the number of directors shall
not be less than eight (8) nor more than fifteen (15), until changed by
amendment of the articles of incorporation or by a bylaw amending this
Section 3.2 duly adopted by the vote of the holders of a majority of the
outstanding shares entitled to vote or written consent of the holders of a
majority of the outstanding shares entitled to vote, provided that a proposal
to reduce the authorized number or the minimum number of directors below five
cannot be adopted. The exact number of directors shall be fixed from time to
time, within the limits specified in the articles of incorporation or in this
Section 3.2 (i) by resolution duly adopted by the board of directors; or (ii)
by a bylaw or amendment thereof duly adopted by the vote of a majority of the
shares entitled to vote represented at a duly held meeting at which a quorum
is present, or by a written consent of the holders of a majority of the
outstanding shares entitled to vote, or by the board of directors; or (iii)
by approval of the shareholders (as defined in Section 153 of the General
Corporation Law).
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Subject to the foregoing provisions, for changing the number
of directors, the number of directors of this corporation has been fixed at
five (5).
Section 3.3. ELECTION AND TERM OF OFFICE. Subject to the
Articles of Incorporation, Statute or these Bylaws, and subject to Section 2.6
regarding Classified Board, the directors shall be elected at each annual
meeting of shareholders but, if any such annual meeting is not held or the
directors are not elected thereat, the directors may be elected at any special
meeting of shareholders held for that purpose or by written consent in
accordance with Section 2.8 of Article II of these Bylaws. All directors shall
hold office until their respective successors are elected, subject to the
General Corporation Law and the provisions of these Bylaws with respect to
vacancies on the board.
Section 3.4. VACANCIES. A vacancy in the board of directors
shall be deemed to exist (i) in case of the death, resignation or removal of any
director, (ii) if a director has been declared of unsound mind by order of court
or convicted of a felony, (iii) if the authorized number of directors be
increased, or (iv) if the shareholders fail, at any annual or special meeting of
shareholders at which any director or directors are elected, to elect the full
authorized number of directors to be voted for at that meeting.
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.
Any director may resign effective upon giving written notice
to the chairman of the board, the president, the Secretary or the board of
directors of the corporation, unless the notice specifies a later time for the
effectiveness of such resignation. If the board of directors accepts the
resignation of a director tendered to take effect at a future time, the board or
the shareholders shall have power to elect a successor to take office when the
resignation is to become effective, as provided in the previous paragraph.
No reduction of the authorized number of directors shall have
the effect of removing any director prior to the expiration of his term of
office.
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Section 3.5. PLACE OF MEETING. Regular meetings of the board
of directors shall be held at any place within the State of California which has
been designated from time to time by resolution of the board or by written
consent of all members of the board. In the absence of such designation regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the board may be held either at a place so designated,
within or without the State of California, or at the principal executive office.
Section 3.6. ORGANIZATION MEETING. Immediately following each
annual meeting of shareholders, the board of directors shall hold a regular
meeting at the place of said annual meeting or at such other place as shall be
fixed by the board of directors, for the purpose of organization, election of
officers, and the transaction of other business. Call and notice of such
meetings are hereby dispensed with.
Section 3.7. OTHER REGULAR MEETINGS. Other regular meetings of
the board of directors shall be held without call on the 3rd Wednesday of
January, April, July and October of each year, at 9:00 a.m. (unless another date
and time is fixed by the board); provided, however, should said day fall upon a
legal holiday, then said meeting shall be held at the same time on the next day
thereafter ensuing which is a full business day. Notice of all such regular
meetings of the board of directors is hereby dispensed with.
Section 3.8. SPECIAL MEETINGS. Special meetings of the board
of directors for any purpose or purposes shall be called at any time by the
chairman of the board, the president, or by any two directors.
Written notice of the time and place of special meetings shall
be delivered personally to each director or communicated to each director
orally, by telephone, or by telegraph or mail, charges prepaid, addressed to him
at his address as it is shown upon the records of the corporation or, if it is
not so shown on such records or is not readily ascertainable, at the place at
which the meetings of the directors are regularly held. In case such notice is
mailed or telegraphed, it shall be deposited in the United States mail or
delivered to the telegraph company in the place in which the principal executive
office of the corporation is located at least forty-eight hours prior to the
time of the holding of the meeting. In case such notice is delivered personally
or by telephone, as above provided, it shall be so delivered at least
twenty-four hours prior to the time of the holding of the meeting. Such mailing,
telegraphing or delivery, personally, orally or by telephone, as above provided,
shall be due, legal and personal notice to such director.
Any notice shall state the date, place and hour of the meeting
and may state the general nature of the business to be transacted, and other
business may be transacted at the meeting.
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Section 3.9. ACTION WITHOUT MEETING. Any action by the board
of directors may be taken without a meeting if all members of the board shall
individually or collectively consent in writing to such action. Such written
consent or consents shall be filed with the minutes of the proceedings of the
board and shall have the same force and effect as a unanimous vote of such
directors.
Section 3.10. ACTION AT A MEETING: QUORUM AND REQUIRED VOTE.
Presence of a majority of the authorized number directors at a meeting of the
board of directors constitutes a quorum for the transaction of business, except
as hereinafter provided., or as provided in the Articles of Incorporation or
Statute. Members of the board may participate in a meeting through use of
conference telephone or similar communications equipment, so long as all members
participating in such meeting can hear one another. Participation in a meeting
as permitted in the preceding sentence constitutes presence in person at such
meeting. Except as provided in the Articles of Incorporation, Statute or Bylaws,
every act or decision done or made by a majority of the directors present at a
meeting duly held at which a quorum is present shall be regarded as the act of
the board of directors, unless a greater number, or the same number after
disqualifying one or more directors from voting, is required by law, by the
articles of incorporation, or by these Bylaws. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of director, provided that any action taken is approved by at least a
majority of the required quorum for such meeting.
Section 3.11. VALIDATION OF DEFECTIVELY CALLED OR NOTICED
MEETINGS. The transactions of any meeting of the board of directors, however
called and noticed or wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum is present and if,
either before or after the meeting, each of the directors not present or who,
though present, has prior to the meeting or at its commencement, protested the
lack of proper notice to him, (i) signs a written waiver of notice or a consent
to holding such meeting or an approval of the minutes thereof, or (ii) waives
notice and withdraws his objection. All such waivers, consents or approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
Attendance of a director at any meeting shall constitute a
waiver of notice of such meeting, unless a director attends for the express
purpose of objecting to the transaction of any business because the meeting is
not lawfully called, noticed, or convened; provided, however, if after stating
his objection, the objecting director continues to attend and by his attendance
participates in any matters other than those to which he objected, he shall be
deemed to have waived notice of such meeting and withdrawn his objections.
Section 3.12. ADJOURNMENT. A majority of the directors present
at any director's meeting, either regular or special, may adjourn from time to
time until the time fixed for the next regular meeting of the board.
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Section 3.13. NOTICE OF ADJOURNMENT. If the meeting is
adjourned for more than 24 hours, notice of any adjournment to another time or
place must be given prior to the time of the adjourned meeting to the directors
who were not present at the time of adjournment. Otherwise notice of the time
and place of holding an adjourned meeting need not be given to absent directors
if the time and place be fixed at the meeting adjourned.
Section 3.14. FEES AND COMPENSATION. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by resolution of the
board.
Section 3.15. INDEMNIFICATION OF AGENTS OF THE CORPORATION;
PURCHASE OF LIABILITY INSURANCE.
(a) The corporation shall, to the maximum extent and
in the manner permitted by the California Corporations Code (the "Code"),
indemnify each of its directors against expenses (as defined in Section 317(a)
of the Code), judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding (as defined in Section
317(a) of the Code), arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 3.15 a "director" of the
corporation includes any person (i) who is or was serving at the request of the
corporation (ii) as a director of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director of a corporation
which was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation.
(b) The corporation shall have the power, to the
extent and in the manner permitted by the Code, to indemnify each of its
officers, employees and agents against expenses (as defined in Section 317(a) of
the Code), judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding (as defined in Section
317(a) of the Code), arising by reason of the fact that such person is or was an
officer, employee or agent of the corporation. For purposes of this Section
3.15, an "officer", "employee" or "agent" of the corporation includes any person
(i) who is or was an officers, employee, or agent of the corporation, (ii) who
is or was serving at the request of the corporation as an officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was an officer, employee or agent of the corporation
which was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation.
(c) Expenses incurred in defending any civil or
criminal action or proceeding for which indemnification is required pursuant to
Section 3.15 shall be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of the indemnified party to repay such
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amount if it shall ultimately be determined that the indemnification party is
not entitled to be indemnified as authorized in this Section 3.15. Expenses
incurred in defending any civil or criminal action or proceeding for which
indemnification s permitted pursuant to Section 3.15 may be paid by the
corporation in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of the indemnified party to repay
such amount if it shall ultimately be determined that the indemnified party is
not entitled to be indemnified as authorized in this Section 3.15.
(d) The indemnification provided by this Section 3.15
shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any bylaw, agreement, vote of shareholders
or disinterested directors or otherwise, both as to action in an official
capacity and as to action in another capacity while holding such office, to the
extent that such additional rights to indemnification are authorized in the
Articles of Incorporation.
(e) The corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was an agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Section 3.15.
(f) No indemnification or advance shall be made under
this Section 3.15, except where such indemnification or advance is mandated by
law or the order, judgment or decree of any court of competent jurisdiction, in
any circumstance where it appears:
(1) That it would be inconsistent with a
provision of the Articles of Incorporation, these Bylaws, a resolution of the
shareholders or an agreement in effect at the time of the accrual of the alleged
cause of the action asserted in the proceeding in which the expenses were
incurred or other amounts were paid, which prohibits or otherwise limits
indemnification; or
(2) That it would be inconsistent with any
condition expressly imposed by a court in approving a settlement.
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ARTICLE IV
OFFICERS
Section 4.1. OFFICERS. The officers of the corporation shall
be a chief executive officer, a vice-president, a secretary and a chief
financial officer. The corporation may also have, at the discretion of the board
of directors, a chairman of the board, one or more additional vice-presidents,
one or more assistant secretaries, and such other officers as may be appointed
in accordance with the provisions of Section 3 of this Article. One person may
hold two or more offices, except that the offices of president and Secretary
shall not be held by the same person.
Section 4.2. ELECTION. The officers of the corporation, except
such officers as may be appointed in accordance with the provisions of Section
4.3 or Section 4.5 of this Article, shall be chosen annually by the board of
directors, and each shall hold his office until he shall resign or shall be
removed or otherwise disqualified to serve, or his successor shall be elected
and qualified.
Section 4.3. SUBORDINATE OFFICERS, ETC. The board of directors
may appoint, and may empower the president to appoint, such other officers as
the business of the corporation may require, each of whom shall hold office, for
such period, have such authority and perform such duties as are provided in the
Bylaws or as the board of directors may from time to time determine.
Section 4.4. REMOVAL AND RESIGNATION. Any officer may be
removed, either with or without cause, by the board of directors, at any regular
or special meeting thereof, or, except in case of an officer chosen by the board
of directors, by any officer upon whom such power of removal may be conferred by
the board of directors (subject, in each case, to the rights, if any, of an
officer under any contract of employment).
Any officer may resign at any time by giving written notice to
the board of directors or to the president, or to the Secretary of the
corporation, without prejudice however, to the rights, if any, of the
corporation under any contract to which such officer is a party. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 4.5. VACANCIES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in the Bylaws for regular appointments to such office.
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Section 4.6. CHAIRMAN OF THE BOARD. The chairman of the board,
if there shall be such a person, shall be an officer of the board only and not
of the corporation, and shall, if present, preside at all meetings of the board
of directors. He may exercise and perform such other powers and duties as may be
from time to time assigned to him by the board of directors or prescribed by the
Bylaws, in which case he may be deemed to be an officer of the corporation.
Section 4.7. PRESIDENT. Subject to such supervisory powers, if
any, as may be given by the board of directors to the chairman of the board, if
there be such an officer, the president shall be the chief executive officer of
the corporation and shall, subject to the control of the board of directors,
have general supervision, direction and control of the business and officers of
the corporation. He shall preside at all meetings of the shareholders and, in
the absence of the chairman of the board, or if there be none, at all meetings
of the board of directors. He shall be ex-officio a member of all the standing
committees (except the audit committee), including the executive committee, if
any, and shall have the general powers, and duties of management usually vested
in the office of president of a corporation, and shall have such other powers
and duties as may be prescribed by the board of directors or the Bylaws.
Section 4.8. VICE-PRESIDENT. In the absence or disability of
the president, the vice-presidents in order of their rank as fixed by the board
of directors or, if not ranked, the vice-president designated by the board of
directors, shall perform all the duties of the president, and when so acting
shall have all the powers of, and be subject to all the restrictions upon the
president. The vice-presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
board of directors or the Bylaws.
Section 4.9. SECRETARY. The Secretary shall record or cause to
be recorded, and shall keep or cause to be kept, at the principal executive
office and such other place as the board of directors may order, a book of
minutes of actions taken at all meetings of directors and shareholders, with the
time and place of holding, whether regular or special, and, if special, how
authorized, the notice thereof given, the names of those present at director's
meetings, the number of shares present or represented at shareholder's meetings,
and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the
principal executive office or at the office of the corporation's transfer agent,
a share register, or a duplicate share register, showing the names of the
shareholders and their addresses, the number and classes of shares held by each,
the number and date of certificates issued for the same, and the number and date
of cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all
the meetings of the shareholders and of the board of directors required by the
Bylaws or by law to
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be given, and he shall keep the seal of the corporation in safe custody, and
shall have such other powers and perform such other duties as may be prescribed
by the board of directors or by the Bylaws.
Section 4.10. CASHIER. The cashier shall be the chief
financial officer of the corporation and shall keep and maintain, or cause to be
kept and maintained, adequate and correct accounts of the properties and
business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, surplus and
shares. The books of account shall at all reasonable times be open to inspection
by any director.
The cashier shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as cashier and of the financial condition of the corporation, and
shall have such other powers and perform such other duties as may be prescribed
by the board of directors or the Bylaws.
ARTICLE V
MISCELLANEOUS
Section 5.1. RECORD DATE. The board of directors may fix a
time in the future as a record date for the determination of the shareholders
entitled to notice of and to vote at any meeting of shareholders or entitled to
give consent to corporate action in writing without a meeting, to receive any
report, to receive any dividend or distribution, or any allotment of rights, or
to exercise rights in respect to any change, conversion, or exchange of shares.
The record date so fixed shall be not more than sixty (60) days nor less than
ten (10) days prior to the date of any meeting, nor more than sixty (60) days
prior to any meeting or any other event for the purpose of which it is fixed.
When a record date is so fixed, only shareholders of record on that date are
entitled to notice of and to vote at any such meeting, to give consent without a
meeting, to receive any report, to receive a dividend, distribution, or
allotment of rights, or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the articles of incorporation
or Bylaws.
Section 5.2. INSPECTION OF CORPORATE RECORDS. The accounting
books and records, the record of shareholders, and minutes of proceedings of the
shareholders and the board and committees of the board of this corporation and
any subsidiary of this corporation shall be open to inspection upon the written
demand on the corporation of any shareholder or holder of a voting trust
certificate at any reasonable time during usual business hours, for a purpose
reasonably related to such holder's interests as a shareholder or as the holder
of such voting trust certificate.
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Such inspection by a shareholder or holder of a voting trust certificate may be
made in person or by agent or attorney, and the right of inspection includes the
right to copy and make extracts.
Section 5.3. CHECKS, DRAFTS, ETC. All checks, drafts or other
orders for payment of money, notes or other evidences of indebtedness, issued in
the name of or payable to the corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time, shall be determined
by resolution of the board of directors.
Section 5.4. ANNUAL AND OTHER REPORTS. The board of directors
of the corporation shall cause an annual report to be sent to the shareholders
not later than 120 days after the close of the fiscal or calendar year. The
requirement for such annual report is dispensed with so long as this corporation
has less than 100 shareholders of record. Such report shall contain a balance
sheet as of the end of such fiscal year and an income statement and statement of
changes in financial position for such fiscal year, accompanied by any report
thereon of independent accountants or, if there is no such report, the
certificate of an authorized officer of the corporation that such statements
were prepared without audit from the books and records of the corporation.
A shareholder or shareholders holding at least five percent of
the outstanding shares of any class of the corporation may make a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the current fiscal year ended
more than 30 days prior to the date of the request and a balance sheet of the
corporation as of the end of such period and, in addition, if no annual report
for the last fiscal year has been sent to shareholders, the annual report for
the last fiscal year. The corporation shall use its best efforts to deliver the
statement to the person making the request within 30 days thereafter. A copy of
any such statements shall be kept on file in the principal executive office of
the corporation for 12 months and they shall be exhibited at all reasonable
times to any shareholder demanding an examination of them or a copy shall be
mailed to such shareholder.
The corporation shall, upon the written request of any
shareholder, mail to the shareholder a copy of the last annual income statement
which it has prepared and a balance sheet as of the end of the period. The
quarterly income statements and balance sheets referred to in this section shall
be accompanied by the report thereon, if any, of any independent accountants
engaged by the corporation or the certificate of an authorized officer of the
corporation that such financial statements were prepared without audit from the
books and records of the corporation.
Section 5.5. CONTRACTS, ETC., HOW EXECUTED. The board of
directors, except as in the Bylaws otherwise provided, may authorize any officer
or officers, agent or agents, to enter into any contract or execute any
instrument in the name of
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and on behalf of the corporation, and such authority may be general or confined
to specific instances; and, unless so authorized by the board of directors, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or to any amount.
Section 5.6. CERTIFICATE FOR SHARES. Every holder of shares in
the corporation shall be entitled to have a certificate signed in the name of
the corporation by the chairman or vice-chairman of the board or the president
or a vice-president and by the chief financial officer or the Secretary or any
Assistant Secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any of the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if such
person were an officer, transfer agent or registrar at the date of issue.
Any such certificate shall also contain such legend or other
statement as may be required by Section 418 of the General Corporation Law, the
Corporate Securities Law of 1968, the federal securities laws, and any agreement
between the corporation and the issuee thereof.
No new certificate for shares shall be issued in lieu of an
old certificate unless the latter is surrendered and cancelled at the same time;
provided, however, that a new certificate will be issued without the surrender
and cancellation of the old certificate if (1) the old certificate is lost,
apparently destroyed or wrongfully taken; (2) the request for the issuance of
the new certificate is made within a reasonable time after the owner of the old
certificate has notice of its loss, destruction, or theft; (3) the request for
the issuance of a new certificate is made prior to the receipt of notice by the
corporation that the old certificate has been acquired by a bona fide purchaser;
(4) the owner of the old certificate files a sufficient indemnity bond with or
provides other adequate security to the corporation; and (5) the owner satisfies
any other reasonable requirements imposed by the corporation. In the event of
the issuance of a new certificate, the rights and liabilities of the
corporation, and of the holders of the old and new certificates, shall be
governed by the provisions of Section 8104 and 8405 of the California Commercial
Code.
Section 5.7. REPRESENTATION OF SHARES OF OTHER CORPORATIONS.
The president or vice-president and the Secretary or any Assistant Secretary of
this corporation are authorized to vote, represent and exercise on behalf of
this corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of this corporation. The
authority herein granted to said officers to vote or represent on behalf of this
corporation any and all shares held by this corporation in any other corporation
or corporations may be exercised either by such
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officers in person or by any other person authorized so to do by proxy or power
of attorney duly executed by said officers.
Section 5.8. INSPECTION OF BYLAWS. The corporation shall keep
in its principal executive office in California, the original or a copy of the
Bylaws as amended or otherwise altered to date, certified by the Secretary,
which shall be open to inspection by the Shareholders at all reasonable times
during office hours.
Section 5.9. CONSTRUCTION AND DEFINITIONS. Unless the context
otherwise requires, the general provisions, rules of construction and
definitions contained in the California General Corporation Law shall govern the
construction of these Bylaws. Without limiting the generality of the foregoing,
the masculine gender includes the feminine and neuter, the singular number
includes the plural and the plural number includes the singular, and the term
"person" includes a corporation as well as a natural person.
ARTICLE VI
AMENDMENTS
Section 6.1. POWER OF SHAREHOLDERS. Except as provided in the
Articles of incorporation, Statute, or thee bylaws, new Bylaws may be adopted or
these Bylaws may be amended or repealed by the affirmative vote of a majority of
the outstanding shares entitled to vote, or by the written assent of
shareholders entitled to vote such shares, except as otherwise provided by law
or by the articles of incorporation.
Section 6.2. POWER OF DIRECTORS. Subject to the right of
shareholders as provided in Section 6.1 of this Article VI to adopt, amend or
repeal Bylaws, Bylaws may be adopted, amended or repealed by the board of
directors provided, however, that the board of directors may adopt a bylaw or
amendment thereof changing the authorized number of directors only for the
purpose of fixing the exact number of directors within the limits specified in
the articles of incorporation or in Section 3.2 of Article III of these Bylaws.
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CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am duly elected, qualified, and acting Secretary of
the PACIFIC COMMUNITY BANKING GROUP, a California corporation; and
2. That the forgoing Bylaws, comprising 21 pages, constitute
the Bylaws of the said Corporation as duly adopted by action of the Board of
Directors of the Corporation duly taken on February 23, 1999.
IN WITNESS HEREOF, I have hereunto subscribed my name and
affix the seal of said Corporation this 25 day of February, 1999.
/s/ Alfred Jannard
------------------------------------
Alfred Jannard, Secretary
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Exhibit 3.4
CERTIFICATE OF DETERMINATION
FOR
PACIFIC COMMUNITY BANKING GROUP
E. Lynn Caswell and Alfred Jannard certify that:
1. They are the Chairman of the Board of Directors and
Secretary, respectively, of Pacific Community Banking Group (the "Company"), a
California corporation.
2. The number of authorized shares of Preferred Stock of the
Company is 100,000,000 shares, none of which have been issued.
3. The Board of Directors of the Company has duly adopted the
following resolutions:
WHEREAS, the Articles of Incorporation of the Company
authorize the Preferred Stock of the Company to be issued in series and
authorize the Board of Directors to determine 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 and designation of any
such series.
NOW THEREFORE, BE IT RESOLVED, that the Board of
Directors does hereby establish a Series A Preferred Stock and a Series B
Preferred Stock (collectively the "Preferred Stock") as follows:
(a) The rights, preferences privileges and
restrictions granted to and imposed upon the first such series, designated
Series A Preferred Stock, of which the Company is hereby authorized to issue
1,085,000 shares, and the
<PAGE>
second such series, designated Series B Preferred Stock, of which the Company is
hereby authorized to issue 375,000 shares, are set forth herein. The Board of
Directors is authorized to decrease the number of shares of any series
subsequent to the issuance of shares of that series, but not below the number of
shares of that series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status they had prior to the adoption of the resolution originally fixing
the number of shares of such series. The relative rights, preferences,
privileges and restrictions granted to or imposed upon the Series A Preferred
Stock, and the Series B Preferred Stock or the holders thereof are as follows:
(b) The holders of Preferred Stock are not entitled
to receive dividends.
(c) Upon the voluntary or involuntary liquidation,
winding up or dissolution of the Company, out of the assets available for
distribution to shareholders the Preferred Stock shall be entitled to receive,
in preference to any payment on the Common Stock, an amount equal to $1.00 per
share. After the full preferential liquidation amount has been paid to, or
determined and set apart for, the Preferred Stock, the remaining assets shall be
paid to Common Stock. In the event the assets of the corporation are
insufficient to pay the full preferential liquidation amount required to be paid
to the Preferred Stock, the entire remaining assets shall be paid to the
Preferred Stock and the Common Stock shall receive nothing. A reorganization
shall not be considered to be a liquidation, winding up or dissolution within
the meaning of this subdivision (c) and the Preferred Stock shall
2
<PAGE>
be entitled only to the rights provided in the plan of reorganization, Division
1, Chapter 17, Article 5 of the Financial Code of the State of California, and
Chapters 12 and 13 of the California General Corporations Law.
(d)(1) Without the approval of at least two-thirds of
the outstanding shares of Preferred Stock, and any required regulatory agency,
the Company shall not:
(i) amend the articles of incorporation to
alter or change any rights, preferences or privileges of the Preferred Stock;
(ii) increase the authorized number of
shares of Preferred Stock;
(iii) authorize another class of shares
senior to the Preferred Stock with respect to distribution of assets on
liquidation;
(iv) enter into a reorganization with any
other corporation or sell all or substantially all of its assets to any
other Company or corporation, even though the transaction is not a
reorganization, except a reorganization not requiring approval of the Common
Stock;
(v) restrict the transfer or hypothecation
of shares of Preferred Stock other than as required by federal or state
securities laws or regulations;
(d)(2) Except as otherwise expressly provided by law
or by this Certificate of Determination, the Common Stock of the Company has
exclusive voting rights on all matters requiring a vote of shareholders,
including election of directors, and the Preferred Stock has no voting rights.
If the Company violates
3
<PAGE>
any of the covenants in subdivision (d)(1) of this Certificate of Determination,
which violation is not cured within 30 days after written notice by 10% or more
of the outstanding shares of Preferred Stock, the Preferred Stock shall have the
right to elect one (1) director and the Common Stock shall have the right to
elect the remaining directors. Such right in the Preferred Stock shall continue
until such covenant violation shall have been cured, and until the Company shall
have made any and all such redemptions then required whether or not funds are
legally available therefore, as the case or cases may be, after which the
exclusive right to elect directors shall revert to the Common Stock, subject to
renewal of the voting right of the Preferred Stock from time to time. At any
time after the right to elect directors is vested in the Preferred Stock, and at
any time after the exclusive right to elect directors shall revert to the Common
Stock, the holders of 10% or more of the outstanding shares of Preferred Stock
or Common Stock, as the case may be, have a right to call a special meeting of
shareholders for the purpose of electing all of the members of the Board of
Directors, such right to be exercisable by delivering a request in writing for
the calling of the special meeting to the president or secretary, or to the
chairman of the board or vice-president if there be such. The officer receiving
the request shall forthwith cause notice to be given to the shareholders
entitled to vote that a meeting will be held at a time requested by the person
or persons calling the meeting, not less than 35 nor more than 60 days after the
receipt of the request. If the notice is not given within 20 days after receipt
of the request, the shareholders calling the meeting shall have the rights
accorded to them pursuant to subdivision (c) of Section 601 of the California
4
<PAGE>
Corporations Code. Upon the election of directors by the Preferred Stock at a
special meeting, the terms of all persons who were directors immediately prior
thereto shall terminate and the directors elected by the Preferred Stock
together with those elected at the special meeting by the Common Stock shall
constitute the directors of the Company until the next annual meeting. Upon the
election of directors by the Common Stock at a special meeting after the
exclusive right to elect directors has reverted to the Common Stock, the terms
of all persons who were directors immediately prior thereto shall terminate and
the directors elected by the Common Stock at the special meeting shall
constitute the directors of the Company until the next annual meeting.
(e)(1) The Preferred Stock is subject to redemption,
out of funds legally available therefor, in whole, or from time to time in part,
at the option of the Board of Directors of the Company, subject to any necessary
regulatory approvals. If only a part of the Preferred Stock is to be redeemed,
the redemption shall be effected on a prorata basis. The redemption price shall
be $1.00 per share (herein called the "redemption price").
(2) The Company shall mail a notice of redemption to
each holder of record of shares to be redeemed addressed to the holder at the
address of such holder appearing on the books of the Company or given by the
holder to the Company for the purpose of notice, or if no such address appears
or is given at the place where the principal executive office of the Company is
located, not earlier than 60 nor later than 20 days before the date fixed for
redemption. The notice of redemption shall include (i) the class of shares or
the part of a class of shares to be
5
<PAGE>
redeemed, (ii) the date fixed for redemption, (iii) the redemption price, (iv)
the place at which the shareholders may obtain payment of the redemption price
upon surrender of their share certificates and (v) the last date prior to the
date of redemption that the right of conversion may be exercised. If funds are
available on the date fixed for the redemption, then whether or not the share
certificates are surrendered for payment of the redemption price, the shares
shall no longer be outstanding and the holders thereof shall cease to be
shareholders after the date fixed for redemption and shall be entitled only to
receive the redemption price without interest upon surrender of the share
certificate. If less than all the shares represented by one share certificate
are to be redeemed, the Company shall issue a new share certificate for the
shares not redeemed.
(3) The Company shall also cause a copy of the notice
of redemption to be published in a newspaper of general circulation in the
county in which the principal executive office of the Company is located at
least once a week for two successive weeks, in each instance on any day of the
week, commencing not earlier than 60 nor later than 20 days before the date
fixed for redemption as provided in this paragraph (3). The failure of the
Company to comply with the provision for mailing of notice of redemption in
paragraph (2) does not invalidate the redemption of the shares.
If, on or prior to any date fixed for redemption, the
Company deposits with any Company or trust company in this state as a trust fund
a sum sufficient to redeem, on the date fixed for redemption thereof, the shares
called for redemption, with irrevocable instructions and authority to the
Company or trust
6
<PAGE>
company to publish the notice of redemption thereof (or to complete such
publication if theretofore commenced) and to pay, on and after the date fixed
for redemption or prior thereto, the redemption price of the shares to their
respective holders upon the surrender of their share certificates, then from and
after the date of the deposit (although prior to the date fixed for redemption)
shares so called and tendered shall be redeemed and dividends on those shares
shall cease to accrue after the date fixed for redemption. The deposit shall
constitute full payment of the shares to their holders and from and after the
date of the deposit the shares shall no longer be outstanding and the holders
thereof shall cease to be shareholders with respect to such shares and shall
have no rights with respect thereto except the right to receive from the Company
or trust company payment of the redemption price of the shares without interest,
upon surrender of their certificates therefor, and the right to convert the
shares in accordance with subdivision (f) of this Certificate of Determination.
The Company or trust company forthwith shall return to the Company funds
deposited for shares converted. After 120 days, the Company or trust company
shall return to the Company funds deposited and not claimed and thereafter the
holder of a share certificate for shares redeemed shall look to the Company for
payment.
(f)(1) The Preferred Stock will be automatically
converted into Common Stock only at the closing date of the Company's initial
public offering of Common Stock, subject to such regulatory approvals which may
be required. For the purpose of any such conversion, each share of Preferred
Stock shall be treated as equivalent to its liquidation preference. The number
of shares of Common Stock
7
<PAGE>
issuable with respect to any shares of Preferred Stock upon conversion shall be
determined by dividing the aggregate dollar equivalent of such shares of
Preferred Stock by the "conversion price" in effect at the date of conversion.
The "conversion price" per share for the Series A Preferred Stock shall be equal
to 80% of the Company's initial public offering price per share of Common Stock.
The "conversion price" per share for the Series B Preferred Stock shall be equal
to 85% of the Company's initial public offering price per share of Common Stock.
Upon conversion, no fractional shares shall be issued and the Company shall in
lieu thereof pay in cash the fair value of the fraction. The Company shall
reserve and keep reserved out of its authorized but unissued shares of Common
Stock sufficient shares to effect the conversion of all shares of Preferred
Stock outstanding from time to time.
(2) Upon conversion, the Series A Preferred Stock
share certificate, and the Series B Preferred share certificate, shall be
delivered to the Company's Transfer Agent, if it has one, otherwise to the
Company at its principal executive office. The endorsement of the share
certificate shall be in form satisfactory to the Transfer Agent or the Company.
The holder shall also provide evidence of compliance with regulatory
requirements or an opinion of counsel that none is required, satisfactory to
Company's counsel. Upon the date of the completion of the Company's initial
offering of Common Stock, the conversion shall be deemed to have occurred, and
the person entitled to receive share certificates for Common Stock shall be
regarded for all corporate purposes from and after such date as the holder of
the number of shares of Common Stock to which he is
8
<PAGE>
entitled upon the conversion.
(g) The holders of Preferred Stock shall have no
right to vote upon any matter except as otherwise required by law.
-------------------------------
E. LYNN CASWELL
-------------------------------
ALFRED JANNARD
9
<PAGE>
VERIFICATION
E. Lynn Caswell and Alfred Jannard declare under penalty of
perjury under the laws of the State of California that they have read the
foregoing Certificate of Determination and know the contents thereof and that
the same is true of their own knowledge. Dated: February 25, 1999
-------------------------------
E. LYNN CASWELL
-------------------------------
ALFRED JANNARD
10
<PAGE>
Exhibit 4.2
NO.
---
FORM OF WARRANT TO PURCHASE STOCK OF PACIFIC COMMUNITY BANKING GROUP
Incorporated Under the Laws of the State of California.
THIS CERTIFIES THAT, for value received, , the registered
holder hereof or registered assigns (the "Holder"), is entitled to purchase
from Pacific Community Banking Group, a California Corporation (the
"Company), commencing , 1999 until 5:00 P.M., Pacific Time,
, 2009, at the purchase price of $ per share from the date of
issuance to on or before the end of the tenth year after the date of the
issuance (the "Warrant Price"), the number of shares of Common Stock of the
Company ("Common Stock"), which is equal to the number of Warrants set forth
above. The number of shares purchasable upon exercise of this Warrant and the
Warrant Price per share shall be subject to adjustment from time to time as
set forth in the Warrant Agreement referred to below.
This Warrant may be exercised in whole or in part by presentation of
this Warrant with the Purchase Form duly executed and simultaneous payment for
the Warrant Price (subject to adjustment) at the principal office of the
Company, 23332 Mill Creek Drive, Suite 230, Laguna Hills, California 92653.
Payment of such price shall be made at the option of the Holder hereof in cash,
by check or any combination thereof.
This Warrant is one of a duly authorized issue of Warrants evidencing
the right to purchase an aggregate of up to shares of Company Common
Stock and is issued under and in accordance with a Warrant Agreement dated as of
1999, between the Company and the Holder and is subject to the terms
and provisions contained in the Warrant Agreement to all of which the Holder of
this Warrant by acceptance hereof consents.
Upon any partial exercise of this Warrant, there shall be signed and
issued to the Holder hereof a new Warrant in respect of the shares of Common
Stock as to which this Warrant shall not have been exercised. This Warrant may
be exchanged at the office of the Company by surrender of this Warrant properly
endorsed either separately or in combination with one or more other Warrants for
one or more new Warrants entitling the Holder thereof to purchase the same
aggregate number of shares as were evidenced by the Warrant or Warrants
exchanged. No fractional shares will be issued upon the exercise of this
Warrant, but the Company shall pay the cash value of any fraction upon the
exercise of one or more Warrants. This Warrant is transferable at the office of
the Company, in the manner and subject to the limitations set forth in the
Warrant Agreement. This Warrant shall be separately transferable upon the date
of issuance and for the ten-year period from the date of issuance.
1
<PAGE>
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant as the absolute owner for any purpose and as the
person entitled to exercise the rights represented hereby, or to the transfer
hereof on the books of the Company, any notice to the contrary notwithstanding,
and until such transfer on such books, the Company may treat the Holder hereof
as the owner for all purposes.
This Warrant does not entitle any Holder hereof to any of the rights of
a stockholder of the Company.
This Warrant shall not be valid or obligatory for any purpose until it
shall have been executed by the Company.
Dated: , 1999
-------------
PACIFIC COMMUNITY BANKING GROUP
By:
-----------------------------------
2
<PAGE>
EXHIBIT 10.1
Indemnity Agreement
<PAGE>
INDEMNITY AGREEMENT
THIS AGREEMENT is made as of the date of October 31, 1997 by and
between PACIFIC COMMUNITY BANKING GROUP, a California corporation (the
"Company"), and E. LYNN CASWELL ("Indemnitee"), a director and/or officer of
the Company, with reference to the following facts:
A. The Company and the Indemnitee recognize the importance of
providing the Company's directors and executive officers ("officers") with
advance information and guidance with respect to the legal risks and
potential liabilities to which they may become personally exposed as a result
of performing their duties for the Company;
B. The Company and the Indemnitee are aware of the substantial
growth in the number of lawsuits filed against corporate officers and directors
in connection with their activities in such capacities and by reason of their
status as such;
C. The Company and the Indemnitee recognize that the cost of
defending against such lawsuits, whether or not meritorious, could be beyond
the financial resources of most directors and officers of the Company;
D. The Company and the Indemnitee recognize that the legal risks
and potential liabilities, and the threat thereof, and the resultant
substantial time and expense endured in defending against such lawsuits, bear
no reasonable or logical relationship to the amount of compensation received
by the Company's directors and officers. These factors pose a significant
deterrent to, and induce increased reluctance on the part of, experienced and
capable individuals to serve as directors and officers of the Company;
E. The Company has investigated the availability and deficiency
of liability insurance to provide its directors and officers with adequate
protection against the foregoing legal risks and potential liabilities It has
concluded that such insurance does not provide adequate protection to its
directors and officers, is unreasonably expensive, or both. Thus, it would
be in the best interests of the Company and its shareholders to contract with
its directors and certain officers, including the Indemnitee, to indemnify
them to the fullest extent permitted by law (as in effect on the date hereof,
or, to the extent any amendment may expand such permitted indemnification, as
hereinafter in effect) against personal liability for actions taken in the
performance of their duties to the Company;
F. The Board of Directors of the Company has concluded that it is
not only reasonable and prudent but necessary for the Company to
contractually obligate itself to indemnify in a reasonable and adequate
manner its directors and officers and
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<PAGE>
to assume for itself maximum liability for expenses and damages in connection
with claims lodged against such directors and officers for their line of duty
decisions and actions;
G. The General Corporation Law of the State of California (the
"Code") empowers the Company to indemnify certain persons serving as a
director, officer, employee or agent of the Company or a person who serves at
the request of the Company as a director, officers, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
and further specifies in Code Section 317(g) that the indemnification
provisions set forth in the Code "shall not be deemed exclusive of any other
rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of shareholders or disinterested directors or
otherwise, both as to action in an official capacity and as to action in
another capacity while holding such office, to the extent such additional
rights to indemnification are authorized in the articles of the corporation";
thus, Section 317 does not by itself limit the extent to which the Company
may indemnify persons serving as its officers and directors;
H. In order to give proper effect to the indemnification
provisions provided under the Code, the Articles of Incorporation which
permit the Company to indemnify its directors and officers to the fullest
extent permissible under the Code, subject to the limitations set forth in
Section 204(a)(11) of the Code;
I. The Board of Directors of the Company has determined, after
due consideration and investigation of this Agreement and various other
options available in lieu hereof, that this Agreement is reasonable, prudent
and necessary to promote and ensure the best interests of the Company and its
shareholders. This Agreement is intended to: (1) induce and encourage highly
experienced and capable persons such as the Indemnitee to serve as officers
and/or directors of the Company; (2) encourage such persons to resist what
they consider unjustifiable suits and claims made against them in connection
with the good faith performance of their duties to the Company, secure in
knowledge that certain expenses, costs and liabilities incurred by them in
their defense of such litigation will be borne by the Company and that they
will receive the maximum protection against such risks and liabilities
legally may be made available to them; and (3) encourage directors to
exercise their best business judgment regarding matters which come before the
Board of Directors without undue concern for the risk that claims may be made
against them on account thereof.
J. The Company desires to have the Indemnitee continue to serve
as an officer and/or director of the Company free from concern for
unpredictable, inappropriate or unreasonable legal risk and personal
liabilities by reason of his acting in good faith in the performance of his
duty to the Company. The Indemnitee desires to continue to serve as an
officer and/or director of the Company, provided, and on the express
condition, that he is furnished with the indemnity set forth herein.
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<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth below and based on the premises set forth above, the
Company and Indemnitee do hereby agree as follows:
1. DEFINITIONS. For the purposes of this Agreement, the
following definitions shall apply:
(a) The term "Proceeding" shall include, for the purposes of
this Agreement, any threatened, pending or completed action, suit or
proceeding, whether brought in the name of the Company or otherwise and
whether of a civil, criminal or administrative or investigative nature,
including, but not limited to, actions, suits or proceedings brought under
and/or predicated upon the Securities Act of 1933, as amended, and/or the
Securities Exchange Act of 1934, as amended, and/or their respective state
counterparts and/or any rule or regulation promulgated thereunder, in which
Indemnitee may be or may have been involved as party or otherwise (other than
plaintiff against the Company), by reason of the fact that Indemnitee is or
was an Agent of the Company by reason any action taken by him or of any
inaction on his part while acting as such Agent.
(b) The term "Expenses", includes, without limitation, all
direct and indirect costs of any type or nature whatsoever, including,
without limitation, expenses of investigations, judicial or administrative
proceedings or appeals, court costs, attorneys' fees and disbursements and
any expenses of establishing a right to indemnification under law or
Paragraph 8 of this Agreement, actually and reasonably incurred by the
Indemnitee in connection with the investigation, preparation, defense or
appeal of a except that "Expenses" shall not include the amount of any
judgment, fine or penalty actually levied against Indemnitee or amounts paid
in settlement of a Proceeding.
(c) References to "other enterprise" shall include employee
benefit plans; reference to "fines" shall include any excise tax assessed
with respect to any employee benefit plan; references to "serving at the
request of the Company" shall include any service as a director of the
Company which imposes duties on, or involves services by, such director with
respect to an employee benefit plan, its participants, or beneficiaries; and
a person who acts in good faith and in a manner he reasonably believes to be
in the interest of the participants and beneficiaries of an employee benefit
plan shall be deemed to have acted in a manner in the best interests of the
Company as referred to in this Agreement.
(d) For the purposes of this Agreement, Indemnitee shall be
deemed to have been acting as an "Agent" if he was acting in his capacity as
an officer of the Company, director of the Company, member of a committee of
the Board of Directors of this Company, or agent of the Company, or was
serving as a director or officer of another foreign or domestic corporation,
partnership, joint venture, trust or any other
- 3 -
<PAGE>
enterprise at the request of the Company, or was a director and/or officer of
the foreign or domestic corporation which was a predecessor corporation to
the Company or of another enterprise at the request of such predecessor
corporation, whether or not he is serving in such capacity at the time any
liability or expense is incurred for which indemnification or reimbursement
can be provided under this Agreement.
(e) The term "Applicable Standard" means that a person acted
in good faith and in a manner such person believed to be in the best
interests of the Company; except that in a criminal proceeding, such person
must also have had no reasonable cause to believe that such person's conduct
was unlawful. The termination of any Proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent
shall not, of itself, create any presumption, or establish, that the person
did not meet the "Applicable Standard."
(f) "Independent Legal Counsel" shall include any firm of
attorneys selected by the Board of Directors or by the regular corporate
counsel for the Company from a list of firms which meet minimum size criteria
and other reasonable criteria established by the Board of Directors of the
Company, so long as such firm has not represented the Company, Indemnitee or
any entity controlled by Indemnity within the proceeding 24 calendar months.
2. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to
serve as a Director and/or officer of the Company to the best of his
abilities at the will of the Company or under separate contract, as the case
may be, for so long as Indemnitee is duly elected or appointed and qualified
until such time as he tenders his resignation in writing. Nothing contained
in this Agreement is intended to create in Indemnitee any right to continued
employment.
3. INDEMNIFICATION IN THIRD PARTY PROCEEDINGS. Subject to the
"Limitations on Indemnification" provided in Paragraph 10 herein, or any
other such limitations provided under the Code or any amendment thereto, the
Company shall indemnify Indemnitee if Indemnitee is made a party to or
threatened to be made a party to, or otherwise involved in, any Proceeding
(other than a Proceeding which is an action by or in the right of the Company
to procure a judgment in its favor), by reason of the fact that Indemnitee is
or was an Agent of the Company. This indemnification shall apply, and be
limited, to and against all Expenses, judgments, fines, settlements (if the
settlement is approved in advance by the Company) and other amounts actually
and reasonably incurred by Indemnitee in connection with the defense or
settlement of the Proceeding, so long as it is determined pursuant to
Paragraph 8 of this Agreement or by the court before which such action was
brought, that Indemnitee met the Applicable Standard.
4. INDEMNIFICATION IN PROCEEDINGS BY OR IN THE NAME OF THE COMPANY.
Subject to the "Limitations on Indemnification" provided in Paragraph 10 herein,
or any
- 4 -
<PAGE>
other such limitations provided under the Code or any amendment thereto, the
Company shall indemnify Indemnitee if Indemnitee is made a party to, or
threatened to be made a party to, or otherwise involved in, any Proceeding
which is an action by or in the right of the Company to procure a judgment in
its favor by reason of the fact that Indemnitee is or was an Agent of the
Company. This indemnity shall apply, and be limited, to and against all
Expenses actually and reasonably incurred by Indemnitee in connection with
the defense or settlement of such Proceeding, but only if: (a) Indemnitee met
the Applicable Standard (except that the Indemnitee's belief regarding the
best interests of the Company need not have been reasonable); and (b) the
action is not settled or otherwise disposed of without court approval. No
indemnification shall be made under this Section 4 in respect of any claim,
issue or matter as to which Indemnitee shall have been adjudged to be liable
to the Company in the performance of such person's duty to the Company,
unless, and only to the extent that, the court in which such Proceeding is or
was pending shall determine upon application that, in view of all the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnification for the Expenses which such court shall determine.
5. EXPENSE OF SUCCESSFUL INDEMNITEE. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee has been
successful on the merits in defense of any Proceeding or in defense of any
claim, issue or matter therein, including the dismissal of an action or
portion thereof without prejudice, Indemnitee shall be indemnified against
all Expenses actually and reasonably incurred in connection therewith.
6. SCOPE. Notwithstanding any other provision of this Agreement
but subject to Section 9, the Company shall indemnify the Indemnitee to the
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by other provisions of this Agreement, the
Company's amended Articles of Incorporation, the Company's Bylaws or by
statute.
7. ADVANCEMENT AND REPAYMENT OF EXPENSES. The Expenses incurred
by Indemnitee in defending and investigating any Proceeding shall be advanced
by the Company prior to the final disposition of such Proceeding after
receiving from Indemnitee the copies of invoices presented to Indemnitee for
such Expenses, but only if Indemnitee shall undertake in the form attached as
Exhibit "A" to repay such advances to the extent that it is ultimately
determined that the Indemnitee is not entitled to indemnification. Any
advance required hereunder shall be deemed to have been approved by the Board
of Directors of the Company to the extent this Agreement was so approved. In
determining whether or not to make an advance hereunder, the ability of
Indemnitee to repay shall not be a factor. However, in a proceeding brought
by the Company directly, in its own right (as distinguished from an action
brought derivatively or by any receiver or trustee), the Company shall have
discretion whether or not to make the advances called for hereby if
independent legal counsel advises in writing that the Company has probable
cause to believe, and the Company does
- 5 -
<PAGE>
believe, that Indemnitee did not act in good faith with regard to the subject
matter of the Proceeding or a material portion thereof.
In the event that the Company shall be obligated under this Section
7 to pay the Expenses of any Proceeding against Indemnitee, the Company, if
appropriate, shall be entitled to assume the defense of such Proceeding, with
counsel approved by Indemnitee, which approval shall not be unreasonably
withheld, upon the delivery to Indemnitee of written notice of its election
to do so. After delivery of such notice, approval of such counsel by
Indemnitee and the retention of such counsel by the Company, the Company will
not be liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same Proceeding,
provided that (i) Indemnitee shall have the right to employ his counsel in
any such Proceeding at Indemnitee's expense; and (ii) if (A) the employment
of counsel by Indemnitee has been previously authorized by the Company, or
(B) Indemnitee shall have reasonably concluded that there may be a conflict
of interest between the Company and the Indemnitee in the conduct of such
defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such Proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION;
PROCEDURE UPON APPLICATION. Any and/or 7 hereof shall be made no later than
45 days after receipt of a written request of Indemnitee in accordance with
Paragraph 12 hereof. In all other cases, indemnification shall be made by the
Company only if authorized in the specific case, upon a determination that
indemnification of the Agent is proper under the circumstances and the terms
of this Agreement by: (a) a majority vote of a quorum of the Board of
Directors (or a duly constituted committee thereof), consisting of directors
who are not parties to such proceeding; (b) if such a quorum of directors is
not obtainable, by independent legal counsel in a written opinion, (c)
approval of the shareholders (as defined in Section 153 of the California
Corporations Code), with the Indemnitee shares not being entitled to vote
thereon; or (d) the court in which such proceeding is or was pending upon
application made by the Company, the Indemnitee or any person rendering
services in connection with Indemnitee's defense, whether or not the Company
opposes such application.
The right to indemnification or advances as provided by this Agreement
shall be enforceable by Indemnitee in any court of competent jurisdiction. The
burden of proving that indemnification or advances are not appropriate shall be
on the Company. Neither the failure of the Company (including its Board of
Directors or independent legal counsel) to have made a determination prior to
the commencement of such action that indemnification or advances are proper in
the circumstances because Indemnitee has met the applicable standard of conduct,
nor an actual determination by the Company (including its Board of Directors or
independent legal counsel) that Indemnitee has not met such applicable standard
of conduct, shall be a
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<PAGE>
defense to the action or create a presumption that Indemnitee has not met the
applicable standard of conduct. Indemnitee's Expenses incurred in connection
with successfully establishing his right to indemnification or advances, in
whole or in part, in any such Proceeding shall also be indemnified by the
Company; provided, however, that if Indemnitee is only partially successful,
only an equitably allocated portion of such Expenses shall be indemnified.
If Indemnitee is deceased and is entitled to indemnification under
any provision of this Agreement, the Company shall indemnify Indemnitee's
estate and his or her spouse, heirs, administrators and executors against and
shall assume all of the Expenses, judgments, penalties and fines actually and
reasonably incurred by or for Indemnitee or his estate, in connection with
the investigation, defense, settlement or appeal of any such action, suit or
proceeding; provided, however, that when requested in writing by the spouse
of Indemnitee, and/or the heirs, executors or administrators of Indemnitee's
estate, the Company shall provide appropriate evidence of the Agreement set
our herein to indemnify Agent against and to itself assume such costs,
liabilities and Expenses.
If Indemnitee is entitled under any provision of this Agreement or
indemnification by the Company for some or a portion of the Expenses,
judgments, fines or penalties actually and reasonably incurred by him in the
investigation, defense, appeal or settlement of any Proceeding but not,
however, for the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion (determined on an equitable basis) of
such Expenses, judgments, fines or penalties to which Indemnitee is entitled.
Company's obligations to advance or indemnify hereunder shall be
deemed satisfied to the extent of any payments made by an insurer on behalf
of Company or Indemnitee.
9. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. (a) The
indemnification provided by this Agreement shall not be deemed exclusive of
any other rights to which Indemnitee may be entitled under the Articles of
Incorporation, the Bylaws, any agreement, any vote of shareholders or
disinterested directors, the General Corporation Law of the State of
California, or otherwise, both as to action in his official capacity and as
to action in another capacity while holding such office. The indemnification
under this Agreement shall continue as to Indemnitee even though he may have
ceased to be a director or officer and shall inure to the benefit of the
heirs and personal representatives of Indemnitee.
(b) In the event of any changes, after the date of this
Agreement, in any applicable law, statute, or rule which expand the right of a
California corporation to indemnify its officers and directors, the Indemnitee's
rights and the Company's obligations under this Agreement shall be expanded to
the full extent permitted by
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<PAGE>
such changes. In the event of any changes in any applicable law, statute or
rule, which narrow the right of a California corporation to indemnify a
director or officer, such changes, to the extent not otherwise required by
such law, statute or rule to be applied to this Agreement, shall have no
effect on this Agreement or the parties' rights and obligations hereunder.
10. LIMITATIONS ON INDEMNIFICATION. The Company shall not be
liable under this Agreement to make any payment in connection with any claim
made against the Indemnitee:
(a) for which payment is actually made to the Indemnitee under
a valid and collectible insurance policy, except in respect of any excess
beyond the amount of payment under such insurance;
(b) for which the Indemnitee is indemnified by the Company
otherwise than pursuant to this Agreement;
(c) for an accounting of profits made from the purchase or
sale by the Agent of securities for the Company within the meaning of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any state statutory law or common law;
(d) brought about or contributed to by the active and
deliberate dishonesty of the Indemnitee; however, notwithstanding the
proceeding clause, the Indemnitee shall be protected to the extent otherwise
provided under this Agreement as to any claims upon which suit may be brought
against him by reason of any alleged dishonesty on his part, unless a
judgment or other final adjudication thereof adverse to the Indemnitee shall
establish that he committed (i) acts of active and deliberate dishonesty (ii)
with actual dishonest purpose and intent, which acts were material to the
cause of action so adjudicated;
(e) for acts or omissions that involve intentional misconduct
or a knowing and culpable violation of law;
(f) for acts or omissions that the Indemnitee believes to be
contrary to the best interests of the Company or its shareholders that
involve the absence of good faith on the part of the Indemnitee;
(g) for any transaction from which the Indemnitee derived an
improper personal benefit;
(h) for acts or omissions that show a reckless disregard for
the Indemnitee's duty to the Company or its shareholders in circumstances in
which the Indemnitee was aware, or should have been aware, in the ordinary
course of
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<PAGE>
performing Indemnitee's duties, of a risk of serious injury to the Company or
its shareholders;
(i) for acts or omissions that constitute unexcused matter of
inattention that amounts to abdication of the Indemnitee's duty to the
Company or shareholders;
(j) under Section 310 of the Code [i.e., for any transaction
between the Company and (a) a director, or (b) a corporation, firm, or
association in which the director has a material financial interest];
(k) under Section 316 of the Code [i.e., for any distribution
to shareholders, and for any loan or guaranty to officers or directors,
that violate specified provisions of the Code]; or
(l) for any such further acts or omissions delineated under
Code Section 204(a)(10) or any successor statute thereto.
11. SAVINGS CLAUSE. If this Agreement or any portion hereof is
invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify Indemnitee as to Expenses, judgments,
fines and penalties with respect to any Proceeding to the full extent
permitted by any applicable portion of this Agreement by any other applicable
law.
12. NOTICES. Indemnitee shall, as a condition precedent to his
right to be indemnified under this Agreement, give to the Company notice in
writing within 30 days after he becomes aware of any claim made against him
for which he believes, or should reasonably believe, indemnification will or
could be sought under this Agreement. Notice to the Company shall be directed
to the Company's main office, Attention: President (or such other address the
Company shall designate in writing to Indemnitee). Failure to 80 notify
Company shall not relieve Company of any liability which it may have to
Indemnitee otherwise than under this Agreement.
All notices, requests, demands and other communications
(collectively "notices") provided for under this Agreement shall be in
writing (including communications by telephone, telex or telecommunication
facilities providing facsimile transmission) and mailed (postage prepaid and
return receipt requested), telegraphed, telexed, transmitted or personally
served to each party at the address set forth at the end of this Agreement or
at such other address as any party affected may designate in a written notice
to the other parties in compliance with this section. All such notices shall
be effective when received; provided, however, receipt shall be deemed to be
effective within three (3) business days of any properly addressed notice
having been deposited in the mail, within twenty-four (24) hours from the
time electronic
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<PAGE>
transmission was made, or upon actual receipt of electronic delivery,
whichever occurs first.
No costs, charges or expenses for which indemnity shall be sought
hereunder shall be incurred without the Company's consent, which consent
shall not be unreasonably withheld.
13. MAINTENANCE OF LIABILITY INSURANCE.
(a) The Company hereby agrees that so long as Indemnitee shall
continue to serve as a director and/or officer of the Company and thereafter
so long as Indemnitee shall be subject to any possible Proceeding, the
Company, subject to Section 13(b), shall use its best efforts to obtain and
maintain in full force and effect directors' and officers' liability
insurance ("D&O Insurance") which provides Indemnitee the same rights and
benefits as are accorded to the most favorably insured of the Company's
directors, if Indemnitee is a director; or of the Company's officers, if
Indemnitee is not a director of the Company but is an officer.
(b) Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain D&O Insurance if the Company determines in
good faith that such insurance is not reasonably available, the premium costs
for such insurance are disproportionate to the amount of coverage provided,
the coverage provided by such insurance is limited by exclusions 80 as to
provide an insufficient benefit or the Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the Company.
(c) If, at the time of the receipt of a notice of a claim
pursuant to Section 12 hereof, the Company has D&O Insurance in effect, the
Company shall give prompt notice of the commencement of such Proceeding to
the insurers in accordance with the procedures set forth in the respective
policies. The Company shall thereafter take all necessary or desirable action
to cause such insurers to pay, on behalf of the Indemnitee, all amounts
payable as a result of such Proceeding in accordance with the terms of such
policies.
14. CHOICE OF LAW. This Agreement should be interpreted and enforced
in accordance with the laws of the State of California, including applicable
statutes of limitation and other procedural statutes.
15. AMENDMENTS. Provisions of this Agreement may be waived,
altered, amended or repealed in whole or in part only by the written consent
of all parties.
16. PARTIES IN INTEREST. Nothing in this Agreement, whether
express or implied, is intended to confer any right or remedies under or by
reason of this Agreement to any persons other than the parties to it and
their respective successors
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<PAGE>
and assigns (including an estate of Indemnitee), nor is anything in this
Agreement intended to relieve or discharge the obligation or liability of any
third persons to any party hereto. Furthermore, no provision of this
Agreement shall give any third persons any right of subrogation or action
against any party hereto.
17. SEVERABILITY. Nothing in this Agreement is intended to
require or shall be construed as requiring the Company to do or fail to do
any act in violation of applicable law. The Company's inability, pursuant to
court order, to perform its obligations under this Agreement shall not
constitute a breach of this Agreement. If any portion of this Agreement shall
be deemed by a court of competent jurisdiction to be unenforceable, the
remaining portions shall be valid and enforceable only if, after excluding
the portion deemed to be unenforceable, the remaining terms shall provide for
the consummation of the transaction contemplated herein in substantially the
same manner as originally set forth at the date this Agreement was executed.
18. SUCCESSOR AND ASSIGNS. All terms and conditions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
and their respective transferees, successors and assigns; provided, however,
that this Agreement and all rights, privileges, duties and obligations of the
parties, may not be assigned or delegated by any party without the prior
written consent of the other parties.
19. COUNTERPARTS. This Agreement may be executed simultaneously
in one or more counterparts, each of which shall be deemed an original, but
all of which together shall be deemed an original, but all of which together
shall constitute one and the same instrument.
20. ENTIRE AGREEMENT. Except as provided in Section 9 hereof,
this Agreement represents and contains the entire agreement and understanding
between and among the parties, and all previous statements or understandings,
whether express or implied, oral or written, relating to the subject matter
hereof are fully and completely extinguished and superseded by this
Agreement. This Agreement shall not be altered or varied except by a writing
duly signed by all of the parties.
21. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee
acknowledge that in certain instances, federal law or applicable public
policy may prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise. Indemnitee understands and acknowledges
that the Company has undertaken or may be required in the future to undertake
with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of
the Company's right under public policy to indemnify Indemnitee.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement
as of the date first above written.
PACIFIC COMMUNITY BANKING GROUP
By: /s/ E. Lynn Caswell
----------------------------
E. Lynn Caswell
Chairman of the Board
By: /s/ E. Lynn Caswell
----------------------------
E. Lynn Caswell
Secretary
"Company"
----------------------------
Address:
-------------------
-------------------
"Indemnitee"
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<PAGE>
EXHIBIT A
UNDERTAKING
THIS UNDERTAKING is made as of the date of _____________, 19__ by
___________________ ("Indemnitee") with reference to the following facts:
A. Indemnitee and PACIFIC COMMUNITY BANKING GROUP (the "Company")
have executed an Indemnity Agreement dated _____________, 19__ permitting
Indemnitee indemnification of all direct and indirect costs of Proceedings
(as defined in the Indemnity Agreement) by reason of the fact that Indemnitee
is an Agent (as defined in the Indemnity Agreement) of the Company and has
met the Applicable Standard (as defined in the Indemnity Agreement).
B. Paragraph 7 of the Indemnity Agreement allows for the Company to
advance Expenses incurred by the Indemnitee in defending and investigating
any Proceeding prior to the final disposition of such Proceeding after
receiving from Indemnitee copies of invoices presented to Indemnitee for such
Expenses, but only if Indemnitee shall undertake to repay such advances to
the extent that it is ultimately determined that the Indemnitee is not
entitled to indemnification, as well as other requirements contained in the
Indemnity Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth below and based on the premises set forth above, the
Indemnitee does hereby undertake to the Company as follows:
1. The Expenses incurred by Indemnitee in defending and
investigating any Proceeding shall be advanced by the Company prior to the
final disposition of such Proceeding after receiving from Indemnitee copies
of invoices presented to Indemnitee for such Expenses.
2. Indemnitee hereby undertakes to repay such advances to the
extent that it is ultimately determined that the Indemnitee is not entitled
to indemnification,
3. Any advance required hereunder shall be deemed to have been
approved by the Board of Directors of the Company to the extent the Indemnity
Agreement was approved.
4. In determining whether or not to make an advance hereunder, the
ability of Indemnitee to repay shall not be a factor.
5. In a proceeding brought by the Company directly, in its own
right (as distinguished from an action brought derivatively or by any
receiver or trustee), the
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<PAGE>
Company shall have discretion whether or not to make the advances called for
in the Indemnification Agreement if independent legal counsel advises in
writing that the Company has probable cause to believe, and the Company does
believe, that Indemnitee did not act in good faith with regard to the subject
matter of the Proceeding or a material portion thereof.
6. The remainder of the terms and conditions of the Indemnity
Agreement and Paragraph 7 regarding assumption of the defense by the Company
shall also remain applicable.
IN WITNESS WHEREOF, the undersigned has executed this Undertaking
as of the date first above written.
----------------------------
Address:
----------------------------
----------------------------
"Indemnitee"
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<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
DATED OCTOBER 31, 1997
BETWEEN
PACIFIC COMMUNITY BANKING GROUP
AND
MR. E. LYNN CASWELL
<PAGE>
EMPLOYMENT AGREEMENT AND CONTRACT
THIS EMPLOYMENT AGREEMENT ("Agreement") is approved as of October 31, 1997, with
an effective date of September 1, 1997 (the effective date of employment), by
and between PACIFIC COMMUNITY BANKING GROUP ("PCBG" or "the Company"), with
headquarters located at 23332 Mill Creek Drive, Suite 230, Laguna Hills,
California 92653, and E. LYNN CASWELL, residing at 28551 Breckenridge Drive,
Laguna Niguel, California 92677 (the "Employee").
A. PCBG is a corporation organized for the purpose of carrying on the
business of a multi-bank holding and financial services company.
B. PCBG desires to avail itself of the skill, knowledge and experience of
Employee/Founder in order to insure the successful management of its
business;
C. The parties hereto desire to specify the terms of Employee's
employment by PCBG as its Chairman of the Board (as an Officer as well
as Director position) and Chief Executive Officer in this written
agreement which supersedes all prior agreements, whether written or
oral; and
D. The employment, the duration thereof, the compensation to be paid to
Employee, termination and other terms and conditions of employment
provided in this Agreement were duly fixed, stated, approved and
authorized for and on behalf of PCBG by action of its Board of
Directors at a meeting held on October 31, 1997.
NOW, THEREFORE, on the basis of the foregoing facts and in consideration of
the mutual covenants and agreements contained herein, the parties hereto agree
as follows:
1. TERM
(a) Subject to the provisions below, PCBG agrees to employ Employee,
and Employee agrees to be employed by PCBG, subject to the terms
and conditions of this Agreement, for a five-year, four-month
period commencing on September 1, 1997 and ending on December 31,
2002.
The term for which Employee is employed hereunder is hereinafter
referred to as the "Employment Period." The Term hereof shall be
automatically renewed for a five-year period, unless written notice
is given and received six months prior to the end of the contract
term of the intention of either party not to renew the same.
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<PAGE>
2. DUTIES AND AUTHORITIES
(a) During the Employment Period, Employee shall devote all his
productive time, ability and attention to the business and
affairs of the Company. Employee shall not directly render
service of a business, commercial or professional nature to any
other person or organization without the consent of the Board of
Directors of PCBG, provided, however, that nothing contained
herein shall prohibit Employee from serving as an advisor or
director of any corporation which does not compete with the
business of the Company, or any charitable or non-profit
organization. Employee agrees during the Employment Period to
use his best efforts, skill and abilities to promote the
Company's interests and to serve as the Chairman of the Board (as
an Executive Officer as well as Director position) and Chief
Executive Officer of the Company. Employee's duties shall
include all responsibilities normally assigned to the Chairman
and Chief Executive Officer. The Company shall also cause
Employee to be nominated, and management proxies will be voted to
elect Employee as a director of PCBG during the entire term of
this Agreement, and as a director of any company that acquires
PCBG during the term hereof. Employee shall receive any and all
Director's fees paid to the Company's Directors during the term
of this Agreement.
3. COMPENSATION
(a). From the Commencement Date and continuing through the Term, the
Company agrees to pay Employee a base annual salary in the amount
of $135,000, payable in installments on the normal payroll dates
of the Company, except as amended by Section 3(m) of this
Agreement. Base salary, total cash compensation and total
compensation of Employee shall in no event be less than that of
any other Company officer or that of any officer of any
subsidiary or affiliate, adjusted annually. The Board of
Directors may elect to adjust upward the base annual salary and
other compensation of Employee from time to time, at its sole
discretion.
(b). During the term of this Agreement, Employee shall also receive
annual increases to the compensation described in Section 3.(a)
equal to the cumulative annual increase to the Orange County
Consumer Price Index as shown in the Los Angeles Times from time
to time, but not less than 3% per annum.
(c) During the term of this Agreement, the Company agrees within
sixty days after the end of the fiscal year to pay to Employee a
bonus of not less than 10% of Employee's base salary at the end
of the Company's fiscal year. The amount may be increased at the
discretion of the Board of Directors, or reduced or eliminated at
its discretion if the Company's net pretax
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<PAGE>
profits are less than 0.80% of Average Assets of the Company for
the fiscal year.
(d) During the term of this Agreement, the Company agrees to pay to
Employee an automobile expense allowance in the amount of $900.00
per month, and necessary insurance costs, such amount to be
adjusted by 3% per annum. It is deemed in the Company's best
interests to provide commercial insurance to afford greater
protection to the Company from liability.
(e) During the Employment Period, Employee shall be eligible to
participate in any pension or profit-sharing plan, or similar
benefit plan or retirement program of the Company now or
hereafter existing, to the extent that he is eligible under the
provisions thereof and commensurate with his position in
relationship to other participants.
(f) Employee will be entitled to vacation of four (4) weeks per annum
during the term of this agreement, at the convenience of the
Company. Employee will also be granted appropriate and
reasonable time to attend industry meetings, seminars and
conventions which are important to the Company's business, or of
which the employee is an officer, Director or committee member.
Employee shall also be granted appropriate and reasonable time to
serve as a Director of the Federal Reserve Bank of San Francisco.
(g) The Company will provide Employee and his dependents with group
medical, accident, and health insurance coverage, without cost to
Employee, and the Company will provide Employee income
continuation disability insurance coverage consistent with
Employee's executive employment, and life insurance coverage in
an amount equal to four (4) times annual salary. Such insurance
coverages shall take effect at the earliest possible date after
the commencement date of this agreement. Company shall reimburse
Employee for the uninsured or deductible portions of Employee's
annual physical and Employee shall complete such physical each
year during the employment term.
(h) During the term of this Agreement, and effective as soon as
practicable one year after the effective date of this contract,
and subject to the successful completion of the first acquisition
or merger transaction, PCBG shall purchase an income
continuation policy or plan for the benefit of Employee to be
effective at Employee's normal retirement date or full disability
in an amount payable at $60,000 per annum for a period of fifteen
(15) years after retirement. As a retirement and/or pension
plan, the policy as funded shall be the property of Employee if
Employee completes the term of this Agreement, or upon his death
ownership shall pass to his spouse or to his estate should no
spouse be living or existent
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<PAGE>
upon his death. The conditions contained in Section 9(a) herein
shall also apply, but shall not change the provisions of this
section.
(i) In order for the Employee to carry out the Company's business
interests, including entertainment, business development, and
community responsibilities, the Company agrees within one (1)
year of the effective date of this Agreement to purchase as owner
for Employee's benefit and in Employee's name, an equity
membership in an area country club of the Employee's choosing, at
a reasonable cost as applicable to such area clubs. Upon
Employee's termination or resignation for any reason, Employee
may purchase said membership from the Company at its unamortized
remaining balance, if any.
(j) Upon timely presentation to the Company of necessary and proper
documentation in accordance with the regulations of the Internal
Revenue Service, the Company will reimburse Employee for any
necessary, usual, customary and reasonable business expenses
incurred by Employee in connection with his position or for the
Company's benefit, including the costs of cellular phone service
related to Company business. The company will also pay for the
business related charges associated with the Employee's
memberships at the Center Club, Costa Mesa, and the Balboa Bay
Club, Newport Beach, as being advantageous to the Company's
business and business development interests.
Any expenses of Employee for his activities in industry
association groups, the Federal Reserve Bank of San Francisco, or
other business, industry, civic, or charitable organizations
which are not reimbursed by those groups will be reimbursed by
the Company to the Employee upon presentation of proper
documentation.
All of Employee's documented expenses paid for the benefit of the
Company's organization from inception, for start-up costs, travel
expense, and ongoing operations which have not been reimbursed
will be repaid to Employee or credited to Employee's stock
purchase commitment as a founding investor of the Company.
Documentation to be provided to Company's outside auditors and
accountants prior to stock distribution.
(k) The Company agrees to grant to the Employee, as both Chief
Executive Officer and as the Company Founder assuming the
associated risks of such an enterprise, the greater of two
hundred fifty thousand (250,000) ten year incentive stock option
shares, or options equal to 5% of the Company's outstanding
common stock after the option grant, at the earliest possible
date after the effective date of this Agreement. The options
will have an exercise price equal to the then fair market value
of the Company's common stock on the date of grant of said option
shares. Should regulations or the amount of outstanding Company
stock not allow for the full grant contained in this Agreement,
the remainder will be
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<PAGE>
automatically granted as available under the Company's Stock
Option Plan. The options shall be vested immediately, but be
exercisable after one (1) year, in an amount not to exceed 33
1/3 % per year for the first three years after exercise date,
subject to Section 10 herein. The amount of the options
granted to Employee shall remain at the greater of two
hundred thousand (200,000) ten year incentive stock option
shares, or options equal to 5% of the Company's outstanding
common stock after the option grant during the term of this
Agreement, or as soon as thereafter available under the terms
of the Plan.
(l) During the organization and initiation of PCBG's business affairs
and operations Employee's salary and auto allowance will be
prorated as follows:
- One-half of the contract amount for the period from
September 1, 1997 to the last day of the month following the
first agreement on the principle terms of the Company's
first proposed acquisition or merger transaction.
- Full amount of the contract amount from the first of the
month thereafter.
- Benefits to be fully compensated or reimbursed from
September 1, 1997.
- Unpaid amounts, if any, from the above may be reimbursed or
credited to Employee's stock purchase commitment as a
founding investor of PCBG.
4. CONFIDENTIAL INFORMATION.
Without the prior written permission of the Company in each case,
Employee shall not publish, disclose or make available to any other
person, firm or corporation, either during or after the termination of
this Agreement, any confidential information which Employee may obtain
during the Employment Period, or which Employee may create prior to
the end of the Employment Period relating to the business of the
Company, or to the business of any customer or supplier of any of
them; provided, however, Employee may use such information during the
Employment Period for the benefit of the Company. At the termination
or expiration of this Agreement, Employee shall return all documents,
files, notes, writings and other tangible evidence of such
confidential information to the Company.
5. COVENANT NOT TO SOLICIT CUSTOMERS OR FELLOW EMPLOYEES.
Employee agrees that for a period of six (6) months following the
termination of his employment, assuming that such termination was
voluntary, he will not solicit
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<PAGE>
the business of any customer with whom the Company or a subsidiary
bank has done business during the preceding one year period. If
that termination is by action of the Board of Directors he shall
be under no constraints regarding a covenant not to solicit
customers or fellow employees. Employee further agrees not to
solicit the services of any officer or employee of the Company
during such 6-month period.
6. REMEDY.
Employee understands that, because of the unique character of the
services to be rendered by Employee hereunder, the Company would not
have any adequate remedy at law for the material breach by Employee of
any one or more of the covenants set forth in this Agreement and
agrees that in the event of any such material breach, the Company may
in addition to the other remedies which may be available to it:
(a) Declare forfeited any moneys representing salary, contingent
payments or other fringe benefits due and payable to
Employee, and, or alternatively,
(b) File a suit in equity to enjoin Employee from the breach of
such covenants.
7. TERMINATION OF EMPLOYEE WITHOUT CAUSE.
The Board of Directors may not terminate Employee's employment
hereunder without Cause. Employee shall not have the right to resign
without cause. In the event that the Board of Directors and Employee
shall mutually agree that irreconcilable differences unrelated to
cause or any material breach of this agreement have arisen, they may
mutually agree to the separation of Employee. In such case, Employee
will be entitled to the remainder of all salary, benefits, options,
and allowances due under this contract, but in no event less than the
equivalent of two (2) years of said salary, benefits and allowances,
adjusted for all applicable state and federal taxes.
8. Termination of Employee for Cause.
(a) Notwithstanding anything herein contained, on or after the date
hereof and prior to the end of the Employment Period, the Company
shall have the right to terminate Employee's employment hereunder
for Cause (as defined in Subsection 10(b) below) by giving to
Employee written notice of such termination as of a date (not
earlier than thirty (30) days after such notice) to be specified
in such notice, and the Employment Period shall terminate on the
date so specified, whereupon Employee shall be entitled to
receive six (6) months salary at the rate provided in Section 3,
plus his accrued vacation pay; provided, however, that if
termination is due to physical or mental disability of Employee,
such termination shall not affect any rights which Employee may
have at the time of termination
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<PAGE>
pursuant to any insurance or other death benefit, bonus,
retirement, or arrangements of the Company; or any stock option
plan or any options thereunder, which rights shall continue to
be governed by the provisions of such plans and arrangements,
and Sections 7, 8, and 9 of this Agreement.
(b) For purposes of this Agreement, "Cause" shall mean the
determination by the Board of Directors, acting in good faith and
by two-thirds vote in a duly constituted meeting, that Employee
has (i) willfully failed to perform or habitually neglected the
appropriate duties which he is required to perform hereunder; or
(ii) willfully failed to follow any significant policy of the
Company which materially or adversely affects the condition of
the Company; or (iii) engaged in any activity in contravention of
any significant company policy, statute, regulation or
governmental policy which materially or adversely affects the
Company's condition; or (iv) willfully refused to follow any
lawful and appropriate instruction from the Board of Directors
unless Employee asserts that compliance with such instruction
would cause the Company or Employee to violate any statute,
regulation, governmental or Company policy; or (v) subject to
Subsection (c) below, become physically or mentally disabled and
evidences his inability to discharge his duties as Chief
Executive Officer of the Company; or (vi) been convicted of or
pleaded guilty or nolo contendere to any felony; or (vii)
committed any act which would cause termination of coverage under
the Company's Bond as to Employee, as distinguished from
termination of coverage as to the Company as a whole. For
purposes of this Agreement, "Cause" shall also mean the Company
is required to remove or replace Employee by formal order or
instruction, including a consent order or agreement, from the
California State Banking Department, the Federal Reserve Bank, or
any other supervisory authority having jurisdiction.
(c) If Employee becomes disabled and such disability continues for a
period of three hundred and sixty-five (365) consecutive days,
then upon expiration of such 365-day period, if the term of this
Agreement has not already expired, the Company may, in its
discretion, terminate the Agreement and all benefits due
hereunder, but Employee shall be entitled upon such termination
to receive disability payments in accordance with such disability
plan as may be established for the payment of disability
benefits; provided, however, that if such disability is job
related, as determined by an arbitrator mutually acceptable to
the Company and Employee or Employee's representative, then the
compensation due hereunder shall continue for the entire
remaining term of this Agreement, but not less than three (3)
years, and all options shall be handled as described in Section 9
under the "consulting" provisions therein. The provisions of
Sections 3(g) and 3(h) shall also apply if Employee is disabled,
in addition to the terms of this section.
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9. (a) Should the Company determine to sell to or merge with another
company, corporation, firm, or individual(s); or engage in a
consolidation, dissolution or transfer of the assets of the
Company, internally or externally in such a manner as to
fundamentally change its existing structure, or transfer or sell
effective (20% or more) or actual (50% or more) controlling
ownership of the Company, the Company will, at the conclusion of
such activity, and as a condition thereof, pay all remaining
salary, benefits, and allowances due the Employee under this
contract, but in no event, not less than the equivalent of three
(3) years of said salary, benefits and allowances with the gross
amount increased and adjusted for all applicable state and
federal taxes. All other rights or benefits granted to Employee
under the terms of this Agreement shall be immediately vested.
(b) Such payment shall terminate this Agreement in all respects, but
shall not prohibit Employee from continuing as an Employee under
a new agreement with the Company or a successor company. Upon
such events as described in Sections 7 and 8 herein, Employee
will become a consultant of the Company or a successor company,
without employment restriction, at a payment of $1.00 per year
for a period equal to the remaining grant period of any
unexercised stock options, and such options or replacement
options shall remain in force for the full term of their original
grant. Employee, at his sole discretion only, may waive the
provisions of this Section.
10. With respect to any stock options issued to the Employee that were
outstanding on the date of the termination of his employment under
Sections 8 and 9, any options which would become exercisable had the
Employee remained in the employ of the Company through the end of the
Employment Period but which are not exercisable on the effective date
of the Employee's termination of employment under this Section 10
shall automatically become exercisable upon any such termination, and
shall remain exercisable in full, as described in Sections 8 and 9
herein.
11. The parties to this Employment Agreement and Contract agree that the
compensation provisions are in all respects consistent with the
experience, knowledge and skills of Employee, the risks to him
associated with his position as Company founder, as well as the
current general market conditions for financial industry executives
with similar experience, knowledge, skills, and industry standing to
that of the Employee. Nevertheless, Employee, as the Company's
organizer, founder and initial shareholder, may at his sole discretion
during the Employment Period, elect to postpone, waive, or otherwise
modify (reduce to the Company's benefit) the terms and provisions of
Sections Three (3) and Nine (9) of this Agreement if he deems such
actions to be in the best interests of the Company. Notwithstanding
the foregoing, the lack of any such postponement, waiver, or other
such modification shall not be construed as a failure to consider the
Company's best interests. Nor shall any such postponement, waiver, or
other
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such modification as to one or more provisions imply or be
construed to imply a modification of any other provision contained
herein, or that this Agreement in whole or in part is not in the
best interests of PCBG.
12 TERMINATION UPON EMPLOYEE'S DEATH; EFFECT OF TERMINATION ON OTHER
PLANS.
(a) Notwithstanding anything herein contained, if Employee shall die
this Agreement shall terminate on the date of Employee's death,
whereupon Employee's estate shall be entitled to receive his
salary, accrued vacation, and any bonus earned up through the
date of termination. Such termination shall not affect any
rights which Employee may have at the time of his death pursuant
to any other death benefit, bonus, or retirement benefit.
Additionally, health insurance benefits for the Employee's spouse
will be continued for a period of one year.
(b) Notwithstanding anything herein contained, any termination of
employment under this Section 11 shall not affect any accrued
rights which Employee may have at the time of such termination,
including, but not limited to, any of the Company's plans for
arrangements for insurance, vacation, retirement, and stock
options, which then accrued rights shall continue to be governed
by the provisions of such plans and arrangements to the extent
they are not inconsistent with the terms of this Agreement.
13. MODIFICATION.
This Agreement sets forth the entire understanding of the parties with
respect to the subject matter hereof, supersedes all existing
agreements between them concerning such subject matter, and may be
modified only by written instrument duly executed by each party.
14. NOTICES.
Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested or delivered against receipt to the party set
forth in the preamble to this Agreement (or to such other address as
the party shall have furnished in writing in accordance with the
provisions of this Section 13). Notice to the estate of Employee
shall be sufficient if addressed to Employee as provided in this
Section 13. Any notice or other communication given by certified mail
shall be deemed given at the time of receipted certification thereof.
15. DISPUTE RESOLUTION PROCEDURES.
Any controversy or claim arising out of this Agreement or the breach
thereof, or the interpretation thereof, except for assertions of fraud
or illegalities, shall be settled by binding arbitration in accordance
with the Rules of the American
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Arbitration Association; and judgment upon the award rendered in
such arbitration shall be final and may be entered in any court
having jurisdiction thereof. Notice of the demand for arbitration
shall be filed in writing with the other party to this Agreement and
with the American Arbitration Association. In no event shall the
demand for arbitration be made after the date when institution or
legal or equitable proceedings based on such claim, dispute or other
matters in question would be barred by the applicable statute of
limitations. This agreement to arbitrate shall be specifically
enforceable under the prevailing arbitration law. Any party
desiring to initiate arbitration procedures hereunder shall serve
written notice on the other party. The parties agree that an
arbitrator shall be selected pursuant to these provisions within
thirty (30) days of the notice of arbitration. In the event of any
arbitration pursuant to these provisions, the parties shall retain
the rights of all discovery provided pursuant to the California Code
of Civil Procedure and the Rules thereunder, except that all time
periods contained in said Code and Rules shall be shortened by fifty
percent (50%) for purposes of arbitration proceedings hereunder.
Any arbitration initiated pursuant to these provisions shall be on
an expedited basis and the dispute shall be heard within one hundred
twenty (120) days following the serving of the notice of arbitration
and a written decision shall be rendered within sixty (60) days
thereafter. All rights, causes of action, remedies and defenses
available under California law and equity are available to the
parties hereto and shall be applicable as though in a court of law.
The parties shall share equally all costs of any such arbitration.
16. INDEMNIFICATION.
The Company shall use its most diligent and best efforts to obtain and
maintain a Directors and Officers Liability Insurance Policy in the
largest amount available or reasonably affordable. In addition, to
the fullest extent allowed by law, the Company shall indemnify
Employee for any and all of his actions, or forbearance of any action,
as an employee and Director of the Company, carried out or undertaken
in good faith in the course of his duties, even if such is held to be
negligent. The Company will indemnify Employee, defend, and bear the
cost of defense with regard to any action or threatened action brought
by a third party against the Employee (whether or not the Company is
joined or included as a party defendant) and/or the Company. This
indemnification shall include not only the costs of defense, but also
any other expenses, judgements, fines, settlements, or other amounts
actually and reasonably incurred. This indemnification does not and
will not include illegal acts knowingly and willfully carried out by
the Employee, but will include all actions carried out by the Employee
acting in good faith and in a manner the Employee reasonably believed
to be in the best interest of the Company, so long as the alleged
actions by Employee arose out of and was within the course and full
scope of his employment as an Officer and Director of the Company.
Such indemnification shall also apply to any and all subsidiaries of
the Company as regards the actions of Employee and his involvement and
actions within or regarding those subsidiaries.
17. MISCELLANEOUS.
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(a) This Agreement is drawn to be effective in the State of
California and shall be construed in accordance with California
laws, except to the extent superseded by any other federal law.
No amendment or variation of the terms of this Agreement shall be
valid unless made in writing and signed by Employee and a duly
authorized representative of the Company.
(b) Any waiver by either party of a breach of any provision of this
Agreement shall not operate as to be construed to be a waiver of
any other breach of such provision or of any breach of any other
provision of this Agreement. The failure of a party to insist
upon strict adherence to any term of this Agreement on one or
more occasions shall not be considered a waiver or deprive that
party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must
be in writing.
(c) Employee's rights and obligations under this Agreement shall not
be transferable by assignment or otherwise, such rights shall not
be subject to commutation, encumbrance or the claims of
Employee's creditors, and any attempt to do any of the foregoing
shall be void. The provisions of this Agreement shall be binding
upon and inure to the benefit of the Company, their successors
and those who are its assigns under Section 8.
(d) This Agreement does not create, and shall not be construed as
creating, any rights enforceable by a person not a party to this
Agreement (except as provided in Subsection (c) above.
(e) The headings in this Agreement are solely for the convenience of
reference and shall be given no effect on the construction or
interpretation of this Agreement.
(f) This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall
be governed by and construed in accordance with the laws of the
State of California, without giving effect to conflict of laws,
except where federal law governs.
18. RESIGNATION AS DIRECTOR UPON TERMINATION
Upon termination of this Agreement, Employee, if he is then serving as
a director of the Company, agrees to immediately resign his position
as a director, unless otherwise agreed, by giving written notice of
his resignation to the Secretary of the Board of Directors of the
Company.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
signed by its duly authorized officer or representative and Employee
has executed this Agreement to be effective as of the day and year
written above on Page 1 herein.
PACIFIC COMMUNITY BANKING GROUP By: /s/ E. Lynn Caswell
-----------------------------
E. Lynn Caswell
Chairman and Chief Executive Officer
EMPLOYEE: By: /s/ E. Lynn Caswell
-----------------------------
E. Lynn Caswell
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<PAGE>
AGREEMENT
This AGREEMENT is entered into this 24th day of March, 1999, by and between
THE BANK OF HEMET, a California corporation (hereinafter referred to as the
"Bank"), PACIFIC COMMUNITY BANKING GROUP, a California corporation (hereinafter
referred to as the "Company"), and HAROLD R. WILLIAMS, JR. (hereinafter referred
to as the "Executive"). This Agreement will become effective upon the
completion of the acquisition of the Bank by the Company pursuant to the First
Restatement of Agreement and Plan of Reorganization dated January 5, 1999, as
amended.
RECITALS
WHEREAS, Executive has been an Executive Officer of the Bank since 1994 and
will become Executive Vice President and Chief Financial Officer of the Company
upon the completion of the acquisition of the Bank by the Company;
WHEREAS, the Bank and the Company desire to continue to avail itself of the
skill, knowledge and experience of Executive in order to ensure the successful
operation of the Bank and the Company without distraction; and
WHEREAS, to induce Executive to remain in the employ of the Bank and the
Company, and to continue as an Executive Officer of the Bank and to become
Executive Vice President and Chief Financial Officer of the Company, the Bank
and the Company are willing to provide benefits to Executive in the event his
employment is terminated or adversely affected as provided herein.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, the parties hereto covenant and agree as follows:
A. TERM OF AGREEMENT
This Agreement shall terminate upon the first to occur of (i) the
termination of Executive's employment with Bank and/or the Company for Cause,
Disability (both as defined below), death of Executive, or voluntarily by
Executive other than for Good Reason, and shall have occurred between the
effective date of this Agreement and December 31, 2002 (the "Term of this
Agreement"), or (ii) December 31, 2002.
B. EFFECT ON EMPLOYMENT
This Agreement is not intended to alter or otherwise change the current
employment relationship between Executive and the Bank and/or the Company
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except as described in the following Paragraphs, and Executive further
acknowledges his employment at-will status with the Bank and the Company as
described under the Bank's Personnel Policy.
C. TERMINATION OF EMPLOYMENT
If Executive's employment is terminated by the Bank and the Company, or
Executive terminates employment with the Bank and/or the Company pursuant to
Paragraph C.3. below, and unless such termination is (a) because of his death,
(b) for Cause or Disability (both as defined below) or (c) by Executive other
than for Good Reason (as defined below), he shall be entitled to the benefits
provided in Paragraph D.2(a). or D.2(b). below.
1. DISABILITY. If, as a result of Executive's incapacity due to
physical or mental illness, he shall have been absent from or unable to perform
his duties with the Bank and/or the Company for a period of three consecutive
months, and if within 30 days after written notice of termination is given
(which notice may not be given prior to the expiration of the three-month
period) he shall not have recommenced the full-time performance of his duties,
the Bank and/or the Company may terminate his employment for "Disability."
2. CAUSE. Termination of Executive's employment for "Cause" shall
mean the determination by the Bank and/or the Company that the Executive has (i)
willfully failed to perform or habitually neglected the appropriate duties which
he is required to perform hereunder; or (ii) willfully failed to follow any
significant policy of the Company which materially or adversely affects the
condition of the Company; or (iii) engaged in any activity in contravention of
any significant company policy, statute, regulation or governmental policy which
materially or adversely affects the Company's condition; or (iv) willfully
refused to follow any lawful and appropriate instruction from the Board of
Directors unless Executive asserts that compliance with such instruction would
cause the Company or Executive to violate any statute, regulation, governmental
or Company policy; or (v) subject to Section C.1 above, become physically or
mentally disabled and evidences his inability to discharge his duties as Chief
Financial Officer of the Company; or (vi) been convicted of or pleaded guilty or
nolo contendere to any felony; or (vii) committed any act which would cause
termination of coverage under the Company's Bond as to Executive, as
distinguished from termination of coverage as to the Company as a whole. For
purposes of this Agreement, "Cause" shall also mean the Company is required to
remove or replace Executive by formal order or instruction, including a consent
order or agreement, from the California Department of Financial Institutions,
the Federal Reserve Bank, or any other supervisory authority having
jurisdiction.
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3. GOOD REASON. Termination by Executive of his employment for
"Good Reason" shall mean termination by him after any of the following events
occur without his express written consent:
(i) A reduction in Executive's then current annual salary or
benefits;
(ii) A material diminution in Executive's title, authority or
responsibilities;
4. NOTICE OF TERMINATION. Any purported termination by the Bank
and/or the Company, or by Executive for Good Reason, shall be communicated by
written "Notice of Termination" to the other party hereto. A Notice of
Termination shall mean a notice which indicates the specific termination
provision in this Agreement relied upon and sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of
Executive's employment under the provision so indicated.
5. DATE OF TERMINATION. The "Date of Termination" shall mean (i) if
Executive's employment is terminated by death, the date of death, (ii) if
Executive's employment is terminated for Disability, 30 days after Notice of
Termination is given (provided that Executive shall not have recommenced the
full-time performance of his duties during such 30-day period), (iii) if
Executive's employment is terminated pursuant to subparagraph 2 or 3 above, the
date specified in the Notice of Termination, which shall be not less than 30
days after the date such Notice of Termination is given, and (iv) if Executive
voluntarily terminates employment for other than for Good Reason, the date
specified in the Notice of Termination, which shall be not less than 30 days
after the Notice of Termination is given.
D. BENEFITS
1. REGULAR COMPENSATION. If Executive's employment shall be
terminated by the Bank and/or the Company for Disability, Cause, or his death,
or by Executive other than for Good Reason, the Bank and/or the Company shall
pay Executive the full accrued base salary and accrued incentive bonus through
the Date of Termination, less withholding required by law, at the rate in effect
at the time Notice of Termination is given or death occurs, and the Bank and the
Company shall have no further obligation to him under this Agreement.
2. SEVERANCE BENEFITS. (a) If Executive's employment shall be
terminated by the Bank and/or the Company other than for Disability, Cause or
his death, or by Executive for Good Reason, within twelve (12) months of the
effective date of this Agreement, Executive shall be entitled to receive an
amount equal to
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Executive's base salary paid by the Bank and/or the Company to Executive for the
previous eighteen (18) months. Such amount shall be payable to Executive in a
lump sum payment within three (3) business days following the Date of
Termination, less withholding as required by law. In addition, the Bank and/or
the Company shall continue payment of all of Executive's benefits in effect on
the date of Executive's termination including health and other medical benefits
for a period of eighteen (18) months from the Date of Termination. Payment of
the foregoing amounts shall discharge the Bank and the Company from any further
obligation and liability to Executive under this Agreement.
(b) If Executive's employment shall be terminated by the Bank and/or
the Company other than for Disability, Cause or his death, or by Executive for
Good Reason, after twelve (12) months from the effective date of this Agreement
until December 31, 2002, Executive shall be entitled to receive an amount equal
to Executive's base salary paid by the Bank and/or the Company to Executive for
the previous twelve (12) months. Such amount shall be payable to Executive in a
lump sum payment within three (3) business days following the Date of
Termination, less withholding as required by law. In addition, the Bank and/or
the Company shall continue payment of all of Executive's benefits in effect on
the date of Executive's termination including health and other medical benefits
for a period of twelve (12) months from the Date of Termination. Payment of the
foregoing amounts shall discharge the Bank and the Company from any further
obligation and liability to Executive under this Agreement.
Notwithstanding the foregoing, in the event that any payment or
benefit received or to be received by Executive in connection with the
termination of employment pursuant to the terms of this Agreement would not be
deductible (in whole or in part) by the Bank and/or the Company as a result of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), the
amount of the payment shall be reduced until no portion is not deductible as a
result of Section 280G of the Code.
3. BONUS. Executive shall be entitled to a bonus in the minimum
amount of $60,000 which shall be payable no later than February 29, 2000. In
addition, during the term of this Agreement, Executive may receive such bonuses,
if any, as the Board of Directors in its sole discretion shall determine.
4. STOCK OPTIONS. Upon the completion of the acquisition of the
Bank by the Company, Executive shall be granted a ten-year incentive stock
option of 50,000 option shares under the Company's 1999 Stock Option Plan at an
exercise price equal to the Company's initial public offering price. Such stock
options shall be vested at 33 1/3 percent each year starting December 31, 1999.
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E. GENERAL PROVISIONS
1. RETURN OF DOCUMENTS. Executive expressly agrees that all
manuals, documents, files, reports, studies, instruments or other materials used
and/or developed by Executive related to banking or of a banking nature during
the term of his employment are solely the property of the Bank and/or the
Company, and that Executive has no right, title or interest therein. Upon
termination of Executive's employment, Executive shall promptly deliver
possession of all of said property to the Bank and/or the Company in good
condition.
2. NOTICES. Any notice, request, demand or other communication
required or permitted hereunder shall be in writing and shall be deemed to be
properly given when personally served or forty-eight hours after deposit in the
United States mail, postage prepaid, in each case addressed to the Bank and/or
the Company as its head office location or to Executive at his last residence
address on the Bank or the Company's records. Either party may change its
address by written notice in accordance with this subparagraph.
3. BINDING EFFECT; SUCCESSORS. Except to the extent otherwise
provided herein, this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective executors, administrators,
successors and assigns. The Bank and/or the Company will require any successor
to all or substantially all of its assets to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the Bank
and/or the Company would be required to perform it if no such succession had
taken place. Failure of the Bank and/or the Company to obtain such assumption
and agreement prior to the effectiveness of any such succession shall entitle
Executive to the benefits from the Bank and/or the Company in the same amount
and on the same terms as he would be entitled to hereunder if he terminated his
employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
4. APPLICABLE LAW. Except to the extent governed by the laws of the
United States, this Agreement is to be governed by and construed under the laws
of the State of California.
5. CAPTIONS AND PARAGRAPH HEADINGS. Captions and paragraph headings
used herein are for convenience only and are not part of this Agreement and
shall not be used in construing it.
6. SEVERABILITY. Should any provision of this Agreement for any
reason be declared invalid, void or unenforceable by a court of competent
jurisdiction, the validly and binding effect of any remaining portion shall not
be
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affected, and the remaining portions of this Agreement shall remain in full
force and effect as if this Agreement had been executed with said provision
eliminated.
7. ENTIRE AGREEMENT. This Agreement contains the entire agreement
of the parties relating to termination of employment as provided herein. It
supersedes any and all other agreements, either oral or in writing, between the
parties hereto with respect to such subject matter, and does not otherwise
modify, alter or change the employment relationship of Executive with the Bank
and/or the Company. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, oral or otherwise, have
been made by any party, or anyone acting on behalf of any party, which are not
embodied herein, and that no other agreement, statement or promise not contained
in this Agreement concerning its subject matter shall be valid or binding.
8. MODIFICATION; WAIVER. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge is
agreed to in writing and signed by Executive and such officer of the Bank and/or
the Company as may be specifically designated or authorized by the Board of
Directors or by the Chief Executive Officer. No waiver by either party hereto
at any time of any breach by the other party hereto of, or 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.
9. ARBITRATION. In the event that any dispute shall arise between
the parties concerning the provisions of this Agreement or the performance of
any part of their obligations hereunder, or in the event of an alleged breach of
this Agreement by either of the parties hereto, and the parties are unable to
mutually adjust and settle same, such dispute or disputes shall be submitted to
binding arbitration pursuant to the applicable rules of the American Arbitration
Association, and the decision and determination of the arbitrators shall be
final and conclusive.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
THE BANK OF HEMET
By: /s/ James B. Jaqua
---------------------------------------------
James B. Jaqua, President and
Chief Executive Officer
By: /s/ Leslie Besic
---------------------------------------------
Leslie Besic, Assistant Secretary
PACIFIC COMMUNITY BANKING GROUP
By: /s/ E. Lynn Caswell
---------------------------------------------
E. Lynn Caswell, Chairman of the Board
By: /s/ Alfred Jannard
---------------------------------------------
Alfred Jannard, Secretary
EXECUTIVE
/s/ Harold R. Williams, Jr.
---------------------------------------------
Harold R. Williams, Jr.
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<PAGE>
PACIFIC COMMUNITY BANKING GROUP
1999 STOCK OPTION PLAN
Adopted February 23, 1999
1. PURPOSE
The purpose of the Pacific Community Banking Group 1999 Stock Option
Plan (the "Plan") is to strengthen Pacific Community Banking Group (the
"Corporation") and those corporations which are or hereafter become
subsidiary corporations by providing additional means of attracting and
retaining competent managerial personnel and by providing to participating
directors, officers, key employees, consultants and others with significant
and material business relationships added incentives for high levels of
performance and for unusual efforts to increase the earnings of the
Corporation and any Subsidiary corporations; and to allow such individuals
the opportunity to participate in the ownership of the Corporation and
thereby have an interest in the success and increased value of the
Corporation. The Plan seeks to accomplish these purposes and achieve these
results by providing a means whereby such directors, officers, key employees,
consultants and others with significant and material business relationships
may purchase shares of Common Stock of the Corporation pursuant to Stock
Options granted in accordance with this Plan.
Stock Options granted pursuant to this Plan are intended to be Incentive
Stock Options or Non-Qualified Stock Options, as shall be determined and
designated by the Stock Option Committee upon the grant of each Stock Option
hereunder.
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2. DEFINITIONS
For the purposes of this Plan, the following terms shall have the
following meanings:
(a) "COMMON STOCK." This term shall mean shares of the
Corporation's no par value common stock, subject to adjustment pursuant to
Paragraph 14 (Adjustment Upon Changes in Capitalization) hereunder.
(b) "CORPORATION." This term shall mean Pacific Community
Banking Group, a California corporation.
(c) "ELIGIBLE PARTICIPANT." This term shall mean: (i) all directors
of the Corporation or any Subsidiary; (ii) all full time officers (whether or
not they are also directors) of the Corporation or any Subsidiary; (iii) all
full time key employees (as such persons may be determined by the Stock
Option Committee from time to time) of the Corporation or any Subsidiary;
and (iv) consultants and others with significant and material business
relationships with the Corporation.
(d) "EMPLOYER." This term shall mean the Corporation, as defined
herein, or any other subsidiary of the Corporation, as appropriate, depending
upon which company Optionee is employed.
(e) "FAIR MARKET VALUE." This term shall mean the fair market value
of the Corporation's Common Stock as determined by any reasonable valuation
method in accordance with the Commissioner of Corporations Regulation Section
260.140.50, which generally provides that in determining whether the price is
fair, predominant weight will be given to the following: (a) if securities of
the same class are publicly traded on an active market of substantial depth,
the recent market price
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of such securities; (b) if the securities of the same class have not been so
publicly traded, the price at which securities of reasonable comparable
corporations (if any) in the same industry are being traded, subject to
appropriate adjustments for the dissimilarities between the corporations
being compared; or (c) in the absence of any reliable indicator under
subsection (a) or (b), the earnings history, book value and prospects of the
issuer in light of market conditions generally.
(f) "INCENTIVE STOCK OPTION." This term shall mean a Stock Option
which is an "Incentive Stock Option" within the meaning of Section 422A of
the Internal Revenue Code of 1986, as amended.
(g) "NON-QUALIFIED STOCK OPTION." This term shall mean a Stock
Option which is not an Incentive Stock Option.
(h) "OPTION SHARES." This term shall mean shares of Common Stock
which are covered by and subject to any outstanding unexercised Stock Option
granted pursuant to this Plan.
(i) "OPTIONEE." This term shall mean any Eligible Participant to
whom a stock option has been granted pursuant to this Plan, provided that at
least part of the Stock Option is outstanding and unexercised.
(j) "PLAN." This term shall mean the Pacific Community Banking
Group 1999 Stock Option Plan as embodied herein and as may be amended from
time to time in accordance with the terms hereof and applicable law.
(k) "STOCK OPTION." This term shall mean the right to purchase from
the Corporation a specified number of shares of Common Stock under the Plan
at a price and upon terms and conditions determined by the Stock Option
Committee.
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(l) "STOCK OPTION COMMITTEE." The Board of Directors of the
Corporation may select and designate a stock option committee consisting of
at least three and not more than five persons, at least two of whom are
directors, having full authority to act in the matters. Regardless of whether
a Stock Option Committee is selected, the Board of Directors may act as the
Stock Option Committee and any action taken by the Board of Directors as such
shall be deemed to be action taken by the Stock Option Committee. All
references in the Plan to the "Stock Option Committee" shall be deemed
references to the Board of Directors acting as a stock option committee and
to a duly appointed Stock Option Committee, if there be one. In the event of
any conflict between any action taken by the Board of Directors acting as a
Stock Option Committee and any action taken by a duly appointed Stock Option
Committee, the action taken by the Board of Directors shall be controlling
and the action taken by the duly appointed Stock Option Committee shall be
disregarded.
(m) "SUBSIDIARY." This term shall mean any subsidiary corporation
of the Corporation as such term is defined in Section 425(f) of the Internal
Revenue Code of 1986, as amended.
3. ADMINISTRATION
(a) STOCK OPTION COMMITTEE. This Plan shall be administered by the
Stock Option Committee. The Board of Directors of the Corporation shall have
the right, in its sole and absolute discretion, to remove or replace any
person from or on the Stock Option Committee at any time for any reason
whatsoever.
(b) ADMINISTRATION OF THE PLAN. Any action of the Stock Option
Committee with respect to the administration of the Plan shall be taken
pursuant to
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a majority vote, or pursuant to the unanimous written consent, of its
members. Any such action taken by the Stock Option Committee in the
administration of this Plan shall be valid and binding, so long as the same is
in conformity with the terms and conditions of this Plan. Subject to
compliance with each of the terms, conditions and restrictions set forth in
this Plan, including, but not limited to, those set forth in Section 6(a)(ii)
hereof, the Stock Option Committee shall have the exclusive right, in its
sole and absolute discretion, to establish the terms and conditions of any
Stock Options granted under the Plan, including, without limitation, the
power to: (i) establish the number of Stock Options, if any, to be granted
hereunder, in the aggregate and with regard to any individual Eligible
Participant; (ii) determine the time or times when such Stock Options, or any
parts thereof, may be exercised; (iii) determine and designate which Stock
Options granted under the Plan shall be Incentive Stock Options and which
shall be Non-Qualified Stock Options; (iv) determine the Eligible
Participants, if any, to whom Stock Options are granted; (v) determine the
duration and purposes, if any, of leaves of absence which may be permitted to
holders of unexercised, unexpired Stock Options without such constituting a
termination of employment under the Plan; (vi) prescribe and amend the
terms, provisions and form of any instrument or agreement setting forth the
terms and conditions of every Stock Option granted hereunder; and (vii) make
loans to or guarantee any obligations of any Optionees, except directors, in
connection with the exercise of Stock Options as specified in Section 8(d)
hereof, whenever the Stock Option Committee determines that such loan or
guarantee may reasonably be expected to benefit the corporation, subject to
the provisions of Section 315(b) of the
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California General Corporations Law of 1977, as amended and subject to
Regulations G, U and T promulgated by the Board of Governors of the Federal
Reserve System pursuant to Section 7 of the Securities Exchange Act of 1934,
if the Option Shares are listed on a stock exchange or are contained in the
list of over-the-counter margin securities published by the Federal Reserve
Board.
(c) DECISIONS AND DETERMINATIONS. Subject to the express provisions
of the Plan, the Stock Option Committee shall have the authority to construe
and interpret the Plan, to define the terms used therein, to prescribe,
amend, and rescind rules and regulations relating to the administration of the
Plan, and to make all other determinations necessary or advisable for
administration of the Plan. Determinations of the Stock Option Committee on
matters referred to in this Section 3 shall be final and conclusive so long
as the same are in conformity with the terms of this Plan.
4. SHARES SUBJECT TO THE PLAN
Subject to adjustments as provided in Section 14 hereof, the maximum
number of shares of Common Stock which may be issued upon exercise of Stock
Options granted under this Plan is limited to 30% of the issued and
outstanding shares of the Corporation up to a maximum of 1,350,000 shares in
the aggregate. If any Stock Option shall be canceled, surrendered, or expire
for any reason without having been exercised in full, the unpurchased Option
Shares represented thereby shall again be available for grants of Stock
Options under this Plan.
5. ELIGIBILITY
Only Eligible Participants shall be eligible to receive grants of Stock
Options under this Plan.
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6. GRANTS OF STOCK OPTIONS
(a) GRANT. Subject to the express provisions and limitations of
the Plan, the Stock Option Committee, in its sole and absolute discretion,
may grant Stock Options to Eligible Participants of the Corporation, for a
number of Option Shares, at the price(s) and time(s), on the terms and
conditions and to such Eligible Participants as it deems advisable and
specifies in the respective grants.
Subject to the limitations and restrictions set forth in the Plan,
an Eligible Participant who has been granted a Stock Option may, if otherwise
eligible, be granted additional Stock Options if the Stock Option Committee
shall so determine. The Stock Option Committee shall designate in each grant
of a Stock Option whether the Stock Option is an Incentive Stock Option or a
Non-Qualified Stock Option.
An eligible director, officer or employee shall not participate in
the granting of his or her own options.
(b) DATE OF GRANT AND RIGHTS OF OPTIONEE. The determination of the
Stock Option Committee to grant a Stock Option shall not in any way
constitute or be deemed to constitute an obligation of the Corporation, or a
right of the Eligible Participant who is the proposed subject of the grant,
and shall not constitute or be deemed to constitute the grant of a Stock Option
hereunder unless and until both the Corporation and the Eligible Participant
have executed and delivered the form of stock option agreement then required
by the Stock Option Committee as evidencing the grant of the Stock Option,
together with such other instruments as may be required by the Stock Option
Committee pursuant to this Plan; provided, however, that the Stock Option
Committee may fix the date of grant as any date on or after the date
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of its final determination to grant the Stock Option (or if no such date is
fixed, then the date of grant shall be the date on which the determination was
finally made by the Stock Option Committee to grant the Stock Option), and
such date shall be set forth in the stock option agreement. The date of grant
as so determined shall be deemed the date of grant of the Stock Option for
purposes of this Plan.
(c) SHAREHOLDER-EMPLOYEES. Notwithstanding anything to the
contrary contained elsewhere herein, a Stock Option shall not be granted
hereunder to an Eligible Participant who owns, directly or indirectly, at the
date of the grant of the Stock Option, more than ten percent (10%) of the
total combined voting power of all classes of capital stock of the
Corporation or a Subsidiary corporation, unless the purchase price of the
Option Shares subject to said Stock Option is at least 110% of the Fair
Market Value of the Option Shares, determined as of the date said Stock
Option is granted.
(d) MAXIMUM VALUE OF STOCK OPTIONS. Except as provided in
paragraph (e) of this Section 6, the maximum aggregate Fair Market Value of
Option Shares (determined as of the respective Stock Option grant dates) for
which an Eligible Participant may be granted Incentive Stock Options in any
calendar year shall not exceed $100,000, plus any "unused carryover amount."
The unused carryover amount, determined on a yearly basis, shall be equal to
one-half (1/2) of the difference between $100,000 and the aggregate Fair
Market Value (determined as of the respective Stock Option grant dates) of
all of the Option Shares subject to Incentive Stock Options granted to the
Optionee during the calendar year under the Plan. The provisions of
Section 422A(c)(4) of the Internal Revenue Code of 1986,
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as amended, are incorporated herein by this reference for the purpose of the
determination and application of the unused carryover amount.
The aggregate fair market value (determined at the time the option
is granted) of the stock with respect to which incentive stock options are
exercisable for the first time by such individual under the terms of the
Plan during any calendar year is limited to $100,000, but the value of stock
for which options may be granted to an employee in a given year may exceed
$100,000, but such options in excess of $100,000 shall be treated as
non-qualified options.
(e) SUBSTITUTED STOCK OPTIONS. If all of the outstanding shares of
common stock of another corporation are changed into or exchanged solely for
common stock in a transaction to which Section 425(a) of the Internal Revenue
Code of 1986, as amended, applies, then, subject to the approval of the
Board of Directors of the Bank, Stock Options under the Plan may be
substituted ("Substituted Options") in exchange for valid, unexercised and
unexpired stock options of such other corporation. Substituted options shall
qualify as Incentive Stock Options under the Plan, provided that (and to the
extent) the stock options exchanged for the Substituted-Options were
"Incentive Stock Options" within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended.
(f) NON-QUALIFIED STOCK OPTIONS. All Stock Options granted by the
Stock Option Committee which: (i) are designated at the time of grant as
Incentive Stock Options but do not so qualify under the provisions of Section
422A of the Code or any regulations or rulings issued by the Internal Revenue
Service for any reason; (ii) are in excess of the fair market value
limitations set forth in Section 6(d); or (iii)
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are designated at the time of grant as Non-Qualified Stock Options, shall be
deemed Non-Qualified Stock Options under this Plan. Non-Qualified Stock
Options granted or substituted hereunder shall be so designated in the stock
option agreement entered into between the Corporation and the Optionee.
7. STOCK OPTION EXERCISE PRICE
(a) MINIMUM PRICE. The exercise price of any Option Shares shall
be determined by the Stock Option Committee, in its sole and absolute
discretion, upon the grant of a Stock Option. Except as provided elsewhere
herein, said exercise price shall not be less than one hundred percent (100%)
of the Fair Market Value of the Common Stock represented by the Option Share
on the date of grant of the related Stock Option.
(b) EXCHANGED STOCK OPTIONS. Where the outstanding shares of stock
of another corporation are changed into or exchanged for shares of Common
Stock of the Corporation without monetary consideration to that other
corporation, then, subject to the approval of the Board of Directors of the
Corporation, Stock Options may be granted in exchange for unexercised,
unexpired stock options of the other corporation, and the exercise price of
the Option Shares subject to each Stock Option so granted may be fixed at a
price less than one hundred percent (100%) of the Fair Market Value of the
Common Stock at the time such Stock Option is granted if said exercise price
has been computed to be not less than the exercise price set forth in the
stock option of the other corporation, with appropriate adjustment to reflect
the exchange ratio of the shares of stock of the other corporation into the
shares of Common Stock of the Corporation.
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(c) SUBSTITUTED OPTIONS. The exercise price of the Option Shares
subject to each Substituted Option may be fixed at a price less than one
hundred percent (100%) of the Fair Market Value of the Common Stock at the
time such Substituted option is granted if said exercise price has been
computed to be not less than the exercise price set forth in the stock option
of the other corporation for which it was exchanged, with appropriate
adjustment to reflect the exchange ratio of the shares of stock of the other
corporation into the shares of Common Stock.
8. EXERCISE OF STOCK OPTIONS.
(a) EXERCISE. Except as otherwise provided elsewhere herein, each
Stock Option shall be exercisable in such increments, which need not be
equal, and upon such contingencies as the Stock Option Committee shall
determine at the time of grant of the Stock Option; provided, however, (i)
that if an Optionee shall not in any given period exercise any part of a
Stock Option which has become exercisable during that period, the Optionee's
right to exercise such part of the Stock Option shall continue until
expiration of the Stock Option or any part thereof as may be provided in the
related Stock Option Agreement, and (ii) in the case of options that are not
granted to officers, directors, consultants of, or others with significant
and material business relationships with, the Company, a minimum of 20% of
the stock options shall be exercisable in each year over a five year period
from the date the option is granted. No Stock Option or part thereof shall
be exercisable except with respect to whole shares of Common Stock, and
fractional share interests shall be disregarded except that they may be
accumulated.
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(b) PRIOR OUTSTANDING INCENTIVE STOCK OPTIONS. Incentive Stock
Options granted to an Optionee may be exercisable while such Optionee has
outstanding and unexercised any Incentive Stock Option previously granted
(or substituted) to him or her pursuant to this Plan. The Stock Option
Committee shall determine if such options shall be exercisable if there are
any Incentive Stock Options previously granted (or substituted) to him or her
pursuant to this Plan, and such determination shall be evidenced in the
Agreement executed by the Optionee and Company, subject to the requirements
of Rule 260.141.41(f) of the California Commissioner of Corporations. An
Incentive Stock Option shall be treated as outstanding until it is exercised
in full or expires by reason of lapse of time.
(c) NOTICE AND PAYMENT. Stock Options granted hereunder shall be
exercised by written notice delivered to the Corporation specifying the
number of Option Shares with respect to which the Stock Option is being
exercised, together with concurrent payment in full of the exercise price
as hereinafter provided in Section 8(d) hereof. If the Stock Option is being
exercised by any person or persons other than the Optionee, said notice shall
be accompanied by proof, satisfactory to counsel for the Corporation, of the
right to such person or persons to exercise the Stock Option. The
Corporation's receipt of a notice of exercise without concurrent receipt of
the full amount of the exercise price shall not be deemed an exercise of a
Stock Option by an Optionee, and the Corporation shall have no obligation to
an Optionee for any Option Shares unless and until full payment of the
exercise price is received by the Corporation in accordance with Section 8(d)
hereof, and all of the
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terms and provisions of the Plan and the related stock option agreement have
been complied with.
(d) PAYMENT OF EXERCISE PRICE. The exercise price of any Option
Shares purchased upon the proper exercise of a Stock Option shall be paid in
full at the time of each exercise of a Stock Option in cash and/or, with the
prior written approval of the Stock Option Committee, in Common Stock of the
Corporation which, when added to the cash payment, if any, has an aggregate
Fair Market Value equal to the full amount of the exercise price of the Stock
Option, or part thereof, then being exercised and/or, with the prior written
approval of the Stock Option Committee and if legally permitted, on a
deferred basis evidenced by a promissory note, containing such terms and
subject to such security as the Stock Option Committee shall determine to be
fair and reasonable from time to time, for the total option price for the
number of shares so purchased. No Director may purchase any Stock Option on a
deferred basis evidenced by a promissory note. Unless payment is on a
deferred basis, payment by an Optionee as provided herein shall be made in
full concurrently with the Optionee's notification to the Corporation of his
intention to exercise all or part of a Stock Option. If all or part of
payment is made in shares of Common Stock as heretofore provided, such
payment shall be deemed to have been made only upon receipt by the
Corporation of all required share certificates, and all stock powers and
other required transfer documents necessary to transfer the shares of Common
Stock to the Corporation.
(e) REORGANIZATION. Notwithstanding any provision in any stock
option agreement pertaining to the time of exercise of a Stock Option, or
part thereof,
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upon adoption by the requisite holders of the Corporation's outstanding
shares of Common Stock of any plan of dissolution, liquidation,
reorganization, merger, consolidation or sale of all or substantially all of
the assets of the Corporation to another corporation, or the acquisition of
stock representing more than 50% of the voting power of the Corporation then
outstanding, by another corporation or person, which would, upon
consummation, result in termination of a Stock Option in accordance with
Section 16 hereof, the Stock Option shall become immediately exercisable as
to all Option Shares, whether or not vested, for such period of time as may
be determined by the Stock Option Committee, but in any event not less than
30 days prior to the adoption of the plan of dissolution, liquidation,
reorganization, merger, consolidation, sale, or acquisition on the condition
that the terminating event described in Section 16 hereof is consummated. Any
Option Shares not exercised will be terminated. If such Terminating Event is
not consummated, Stock Options granted pursuant to the Plan shall be
exercisable in accordance with their respective terms.
(f) MINIMUM EXERCISE. Not less than ten (10) Option Shares may be
purchased at any one time upon exercise of a Stock Option unless the number
of shares purchased is the total number which remains to be purchased under
the Stock Option.
(g) COMPLIANCE WITH LAW. No shares of Common Stock shall be issued
by the Corporation upon exercise of any Stock Option, and an Optionee shall
have no rights or claim to such shares, unless and until: (a) payment in full
as provided in Section 8(d) hereof has been received by the Corporation; (b)
in the
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opinion of the counsel for the Corporation, all applicable registration
requirements of the Securities Act of 1933, all applicable listing
requirements of securities exchanges or associations on which the
Corporation's Common Stock is then listed or traded, and all other
requirements of law and of regulatory bodies having jurisdiction over such
issuance and delivery, have been fully complied with; and (c) if required by
federal or state law or regulation, the Optionee shall have paid to the
Corporation the amount, if any, required to be withheld on the amount deemed
to be compensation to the Optionee as a result of the exercise of his or her
Stock Option, or made other arrangements satisfactory to the Corporation, in
its sole discretion, to satisfy applicable income tax withholding
requirements.
9. NONTRANSFERABILITY OF STOCK OPTIONS.
Each Stock Option shall, by its terms, be nontransferable by the
Optionee other than by will or the laws of descent and distribution, and
shall be exercisable during the Optionee's lifetime only by the Optionee or
his or her guardian or legal representative.
10. CONTINUATION OF EMPLOYMENT.
Except for Optionees with a written contract for any definite term, this
Agreement shall not obligate the Corporation or a Subsidiary to employ
Optionee.
11. CESSATION OF EMPLOYMENT.
Except as provided in Sections 8(e), 12, 13, 14, 15 or 16 hereof, if,
for any reason, an Optionee's status as an Eligible Participant is
terminated, the Stock Options granted to such Optionee shall expire on the
expiration dates specified for said Stock Options at the time of their
initial grant, or three (3) months after the
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Optionee's status as an Eligible Participant is terminated, whichever is
earlier. Thereafter, Options shall be exercisable only as to those
increments, if any, which had become exercisable as of such expiration date,
and any Stock Options or increments which had not become exercisable as of
such date shall expire and terminate automatically on such expiration date.
12. TERMINATION FOR VIOLATION OF STANDARDS OF CONDUCT AS REFERENCED IN
OPTIONEE'S EMPLOYEE HANDBOOK.
If Optionee's status as an Eligible Participant is terminated for
violation of the Employer's Standards of Conduct, the vested portion of Stock
Options granted to such Optionee shall be exercisable for a thirty (30) day
period following such termination, and thereafter such Stock Options shall
automatically expire and terminate in their entirety; provided, however, that
the Stock Option Committee may, in its sole discretion, within thirty (30)
days of such termination, reinstate such Stock Options to the status of
options terminated for reasons other than violations of the Employer's
Standards of Conduct, death or disability by giving written notice of such
reinstatement to the Optionee. In the event of such reinstatement, the
Optionee may exercise the Stock Options as provided in Section 11 herein.
Reasons for termination for violation of the Employer's Standards of Conduct
shall include, but not be limited to, termination for malfeasance or gross
misfeasance in the performance of duties or conviction of illegal activity in
connection therewith, and, in any event, the determination of the Stock
Option Committee with respect thereto shall be final and conclusive.
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13. DEATH OF OPTIONEE
If an Optionee loses his status as an Eligible Participant by reason of
death, or if an Optionee dies during the three-month period referred to in
Section 12 hereof, the Stock Options granted to such Optionee shall expire on
the expiration dates specified for said Stock Options at the time of their
initial grant, or one (1) year after the date of such death, whichever is
earlier. After such death but before such expiration, subject to the terms
and provisions of the Plan and the related stock option agreements, the
person or persons to whom such Optionee's rights under the Stock Options shall
have passed by will or by the applicable laws of descent and distribution, or
the executor or administrator of the Optionee's estate, shall have the right
to exercise such Stock Options to the extent that increments, if any, had
become exercisable as of the date on which the Optionee's status as an
Eligible Participant had been lost.
14. DISABILITY OF OPTIONEE
If an Optionee is disabled while employed by or while serving as a
director of the Corporation or a Subsidiary or during the three-month period
referred to in Section 12 hereof, the Stock Options granted to such Optionee
shall expire on the expiration dates specified for said Stock Options at the
time of their initial grant, or one (1) year after the date of such
disability, whichever is earlier. After such disability but before such
expiration, the Optionee or a guardian or conservator of the Optionee's
estate, as duly appointed by a court of competent jurisdiction, shall have
the right to exercise such Stock Options to the extent that increments, if
any, had become exercisable as of the date on which the Optionee became
disabled or ceased to be employed by the
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Corporation or a Subsidiary as a result of the disability. For the purpose of
this Section 14, an Optionee shall be deemed to have become "disabled" if it
shall appear to the Stock Option Committee, upon written certification
delivered to the Corporation by a qualified licensed physician, that the
Optionee has become permanently and totally unable to engage in any
substantial gainful activity by reason of any medically determinable physical
or mental impairment which can be expected to result in death, or which has
lasted or can be expected to last for a continuous period of not less than 12
months.
15. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
If the outstanding shares of Common Stock of the Corporation are
increased, decreased, or changed into or exchanged for a different number or
kind of shares or securities of the Corporation, through a reorganization,
merger, recapitalization, reclassification, stock split, stock dividend,
stock consolidation, or otherwise, without consideration to the Corporation,
an appropriate and proportionate adjustment shall be made in the number and
kind of shares as to which Stock Options may be granted. A corresponding
adjustment changing the number or kind of Option Shares and the exercise
prices per share allocated to unexercised Stock Options, or portions thereof,
which shall have been granted prior to any such change, shall likewise be
made. Any such adjustment, however, in an outstanding Stock Option shall be
made without change in the total price applicable to the unexercised portion
of the Stock Option, but with a corresponding adjustment in the price for
each Option Share subject to the Stock Option. Any adjustment under this
Section shall be made by the Stock Option Committee, whose determination as
to what adjustments shall be made, and the
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extent thereof, shall be final and conclusive. No fractional shares of stock
shall be issued or made available under the Plan on account of any such
adjustment, and fractional share interests shall be disregarded and the
fractional share interest shall be rounded down to the nearest whole number.
16. TERMINATING EVENTS
Not less than thirty (30) days prior to consummation of a plan of
dissolution or liquidation of the Corporation, or consummation of a plan of
reorganization, merger or consolidation of the Corporation with one or more
corporations, as a result of which the Corporation is not the surviving
corporation and the outstanding securities of the class then subject to
options hereunder are changed or exchanged for cash or property or securities
not of the Corporation's issue, or upon the sale of all or substantially all
the assets of the Corporation to another corporation, or the acquisition of
stock representing more than fifty percent (50%) of the voting power of the
Corporation then outstanding by another corporation or person (the
"Terminating Event"), the Stock Option Committee or the Board of Directors
shall notify each Optionee of the pendency of the Terminating Event. Upon the
effective date of the Terminating Event, the Plan shall automatically
terminate and all Stock Options theretofore granted shall terminate, unless
provision is made in connection with such transaction for the continuance of
the Plan and/or assumption of Stock Options theretofore granted, or
substitution for such Stock Options with new stock options, covering stock of
a successor employer corporation, or a parent or subsidiary corporation
thereof, solely at the discretion of such successor corporation, or parent or
subsidiary corporation, with appropriate adjustments as to number and kind of
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shares and prices, in which event the Plan and options theretofore granted
shall continue in the manner and under the terms so provided. If the Plan and
unexercised options shall terminate pursuant to the foregoing sentence, all
persons shall have the right to exercise any unexercised portions of options
outstanding and not exercised, shall have the right, at such time prior to
the consummation of the transaction causing such termination as the
Corporation shall designate and for a period of not less than 30 days, to
exercise all unexercised portions of their options, including the portions
which would, but for this paragraph entitled "Terminating Events," not yet be
exercisable.
17. AMENDMENT AND TERMINATION
The Board of Directors of the Corporation may at any time and from
time-to-time suspend, amend, or terminate the Plan and may, with the consent
of Optionee, make such modifications of the terms and conditions of a Stock
Option as it shall deem advisable; provided that, except as permitted under
the provisions of Section 16 hereof, no amendment or modification may be
adopted without the Corporation having first obtained all necessary
regulatory approvals and approval of the holders of a majority of the
Corporation's shares of Common Stock present, or represented, and entitled to
vote at a duly held meeting of shareholders of the Corporation if the
amendment or modification would;
(a) materially increase the benefits accruing to participants under
the Plan;
(b) materially increase the number of securities which may be
issued under the Plan;
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(c) materially modify the requirements as to eligibility for
participation in the Plan;
(d) increase or decrease the exercise price of any Stock Options
granted under the Plan;
(e) increase the maximum term of Stock Options provided for herein;
(f) permit Stock Options to be granted to any person who is not an
Eligible Participant; or
(g) change any provision of the Plan which would affect the
qualification as an incentive Stock Option under the Plan.
No Stock Option may be granted during any suspension of the Plan or
after termination of the Plan. Amendment, suspension, or termination of the
Plan shall not (except as otherwise provided in Section 17 hereof), without
the consent of the Optionees, alter or impair any rights or obligations under
any Stock Option theretofore granted.
18. RIGHTS OF ELIGIBLE PARTICIPANTS AND OPTIONEES
Neither any Eligible Participant, any Optionee or any other person shall
have any claim or right to be granted any Stock Option under this Plan, and
neither this Plan nor any action taken hereunder shall be deemed or construed
as giving any Eligible Participant, Optionee or any other person any right to
be retained in the employ of the Corporation or any subsidiary of the
Corporation. Without limiting the generality of the foregoing, there is no
vesting of any right in the classification of any person as an Eligible
Participant or Optionee, such classification being used solely to
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define and limit those persons who are eligible for consideration of the
grant of Stock Options under the Plan;
19. PRIVILEGES OF STOCK OWNERSHIP; SECURITIES LAW COMPLIANCE; NOTICE OF SALE
No Optionee shall be entitled to the privileges of stock ownership as to
any Option Shares not actually issued and delivered. No Option Shares may be
purchased upon the exercise of a Stock Option unless and until all then
applicable requirements of all regulatory agencies having jurisdiction and
all applicable requirements of securities exchanges upon which the stock of
the Corporation is listed (if any) shall have been fully complied with. The
Corporation will diligently endeavor to comply with all applicable
securities laws before any options are granted under the Plan and before any
stock is issued pursuant to options. The Optionee shall, not more than five
(5) days after each sale or other disposition of shares of Common Stock
acquired pursuant to the exercise of Stock Options, give the Corporation
notice in writing of such sale of other disposition.
The Corporation will provide to each Optionee its Annual Report as
required by Section 260.140.46 of the regulations of the California
Commissioner of Corporations.
20. EFFECTIVE DATE OF THE PLAN
The Plan shall be deemed adopted as of February 23, 1999, and shall be
effective immediately, subject to approval of the Plan by the holders of at
least a majority of the Corporation's outstanding shares of Common Stock and
approval of the Plan by the California Commissioner of Corporations.
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21. TERMINATION
Unless previously terminated as aforesaid, the Plan shall terminate ten
(10) years from the earliest date of (i) adoption of the Plan by the Board of
Directors; or (ii) approval of the Plan by holders of at least a majority of
the Corporation's outstanding shares of Common Stock. No Stock Options shall
be granted under the Plan thereafter, but such termination shall not affect
any Stock Option theretofore granted.
22. OPTION AGREEMENT
Each Stock Option granted under the Plan shall be evidenced by a written
stock option agreement executed by the Corporation and the Optionee, and
shall contain each of the provisions and agreements herein specifically
required to be contained therein, and such other terms and conditions as are
deemed desirable by the Stock Option Committee and are not inconsistent with
the Plan.
23. STOCK OPTION PERIOD
Each Stock Option and all rights and obligations thereunder shall expire
on such date as the Stock Option Committee may determine, but not later than
ten (10) years from the date such Stock Option is granted, and shall be
subject to earlier termination as provided elsewhere in the Plan.
24. EXCULPATION AND INDEMNIFICATION OF STOCK OPTION COMMITTEE
In addition to such other rights of indemnification which they may have
as directors of the Corporation or as members of the Stock Option Committee,
the present and former members of the Stock Option Committee, and each of
them, shall be indemnified by the Corporation for and against all costs,
judgments, penalties and
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reasonable expenses, including reasonable attorney's fees, actually and
necessarily incurred by them in connection with any action, suit or
proceeding, or in connection with any appeal thereof, to which they or any of
them may be a party by reason of any act or omission of any member of the
Stock Option Committee under or in connection with the Plan or any Stock
Option granted thereunder; provided, however, that a member of the Stock
Option Committee shall not be entitled to any indemnification whatsoever
pursuant to this Section for as a result of any act or omission of such
member which was not taken in good faith and which constituted willful
misconduct or gross negligence by such member; provided further, that any
amounts paid by any member of the Stock Option Committee in settlement of any
action, suit or proceeding for which indemnification may be sought pursuant
to this Section shall be first approved in writing by independent legal
counsel selected by the Corporation; and, provided further, that within
thirty (30) days after institution of any action, suit or proceeding against
any member with respect to which such member is entitled to indemnification
hereunder, such member shall, in writing, offer the Corporation the
opportunity, as its own expense, to handle (including settle) and conduct the
defense thereof. The provisions of this Section shall apply to the estate,
executor and administrator of each member of the Stock Option Committee.
25. (Reserved)
26. NOTICES
All notices and demands of any kind which the Stock Option Committee,
any Optionee, Eligible Participant, or any other person may be required or
desires to serve under the terms of this Plan shall be in writing and shall
be served by personal service
24
<PAGE>
upon the respective person or by leaving a copy of such notice or demand at
the address of such person as may be reflected in the records of the
Corporation, or in the case of the Stock Option Committee, with the Secretary
of the Corporation, or by mailing a copy thereof by certified or registered
mail, postage prepaid, with return receipt requested. In the case of service
by mail, it shall be deemed complete at the expiration of the third day after
the day of mailing, except for notice of the exercise of any Stock Option and
payment of the Stock Option exercise price, both of which must be actually
received by the Corporation.
27. (Reserved)
28. LIMITATION OF RIGHTS
The Stock Option Committee, in its sole and absolute discretion, is
entitled to determine who, if anyone, is an Eligible Participant under this
Plan, and which, if any, Eligible Participant shall receive any grant of a
Stock Option. No oral or written agreement by any person on behalf of the
Corporation relating to this Plan or any Stock Option granted hereunder is
authorized, and such agreement may not bind the Corporation or the Stock
Option Committee to grant any Stock Option to any person.
29. SEVERABILITY
If any provision of this Plan as applied to any person or to any
circumstances shall be adjudged by a court of competent jurisdiction to be
void, invalid, or unenforceable, the same shall in no way effect any other
provision hereof, the application of any such provision in any other
circumstances, or the validity of enforceability hereof.
25
<PAGE>
30. CONSTRUCTION
Where the context or construction requires, all words applied in the
plural shall be deemed to have been used in the singular and vice versa, and
the masculine gender shall include the feminine and the neuter.
31. HEADINGS
The headings of the several paragraphs of this Plan are inserted solely
for convenience of reference and are not intended to form a part of and are
not intended to govern, limit or aid in the construction of any term or
provision hereof.
32. SUCCESSORS
This Plan shall be binding upon the respective successors, assigns,
heirs, executors, administrators, guardians and personal representatives of
the Corporation and any Optionee.
33. GOVERNING LAW
This Plan shall be governed by and construed in accordance with the laws
of the State of California.
34. CONFLICT
In the event of any conflict between the terms and provisions of this
Plan, and any other document, agreement or instrument, including, without
limitation, any stock option agreement, the terms and provisions of this Plan
shall control.
26
<PAGE>
SECRETARY'S CERTIFICATE OF ADOPTION
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Assistant Secretary of Pacific
Community Banking Group; and
2. That the foregoing Pacific Community Banking Group 1999 Stock
Option Plan was duly adopted by the Board of Directors of Pacific Community
Banking Group as the Stock Option Plan for the Corporation at a meeting duly
called as required by law and convened on the 23rd day of February, 1999.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the Corporation this 23rd day of February, 1999.
/s/ MARGARAT HOWE
--------------------------------------
Margarat Howe, Assistant Secretary
[SEAL]
27
<PAGE>
OPTIONEES TO WHOM INCENTIVE STOCK OPTIONS ARE GRANTED MUST MEET CERTAIN
HOLDING PERIOD AND EMPLOYMENT REQUIREMENTS FOR FAVORABLE TAX TREATMENT.
UNLESS OTHERWISE STATED, ALL DEFINED TERMS IN THE PLAN SHALL HAVE THE SAME
MEANING HEREIN AS SET FORTH IN THE PLAN.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
PACIFIC COMMUNITY BANKING GROUP
STOCK OPTION AGREEMENT
----------------------
/ / Incentive Stock Option
/ / Non-Qualified Stock Option
THIS AGREEMENT, dated the ___ day of ________, 19__, by and between
Pacific Community Banking Group, a California corporation (the
"Corporation"), and ________________ (the "Optionee");
WHEREAS, pursuant to the Corporation's 1999 Stock Option Plan (the
"Plan"), the Stock Option Committee has authorized the grant to Optionee of a
Stock Option to purchase all or any part of ______________ (______)
authorized but unissued shares of the Corporation's Common Stock at the price
of ________________ Dollars ($______) per share, such Stock Option to be for
the term and upon the terms and conditions hereinafter stated;
NOW, THEREFORE, it is hereby agreed:
1. GRANT OF STOCK OPTION. Pursuant to said action of the Stock
Option Committee and pursuant to authorizations granted by all appropriate
regulatory
1
<PAGE>
and governmental agencies, the Corporation hereby grants to Optionee a Stock
Option to purchase, upon and subject to the terms and conditions of the Plan,
which is incorporated in full herein by this Reference, all or any part of
______________ (____) Option Shares of the Corporation's Common Stock, at the
price of _____________ Dollars ($______) per share. For purposes of this
Agreement and the Plan, the date of grant shall be ________________, 19__. At
the date of grant, Optionee [DOES] [DOES NOT OWN] stock possessing more than
10% of the total combined voting power of all classes of capital stock of the
Corporation or any Subsidiary.
The Stock Option granted hereunder [IS] [IS NOT] intended to
qualify as an Incentive Stock Option within the meaning of Section 422A of
the Internal Revenue Code of 1986, as amended.
2. EXERCISABILITY. This Stock Option shall be exercisable as to
_____________ Option Shares on _____________, 19__, as to ________________
Option Shares on _____________, 19__, as to _______________ Option Shares on
_____________, 19__, as to ________________ Option Shares on _____________,
19__, and as to _______________ Option Shares on ______________, 19__. This
Stock Option shall remain exercisable as to all of such Option Shares until
_____________, 19__ (but not later than ten (10) years from the date
hereof), at which time it shall expire in its entirety, unless this Stock
Option has expired or terminated earlier in accordance with the provisions
hereof. Option shares as to which this Stock Option becomes exercisable may
be purchased at any time prior to expiration of this Stock Option.
2
<PAGE>
3. EXERCISE OF STOCK OPTION. Subject to the provision of
Paragraph 4 hereof, this Stock Option may be exercised by written notice
delivered to the Corporation stating the number of Option Shares with respect
to which this Stock Option is being exercised, together with cash and/or, if
permitted at the time of exercise by the Stock Option Committee, shares of
Common Stock of the Corporation which, when added to the cash payment, if
any, have an aggregate Fair Market Value equal to the full amount of the
purchase price of such Option Shares, and/or, if permitted at the time of
exercise by the Stock Option Committee and if legally permitted, and if
Optionee is not also a director, consultant or business advisor of the
Corporation or any of its subsidiaries, on a deferred basis evidenced by a
promissory note. Not less than ten (10) Option shares may be purchased at any
one time unless the number purchased is the total number which remains to be
purchased under this Stock Option and in no event may the Stock Option be
exercised with respect to fractional shares. Upon exercise, Optionee shall
make appropriate arrangements and shall be responsible for the withholding of
any federal and state income taxes then due.
4. PRIOR OUTSTANDING STOCK OPTIONS. Incentive Stock Options
granted to an Optionee may be exercisable while such Optionee has outstanding
and unexercised any Incentive Stock Option previously granted to him or her
pursuant to this Plan. The Stock Option Committee shall determine if such
options shall be exercisable if there are any Incentive Stock Options
previously granted (or substituted) to him or her pursuant to this Plan, and
such determination shall be evidenced in the Agreement executed by the
Optionee and the Corporation, subject
3
<PAGE>
to the requirements of Rule 260.141.41(f) of the California Commissioner of
Corporations. An Incentive Stock Option shall be treated as outstanding until
it is exercised in full or expires by reason of lapse of time.
5. CESSATION OF EMPLOYMENT. Except as provided in paragraphs 7,
9, or 11 hereof, if Optionee's status as an Eligible Participant under the
Plan is terminated, this Stock Option shall expire three (3) months
thereafter or on the date specified in Paragraph 2 hereof, whichever is
earlier. During such period after termination of status as an Eligible
Participant, this Stock Option shall be exercisable only as to those
increments, if any, which had become exercisable as of the date on which the
Optionee's status as Eligible Participant was terminated, and any Stock
Options or increments which had not become exercisable as of such date shall
expire and terminate automatically on such date.
6. TERMINATION FOR VIOLATION OF STANDARDS OF CONDUCT AS REFERENCED
IN OPTIONEE'S EMPLOYEE HANDBOOK. If Optionee's status as an Eligible
Participant under the Plan is terminated for violation of the Employer's
Standard of Conduct, the vested portion of this Stock Option shall be
exercisable for a thirty (30) day period following such termination, and
thereafter this Stock Option shall automatically expire and terminate in
their entirety; provided, however, that the Stock Option Committee may, in
its sole discretion, within thirty (30) days of such termination, reinstate
such Stock Options to the status of options terminated for reasons other than
violations of the Employer's Standards of Conduct, death or disability by
giving written notice of such reinstatements to the Optionee. In the event of
such reinstatement, the Optionee may exercise the Stock Options as provided
in Section 11 herein.
4
<PAGE>
Termination for violation of the Employer's Standard of Conduct shall
include, but not be limited to, or termination for malfeasance or gross
misfeasance in the performance of duties or conviction of illegal activity in
connection therewith, and, in any event, the determination of the Stock
Option Committee with respect thereto shall be final and conclusive.
7. DISABILITY OR DEATH OF OPTIONEE. If Optionee loses his or her
status as an Eligible Participant under the Plan by reason of death or if
Optionee is disabled while employed by the Corporation or a Subsidiary, or
if Optionee dies or becomes so disabled during the three-month period
referred to in Paragraph 5 hereof, this Stock Option shall automatically
expire and terminate one (1) year after the date of Optionee's disability or
death or on the day specified in Paragraph 2 hereof, whichever is earlier.
After Optionee's disability or death but before such expiration, the person
or persons to whom Optionee's rights under this Stock Option shall have
passed by order of a court of competent jurisdiction or by will or the
applicable laws of descent and distribution, or the executor, administrator
or conservator of Optionee's estate, shall have the right to exercise this
Stock Option to the extent that increments, if any, had become exercisable as
of the date on which Optionee's status as an Eligible Participant under the
Plan had been terminated. For purposes hereof, "disability" shall have the
same meaning as set forth in Section 14 of the Plan.
8. NONTRANSFERABILITY. This Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during Optionee's lifetime only by Optionee or his or her
guardian or legal representative.
5
<PAGE>
9. EMPLOYMENT. Except for optionees with a written contract for
any definite term, this Agreement shall not obligate the Corporation or a
Subsidiary to employ Optionee.
10. PRIVILEGES OF STOCK OWNERSHIP. Optionee shall have no rights as
a stockholder with respect to the Option Shares unless and until said Option
Shares are issued to Optionee as provided in the Plan. Except as provided in
Section 15 of the Plan, no adjustment will be made for dividends or other
rights in respect of which the record date is prior to the date such stock
certificates are issued.
11. MODIFICATION AND TERMINATION BY BOARD OF DIRECTORS. The rights
of Optionee are subject to modification and termination upon the occurrence
of certain events as provided in Sections 12, 13, 14, 15 and 16 of the Plan.
Upon adoption by the requisite holders of the Corporation's outstanding
shares of Common Stock of any plan of dissolution, liquidation,
reorganization, merger, consolidation or sale of all or substantially all of
the assets of the Corporation to, or the acquisition of stock representing
more than fifty percent (50%) of the voting power of the Corporation then
outstanding by another corporation or person which would, upon consummation,
result in termination of this Stock Option in accordance with Section 16 of
the Plan, this Stock Option shall become immediately exercisable as to all
unexercised Option Shares notwithstanding the incremental exercise provisions
of paragraph 2 of this Agreement for a period then specified by the Stock
Option Committee, but in any event not less than 30 days, in accordance with
Section 8(e) of the Plan, on the condition that the terminating event
described in Section 16 of the Plan is consummated. If such terminating event
is not consummated, this Stock Option shall
6
<PAGE>
be exercisable in accordance with the terms of the Agreement, excepting this
Paragraph 11.
12. NOTIFICATION OF SALE. Optionee agrees that Optionee, or any
person acquiring Option Shares upon exercise of this Stock Option, will
notify the Corporation in writing not more than five (5) days after any sale
or other disposition of such Shares.
13. (Reserved)
14. NOTICES. All notices to the Corporation provided for in this
Agreement shall be addressed to it in care of its President or Chief
Financial Officer at its principal office and all notices to Optionee shall
be addressed to Optionee's address on file with the Corporation or a
subsidiary corporation, or to such other address as either may designate to
the other in writing, all in compliance with the notice provisions set forth
in Section 26 of the Plan.
15. INCORPORATION OF PLAN. All of the provisions of the Plan are
incorporated herein by reference as if set forth in full hereat. In the event
of any conflict between the terms of the Plan and any provision contained
herein, the terms of the Plan shall be controlling and the conflicting
provisions herein shall be disregarded.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
PACIFIC COMMUNITY BANKING GROUP
By:
-----------------------------------
By:
-----------------------------------
OPTIONEE
---------------------------------------
8
<PAGE>
EXHIBIT 10.5
STOCKHOLDER AGREEMENT
<PAGE>
STOCKHOLDER AGREEMENT
THIS AGREEMENT is entered into this 31st day of October, 1997 by and
between E. Lynn Caswell ("Shareholder") and PACIFIC COMMUNITY BANKING GROUP
("Corporation"), a California corporation with its principal executive office
at 23332 Mill Creek Drive, Suite 230, Laguna Hills, California 92653.
A. WHEREAS, the Articles of Incorporation of the Corporation currently
authorize the issuance of up to 100,000,000 of its no par value Common Stock
("Common Stock") and 100,000,000 of its no par value Preferred Stock.
B. WHEREAS, the Board of Directors of the Corporation have authorized
the sale and issuance of 10,000 shares of the Corporation's Common Stock at
the purchase price of $.25 per share to Shareholder pursuant to the terms of
Corporation Code Section 25102(f);
C. WHEREAS, Shareholder desires to purchase 10,000 shares of the
Corporation's Common Stock for the purchase price of $.25 per share pursuant
to the terms and conditions herein set forth;
IT IS MUTUALLY AGREED by and between the parties hereto as follows:
1. PURCHASE. The Corporation agrees to sell and Shareholder agrees to
purchase 10,000 shares of the Corporation's Common Stock at the price of $.25
per share for an aggregate purchase price of $2,500.00
2. TRANSFER OF SHARES. The Shareholder agrees not to sell, assign,
transfer, encumber, hypothecate, or make any other disposition of any of the
shares of the Common Stock to be purchased except with the prior written
consent of and at the direction of the Corporation and except in accordance
with the terms of this Stockholder Agreement. This Stockholder Agreement
shall be binding upon and shall operate for the benefit of the Corporation
and the Shareholder and the respective executors or administrators and any
transferees or assignees of the Shareholder, whether such transfers or
assignments are in accordance with or in violation of the provisions of this
Stockholder Agreement.
3. TERMINATION. This Stockholder Agreement shall terminate upon the
occurrence of any of the following events:
(a) The bankruptcy, receivership, or dissolution of the Corporation;
or
(b) Mutual agreement of the Corporation and Shareholder;
4. LEGEND. Upon execution of this Stockholder Agreement, the
certificate representing the number of shares of Stock to be issued shall be
endorsed as follows:
- 1 -
<PAGE>
"It is unlawful to consummate a sale or transfer of this
security, or any interest therein, or to receive any
consideration therefor, without the prior written consent of
the Commissioner of Corporations of the State of California,
except as permitted by the Commissioner's rules.
Additionally, this certificate is transferable only upon
compliance with provisions of a Stockholder Agreement dated
October 31, 1997."
5. GOVERNING LAW. This Stockholder Agreement shall be construed and
governed by the laws of the State of California. The offer and sale of this
stock will not be accompanied by the publication of any advertisement, that
no selling expenses will be given, paid or incurred in connection therewith,
that no promotional considerations will be given, paid or incurred in
connection therewith, that a notice in the form prescribed by the rules of
Commissioner of Corporations ("Commissioner") shall be filed with the
Commissioner, and that a copy of Section 260.141.11 of the Corporate
Securities Rules is attached hereto and is hereby acknowledged as received by
shareholder.
6. ENTIRE AGREEMENT. This Stockholder Agreement constitutes the sole
and only agreement of the parties hereto respecting the sale and purchase of
the shares of the Corporation and the resale and repurchase of the shares of
the Corporation's Common Stock and correctly sets forth the rights, duties,
and obligations of each party to the other in relation thereto as of this
date. Any prior agreements, promises, negotiations or representations
concerning the subject matter of this Stockholder Agreement not expressly set
forth in this Stockholder Agreement are of no force or effect.
IN WITNESS WHEREOF, the parties hereto have executed this Stockholder
Agreement in Laguna Hills, California on the date first above written.
PACIFIC COMMUNITY BANKING GROUP
By /s/ E. Lynn Caswell
--------------------------------------
E. Lynn Caswell
Chairman of the Board
By /s/ E. Lynn Caswell
--------------------------------------
E. Lynn Caswell,
Chief Financial Officer
By /s/ E. Lynn Caswell
--------------------------------------
E. Lynn Caswell
"Shareholder"
- 2 -
<PAGE>
EXHIBIT 10.6
Warrant Purchase Agreement
between
PCBG and TBOH
dated
July 30, 1998
<PAGE>
EXHIBIT C WARRANT PURCHASE AGREEMENT
This WARRANT PURCHASE AGREEMENT (the "Agreement"), dated as of July 30,
1998, between Pacific Community Banking Group, a California corporation
("PCBG"), and Bank of Hemet, a California corporation ("BOH") is made with
reference to the following:
RECITALS
A. PCBG and BOH have entered into an Agreement and Plan of
Reorganization dated July 30, 1998 (the "Merger Agreement") whereby BOH would
be merged with PCBG Merger Corporation, a proposed subsidiary of PCBG, and
BOH would become a wholly-owned subsidiary of PCBG (collectively, the
"Merger").
B. As partial consideration to PCBG for entering into the Merger
Agreement, BOH has agreed to issue to PCBG a warrant entitling the holder
thereof to purchase up to 19.9% (or 210,800 shares) of the outstanding common
stock of BOH ("Common Stock"), assuming the exercise of this Warrant, subject
to such restrictions and conditions as may be imposed by bank regulatory
authorities having jurisdiction over PCBG and BOH, respectively.
C. Terms used herein and not otherwise defined shall have the meanings
ascribed to them in Article VI hereof.
In consideration of these premises and of the representations, covenants
and agreements hereinafter set forth, BOH and PCBG hereby agree as follows:
ARTICLE I
ISSUANCE AND SALE OF WARRANT
Section 1.1 ISSUANCE AND SALE OF THE WARRANT. Subject to the terms
and conditions of this Agreement, and in reliance upon the representations
and warranties hereinafter set forth, and in consideration for the execution
and delivery of the Merger Agreement, BOH hereby issues to PCBG one or more
warrants (such warrants, together with any warrants issued pursuant to
Section 1.4, the "Warrants") entitling the holder thereof to purchase in the
aggregate 210,800 duly authorized and newly issued shares of Common Stock,
subject to adjustment as provided below. The Warrants being issued at the
time of the execution of this Agreement will be evidenced by a single
certificate in the form of Exhibit A hereto. All Warrants issued pursuant to
Section 1.4 will be evidenced by one or, at PCBG's request, more certificates
in the form of Exhibit A hereto, dated the date of their issuance,
exercisable at the adjusted exercise price at the time in effect for the
Warrants issued pursuant to this Section 1.1.
1
<PAGE>
Section 1.2 WARRANT PRICE. The initial exercise price at which shares
of Common Stock may be acquired pursuant to exercise of the Warrants shall be
$46.50 per share (the "Warrant Price"), subject to adjustment as provided in
Section 1.4.
Section 1.3 EXERCISE OF WARRANTS.
(a) The Warrants may be exercised in whole or in part only after the
occurrence of an Acquisition Event.
(b) As used herein, an "Acquisition Event" means any of the following
events:
(i) any person (other than PCBG or an Affiliate of PCBG) shall
have commenced (as such term is defined in Rule 14d-2 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), or shall have filed a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to, a tender offer or exchange offer to
purchase any shares of Common Stock such that, upon consummation of such
offer, such person would own or control 25% or more of the then outstanding
Common Stock, and such person shall have consummated such tender offer or
exchange offer;
(ii) BOH, without having received PCBG's prior written consent or
except as permitted by the Merger Agreement, shall have authorized,
recommended, proposed or publicly announced an intention to authorize,
recommend or propose, or entered into, an agreement with any person (other
than PCBG or any Affiliate of PCBG to (A) effect a merger, consolidation or
similar transaction involving BOH, (B) sell, lease or otherwise dispose of
assets of BOH representing 10% or more of the consolidated assets of BOH, or
(C) issue, sell or otherwise dispose of (including by way of merger,
consolidation, share exchange or any similar transaction) securities
representing 10% or more of the voting power of BOH (any of the foregoing an
"Acquisition Transaction").
(iii) any person (other than BOH or PCBG in a fiduciary capacity)
shall have acquired beneficial ownership (as such term is defined in Rule
13d-3 under the Exchange Act) or the right to acquire beneficial ownership
of, or any "group" (as such term is defined in the Exchange Act) shall have
been formed which beneficially owns or has the right to acquire beneficial
ownership of, 25% or more of the then outstanding Common Stock; or
(iv) the holders of Common Stock shall not have approved the
Merger Agreement at the meeting of such stockholders held for the purpose of
voting on the Merger Agreement, such meeting shall not have been held or
shall have been canceled prior to termination of the Merger Agreement and
BOH's Board of Directors shall have withdrawn or modified in a manner adverse
to PCBG the recommendation of BOH's Board of Directors with respect to the
Merger Agreement, in each case after any person (other than PCBG) shall have
(A) publicly announced a proposal, or publicly disclosed an intention to make
a proposal, to engage in an Acquisition Transaction or (B) filed an
2
<PAGE>
application (or given a notice), whether in draft or final form, under the
BHC Act or the Change in Bank Control Act for approval to engage in an
Acquisition Transaction.
As used in this Agreement, "person" shall have the meaning specified in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
(c) In the event PCBG is entitled to and wishes to exercise the
Warrants, it shall send to BOH a written notice (the date of which being
herein referred to as the "Notice Date") specifying (i) the total number of
shares it will purchase pursuant to such exercise and (ii) a place and date
not earlier than three Business Days nor later than 60 Business Days from the
Notice Date for the closing of such purchase (the "Closing Date"); provided
that if prior notification to or approval of the Federal Reserve Board or any
other regulatory agency is required in connection with such purchase, PCBG
shall promptly file the required notice or application for approval, shall
promptly notify BOH of such filing, and shall expeditiously process the same
and the period of time that otherwise would run pursuant to this sentence
shall run instead from the date on which any required notification periods
have expired or been terminated or such approvals have been obtained and any
requisite waiting period or periods shall have passed.
(d) At the closing referred to in subsection (c), PCBG shall pay to BOH
the aggregate purchase price for the shares of Common Stock purchased
pursuant to the exercise of the Warrants in immediately available funds by
wire transfer to a bank account designated by BOH, provided that failure or
refusal of BOH to designate such a bank account shall not preclude PCBG from
exercising the Warrants.
(e) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (d), BOH shall deliver to PCBG a
certificate or certificates representing the number of shares of Common Stock
purchased by PCBG.
(f) Upon the giving by PCBG to BOH of the written notice of exercise
of the Warrants provided for under subsection (c) and the tender of the
applicable purchase price in immediately available funds, PCBG shall be
deemed to be the holder of record of the shares of Common Stock issuable upon
such exercise, notwithstanding that the stock transfer books of BOH shall
then be closed or that certificates representing such shares of Common Stock
shall not then be actually delivered to PCBG. BOH shall pay all expenses, and
any and all federal, state and local taxes or other charges that may be
payable in connection with the preparation, issue and delivery of stock
certificates hereunder in the name of PCBG.
Section 1.4 ADDITIONAL WARRANTS; ADJUSTMENTS TO WARRANT PRICE AND
NUMBER OF SHARES. The number of shares to which the Warrants may be exercised
and the Warrant Price shall be subject to adjustment as provided below:
(a) ADDITIONAL WARRANTS. If BOH shall, on one or more occasions after
the date hereof, issue additional shares of Common Stock, and if, as a result
of any such
3
<PAGE>
issuance the shares of Common Stock issued or issuable upon the exercise of
Warrants issued pursuant to Section 1.1 hereof shall represent less than
19.9% of the outstanding Common Stock, assuming the exercise of all Warrants
and all other options, warrants or other securities convertible into Common
Stock, BOH shall issue to PCBG, promptly upon PCBG's demand, without further
consideration, Warrants to purchase a number of authorized but unissued
shares of Common Stock which, when added to the shares issued or issuable
upon the exercise of such previously issued Warrants, would represent 19.9%
as the case may be of the outstanding Common Stock.
(b) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If BOH at any time
or from time to time after the date of this Agreement effects a subdivision
of the Common Stock, the Warrant Price then in effect immediately before that
subdivision shall be proportionately decreased, and conversely, if BOH at any
time or from time to time after the date of this Agreement combines the
outstanding shares of Common Stock, the Warrant Price then in effect
immediately before the combination shall be proportionately increased. Any
adjustment under this subsection (b) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(c) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event
BOH at any time or from time to time after the date of this Agreement makes,
or fixes a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in additional
shares of Common Stock, then and in each such event the Warrant Price then in
effect shall be decreased as of the time of such issuance or, in the event
such a record date is fixed, as of the close of business on such record date,
by multiplying the Warrant Price then in effect by a fraction (i) the
numerator of which is the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date, and (ii) the denominator of which shall be the
total number of shares of Common Stock issued and outstanding immediately
prior to the time of such issuance or the close of business on such record
date plus the number of shares of Common Stock issuable in payment of such
dividend or distribution; provided, however, that if such record date is
fixed and such dividend is not fully paid or if such distribution is not
fully made on the date fixed therefor, the Warrant Price shall be recomputed
accordingly as of the close of business on such record date and thereafter
the Warrant Price shall be adjusted pursuant to this subsection (c) as of the
time of actual payment of such dividends or distributions.
(d) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event
BOH at any time or from time to time after the date of this Agreement makes,
or fixes a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in securities of
BOH other than shares of Common Stock, then in each such event provision
shall be made so that the holders of Warrants shall receive upon exercise
thereof, in addition to the number of shares of Common Stock receivable
thereupon, the amount of securities of BOH which they would have received had
their Warrants been converted into Common Stock on the date of such event and
had they thereafter, during the period from the date of such event to and
including the date of
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exercise of the Warrants, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for
during such period under this Section 1.4.
(e) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If the
Common Stock issuable upon the exercise of the Warrants is changed into the
same or a different number of shares of any class or classes of stock,
whether by recapitalization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend or a reorganization,
merger, consolidation or sale of assets provided for elsewhere in this
Section 1.4), then and in any such event each holder of Warrants shall have
the right thereafter to receive upon exercise of the Warrants the kind and
amount of stock and other securities and property receivable upon such
reorganization, reclassification or other change by holders of the number of
shares of Common Stock into which such Warrants might have been exercised
immediately prior to such reorganization, reclassification or change, all
subject to further adjustment as provided in this Section 1.4.
(f) REORGANIZATION, MERGERS, CONSOLIDATIONS AND SALES OF ASSETS. If at
any time or from time to time there is a capital reorganization of the Common
Stock (other than a recapitalization, subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this Section
1.4), or a merger or consolidation of BOH with or into another corporation,
or the sale of all or substantially all of BOH's properties and assets to any
other person, then, as a part of such reorganization, merger, consolidation
or sale, provision shall be made so that the holders of the Warrants shall
thereafter be entitled to receive upon exercise of the Warrants the number of
shares of stock or other securities or property of BOH, or of the successor
corporation resulting from such merger or consolidation or sale, to which a
holder of Common Stock deliverable upon exercise of the Warrants would have
been entitled in such capital reorganization, merger, consolidation or sale.
In any such case, appropriate adjustment shall be made in the application of
the provisions of this Section 1.4 and the other terms and conditions with
respect to the rights of the holders of the Warrants after the
reorganization, merger, consolidation or sale to the end that the provisions
of this Agreement, including this Section 1.4 (including adjustment of the
Warrant Price then in effect and number of shares purchasable upon exercise
of the Warrants) shall be applicable after that event and be as nearly
equivalent to the provisions hereof as may be practicable.
(g) SALE OF SHARES BELOW WARRANT PRICE.
(i) If at any time or from time to time after the date of this
Agreement, BOH issues or sells, or is deemed by the express provisions of
this subsection (g) to have issued or sold, Additional Shares of Common Stock
(as hereinafter defined), other than as a dividend or other distribution on
any class of stock as provided in subsection (c) above and other than upon a
subdivision or combination of shares of Common Stock as provided in
subsection (b) above, for an Effective Price (as hereinafter defined) less
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than the Warrant Price (or, if an adjusted Warrant Price shall be in effect
by reason of a previous adjustment, then less than such adjusted Warrant
Price) then and in each such case the then existing Warrant Price shall be
reduced, as of the opening of business on the date of such issuance or sale,
to a price determined by multiplying that Warrant Price by a fraction (i) the
numerator of which shall be (A) the number of shares of Common Stock Deemed
Outstanding at the close of business on the day next preceding the date of
such issue or sale plus (B) the number of shares of Common Stock which the
aggregate consideration received (or by express provision hereof deemed to
have been received) by BOH for the total number of Additional Shares of
Common Stock so issued would purchase at such Warrant Price, and (ii) the
denominator of which shall be the number of shares of Common Stock Deemed
Outstanding at the close of business on the date of such issuance after
giving effect to such issuance of Additional Shares of Common Stock. For
purposes of this paragraph (i), "Common Stock Deemed Outstanding" at any
given time shall mean the sum of (1) the number of shares of Common Stock
actually outstanding at that time, (2) the number of Additional Shares of
Common Stock then deemed to have been issued under paragraphs (iii) or (iv)
of this subsection (g) and (3) the number of shares of Common Stock then
issuable upon exercise of stock options to the extent not already deemed to
have been issued under paragraphs (iii) or (iv) of this subsection (g).
(ii) For the purpose of making any adjustment required under this
subsection (g), the consideration received by BOH for any issuance or sale of
securities shall (i) to the extent it consists of cash be computed at the net
amount of cash received by BOH after deduction of any expenses payable by BOH
and any underwriting or similar commissions, compensation or concessions paid
or allowed by BOH in connection with such issue or sale, (ii) to the extent
it consists of property other than cash, be computed at the fair value of
that property as determined in good faith by the Board and (iii) if
Additional Shares of Common Stock, Convertible Securities (as hereinafter
defined) or rights or options to purchase either Additional Shares of Common
Stock or Convertible Securities are issued or sold together with other stock
or securities or other assets of BOH for a consideration which covers both,
be computed as the portion of the consideration so received that may be
reasonably determined in good faith by the Board to be allocable to such
Additional Shares of Common Stock, Convertible Securities or rights or
options.
(iii) For the purpose of the adjustment required under this
subsection (g), if at any time or from time to time after the date of this
Agreement BOH issues or sells any rights or options for the purchase of, or
stock or other securities convertible into, Additional Shares of Common Stock
(such convertible stock or securities being hereinafter referred to as
"Convertible Securities"), then in each case BOH shall be deemed to have
issued at the time of the issuance of such rights or options or Convertible
Securities the maximum number of Additional Shares of Common Stock issuable
upon exercise or conversion thereof and to have received as consideration for
the issuance of such shares an amount equal to the total amount of the
consideration, if any, received by BOH for the issuance of such rights or
options or Convertible
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Securities plus, in the case of such options or rights, the amounts of
consideration, if any, payable to BOH upon the exercise of such options or
rights and, in the case of Convertible Securities, the amounts of
consideration, if any, payable to BOH upon conversion (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities). No further adjustment of the Warrant Price, adjusted upon the
issuance of such rights, options or Convertible Securities, shall be made as
a result of the actual issuance of Additional Shares of Common Stock on the
exercise of any such rights or options or the conversion of any such
Convertible Securities. If any such rights or options or the conversion
privilege represented by any such Convertible Securities shall expire or be
canceled without having been exercised, the Warrant Price adjusted upon the
issuance of such options, rights or Convertible Securities shall be
readjusted to the Warrant Price which would have been in effect had an
adjustment been made on the basis that the only Additional Shares of Common
Stock so issued were the Additional Shares of Common Stock, if any, actually
issued or sold on the exercise of such rights or optionsor rights of
conversion of such Convertible Securities, and such Additional Shares of
Common Stock, if any, were issued or sold for the consideration actually
received by BOH upon such exercise, plus the consideration, if any, actually
received by BOH for the granting of all such rights or options, whether or
not exercised, plus the consideration received for issuing or selling the
Convertible Securities actually converted plus the consideration, if any,
actually received by BOH (other than by cancellation of liabilities or
obligations evidenced by such Convertible Securities) on the conversion of
such Convertible Securities.
(iv) For the purpose of the adjustment required under this
subsection (g), if at any time or from time to time after the date of this
Agreement BOH issues or sells any rights or options for the purchase of
Convertible Securities, then in each such case BOH shall be deemed to have
issued at the time of the issuance of such rights or options the maximum
number of Additional Shares of Common Stock issuable upon conversion of the
total amount of Convertible Securities covered by such rights or options and
to have received as consideration for the issuance of such Additional Shares
of Common Stock an amount equal to the amount of consideration, if any,
received by BOH for the issuance of such rights or options, plus the minimum
amounts of consideration, if any, payable to BOH upon the exercise of such
rights or options and plus the minimum amount of consideration, if any,
payable to BOH (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) upon the conversion of such
Convertible Securities. No further adjustment of the Warrant Price, adjusted
upon the issuance of such rights or options, shall be made as a result of the
actual issuance of the Convertible Securities upon the exercise of such
rights or options or upon the actual issuance of Additional Shares of Common
Stock upon the conversion of such Convertible Securities. The provisions of
paragraph (iii) above for the readjustment of the Warrant Price upon the
expiration of rights or options or the rights of conversion of Convertible
Securities shall apply in like manner to the rights, options and Convertible
Securities referred to in this paragraph (iv).
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(v) "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued by BOH after the date of this Agreement whether or not
subsequently reacquired or retired by BOH, other than (i) shares of Common
Stock issued upon exercise of the Warrants and (ii) shares issued by way of
dividend or other distribution on shares of Common Stock excluded from the
definition of Additional Shares of Common Stock by the foregoing clause or
shares of Common Stock resulting from any subdivision or combination of
shares of Common Stock so excluded, or shares issued by way of dividend or
other distribution on, or resulting from any subdivision or combination of,
shares of Common stock excluded from the definition of "Additional Shares of
Common Stock" by the foregoing provision. The "Effective Price" of Additional
Shares of Common Stock shall mean the quotient determined by dividing the
total number of Additional Shares of Common Stock issued or sold, or deemed
to have been issued or sold by BOH under this subsection (g), into the
aggregate consideration received or deemed to have been received by BOH for
such issue under this subsection (i).
ARTICLE II
REPURCHASE OF WARRANTS AND LIMITATIONS ON SALE
Section 2.1 REPURCHASE OF WARRANTS.
(a) Prior to the occurrence of an Acquisition Event, BOH shall have no
right to repurchase the Warrants and PCBG shall have no right to require BOH
to repurchase the Warrants.
(b) At any time after the occurrence of an Acquisition Event, BOH
shall have the right to purchase (or to cause a person designated by BOH to
purchase), and PCBG shall have the right to require that BOH repurchase (or,
if BOH shall so elect, cause a person designated by BOH to purchase), (i) all
(but not fewer than all) the Warrants at the time beneficially owned by PCBG
and its Affiliates at the Warrant Call Price in effect for such Warrants on
the date of closing (as provided below) and (ii) all (but not fewer than all)
of the shares of Common Stock purchased by PCBG and its Affiliates pursuant
to this Agreement with respect to which PCBG has beneficial ownership at a
price equal to the aggregate Market Value for such shares as of the date of
closing (as provided below). Any purchase pursuant hereto shall take place on
a Business Day specified in a notice given by BOH to PCBG or by PCBG to BOH,
as the case may be (but in no event prior to the 30th day following the date
of any such notice to PCBG or later than the 30th day following the date of
any such notice to BOH).
(c) The closing of any repurchase of Warrants pursuant to this Section
2.1 shall take place at 10:00 a.m. Laguna Hills Time, on the date set forth
in the applicable notice given by BOH or PCBG, as the case may be, at the
office of PCBG at the address set forth in Section 8.1. The amount payable to
PCBG and its Affiliates upon any repurchase of Warrants shall be paid in
lawful money of the United States by a federal funds check or a wire transfer
of immediately available funds to an account designated
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by PCBG. Upon receipt of such payment, PCBG shall deliver or cause to be
delivered to BOH the certificates representing all the Warrants being
repurchased free and clear of any liens, security interests, charges or
encumbrances.
Section 2.2 CERTAIN DETERMINATIONS OF MARKET VALUE. The calculation
of the Market Value, as required herein, shall be calculated in accordance
with this Section 2.2. In the event that Market Value is to be determined
pursuant to the terms hereof and there is not an established trading market
for shares of Common Stock, or more than 50% of the outstanding shares of
Common Stock are held beneficially or of record by persons, each of whom owns
(individually or together with members of any group of which such persons are
members) 5% or more of the outstanding shares of Common Stock, then PCBG may
elect to have an investment banking firm mutually agreeable to BOH and PCBG
determine (i) whether, in the opinion of such investment banking firm, as a
result of the absence of an established trading market or the concentration
of stock holdings, Market Value (determined in accordance with the provisions
of the definition of Market Value in Article VI) does not accurately reflect
the fair market value of a block of 1,000 shares of Common Stock on the date
as of which Market Value is to be determined, and (ii) if such investment
banking firm determines that Market Value (as so determined) does not
accurately reflect such fair market value, such investment banking firm shall
make determination of the fair market value of a share of Common Stock on the
date as of which Market Value is to be determined, based on whatever factors
it deems relevant, as soon as possible and shall promptly give written notice
to PCBG and BOH of its determination. The fees of such investment banking
firm in connection with such determination shall be paid by PCBG. Such
determination shall be final and binding on the parties hereto and the fair
market value so determined shall, if higher than the Market Value that would
otherwise apply, be the Market Value of a share of Common Stock. In the event
such determination is not transmitted to PCBG and BOH prior to the scheduled
closing date with respect to any repurchase of Warrants or Common Stock, the
scheduled closing of such transaction shall not be postponed, and BOH shall
make such payments on the closing date as are required based on the Market
Value of a share of Common Stock determined as if PCBG had not made an
election under this Section 2.4. Within three Business Days after such
investment banking firm's determination is made and conveyed to PCBG and BOH
in writing, BOH shall make a payment to PCBG, or PCBG shall make a payment to
BOH, as the case may be, equal to the difference between the amount paid on
the closing date and the amount that would have been so payable had such
amount been determined on the basis of such investment banking firm's
determination of the Market Value of a share of Common Stock.
ARTICLE III
RESTRICTIONS ON TRANSFERABILITY OF STOCK;
COMPLIANCE WITH SECURITIES ACT OF 1933
Section 3.1 RESTRICTIONS ON TRANSFERABILITY. The Warrants acquired by
PCBG or any Affiliate of PCBG pursuant to this Agreement and the Common Stock
issuable upon
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exercise of such Warrants and any shares of capital stock received or issued
in respect thereof, including, without limitation, securities issued upon any
stock split, stock dividend, recapitalization, merger, consolidation or
similar event (such Warrants and all such shares of Common Stock and
securities being collectively called the "Restricted Stock") shall not be
hypothecated, nor shall any claim or liability exist, nor shall any
agreement, written or oral, be entered into by PCBG or any Affiliate of PCBG
which would cause any claim or liability to exist with respect to the
Restricted Stock, and the Restricted Stock shall not be transferred except
upon the conditions, to the extent applicable, specified in this Article III.
PCBG will cause any proposed transferee of Restricted Stock held by PCBG or
any other Affiliate of PCBG to agree to take ownership of such Restricted
Stock subject to the provisions, to the extent applicable, of this Article
III; provided, however, that the provisions of this Article shall cease to
apply to any Restricted Stock which shall have been sold in a registered
public offering in accordance with the provisions of this Article III. PCBG
represents that it is purchasing the Restricted Stock for its own account and
not with a view to or for sale in connection with any distribution of such
Restricted Stock.
Section 3.2 RESTRICTIVE LEGEND; NOTICE OF PROPOSED TRANSFERS.
(a) Each certificate representing Restricted Stock shall (unless
otherwise permitted by the provisions of paragraph (b) of this Section) be
stamped or otherwise imprinted with a legend in substantially the following
form:
THESE SHARES/WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THESE SHARES/WARRANTS MAY NOT BE SOLD OR
TRANSFERRED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT WITH
RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER SAID ACT OR (ii)
AN OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT IS AVAILABLE. THE TRANSFERABILITY OF THESE SHARES/
WARRANTS IS FURTHER SUBJECT TO THE PROVISIONS OF A WARRANT PURCHASE
AGREEMENT DATED AS OF JULY 30, 1998, A COPY OF WHICH IS AVAILABLE FOR
INSPECTION AT THE OFFICE OF THE SECRETARY OF THE BANK OF HEMET.
(b) Each holder of a certificate representing Restricted Stock by
acceptance thereof agrees to comply in all respects with the provisions of
this Section 3.2(b). Prior to any proposed transfer of any Restricted Stock
other than pursuant to a registration under the Securities Act, the holder
thereof shall give written notice to BOH of such holder's intention to effect
such transfer. Each such notice shall describe the manner and circumstances
of the proposed transfer of the Restricted Stock to be transferred and shall
be accompanied by an unqualified written opinion of counsel reasonably
satisfactory to BOH to the effect that such proposed transfer may be effected
without registration under the Securities Act. Subject to Section 3.11
hereof, upon delivery to BOH of such notice and such opinion of counsel, the
holder of such Restricted Stock
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shall be entitled to transfer such Restricted Stock in accordance with the
terms of such notice delivered by the holder to BOH. Each certificate
evidencing Restricted Stock transferred as above provided shall bear the
appropriate restrictive legend set forth in paragraph (a) above, except that
such certificate shall not bear such restrictive legend if the opinion of
counsel referred to above shall be to the further effect that such legend is
not required in order to establish compliance with any provisions of the
Securities Act.
Section 3.3 NO TRANSFERS PRIOR TO ACQUISITION EVENT. Notwithstanding
anything to the contrary set forth in this Agreement or the Restricted Stock,
neither PCBG nor any Affiliate of PCBG shall sell, transfer or otherwise
dispose of all or any portion of the Warrants owned by it, other than to an
Affiliate of PCBG, except after the occurrence of an Acquisition Event;
provided, however, that following an Acquisition Event, if BOH or PCBG shall
give notice of its election to exercise its rights under Section 2.1, then
such right of PCBG and its Affiliates to sell, transfer or otherwise dispose
of the Restricted Stock shall no longer be exercised unless BOH shall have
defaulted in its obligation to repurchase such Restricted Stock on the date
specified in any notice.
Section 3.4 LIMITATIONS ON TRANSFEREES AND MANNER OF TRANSFER.
(a) In the event that PCBG and its Affiliates become entitled pursuant
to the provisions of Section 3.3 to sell, transfer or otherwise dispose of
Restricted Stock, such Restricted Stock may be sold or transferred (subject
to Section 3.11 hereof) only (i) to a third party (or a third party and its
Affiliates) in a transaction which complies with the provisions of paragraph
(b) of this Section or (ii) to one or more underwriters or dealers in
connection with a broad public distribution complying with the provisions of
paragraph (c) of this Section of the shares of Common Stock issuable pursuant
to the exercise of the transferred Warrants (such shares being hereinafter
referred to as the "Underlying Shares"). The provisions of this Section shall
only apply to sales, transfers or dispositions by PCBG and its Affiliates,
and shall not apply to sales, transfers or dispositions by transferees of
PCBG or its Affiliates (except that any sale or disposition by dealers or
underwriters shall be conducted in accordance with the applicable provisions
of this Section and further except that all resales shall be made in
accordance with the Securities Act).
(b) PCBG and its Affiliates shall be entitled, subject to the other
applicable provisions of this Article III (including Section 3.11) and
Section 2.1, to sell or transfer Restricted Stock in one or more transactions
exempt from the registration requirements of Section 5 of the Securities Act.
For purposes of the immediately preceding sentence, it shall be assumed that
all Warrants, if any, that already have been sold or transferred by PCBG and
its Affiliates are still outstanding and have not been exercised in whole or
in part to purchase shares of Common Stock.
(c) Warrants owned by PCBG and its Affiliates, unless sold to BOH or an
Affiliate of BOH or in compliance with paragraph (b) of this Section, may
only be sold or transferred to one or more underwriters or dealers in
accordance with the provisions
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of this paragraph. PCBG and its Affiliates may, subject to the terms and
conditions set forth in this paragraph (c), sell or transfer Warrants in
whole or in part to one or more underwriters or dealers who agree in writing
with PCBG, prior to the effective time of any such sale or transfer, to
exercise such Warrants and offer and sell the Underlying Shares either (i) to
the public in a public offering registered under the Securities Act (or any
successor federal securities laws) pursuant to a distribution, or (ii) in
other transactions complying with the requirements of paragraph (b) above.
Notwithstanding any other provision of this Agreement to the contrary, the
exercise of any Warrants transferred to underwriters or dealers in accordance
with this Section and the acquisition by such underwriters or dealers of
shares of Common Stock pursuant to such exercise may be made simultaneously
on the date of the closing of the sale or transfer by PCBG or its Affiliates
of the relevant Warrants to such underwriters or dealers, provided BOH is
given written notice of the date of such closing at least five Business Days
prior thereto. At any such closing, against payment of the exercise price for
shares of Common Stock to be acquired pursuant to the exercise of Warrants,
BOH will deliver or cause to be delivered certificates representing the
Underlying Shares to such underwriters or dealers, in such names and
denominations as it or they shall designate not fewer than two Business Days
prior to such closing.
Section 3.5 "DEMAND" REGISTRATION. From and after such date as PCBG
and its Affiliates become entitled pursuant to Section 3.4 to sell or
transfer any Restricted Stock, BOH shall, if requested by PCBG, as
expeditiously as possible, use its best efforts to effect the registration of
the Restricted Stock (which BOH has been requested to register on a form in
general use under the Securities Act (or any successor federal securities
law) selected by BOH, in order to permit the sale or other disposition of
such Restricted Stock in accordance with the intended method of sale or other
disposition set forth in the request (subject to the provisions of Section
3.4(c)). The right to require registration of the Restricted Stock under this
Section 3.5 may only be exercised once unless PCBG is advised in writing by
its investment banking firm (a copy of which advice shall be supplied to BOH)
that, in the opinion of such firm, an additional or two additional
registrations are appropriate to maximize the benefits to PCBG of the
proposed distribution of Restricted Stock, in which event PCBG may exercise
once or twice more, as applicable, its rights under this Section 3.5. Upon
the issuance of a stop order or injunction, BOH may withdraw any such
registration statement and abandon the proposed offering which PCBG shall
have demanded, in which case PCBG's right shall be reinstated.
Section 3.6 "PIGGYBACK" REGISTRATION. From and after such date as
PCBG and its Affiliates become entitled pursuant to Section 3.4 to sell or
transfer any Restricted Stock, if at any time BOH proposes to register any of
its securities under the Securities Act (or any successor federal securities
law), whether or not for sale for its own account (except with respect to
registration statements filed with respect to the issuance of securities
under employee benefit plans), it will give written notice to PCBG of its
intention to do so. Upon the written request of PCBG, given within 15
calendar days after receipt of BOH's notice, BOH will use its best efforts to
cause to be included in the
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shares to be covered by the registration statement proposed to be filed by
BOH, in accordance with the request of PCBG, the Restricted Stock to be sold
by dealers or underwriters in accordance with the provisions of Section 3.4;
provided, however, that BOH need not include such Restricted Stock in such
registration statement if BOH is advised in writing by its investment banking
firm (a copy of which advise shall be supplied to PCBG) that the inclusion of
such securities shall, in the opinion of such firm, materially interfere with
the orderly sale and distribution of the BOH securities being sold by it. BOH
may, in its sole discretion and without the consent of PCBG, withdraw any
such registration statement and abandon the proposed offering in which PCBG
shall have requested to participate pursuant to this Section.
Section 3.7 REGISTRATION PROCEDURES AND EXPENSES.
(a) If and whenever BOH is required by the provisions of this Article
III to use its best efforts to effect the registration of any of the
Restricted Stock under the Securities Act (or any successor federal
securities law), PCBG and its Affiliates (including the underwriters in the
case of a registration of Underlying Shares) (individually referred to as a
"selling holder" or "holder" and collectively referred to as "selling
holders" or "holders") will furnish in writing such information as is
reasonably requested by BOH for inclusion in the registration statement
relating to such offering and such other information and documentation as BOH
shall reasonably request, and BOH will, as expeditiously as possible:
(i) prepare and file with the SEC or any other federal agency at
the time administering the Securities Act (or a successor federal securities
law) a registration statement with respect to such securities and use its
best efforts to cause such registration statement to become and remain
effective for such period as may be necessary to permit the successful
marketing of such securities, but not exceeding 90 days;
(ii) prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective
and to comply with the provisions of the Securities Act;
(iii) furnish to each selling holder of Restricted Stock being
registered such number of copies of a prospectus and preliminary prospectus
in conformity with the requirements of the Securities Act (or any successor
federal securities law), and such other documents as such seller may
reasonably request in order to facilitate the public sale or other
disposition of the Restricted Stock being registered owned by such seller;
(iv) furnish, at the request of any holder or holders of
securities being registered pursuant to this Article III, on the date that
such securities are delivered to the underwriters for sale pursuant to such
registration or if such securities are not being
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sold through underwriters, on the date the registration statement with
respect to such securities becomes effective (A) an opinion dated such date
of independent counsel representing BOH for the purposes of such
registration, addressed to the underwriters, if any, and to the holder or
holders making such request, stating that such registration statement has
become effective under the Securities Act (or such successor law) and that
(a) to the best of the knowledge of such counsel, no stop order suspending
the effectiveness thereof has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the Securities Act
(or such successor federal securities law); (b) the registration statement,
the related prospectus and each amendment or supplement thereto comply as to
form in all material respects with the requirements of the Securities Act (or
such successor law) and the applicable rules and regulations of the SEC
thereunder, except that such counsel need express no opinion as to financial
information or information provided by selling holders contained therein; (c)
such counsel (subject to such customary limitation on the scope of their
investigation as shall be set forth in such opinion) has no reason to believe
that either the registration statement or the prospectus, or any amendment or
supplement thereto, contains any untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading except that such counsel need express
no opinion as to financial information or information provided by selling
holders contained therein; (d) the descriptions in the registration statement
and in the prospectus, or any amendment or supplement thereto, of all legal
and governmental matters and all contracts and other legal documents or
instruments are accurate and fairly present the information required to be
shown; and (e) such counsel does not know of any legal or governmental
proceedings, pending or contemplated, required to be described in the
registration statement or prospectus, or any amendment or supplement thereto,
or to be filed as exhibits to the registration statement which are not
described and filed as required; and (B) a letter dated such date, from the
independent certified public accountants of BOH, addressed to the
underwriters, if any, and to the holder or holders by or on behalf of whom a
request is made, stating that they are independent certified public
accountants within the meaning of the Securities Act (or such successor law)
and that in the opinion of such accountants the financial statements and
other financial data of BOH included in the registration statement or the
prospectus, or any amendment or supplement thereto, comply as to form in all
material respects with the applicable accounting requirements of the
Securities Act (or such successor law). Such letter from the independent
certified public accountants shall additionally cover such other financial
matters (including information as to the period ending not more than five
business days prior to the date of such letter) with respect to the
registration in respect of which such letter is being given as the holder of
Restricted Stock being registered may reasonably request;
(v) use its best efforts to register or qualify the Restricted
Stock covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as each such selling holder of such
Restricted Stock shall reasonably request and do any and all other acts and
things which may be necessary or reasonably desirable to enable such seller
to consummate the public sale or other disposition in such
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jurisdictions as may be requested by such seller; provided, however, that BOH
shall have no obligation to qualify to do business in any jurisdiction or to
file a general consent to service of process in any jurisdiction;
(vi) notify each selling holder of Restricted Stock covered by
such registration statement, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act (or any successor
Federal securities law), of the happening of any event as a result of which
the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing;
(vii) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security holders,
as soon as reasonably practicable, an earnings statement covering the period
of at least twelve months, but not more than eighteen months, beginning with
the first full calendar month after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act;
(viii) provide a transfer agent and registrar for all Restricted
Stock covered by such registration statement not later than the effective
date of such registration statement;
(ix) use its best efforts to list all Common Stock covered by such
registration statement on each securities exchange, if any, on which any of
the Common Stock is then listed (unless such Common Stock is already so
listed) if such listing is then permitted under the rules of such exchange or
with the NASDAQ, National Market System; and
(x) undertake to take such further actions as may be reasonably
requested by the underwriters.
(b) If any registration statement pursuant to Section 3.5 or 3.6 shall
have been declared effective and, in the judgment of BOH, (A) any event shall
occur or state of facts exist (other than as described in clause (B)) which
requires a notice to the selling holders of Restricted Stock pursuant to
clause (vi) of paragraph (a) of this Section 3.7 or (B) the offering at the
time of Restricted Stock pursuant to such registration statement would
adversely affect, or would be improper in view of, a public offering,
financing, reorganization, recapitalization, merger, consolidation,
acquisition, or other similar transaction, or negotiations, discussions or
pending proposals with respect thereto, immediately upon receipt of notice to
such effect from BOH, PCBG shall cease to offer or sell any Restricted Stock
registered thereunder and cease to deliver or use the prospectus in use
thereunder. In the case of any matter described in clause (A), BOH shall, as
promptly as practicable, furnish to each selling holder a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary
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so that, as thereafter delivered to the purchaser of such securities, such
prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances then
existing. In the case of any matter described in clause (B), BOH shall
promptly notify PCBG at such times as, in BOH's judgment, such offering may
be recommended (which shall be no later than 90 days following such
suspension); provided that PCBG may, in its sole discretion, discontinue such
offering with respect to the Restricted Stock covered thereby, in which event
PCBG shall be entitled to "demand" registration rights hereunder to the full
extent as if such offering had not been requested.
All expenses incurred by BOH in complying with Sections 3.5 and 3.6
hereof, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel for BOH, the expense of
any special audits incident to or required by such registration, and blue sky
fees and expenses are herein called "Registration Expenses," except for all
underwriting discounts and selling commissions applicable to the sales, all
fees and disbursements of counsel for any selling holder or holders
(including counsel designated by any seller for a "due diligence"
investigation of BOH), all of which are herein called "Selling Expenses." BOH
shall pay all Registration Expenses and the selling holder or holders of
Restricted Stock being registered shall pay all Selling Expenses.
Section 3.8 INDEMNIFICATION. In the event of a registration of any of
the Restricted Stock under the Securities Act (or any successor Federal
securities law) pursuant to this Article III, BOH will indemnify and hold
harmless each underwriter of such Restricted Stock, PCBG and its Affiliates
as the transferors of the Restricted Stock or any portion thereof to
underwriters, and each other person, if any, who controls such seller,
assignor or underwriter within the meaning of Section 15 of the Securities
Act, against any losses, claims, damages or liabilities, joint or several, to
which such seller, underwriter, assignor or controlling person may become
subject under the Securities Act (or such successor law) or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of any material fact contained in any registration statement under
which such Restricted Stock shall have been registered under the Securities
Act (or such successor law), any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading; and will reimburse such seller, transferor and
underwriter and each such controlling person for any legal or any other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that BOH will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, said preliminary prospectus or said
prospectus or said amendment or supplement in
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reliance upon and in conformity with written information furnished to BOH
through an instrument execute by such seller, transferor or underwriter
specifically for use in the preparation thereof; and provided further that if
any losses, claims, damages or liabilities arise out of or are based upon an
untrue statement, alleged untrue statement, omission or alleged omission
contained in any preliminary prospectus which did not appear in the final
prospectus, BOH shall not have any such liability with respect thereto to
such seller, transferor or underwriter or any person who controls such
seller, transferor or underwriter within the meaning of Section 15 of the
Securities Act if such seller, transferor or underwriter or any person on
their behalf delivered a copy of the preliminary prospectus to the person
alleging such losses, claims, damages or liabilities and failed to deliver a
copy of the final prospectus, as amended or supplemented if it has been
amended or supplemented, to such person at or prior to the written
confirmation of the sale to such person.
In the event of any registration of any Restricted Stock under the
Securities Act (or a successor Federal securities law) pursuant to this
Article III, each seller of such Restricted Stock (other than any underwriter
or dealer purchasing Underlying Shares), and PCBG and its Affiliates, as
transferors of Restricted Stock, severally and not jointly, will indemnify
and hold harmless BOH, each person, if any who controls BOH within the
meaning of Section 15 of the Securities Act, each officer of BOH who signs
the registration statement and each director of BOH against any and all such
losses, claims, damages, or liabilities arising out of or based upon any
untrue statement or alleged untrue statement in or omission or alleged
omission from any such registration statement, prospectus, amendment or
supplement, if the untrue statement or omission or alleged untrue statement
or omission in respect of which such loss, claim, damage or liability is
asserted was made in reliance upon and in conformity with information
furnished in writing to BOH by or on behalf of such seller or transferor
specifically for use in connection with the preparation of such registration
statement, preliminary prospectus, prospectus, amendment or supplement;
provided, however, that, if any losses, claims, damages or liabilities arise
out of or are based upon an untrue statement, alleged untrue statement,
omission or alleged omission contained in any preliminary prospectus which
did not appear in the final prospectus, such seller or transferor shall not
have any such liability with respect thereto to BOH, any person who controls
BOH within the meaning of Section 15 of the Securities Act, any officer of
BOH who signed the registration statement or any director of BOH if BOH or
any person on their behalf delivered a copy of the preliminary prospectus to
the person alleging such losses, claims, damages or liabilities and failed to
deliver a copy of the final prospectus, as amended or supplemented if it has
been amended or supplemented, to such person at or prior to the written
confirmation of the sale to such person; and provided further that the
liability of any such seller or transferor so to indemnify shall be limited
to an amount equal to the net profit received by such seller upon the sale of
such Restricted Stock, or if the Warrant is sold, the profit on the sale of
the Warrant, pursuant to such registration statement, or by such transferor
from the seller, as the case may be.
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Payments in respect of indemnifications required by this Section 3.8
shall be made by periodic payments during the course of the investigation or
defense, as and when bills are received or expenses incurred. Any party which
proposes to assert the right to be indemnified under this Section 3.8 will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim is to be made
against an indemnifying party under this Section 3.8, notify each such
indemnifying party of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served, but the omission so to notify such
indemnifying party of any such action, suit or proceeding shall not relieve
it from any liability which it may have to any indemnified party otherwise
than under this Section 3.8. In case any such action, suit or proceeding
shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate in, and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party, and
after notice from such indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not
be liable to such indemnified party for any legal or other expenses, other
than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof. The indemnified
party shall have the right to employ its own counsel in any such action, but
the fees and expenses of such counsel shall be at the expense of such
indemnified party, when and as incurred, unless (i) the employment of counsel
by such indemnified party has been authorized in writing by the indemnifying
party, (ii) the indemnified party shall have reasonably concluded that there
may be a conflict of interest beteen the indemnifying party and the
indemnified party in the conduct of the defense of such action (in which case
the indemnifying party shall not have the right to direct the defense of such
action on behalf of the indemnified party) or (iii) the indemnifying party
shall not in fact have employed counsel to assume the defense of such action.
An indemnifying party shall not be liable for employed counsel to assume the
defense of such action. An indemnifying party shall not be liable for any
settlement of any action or claim effected without its consent. In no event
shall an indemnifying party be required to pay for more than one counsel for
an indemnified party, exclusive of local counsel.
Section 3.9 OBLIGATIONS OF BOH WITH RESPECT TO UNDERWRITTEN OFFERING.
In the event that Restricted Stock shall be sold pursuant to a registration
statement in an underwritten offering pursuant to Section 3.5, BOH agrees to
enter into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of an issuer of the
securities being registered and customary covenants and agreements to be
performed by such issuer, including, without limiting the generality of the
foregoing, customary provisions with respect to indemnification by BOH of the
underwriters of such offering. BOH shall have the right to approve the
managing underwriters for such offering (which in no event shall include an
affiliate of PCBG); provided, however, that such approval shall not be
unreasonably withheld.
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Section 3.10 RULE 144 REQUIREMENTS. BOH shall undertake to make
publicly available and available to the holders of Restricted Stock, pursuant
to Rule 144 of the SEC under the Securities Act, such information as shall be
necessary, and to take such further action as any such holder may reasonably
request, to enable the holders of Restricted Stock to make sales of
Restricted Stock pursuant to the Rule. BOH shall furnish to any holder of
Restricted Stock upon request (after the preceding sentences shall have
become applicable), a written statement executed by BOH as to the steps it
has taken to comply with the current public information requirements of Rule
144.
Section 3.11 RIGHTS OF FIRST REFUSAL.
a) In the event PCBG or its Affiliates intend, at any time after the
occurrence of an Acquisition Event to sell, transfer or dispose of any
Restricted Stock (other than to an Affiliate of PCBG in a transaction not
intended to circumvent the transfer restrictions contained in this Agreement)
other than (i) pursuant to a sale or transfer of Warrants to one or more
underwriters or dealers in accordance with Section 3.4(c) (in which case
Section 3.11(b) shall govern) or (ii) at any time after BOH has failed for
any reason to repurchase such Restricted Stock pursuant to Article II hereof
on the closing date scheduled for such repurchase, then:
(i) PCBG shall notify BOH in writing of its or its Affiliate's
intention to sell, transfer or dispose of such Restricted Stock specifying
the number of shares or amount of Warrants, as the case may be, proposed to
be disposed of, the identity or identities of the prospective purchaser or
purchasers thereof, the proposed purchase price therefor and the material
terms of any agreement relating thereto (the "Sale Notice"); and
(ii) BOH shall have the right, by written notice of its exercise
of its right of first refusal given to PCBG within 15 calendar days after
BOH's receipt of such notice of intention from PCBG, to purchase (or to cause
a Person designated by BOH to purchase) all, but not less than all of, the
Restricted Stock specified in such notice of intention for cash at the gross
price set forth therein (including broker's commissions and other transaction
costs of PCBG or its Affiliate to be paid or absorbed by the prospective
purchaser) if the terms set forth in such notice of intention provide for a
cash sale. If the purchase price specified in such notice of intention
include any property other than cash, the purchase price at which BOH shall
be entitled to purchase shall be (x) the amount of cash included in the
purchase price specified in such notice of intention plus (y) property, to
the extent feasible, substantially similar to the property described in such
notice of intention and in any case of equivalent value to such property (as
agreed to by BOH and PCBG, or as determined by a nationally recognized
investment banking firm selected by PCBG and BOH).
If BOH shall have exercised its right of first refusal under this
paragraph (a) (including the designation of another purchaser as referred to
in the next subparagraph), the closing of the purchase of the Restricted
Stock as to which such right BOH shall
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have been exercised shall take place as promptly as practicable, but in no
event more than 10 Business Days after BOH gives notice of such exercise, and
if such closing does not occur within such 10 days, such right of first
refusal provided for herein (including any assignment thereof) shall be null
and void and of no further force and effect with respect to such Restricted
Stock and this Section 3.11 shall no longer apply to any sale or disposition
or proposed sale or disposition of such Restricted Stock; provided that if
prior notification to or approval of the Federal Reserve Board or any other
regulatory authority is required in connection with such purchase, BOH shall
promptly file the required notice or application for approval and shall
expeditiously process the same and the period of time that otherwise would
run pursuant to this sentence shall run instead from the date on which, as
the case may be, (i) any required notification period has expired or been
terminated, or (ii) such approval has been obtained and, in either event, any
requisite waiting period shall have passed.
If BOH elects not to exercise, or fails to exercise or cause to be
exercised, its right of first refusal provided in this paragraph (a) within
the time specified for such exercise or if the Federal Reserve Board or any
other regulatory authority disapproves of BOH's proposed purchase, PCBG and
its Affiliates shall be free thereafter for a period of 90 days to consummate
the sale, transfer or other disposition with any purchaser or purchasers of
the Restricted Stock who shall have been specified in the sale notice at the
price (or at any price in excess of such price) and on substantially the
terms specified therein.
The right of first refusal provided for in this paragraph (a) may only
be exercised with respect to the initial sale, transfer or other disposition
of the Restricted Stock by PCBG or an Affiliate (whether in blocks or as a
whole) to a person that is not an Affiliate of PCBG and not to subsequent
sales, transfers or other dispositions by purchasers of Restricted Stock.
(b) If PCBG or its Affiliates at any time propose to transfer any
Warrants to any underwriters or dealers pursuant to the provisions of Section
3.4, other than at any time after BOH has failed for any reason to repurchase
such Warrants pursuant to Article II hereof on the closing date scheduled for
such repurchase, then PCBG shall first notify BOH in writing of such
intention, specifying the Warrants which it proposes to sell or transfer and
the name or names of the proposed dealers or of the proposed managing
underwriters in the underwriting syndicate to which the sale or transfer is
proposed to be made. BOH shall have the right, exercisable by written notice
given to PCBG 15 calendar days after BOH's receipt of notice from PCBG
pursuant to the immediately preceding sentence, to repurchase, or to cause a
third party designated by BOH to purchase, all, but not fewer than all, the
Warrants proposed to be sold or transferred on the terms and conditions
hereinafter set forth. Any notice given by BOH of exercise of its repurchase
rights under this paragraph (b) shall specify a place in Orange or Riverside
Counties and a Business Day not earlier than 10 days and not later than 15
days after the date of such notice for the closing of the repurchase of the
Warrants being repurchased. The purchase price payable to BOH or its designee
for the repurchase of
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Warrants pursuant to this paragraph (b) shall be a cash price equal to the
product of (x) the number of Underlying Shares covered by the relevant
Warrants (calculated as of the date of the closing of the repurchase) and (y)
the Share Price on such date. At the closing of a sale of Warrants pursuant
to the foregoing provisions, BOH or its designee will make payment to PCBG of
the aggregate price for the Warrants to be repurchased in one of the manners
set forth in Section 2.1(c). At such closing, PCBG shall deliver to BOH or
its designee the certificates representing the Warrants to be repurchased and
BOH shall deliver to PCBG replacement certificates representing the Warrans
(if any) which are not to be repurchased but were covered by the certificate
or certificates surrendered by PCBG. Any election by BOH pursuant to this
paragraph to exercise its repurchase rights in respect of Warrants shall be
irrevocable. In the event BOH fails timely to exercise its repurchase rights
in respect of Warrants within the period specified above during which it must
do so or notifies PCBG in writing prior to the expiration of such period that
it does not intend to exercise such rights or its designee fails to
repurchase Warrants on the date set for the closing of such a purchase, PCBG
and its Affiliates shall be free thereafter to consummate the sale and
transfer of the Warrants specified in this notice to BOH under this paragraph
to any underwriters or dealers who agree to exercise the Warrants and sell
the Underlying Shares in accordance with the provisions of Section 3.4(c),
and this Section 3.11 shall no longer apply to such sale or transfer of such
Warrants.
(c) PCBG shall have the right to withdraw any notice given by it
pursuant to this Section 3.11 at any time before BOH shall have given notice
of its intention to exercise its right of first refusal hereunder (including
by designation of another purchaser).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BOH
BOH represents and warrants to PCBG that:
Section 4.1 AUTHORIZATION OF AGREEMENT; NO CONFLICTS.
(a) The execution and delivery of this Agreement by BOH and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of BOH. This
Agreement has been duly executed and delivered by BOH and constitutes a valid
and binding obligation of BOH, enforceable in accordance with its terms.
(b) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby will not conflict with, or result in
any violation of or default or loss of a material benefit under any provision
of the articles of incorporation, articles or association or bylaws of BOH
or, except for the necessity of obtaining Requisite Regulatory Approvals, any
material mortgage, indenture, lease agreement or other material instrument or
any permit, concession, grant, franchise, license, judgment,
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order, decree, statute, law, ordinance, rule or regulation applicable to BOH
or their respective properties, other than any such conflict, violation,
default or loss which will not have a material adverse effect on BOH. No
material consent, approval, order or authorization of, or registration,
declaration or filing with, any governmental authority is required in
connection with the execution and delivery of this Agreement by BOH or the
consummation by BOH of the transactions contemplated hereby except for any
approvals required to be obtained pursuant to the BHC Act or the Policy
Statement of the Board of Governors of the Federal Reserve System on
Nonvoting Equity Investments by Bank Holding Companies, 12 C.F.R. Section
225.143 (the "FRB Guidelines"), or any other applicable laws, for the
execution and delivery of this Agreement and the issuance of the Warrants by
BOH.
Section 4.2 AUTHORIZED STOCK. BOH has taken all necessary corporate
and other action to authorize and reserve and, subject to obtaining the
governmental and other approvals and consents referred to herein, to permit
it to issue, and, at all times from the date hereof until the obligation to
deliver Common Stock upon the exercise of the Warrants terminates, will have
reserved for issuance, upon exercise of the Warrants, shares of Common Stock
necessary for PCBG to exercise the Warrants, and BOH will take all necessary
corporate action to authorize and reserve for issuance all additional shares
of Common Stock or other securities which may be issued pursuant to this
Agreement. The shares of Common Stock to be issued upon due exercise of the
Warrants, including all additional shares of Common Stock or other securities
which may be issuable pursuant to this Agreement, upon issuance pursuant
hereto, shall be duly and validly issued, fully paid and nonassessable, and
shall be delivered free and clear of all liens, claims, charges and
encumbrances of any kind or nature whatsoever, including any preemptive
rights of any stockholder of BOH.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PCBG
PCBG represents and warrants to BOH that:
Section 5.1 DUE EXECUTION OF AGREEMENT; NO CONFLICTS.
(a) This Agreement has been duly executed and delivered by PCBG and
constitutes a valid and binding obligation of PCBG, enforceable in accordance
with its terms.
(b) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby will not conflict with, or result in
any violation of or default or loss of a material benefit under, any
provision of the certificate of incorporation or By-laws of PCBG or, except
for the necessity of obtaining Requisite Regulatory Approvals, any material
mortgage, indenture, lease, agreement or other material instrument, or any
permit, concession, grant, franchise, license, judgment, order
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decree, statute, law, ordinance, rule or regulation applicable to PCBG or its
respective properties, other than any such conflict, violation, default or
loss which (i) will not have a material adverse effect on PCBG and its
Subsidiaries taken as a whole. No material consent, approval, order or
authorization of, or registration, declaration or filing with, any
Governmental Entity is required in connection with the execution and delivery
of this Agreement by PCBG or the consummation by PCBG of the transactions
contemplated hereby, except for (a) filings required in order to obtain
Requisite Regulatory Approvals, and (b) any approvals required to be obtained
pursuant to the BHC Act, or the FRB Guidelines or any other applicable law
for the execution and delivery of this Agreement by BOH, PCBG and the
issuance of the Warrants.
ARTICLE VI
DEFINITIONS
Except as otherwise provided herein, the capitalized terms set forth
below (in their singular and plural forms as applicable) shall have the
meanings set forth below.
"Affiliate" or "affiliate" shall mean, with respect to any corporation,
any person that, directly or indirectly, controls or is controlled by or is
under common control with such corporation.
"BHC Act" means the Bank Holding Company Act of 1956, as amended.
"Business Day" shall mean any day, other than a Saturday, Sunday or
legal holiday in the State of California, on which banks are open for
substantially all their banking business in Laguna Hills, California..
"Change in Bank Control Act" means the Change in Bank Control Act of
1978, as amended.
"Covered Shares" shall mean on any date, with respect to any Warrants,
the maximum number of shares of Common Stock that would be purchasable upon
the exercise on such date of such Warrants, assuming that such Warrants may
be exercised on such date to purchase the maximum number of shares of Common
Stock purchasable pursuant to the terms thereof (including the limitations
contained in the second paragraph of the certificate evidencing each such
Warrant) without regard to any provision therein (other than such
limitations) or in this Agreement or in any law limiting the right of any
holder of such Warrants to acquire shares otherwise purchasable thereunder.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"Governmental Entity" shall mean any court, administrative agency or
commission or other governmental authority or instrumentality.
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"Market Value" shall mean, on any date, the average of the closing sale
prices of a share of Common Stock on the principal securities exchange on
which the Common Stock is traded, or, if the Common Stock is not at the time
listed on any national securities exchange, as reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), on
the 20 trading days immediately preceding the three trading days immediately
preceding such date, (or such fewer number of trading days immediately
preceding such date for which shares of Common Stock have been listed for
trading on such exchange or quoted on NASDAQ); provided, however, that if
PCBG seeks a determination of the fair market value of a share of Common
Stock pursuant to the provisions of Section 2.2, Market Value shall, if
required pursuant to the terms of such Section, mean the fair market value of
a share of Common Stock on such date determined pursuant to such Section.
"Person" or "person" shall mean an individual, corporation, partnership,
joint venture, trust or unincorporated organization, or a government or any
agency or political subdivision thereof.
"Regulatory Authority" shall mean any United States federal or state
government or governmental authority the approval of which is legally
required for consummation of the Merger.
"Requisite Regulatory Approvals" shall mean all material permits,
approvals and consents required to be obtained, and all waiting periods
required to expire, prior to the consummation of the issuance of the Covered
Shares under applicable federal laws of the United States or applicable laws
of any state having jurisdiction over PCBG or BOH.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Share Price" shall mean, with respect to any Warrants, the amount by
which, on the date of the Acquisition Event triggering the exercisability of
the Warrants(i) the Warrant Price on such date is less than (ii) the greatest
of:
(i) the Market Value of a share of Common Stock on such date; and
(ii) the highest price paid on or prior to such date for a share
of Common Stock (including in any merger or consolidation) by a purchaser or
group of purchasers acting in concert of 50% or more of the outstanding
shares of Common Stock, or, in the case of a purchaser of 50% or more of the
consolidated assets of BOH (as shown on the books of BOH), the Market Value
of a share of Common Stock on the date of consummation of such asset
acquisition.
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"Subsidiary" shall mean, with respect to any corporation (the "parent"),
any other corporation, association or other business entity of which more
than 50% of the shares of the Voting Stock are owned or controlled, directly
or indirectly, by the parent or by one or more Subsidiaries of the parent, or
by the parent and one or more of its Subsidiaries.
"Voting Stock" shall mean the stock entitling the holders thereof to
vote in the election of the directors or trustees of the corporation,
association, or other business entity in question, except that it shall not
include any stock so entitling the holders thereof to vote only upon the
happening of a contingency, whether or not such contingency has occurred.
"Warrant Call Price" shall mean, when used with respect to any Warrant,
the product of (i) the number of Covered Shares on such date and (ii) the
Share Price on such date; provided that the Warrant Call Price with respect
to any Warrant shall in no event exceed (x) the quotient obtained by dividing
$5,000,000 by the number of Covered Shares subject to all the outstanding
Warrants multiplied by (y) the number of Covered Shares subject to such
Warrant.
ARTICLE VII
TERMINATION
Section 7.1 TERMINATION. Subject to Section 7.2, this Agreement may
be terminated in the following circumstances:
(a) at the Effective Time of the Merger, as set forth in the Merger
Agreement;
(b) at the termination of the Merger Agreement prior to the occurrence
of an Acquisition Event; or
(c) two years after the occurrence of an Acquisition Event.
Section 7.2 EFFECT OF TERMINATION. In the event of termination of
this Agreement pursuant to Section 7.1(c), the rights of the parties hereto
shall forthwith become void; provided that, if this Agreement shall terminate
pursuant to Section 7.1(c) and any party has filed an application to purchase
securities with any regulatory authority, this Agreement shall not terminate
as provided in Section 7.1(c), but shall remain in full force and effect
until the day which is 30 Business Days (plus any applicable waiting periods)
after the receipt or denial of regulatory approval or consent, at which time
the Agreement shall then terminate.
Section 7.3 INDEMNIFICATION FOR BREACH. Each party to this Agreement
agrees to indemnify and hold harmless the other party against any loss,
claim, damage or liability arising out of or based upon a Default of this
Agreement by such defaulting party
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in accordance with the procedures set forth in the last paragraph of Section
3.8 of this Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or
mailed by registered or certified mail (return receipt requested) to the
parties at the following addresses (or any such other address for a party as
shall be specified by like notice):
(a) If to BOH:
Mr. James B. Jaqua
President and Chief Executive Officer
The Bank of Hemet
3715 Sunnyside Drive
Riverside, California 92506
Telecopier No.: (909) 784-5791
With copies to:
Gary S. Findley, Esq.
Gary Steven Findley & Associates
1470 Hundley
Anaheim, California 92806
Telecopier No.: (714) 630-7910
(b) If to PCBG:
Mr. E. Lynn Caswell
Chairman and CEO
Pacific Community Banking Group
23332 Mill Creek Drive, Suite 230
Laguna Hills, California 92653
Telecopier No.: (949) 458-2086
With copies to:
Loren P. Hansen, Esquire
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, California 92660
Telecopier No.: (949) 851-1732
26
<PAGE>
Section 8.2 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more counterparts have been
signed by each of the parties and delivered to the other parties, it being
understood that all parties need not sign the same counterpart.
Section 8.3 AMENDMENT. This Agreement may be amended by the parties
hereto, by action taken by their respective Boards of Directors or the duly
authorized committees thereof. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto. The
parties hereto agree to make such amendments as may be necessary to respond
to the request of any Regulatory Authority with respect to this Agreement.
Section 8.4 WAIVER. Any term or provision of this Agreement may be
waived in writing at any time by the party which is, or whose shareholders
are, entitled to the benefits thereof.
Section 8.5 MISCELLANEOUS. This Agreement (including the documents
and instruments referred to herein) (a) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof; (b) except as
contemplated in this Agreement, is not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder; and (c)
except as contemplated in this Agreement, shall not be assigned by operation
of law or otherwise. BOH and PCBG agree that, except as required by law, it
shall not issue any press release with respect to the transactions
contemplated by this Agreement without consulting with each other party
hereto.
Section 8.6 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
27
<PAGE>
IN WITNESS WHEREOF, BOH and PCBG have caused this Agreement to be signed
by their respective officers thereunto duly authorized, all as of the date
first above written.
PACIFIC COMMUNITY BANKING GROUP
By: /s/ E. Lynn Caswell
---------------------------
E. Lynn Caswell
Chairman and CEO
THE BANK OF HEMET
By: /s/ James B. Jaqua
---------------------------
James B. Jaqua
President
By: /s/ Harold R. Williams, Jr.
---------------------------
Secretary
28
<PAGE>
EXHIBIT A
WARRANT
No. 1
July 30, 1998 210,800 Shares
THE BANK OF HEMET
This is to certify that, for value received and subject to the terms and
conditions provided for in a Warrant Purchase Agreement dated as of July 30,
1998 (the "Agreement") by and between The Bank of Hemet, a California
corporation ("BOH"), and Pacific Community Banking Group, a California
corporation ("PCBG"), pursuant to which PCBG and its assigns are entitled to
purchase from BOH, on the terms and conditions set forth therein, 210,800
fully paid and nonassessable shares of common stock of BOH ("Common Stock"),
subject to adjustment as provided in the Agreement. Terms not otherwise
defined herein shall have the meanings ascribed to them in the Agreement.
This Warrant may be exercised by the holder (except any holder which
shall not be permitted by the Bank Holding Company Act of 1956, as amended
("BHC Act"), or other applicable law to own, or shall not have obtained all
regulatory approvals required by such Act or other applicable law as a
precondition to its ownership of, the shares of Common Stock covered hereby)
as to the whole or any part of the shares of Common Stock covered hereby at
any time when such exercise shall be permitted under the terms of this
Warrant, by surrender of this Warrant at the principal office of BOH or at
the office of any transfer agent for the Warrant and upon payment to BOH of
the Warrant Price for shares so purchased by wire transfer to a bank account
designated by BOH. Thereupon, this Warrant shall be deemed to have been
exercised and the person exercising the same to have become a holder of
record of shares of Common Stock (or of the other securities or property to
which it is entitled upon such exercise) purchased hereunder for all
purposes, and certificates for shares so purchased shall be delivered to the
purchaser. If this Warrant shall be exercised in respect of a part of the
shares of Common Stock covered hereby, the holder shall be entitled to
receive a new Warrant covering the number of shares in respect of which this
Warrant shall not have been exercised, but otherwise identical hereto.
1
<PAGE>
This Warrant is exchangeable, upon the surrender hereof by the holder
hereof at such office or agency of BOH, for new Warrants of this tenor
representing in the aggregate the right to subscribe for and purchase the
number of shares which may be subscribed for and purchased hereunder, each of
such new Warrants to represent the right to subscribe for and purchase not
less than 1,000 shares of Common Stock (except to the extent necessary to
round out the balance of the number of shares purchasable hereunder).
BOH covenants and agrees that all shares which may be issued upon the
exercise of the rights represented by this Warrant will, upon issuance, be
fully paid and non-assessable and free from all taxes, liens and charges with
respect to the issue thereof (other than taxes in respect of any transfer
occurring contemporaneously with such issue). BOH further covenants and
agrees that during the period within which the rights represented by this
Warrant may be exercised, BOH will at all times have authorized, and
reserved, a sufficient number of shares of Common Stock to provide for the
exercise of the rights represented by this Warrant, and will at its expense
expeditiously upon each such reservation of shares use its best efforts to
procure the listing thereof (subject to issuance or notice of issuance) on
all stock exchanges on which the shares of Common Stock are then listed, or
if BOH Shares are not then listed on a stock exchange on NASDAQ National
Market System.
The rights of the holder of this Warrant shall be subject to the
following further terms and conditions:
Section 1.1 BOH shall at all times reserve and keep available, free
from preemptive rights, out of its authorized and unissued Common Stock or
shares of Common Stock held in treasury, for the purpose of effecting the
exercise of this Warrant, the full number of shares of Common Stock then
issuable upon the exercise of this and all other outstanding Warrants,
computed on the assumption that the adjustments required by the Agreement
have become effective, in the event such is not then the case.
Section 1.2 BOH will pay any and all taxes that may be payable in
respect of the issue or delivery of shares of Common Stock upon exercise of
this Warrant. BOH shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery of
shares of Common Stock in a name other than that of the holder of the Warrant
or Warrants to be exercised, and no such issue or delivery shall be made
unless and until the person requesting such issue has paid to BOH the amount
of any such tax, or has established, to the satisfaction of BOH, that such
tax has been paid.
2
<PAGE>
Section 1.3 This Warrant shall not entitle the holder of any rights
of a shareholder of BOH, either at law or in equity, or to any notice of
meetings of shareholders or of any other proceedings of BOH.
Section 1.4 Subject to Section 1.5 and the terms and conditions set
forth in the Agreement, this Warrant and all rights hereunder are
transferable (in whole or in part), on the books of BOH by the registered
holder thereof in person or by duly authorized attorney, upon surrender of
this Warrant, properly endorsed, to BOH (or if BOH shall have notified the
registered holder hereof of the appointment of an independent transfer agent
for Warrants, then to such transfer agent). As used herein the term "this
Warrant" shall mean and include any Warrant or Warrants hereafter issued in
consequence of transfers of this Warrant in whole or in part.
Section 1.5 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THIS WARRANT MAY NOT
BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT
WITH RESPECT TO THIS WARRANT WHICH IS EFFECTIVE UNDER THE SECURITIES
ACT, OR (ii) AN OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT IS AVAILABLE. THE TRANSFERABILITY OF THIS
WARRANT IS FURTHER SUBJECT TO THE PROVISIONS OF A WARRANT PURCHASE
AGREEMENT DATED AS OF JULY 30, 1998, A COPY OF WHICH IS AVAILABLE FOR
INSPECTION AT THE OFFICE OF THE SECRETARY OF THE BANK OF HEMET.
Section 1.6 The holder of this Warrant, by the acceptance hereof,
agrees that prior to the exercise of any Warrants, at a time when said
Warrants have not been registered under the Securities Act or any similar
Federal statute, it will, if it has not requested or is then not entitled to
such registration pursuant to the provisions of Article III of the Agreement,
deliver to BOH a written representation that it is acquiring the shares of
Common Stock issuable upon the exercise of such Warrants for its own account
for investment, and not with a view to, or for sale in connection with, any
distribution thereof, and not with any present intention of distributing or
selling the same.
Section 1.7 (a) This Warrant shall terminate and be of no further
force or effect as provided in Article VII of the Agreement.
(b) Notwithstanding any other provision contained herein, this Warrant
and the rights conferred hereby shall terminate, and the full consideration
paid by PCBG for this Warrant shall be immediately due and payable to PCBG,
if BOH or PCBG receives written notice from the Federal Reserve Board to the
effect that the
3
<PAGE>
execution and delivery of the Agreement or the issuance of the Warrants is
not consistent with Section 3 of the BHC Act.
Section 1.8 This Warrant shall be governed by and construed in
accordance with the laws of the State of California.
Section 1.9 This Warrant incorporates by reference all of the terms
and conditions of the Agreement. This Warrant is subject to termination upon
the occurrence of any of the events specified in Section 7.1 of the Agreement.
THE BANK OF HEMET
By: /s/ James B. Jaqua
--------------------
James B. Jaqua
President
By: /s/ Harold R. Williams
-----------------------
Secretary
4
<PAGE>
EXHIBIT 10.7
Form of Noncompetition and Consulting Agreements (Jaqua and McDonough)
for
----------------------
<PAGE>
NONCOMPETITION AGREEMENT
THIS NONCOMPETITION AGREEMENT ("Agreement"), dated as of ___ __, 1999, is
entered into by and between The Bank of Hemet, a state chartered banking
institution ("Bank"), and ___________________ ("Consultant").
RECITALS
A. Bank and Pacific Community Banking Group, a California corporation ("PCBG")
entered into that certain First Restatement of Agreement and Plan of
Reorganization dated as of December 31, 1998 (the "Reorganization
Agreement") whereby Bank will be acquired and become a wholly owned
subsidiary of PCBG.
B. Consultant is a current shareholder of Bank and President, Chief Executive
Officer and a Director of Bank and Chairman of the Board of Directors of
Banklink, a subsidiary of Bank.
C. Bank will continue its business and operations following the reorganization
and pursuant to the Reorganization Agreement, Consultant will receive
substantial consideration from Bank for his common shares and vested
options.
D. The parties recognize and acknowledge the interest of Bank in protecting
its business and goodwill following the reorganization and that Section
16601 of the California Business and Professions Code authorizes this
Agreement for such purpose.
E. Consultant will perform consulting services and not compete with Bank's
business in order to protect said business and goodwill following the
reorganization, provided Bank agrees to pay Consultant fees in accordance
with the terms and conditions hereinafter set forth.
F. Unless otherwise provided in this Agreement, capitalized terms shall have
the meanings given to them in the Reorganization Agreement.
NOW THEREFORE, in consideration of the premises and of the respective
representations, warranties and covenants, agreements and conditions
contained herein and in the Reorganization Agreement, and intending to be
legally bound hereby, Bank and Consultant agree as follows:
ARTICLE I
NON-COMPETITION AGREEMENT
1.1 NONDISCLOSURE. Consultant shall not at any time disclose, use,
transfer or sell any confidential information or proprietary data of Bank,
Banklink, PCBG or its shareholders so long as such information or proprietary
data remains confidential and has not been disclosed or is not otherwise in
the public domain, except as required by law or pursuant to the legal process.
<PAGE>
1.2 CONSIDERATION. In consideration of the covenants contained herein,
Bank shall pay Consultant the amount of $____ per month in cash for the first
eight months of the term and $_____ per month in cash for the remaining of
the term hereof, within five (5) days following each month's end.
1.3 TERM. The term of this Agreement shall begin as of the Effective
Time and shall end upon the expiration of _______________________ after the
Effective Time (the "Term").
1.4 NONCOMPETITION AGREEMENT.
1.4.1 Consultant hereby agrees that during the Term and for a
period of one year thereafter, Consultant will not (i) engage in the Banking
Business (which term shall include the business of banks, savings and loan
institutions, credit unions and other financial institutions) other than on
behalf of Bank and/or PCBG or their affiliates within the Designated Area (as
hereinafter defined), (ii) directly or indirectly own, manage, operate,
control, be employed by, or provide management or consulting services in any
capacity to any firm, corporation or other entity (other than Bank and/or
PCBG or their affiliates) engaged in the Banking Business in the Designated
Area, or (iii) directly or indirectly solicit or otherwise intentionally
cause any employee, officer, or member of the respective Boards of Directors
of Bank and/or PCBG or any other of their affiliates to engage in any action
prohibited under (i) or (ii) of this Section 1.4.1 or solicit any customers
of Bank that have been customers of the Bank in the last three years.
1.4.2 Consultant acknowledges and agrees that irreparable injury
will result to Bank and/or PCBG in the event of a breach of any of the
provisions of this Section 1.4 (the "Designated Provisions") and that Bank
and/or PCBG will have no adequate remedy at law with respect thereto.
Accordingly, in the event of a material breach of any Designated Provision,
and in addition to any other legal or equitable remedy Bank and/or PCBG may
have, Bank and/or PCBG shall be entitled to the entry of a preliminary and
permanent injunction (including, without limitation, specific performance) by
a court of competent jurisdiction in Riverside County, California, to
restrain the violation or breach thereof by Consultant or any affiliates,
agents or any other persons acting for or with Consultant in any capacity
whatsoever, and Consultant submits to the jurisdiction of such court in any
such action.
1.4.3 It is the desire and intent of the parties that the
provisions of this Section 1.4 shall be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction
in which enforcement is sought. Accordingly, if any particular provision of
this Section 1.4 shall be adjudicated to be invalid or unenforceable, such
provision shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such provision in the particular jurisdiction in
which such adjudication is made. In addition, should any court determine
that the provisions of this Section 1.4 shall be unenforceable with respect
to scope, duration or geographic area, such court shall be empowered to
substitute, to the extent enforceable, provisions similar hereto or other
provisions so as to provide to Bank and/or PCBG, to the fullest extent
permitted by applicable law, the benefits intended by this Section 1.4.
1.3.4 As used herein, "Designated Area" shall mean the area
contained within Riverside, San Bernardino and Orange Counties.
2
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CONSULTANT
2.1 PERFORMANCE OF OBLIGATIONS. Consultant represents and warrants to
Bank and/or PCBG that his execution, delivery and performance of this
Agreement will not result in or constitute a breach of or conflict with any
term, covenant, condition or provision of any commitment, contract or other
agreement or instrument, including, without limitation, any other employment
agreement, to which Consultant is or has been a party.
2.2 RESIGNATION. At the Effective Time Consultant shall resign as
President and Chief Executive Officer and Director but continue as an
employee of Bank until the end of such month. Consultant agrees and
acknowledges as of the end of such month, his employment with Bank shall
automatically cease and he shall not continue as an employee of Bank.
Consultant agrees and acknowledges that he will not be entitled to any
warrants for existing stock options pursuant to the Reorganization Agreement
and waives all rights to receive such warrants for stock options upon the
Effective Time.
2.3 INDEMNIFICATION. Consultant shall indemnify, defend, and hold
harmless Bank and PCBG, its directors, officers, representatives and agents,
for, from and against any and all losses, claims, suits, damages, expenses or
liabilities, including court costs and counsel fees, which Bank and/or PCBG
has incurred or to which Bank and/or PCBG may become subject, insofar as such
losses, claims, suits, damages, expenses, liabilities, costs or fees arise
out of or are based upon any failure of any representation or warranty of
Consultant in Section 2.1 hereof to be true and correct when made or any
breach of the provisions of Section 1.4.
ARTICLE III
GENERAL
3.1 GOVERNING LAW. This Agreement is governed by and is to be
construed and enforced in accordance with the laws of the State of
California. If under such law, any portion of this Agreement is at any time
deemed to be in conflict with any applicable statute, rule, regulation or
ordinance, such portion shall be deemed to be modified or altered to conform
thereto or, if that is not possible, to be omitted from this Agreement; the
invalidity of any such portion shall not affect the force, effect and
validity of the remaining portion hereof.
3.2 NOTICES. All notices under this Agreement shall be in writing and
shall be deemed effective when delivered in person, or forty-eight (48) hours
after deposit thereof in the U.S. mails, postage prepaid, for delivery as
requested or certified mail, addressed, in the case of:
3
<PAGE>
Consultant, to:
------------------
-------------------
--------------------
Bank, to:
The Bank of Hemet
3715 Sunnyside Drive
Riverside, California 92506
Attention: Mr. E. Lynn Caswell, Chairman
With a copy to:
Pacific Community Banking Group
23332 Mill Creek Drive, Suite 230
Laguna Niguel, California 92653
Attention: Mr. E. Lynn Caswell, Chairman
3.3 ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding among Bank, PCBG and Consultant with respect to the subject
matter hereof and supersedes and cancels all prior written and oral
agreements and understandings with respect to the subject matter of this
Agreement, which shall be interpreted consistently herewith; provided that
prior to the Effective Time, any agreement between Bank and Consultant shall
remain in effect and shall not be superseded by this Agreement. This
Agreement may be amended but only by a subsequent written agreement of the
parties. This Agreement shall be binding upon and shall inure to the benefit
of Consultant, Consultant's heirs, executors, administrators and
beneficiaries, Bank and/or PCBG and each of their respective successors.
3.4 WITHHOLDING TAXES. All amounts payable to Consultant under this
Agreement shall be subject to applicable income, wage and other taxes, which
shall be the responsibility of Consultant. Bank and/or PCBG will not be
responsible for the withholding of any deductions.
3.5 EFFECT OF AGREEMENT. This Agreement shall have no effect until the
Effective Time. In the event that the Reorganization Agreement is terminated,
this Agreement shall automatically terminate.
3.6 DISPUTE RESOLUTION. Any dispute regarding this Agreement shall
only be heard and resolved in a court of competent jurisdiction located in
the County of Riverside, California.
3.7 LEGAL COSTS. If either party commences an action against the other
party arising or in connection with this Agreement, the prevailing party
shall be entitled to have and recover from the losing party reasonable
attorney's fees and costs of suit.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
year and day first above written.
THE BANK OF HEMET
By ______________________________________
Its _____________________________________
_________________________________________
__________________
ACKNOWLEDGED:
PACIFIC COMMUNITY BANKING GROUP
_______________________________
5
<PAGE>
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement"), dated as of ___ __, 1999, is entered
into by and between The Bank of Hemet, a state chartered banking institution
("Bank"), and ___________________ ("Consultant").
RECITALS
A. Bank and Pacific Community Banking Group, a California corporation ("PCBG")
entered into that certain First Restatement of Agreement and Plan of
Reorganization dated as of December 31, 1998 (the "Reorganization
Agreement") whereby Bank will be acquired and become a wholly owned
subsidiary of PCBG.
B. Consultant is a current shareholder of Bank and President, Chief Executive
Officer and a Director of Bank and Chairman of the Board of Directors of
Banklink, a subsidiary of Bank.
C. Following the consummation of the acquisition of Bank by PCBG, Consultant
wishes to be retained by Banklink in a consulting capacity, as Chairman of
Banklink and as a Director of PCBG.
D. Unless otherwise provided in this Agreement, capitalized terms shall have
the meanings given to them in the Reorganization Agreement.
NOW THEREFORE, in consideration of the premises and of the respective
representations, warranties and covenants, agreements and conditions
contained herein and in the Reorganization Agreement, and intending to be
legally bound hereby, Bank and Consultant agree as follows:
ARTICLE I
CONSULTING SERVICES
1.1 CONSULTING SERVICES. From the Effective Time until the second
anniversary of the Effective Time Consultant will serve as a business
development and strategic business consultant for Banklink. Such services
shall be provided by Consultant on a schedule solely determined by Consultant.
1.2 DIRECTOR RESPONSIBILITIES. On the Effective Time Consultant will
become a Director of PCBG and shall continue as Chairman of Banklink.
Consultant will be entitled to receive monthly Board and Committee fees or
other forms of consideration for outside Directors, payable to either
Consultant or his designee, at Consultant's sole discretion. In the event
that Consultant resigns as a member of the Board of Directors of PCBG, such
Director fees or other forms of consideration shall terminate at such time.
In the event that PCBG requests the resignation of Consultant as a member of
the Board of Directors of PCBG or removes Consultant as a Director
Exhibit 2.1(d)(1)
<PAGE>
before the third anniversary of the Effective Date, PCBG shall pay Consultant
an amount equal to the monthly Director and Committee fees or other forms of
compensation times thirty-six, minus the number of payments previously paid.
Such payment will be made immediately upon notification that Consultant shall
no longer be a Director of PCBG.
1.3 HEALTH/MEDICAL BENEFITS. From the Effective Time until the third
anniversary of the Effective Time, Consultant shall be entitled to
participate in the health/medical benefit program of Bank provided to outside
Directors which is in place at the Effective Time.
1.4 INCENTIVE COMPENSATION. From the Effective Time to the third
anniversary of the Effective Time Consultant shall be entitled to additional
incentive compensation for each new data service customer which executes a
data service contract with Bank, Banklink or their affiliates. Such
incentive compensation shall be $______ for each financial institution
signing a contract with total assets of up to $50 million, $______ for each
financial institution signing a contract with total assets between $50 million
and $100 million and $______ for each financial institution signing a
contract with total assets over $100 million. Such incentive compensation
shall be paid by Bank and/or PCBG and/or Banklink within five days of the
execution of such new data service contract, the form and contents of which
shall be determined by and approved by PCBG and/or the Board of Directors of
Banklink.
1.5 OTHER BENEFITS. As part of Consultant's consulting services,
Consultant shall be entitled to reimbursement for all reasonable
entertainment expenses incurred by Consultant in connection with business
development activities for PCBG or Banklink subject to satisfactory evidence
of such expenses, not to excess $____ per month unless previously authorized
by the Chairman of PCBG or the Board of Directors of Banklink, as
appropriate. Furthermore, Consultant will be able to utilize office space of
Bank and/or PCBG or Banklink during the term of this consulting agreement.
1.6 NONDISCLOSURE. Consultant shall not at any time disclose, use,
transfer or sell any confidential information or proprietary data of Bank,
Banklink, PCBG or its shareholders so long as such information or proprietary
data remains confidential and has not been disclosed or is not otherwise in
the public domain, except as required by law or pursuant to the legal process.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CONSULTANT
2.1 PERFORMANCE OF OBLIGATIONS. Consultant represents and warrants to
Bank and/or PCBG that his execution, delivery and performance of this
Agreement will not result in or constitute a breach of or conflict with any
term, covenant, condition or provision of any commitment, contract or other
agreement or instrument, including, without limitation, any other employment
agreement, to which Consultant is or has been a party.
2.2 RESIGNATION. At the Effective Time Consultant shall resign as
President and Chief Executive Officer and Director but continue as an
employee of Bank until the end of such month, and be paid at each normal pay
period as per existing bank payroll policy. Consultant agrees and
2
<PAGE>
acknowledges that as of the end of such month, his employment with Bank shall
automatically cease and he shall not continue as an employee of Bank.
2.3 INDEMNIFICATION. Consultant shall indemnify, defend, and hold
harmless Bank and PCBG, its directors, officers, representatives and agents,
for, from and against any and all losses, claims, suits, damages, expenses or
liabilities, including court costs and counsel fees, which Bank and/or PCBG
has incurred or to which Bank and/or PCBG may become subject, insofar as such
losses, claims, suits, damages, expenses, liabilities, costs or fees arise
out of or are based upon any failure of any representation or warranty of
Consultant in Section 2.1 hereof to be true and correct when made.
ARTICLE III
GENERAL
3.1 GOVERNING LAW. This Agreement is governed by and is to be
construed and enforced in accordance with the laws of the State of
California. If under such law, any portion of this Agreement is at any time
deemed to be in conflict with any applicable statute, rule, regulation or
ordinance, such portion shall be deemed to be modified or altered to conform
thereto or, if that is not possible, to be omitted from this Agreement; the
invalidity of any such portion shall not affect the force, effect and
validity of the remaining portion hereof.
3.2 NOTICES. All notices under this Agreement shall be in writing and
shall be deemed effective when delivered in person, or forty-eight (48) hours
after deposit thereof in the U.S. mails, postage prepaid, for delivery as
requested or certified mail, addressed, in the case of:
Consultant, to:
----------------
------------------
----------------------------
Bank, to:
The Bank of Hemet
3715 Sunnyside Drive
Riverside, California 92506
Attention: Mr. E. Lynn Caswell, Chairman
With a copy to:
Mr. E. Lynn Caswell
23332 Mill Creek Drive, Suite 230
Laguna Niguel, California 92653
3
<PAGE>
3.3 ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding among Bank, PCBG and Consultant with respect to the subject
matter hereof and supersedes and cancels all prior written and oral
agreements and understandings with respect to the subject matter of this
Agreement, which shall be interpreted consistently herewith; provided that
prior to the Effective Time, any agreement between Bank and Consultant shall
remain in effect and shall not be superseded by this Agreement. This
Agreement may be amended but only by a subsequent written agreement of the
parties. This Agreement shall be binding upon and shall inure to the benefit
of Consultant, Consultant's heirs, executors, administrators and
beneficiaries, Bank and/or PCBG and each of their respective successors.
3.4 WITHHOLDING TAXES. All amounts payable to Consultant under this
Agreement shall be subject to applicable income, wage and other taxes, which
shall be the responsibility of Consultant. Bank and/or PCBG will not be
responsible for the withholding of any deductions.
3.5 EFFECT OF AGREEMENT. This Agreement shall have no effect until the
Effective Time. In the event that the Reorganization Agreement is terminated,
this Agreement shall automatically terminate.
3.6 DISPUTE RESOLUTION. In the event of a dispute between Bank and
Consultant as to the amount due Consultant under section 1.4 of this
Agreement, the Bank and Consultant shall each provide the other with an
accounting of the amounts each asserts are due. The parties shall then
identify any disputes they have with the other's accounting. Upon
identification of any disputed items, the parties shall attempt to agree upon
the amount due to Consultant within seven days. If no mutual agreement is
reached within said period, the parties shall have their respective
accounting firms attempt to agree upon the correct amount due Consultant,
within seven days thereafter. If the accounting firms are unable to reach a
mutual agreement, within said period, the parties shall agree to an
independent "Big Six" accounting firm to resolve any remaining items that
have not been agreed upon, and the opinion of such accounting firm shall be
binding upon the parties for the purposes of this Agreement. The parties
shall cooperate fully with each other and the accounting firms. The cost of
the expert shall be paid by the Bank. Any dispute regarding this Agreement
shall only be heard and resolved in a court of competent jurisdiction located
in the County of Riverside, California.
3.7 LEGAL COSTS. If either party commences an action against the other
party arising or in connection with this Agreement, the prevailing party
shall be entitled to have and recover from the losing party reasonable
attorney's fees and costs of suit.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
year and day first above written.
THE BANK OF HEMET
By ______________________________________
Its _____________________________________
_________________________________________
_______________
ACKNOWLEDGED:
PACIFIC COMMUNITY BANKING GROUP
_______________________________
5
<PAGE>
EXHIBIT A
6
<PAGE>
EXHIBIT 10.8
Form of Executive Salary Continuation Agreement (Jaqua)
between
TBOH and ________
dated March 22, 1995, as amended
<PAGE>
EXECUTIVE SALARY CONTINUATION AGREEMENT
This Agreement is made and entered into this 22nd day of March, 1995, by and
between The Bank of Hemet, a banking corporation organized under the laws of the
State of California (the "Employer"), and __________________, an individual
residing in the State of California (hereinafter referred to as the
"Executive").
RECITALS
WHEREAS, the Executive is an employee of the Employer and is serving as its
President and Chief Executive Officer;
WHEREAS, the Executive's experience and knowledge of the affairs of the Employer
and the banking industry are extensive and valuable;
WHEREAS, it is deemed to be in the best interests of the Employer to provide the
Executive with certain salary continuation benefits, on the terms and conditions
set forth herein, in order to reasonably induce the Executive to remain in the
Employer's employment; and
WHEREAS, the Executive and the Employer wish to specify in writing the terms and
conditions upon which this additional compensatory incentive will be provided to
the Executive, or to the Executive's spouse or the Executive's designated
beneficiaries, as the case may be;
NOW, THEREFORE, in consideration of the services to be performed in the future,
as well as the mutual promises and covenants contained herein, the Executive and
the Employer agree as follows:
AGREEMENT
1. TERMS AND DEFINITIONS.
1.1. ADMINISTRATOR. The Employer shall be the "Administrator" and,
solely for the purposes of ERISA, the "fiduciary" of this Agreement where a
fiduciary is required by ERISA.
1.2. ANNUAL BENEFIT. The term "Annual Benefit" shall mean an annual
sum of __________________ ($_______) multiplied by the Applicable
Percentage (defined below) and then reduced to the extent required: (i) under
the other provisions of this Agreement; (ii) by reason of the lawful order of
any regulatory agency or body having jurisdiction over the Employer; and (iii)
in order for the Employer to properly comply with any and all applicable state
and federal laws, including, but not limited to, income, employment and
disability income tax laws (e.g., FICA, FUTA, SDI).
<PAGE>
1.3. APPLICABLE PERCENTAGE. The term "Applicable Percentage" shall
mean that percentage listed on Schedule "A" attached hereto which is adjacent to
the number of complete years (with a "year" being the performance of personal
services for or on behalf of the Employer as an employee for a period of 365
days) which have elapsed starting from the Effective Date of this Agreement and
ending on the date the Executive's employment with the Employer terminates for
purposes of this Agreement. In the event the Executive's employment with the
Employer is terminated other than by reason of death, disability, termination
for cause or Retirement on the part of the Executive, the Executive shall be
deemed for purposes of determining the number of complete years to have
completed a year of service in its entirety for any partial year of service
after the last anniversary date of the Effective Date during which the
Executive's employment is terminated, provided that in no event shall the
Executive be deemed to have completed a year of service for any partial year if
the partial year occurs prior to the anniversary date of this Agreement.
1.4. BENEFICIARY. The term "beneficiary" or "designated beneficiary"
shall mean the person or persons whom the Executive shall designate in a valid
Beneficiary Designation, a copy of which is attached hereto as Exhibit "B", to
receive the benefits provided hereunder. A Beneficiary Designation shall be
valid only if it is in the form attached hereto and made a part hereof and is
received by the Administrator prior to the Executive's death.
1.5. THE CODE. The "Code" shall mean the Internal Revenue Code of
1986, as amended (the "Code").
1.6. DISABILITY/DISABLED. The term "Disability" or "Disabled" shall
have the same meaning given such term in the principal disability insurance
policy covering the Executive, which is incorporated herein by reference. In the
event the Executive is not covered by a disability policy containing a
definition of "Disability" or "Disabled," these terms shall mean an illness or
incapacity which, having continued for a period of one hundred and eighty (180)
consecutive days, prevents the Executive from adequately performing the
Executive's regular employment duties. The determination of whether the
Executive is Disabled shall be made by an independent physician selected by
mutual agreement of the parties.
1.7. EFFECTIVE DATE. The term "Effective Date" shall mean the date
upon which this Agreement was entered into by the parties, as first written
above.
1.8. ERISA. The term "ERISA" shall mean the Employee.
Retirement Income Security Act of 1974, as amended.
1.9. PLAN YEAR. The term "Plan Year" shall mean the Employer's
calendar year.
1.10. RETIREMENT. The term "Retirement" or "Retires" shall refer to the
date which Executive attains the age of at least 65 and which the Executive
acknowledges in writing to the Employer to
<PAGE>
be the last day he will provide any significant personal services, whether as an
employee, director or independent consultant or contractor, to the Employer. For
purposes of this Agreement, the phrase "significant personal services" shall
mean more than ten (10) hours of personal services rendered to one or more
individuals or entities in any thirty (30) day period.
1.11 SALE OF BUSINESS. The term "Sale of Business" shall mean any (i)
merger, consolidation or reorganization of the Employer in which (A) the
Employer does not survive or (B) the Employer survives with a resulting change
in beneficial ownership of the Employer of more than 50% of the voting shares of
the Employer, (ii) sale of more than 50% of the beneficial ownership of the
voting shares of the Employer to any person or group of persons acting in
concert, or (iii) transfer or sale of more than 50% of the total market value of
the assets of Employer as reflected in the most recent published balance sheet
of the Employer.
1.12. SURVIVING SPOUSE. The term "Surviving Spouse" shall mean the
person, if any, who shall be legally married to the Executive on the date of the
Executive's death.
2. SCOPE, PURPOSE AND EFFECT.
2.1. CONTRACT OF EMPLOYMENT. Although this Agreement is intended to
provide the Executive with an additional incentive to remain in the employ of
the Employer, this Agreement shall not be deemed to constitute a contract of
employment between the Executive and the Employer nor shall any provision of
this Agreement restrict or expand the right of the Employer to terminate the
Executive's employment. This Agreement shall have no impact or effect upon any
separate written employment agreement which the Executive may have with the
Employer, it being the parties' intention and agreement that unless this
Agreement is specifically referenced in said employment agreement (or any
modification thereto), this Agreement (and the Employer's obligations hereunder)
shall stand separate and apart and shall have no effect upon, nor be affected
by, the terms and provisions of said employment agreement.
2.2. FRINGE BENEFIT. The benefits provided by this Agreement are
granted by the Employer as a fringe benefit to the Executive and are not a part
of any salary reduction plan or any arrangement deferring a bonus or a salary
increase. The Executive has no option to take any current payments or bonus in
lieu of the benefits provided by this Agreement.
3. PAYMENTS UPON OR AFTER RETIREMENT.
3.1. PAYMENTS UPON RETIREMENT. If the Executive shall remain in the
continuous employment of the Employer until Retirement, the Executive shall be
entitled to be paid the Annual Benefit with the Applicable Percentage at 100%,
for a period of fifteen (15) years, in One Hundred Eighty (180) equal monthly
installments, with each installment to be paid on the first day of each month,
beginning with the month following the month in which the Executive Retires
or upon such later date as may be mutually agreed upon by the
<PAGE>
Executive and the Employer in advance of said Retirement date. At the Employer's
sole and absolute discretion, the Employer may increase the Annual Benefit as
and when the Employer determines the same to be appropriate in order to reflect
a substantial change in the cost of living. Notwithstanding anything contained
herein to the contrary, the Employer shall have no obligation hereunder to make
any such cost-of-living adjustment.
3.2. PAYMENTS IN THE EVENT OF DEATH AFTER RETIREMENT. The Employer
agrees that if the Executive Retires, but shall die before receiving all of the
One Hundred Eighty (180) monthly payments described in paragraph 3.1 above, the
Employer will make the remaining monthly payments, undiminished and on the same
schedule as if the Executive had not died, to the Executive's designated
beneficiary. If a valid Beneficiary Designation is not in effect, then the
remaining amounts due to the Executive under the term of this Agreement shall be
paid to the Executive's Surviving Spouse. If the Executive leaves no Surviving
Spouse, the remaining amounts due to the Executive under the terms of this
Agreement shall be paid to the duly qualified personal representative, executor
or administrator of the Executive's estate.
4. PAYMENTS IN THE EVENT DEATH OR
DISABILITY OCCURS PRIOR TO RETIREMENT.
4.1. PAYMENTS IN THE EVENT OF DEATH PRIOR TO RETIREMENT. In the
event the Executive should die while actively employed by the Employer at any
time after the Effective Date of this Agreement, the Employer agrees to pay
the Annual Benefit with the Applicable Percentage at 100% for a period of
fifteen (15) years in One Hundred Eighty (180) equal monthly installments,
with each installment to be paid on the first of each month beginning with
the month following the Executive's death, to the Executive's designated
beneficiary.
If a valid Beneficiary Designation is not in effect, then the amounts due to
the Executive under the terms of this Agreement shall be paid to the
Executive's Surviving Spouse. If the Executive leaves no Surviving Spouse,
the amounts due to the Executive under the terms of this Agreement shall be
paid to the duly qualified personal representative, executor or administrator
of the Executive's estate.
4.2. PAYMENTS IN THE EVENT OF DISABILITY PRIOR TO RETIREMENT. In
the event the Executive becomes Disabled while actively employed by the
Employer at any time after the date of this Agreement but prior to
Retirement, the Executive shall: (i) continue to be treated during such
period of Disability as being gainfully employed by the Employer but shall
not add applicable years of service for the purpose of determining the Annual
Benefit; and (ii) be entitled to be paid the Annual Benefit, as set forth on
Schedule "A", for fifteen (15) years, as determined by the applicable years
of service at the time of disability, as defined above, in One Hundred Eighty
(180) equal monthly installments, with each installment to be paid on the
first day of each month, beginning with the month following the earlier of
(1) the month in
<PAGE>
which the Executive attains sixty-five (65) years of age; or (2) the date upon
which the Executive is no longer entitled to receive Disability benefits under
the Executive's principal Disability insurance policy and does not, at such
time, return to and thereafter fulfill the responsibilities associated with the
employment position held with the Employer prior to becoming Disabled by reason
of such Disability continuing. Notwithstanding the foregoing, in the event the
Executive should die while actively or gainfully employed by the Employer at any
time after the Effective Date of this Agreement and prior to attaining the age
of sixty-five (65) years of age, the payments provided in Paragraph 4.1 shall be
paid in lieu of the payments provided in this Paragraph 4.2, provided that the
Executive or his legal representative shall have not elected to take the
benefits provided by Paragraph 5 and payments provided for in this Paragraph 4.2
have not commenced.
5. PAYMENTS IN THE EVENT EMPLOYMENT IS TERMINATED FOR
CAUSE OR EXECUTIVE VOLUNTARILY TERMINATES EMPLOYMENT.
As indicated in Paragraph 2 above, the Employer reserves the right to terminate
the Executive's employment, with or without cause but subject to any written
employment agreement which may then exist, at any time prior to the Executive's
Retirement. In the event that the employment of the Executive shall be
terminated prior to Executive attaining age 65 and either (i) for cause as
defined in Executive's current employment agreement (or most current employment
agreement if there is no current employment agreement), but in no event shall
cause include death or disability or (ii) voluntarily on the part of Executive,
Executive shall not be entitled to any benefits pursuant to this agreement.
5.1 TERMINATION OF EXECUTIVE WITHOUT CAUSE. In the event the
employment of Executive with Employer is (i) terminated without cause, (ii)
terminated for cause after Executive attains age 65, or (iii) terminated
voluntarily by Executive after Executive attains age 65, the Executive or his
legal representative shall be entitled to be paid the Annual Benefit, as set
forth in Schedule "A" for a period of fifteen (15) years, as determined by
the applicable years of service at the time of the Executive's termination of
employment with the Employer, in One Hundred Eighty (180) equal monthly
installments, with each installment to be paid on the first day of each
month, beginning with the month following the month in which the Executive
terminates employment and attains sixty-five (65) years of age or the month
following the Executive's death, whichever occurs first.
5.2 TERMINATION IN A SALE OF BUSINESS. In the event there is a Sale
of Business, the Executive shall be entitled to be paid in a lump sum the
present value (using the annual discount rate equal to the annual interest rate
of a ten year treasury bond) of the Annual Benefit for a period of fifteen (15)
years with the Applicable Percentage being 100% to be paid on the first day of
each month, beginning with the month following the month in which the Executive
for any reason terminates employment with Employer or a successor of Employer
after a Sale of Business.
<PAGE>
6. RIGHT OF THE EMPLOYER TO PAY A LUMP SUM.
The Employer shall at its sole and absolute discretion have the right to pay in
a lump sum the then present value using a discount rate that is to be mutually
agreed upon between the Employer and the Executive or the Executive's
beneficiary of all payments vested and due the Executive or the Executive's
beneficiary pursuant to this Agreement.
7. NO OWNERSHIP RIGHTS TO THE EMPLOYER'S ASSETS.
The Employer reserves the right to determine, in its sole and absolute
discretion, whether, to what extent and by what method, if any, to provide for
the payment of the amounts which may be payable to the Executive, the
Executive's spouse or the Executive's beneficiaries under the terms of this
Agreement ("Benefits"). The rights of the Executive or any beneficiary of the
Executive under this Agreement shall be solely those of an unsecured creditor of
the Employer.
In the event that the Employer, in its sole and absolute discretion, elects
to acquire an insurance policy, an annuity or any other asset to recoup the
costs or any portion thereof of the Benefits, then such insurance policy,
annuity or other asset shall not be deemed to be held under any trust for the
benefit of the Executive or his beneficiaries or to be security for the
performance of the obligations of the Employer under this Agreement, but
shall be, and remain, a general unpledged, unrestricted asset of the
Employer. The Executive and his beneficiaries shall have no rights whatsoever
with respect to, or any claim against, any such insurance policy, annuity or
other asset. In connection with the Employer electing to
acquire any such insurance policy or annuity, the Executive agrees to
cooperate to facilitate such acquisition, and pursuant thereto shall execute
such documents and undergo such medical examinations or tests as the Employer
may reasonably request.
8. CLAIMS PROCEDURE.
The Employer shall, but only to the extent necessary to comply with ERISA, be
designated as the named fiduciary under this Agreement and shall have
authority to control and manage the operation and administration of this
Agreement. Consistent therewith, the Employer shall make all determinations
as to the rights to benefits under this Agreement. Any decision by the
Employer denying a claim by the Executive, the Executive's spouse, or the
Executive's beneficiary for Benefits under this Agreement shall be stated in
writing and delivered or mailed, via registered or certified mail, to the
Executive, the Executive's spouse or the Executive's beneficiary, as the case
may be. Such decision shall set forth the specific reasons for the denial of
a claim. In addition, the Employer shall provide the Executive, the
Executive's spouse or the Executive's beneficiary with a reasonable
opportunity for a full and fair review of the decision denying such claim.
<PAGE>
9. STATUS OF AN UNSECURED GENERAL CREDITOR.
Notwithstanding anything contained herein to the contrary: (i) neither the
Executive, the Executive's spouse or the Executive's beneficiary shall have any
legal or equitable rights, interests or claims in or to any specific property or
assets of the Employer; (ii) none of the Employer's assets shall be held in or
under any trust for the benefit of the Executive, the Executive's spouse or the
Executive's beneficiary or held in any way as security for the fulfillment of
the obligations of the Employer under this Agreement; (iii) all of the
Employer's assets shall be and remain the general unpledged and unrestricted
assets of the Employer; (iv) the Employer's obligation under this Agreement
shall be that of an unfunded and unsecured promise by the Employer to pay money
in the future; and (v) the Executive, the Executive's spouse and the Executive's
beneficiary shall be unsecured general creditors with respect to any benefits
which may be payable under the terms of this Agreement.
10. COVENANT NOT TO INTERFERE.
The Executive agrees not to take any action which prevents the Employer from
collecting the proceeds of any life insurance policy which the Employer may
happen to own at the time of the Executive's death and of which the Employer is
the designated beneficiary.
11. MISCELLANEOUS.
11.1. OPPORTUNITY TO CONSULT WITH INDEPENDENT COUNSEL. The Executive
acknowledges that he has been afforded the opportunity to consult with
independent counsel of his choosing regarding both the benefits granted to him
under the terms of this Agreement and the terms and conditions which may affect
the Executive's right to these benefits. The Executive further acknowledges that
he has read, understands and consents to all of the terms and conditions of this
Agreement, and that he enters into this Agreement with a full understanding of
its terms and conditions.
11.2. ARBITRATION OF DISPUTES. All claims, disputes and other matters
in question arising out of or relating to this Agreement or the breach or
interpretation thereof, other than those matters which are to be determined by
the Employer in its sole and absolute discretion, shall be resolved by binding
arbitration before a representative member, selected by the mutual agreement of
the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"),
presently located at 500 North State College Boulevard, in Orange, California.
In the event JAMS is unable or unwilling to conduct the arbitration provided for
under the terms of this Paragraph, or has discontinued its business, the parties
agree that a representative member, selected by the mutual agreement of the
parties, of the American Arbitration Association ("AAA"), presently located at
2601 Main Street, in Irvine, California, shall conduct the binding arbitration
referred to in this Paragraph. Notice of the demand for arbitration shall be
filed in writing with the other party to this Agreement and with JAMS (or AAA,
if necessary). In no event shall the demand for
<PAGE>
arbitration be made after the date when institution of legal or equitable
proceedings based on such claim, dispute or other matter in question would be
barred by the applicable statute of limitations. The arbitration shall be
subject to such rules of procedure used or established by JAMS, or if there are
none, the rules of procedure used or established by AAA. Any award rendered by
JAMS or AAA shall be final and binding upon the parties, and as applicable,
their respective heirs, beneficiaries, legal representatives, agents, successors
and assigns, and may be entered in any court having jurisdiction thereof. The
obligation of the parties to arbitrate pursuant to this clause shall be
specifically enforceable in accordance with, and shall be conducted consistently
with, the provisions of Title 9 of Part 3 of the California Code of Civil
Procedure. Any arbitration hereunder shall be conducted in Hemet, California,
unless otherwise agreed to by the parties.
11.3. ATTORNEYS' FEES. In the event of any arbitration or litigation
concerning any controversy, claim or dispute between the parties hereto, arising
out of or relating to this Agreement or the breach hereof, or the interpretation
hereof, the prevailing party shall be entitled to recover from the losing party
reasonable expenses, attorneys' fees and costs incurred in connection therewith
or in the enforcement or collection of any judgment or award rendered therein.
The "prevailing party" means the party determined by the arbitrator(s) or court,
as the case may be, to have most nearly prevailed, even if such party did not
prevail in all matters, not necessarily the one in whose favor a judgment is
rendered.
11.4. NOTICE. Any notice required or permitted of either the Executive
or the Employer under this Agreement shall be deemed to have been duly given, if
by personal delivery, upon the date received by the party or its authorized
representative; if by facsimile, upon transmission to a telephone number
previously provided by the party to whom the facsimile is transmitted as
reflected in the records of the party transmitting the facsimile and upon
reasonable confirmation of such transmission; and if by mail, on the third day
after mailing via U.S. first class mail, registered or certified, postage
prepaid and return receipt requested, and addressed to the party at the address
given below for the receipt of notices, or such changed address as may be
requested in writing by a party.
IF TO THE EMPLOYER:
THE BANK OF HEMET
1600 EAST FLORIDA AVENUE
HEMET, CALIFORNIA 92544
ATTENTION: JOHN J. McDONOUGH
CHAIRMAN OF THE BOARD
IF TO THE EXECUTIVE:
----------------------
----------------------
----------------------
<PAGE>
11.5. ASSIGNMENT. Neither the Executive, the Executive's spouse, nor
any other beneficiary under this Agreement shall have any power or right to
transfer, assign, hypothecate, modify or otherwise encumber any part or all of
the amounts payable hereunder, nor, prior to payment in accordance with the
terms of this Agreement, shall any portion of such amounts be: (i) subject to
seizure by any creditor of any such beneficiary, by a proceeding at law or in
equity, for the payment of any debts, judgments, alimony or separate maintenance
obligations which may be owed by the Executive, the Executive's spouse, or any
designated beneficiary; or (ii) transferable by operation of law in the event of
bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer
shall be void and shall terminate this Agreement, and the Employer shall
thereupon have no further liability hereunder.
11.6. BINDING EFFECT/MERGER OR REORGANIZATION. This Agreement shall be
binding upon and inure to the benefit of the Executive and the Employer and, as
applicable, their respective heirs, beneficiaries, legal representatives,
agents, successors and assigns. Accordingly, the Employer shall not merge or
consolidate into or with another corporation, or reorganize or sell
substantially all of its assets to another corporation, firm or person, unless
and until such succeeding or continuing corporation, firm or person agrees to
assume and discharge the obligations of the Employer under this Agreement. Upon
the occurrence of such event, the term "Employer" as used in this Agreement
shall be deemed to refer to such surviving or successor firm, person, entity or
corporation.
11.7. NONWAIVER. The failure of either party to enforce at any time or
for any period of time any one or more of the terms or conditions of this
Agreement shall not be a waiver of such term(s) or condition(s) or of that
party's right thereafter to enforce each and every term and condition of this
Agreement.
11.8. PARTIAL INVALIDITY. If any term, provision, covenant or condition
of this Agreement is determined by an arbitrator or a court, as the case may be,
to be invalid, void or unenforceable, such determination shall not render any
other term, provision, covenant or condition invalid, void or unenforceable, and
the Agreement shall remain in full force and effect notwithstanding such partial
invalidity.
11.9. ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to the
subject matter of this Agreement and contains all of the covenants and
agreements between the parties with respect thereto. Each party to this
Agreement acknowledges that no other representations, inducements, promises or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not set forth herein, and that no other
agreement, statement or promise not contained in this Agreement shall be valid
or binding on either party.
<PAGE>
11.10. MODIFICATIONS. Any modification of this Agreement shall be
effective only if it is in writing and signed by each party or such party's
authorized representative.
11.11. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement
are included solely for the convenience of the parties and shall not affect or
be used in connection with the interpretation of this Agreement.
11.12. NO STRICT CONSTRUCTION. The language used in this Agreement shall
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction will be applied against any
person.
11.13. GOVERNING LAW. The laws of the State of California, other than
those laws denominated choice of law rules, and, where applicable, the rules and
regulations of: (i) the California Superintendent of Banks; (ii) the Federal
Deposit Insurance Corporation; (iii) the Board of Governors of Federal Reserve
System; or (iv) any other regulatory agency or governmental authority having
jurisdiction over the Employer, shall govern the validity, interpretation,
construction and effect of this Agreement.
12. ADDITIONAL LIMITATIONS ON THE AMOUNT OF THE ANNUAL BENEFIT.
The Executive acknowledges and agrees that the parties have entered into this
Agreement based upon certain financial and tax accounting assumptions.
Accordingly, with full knowledge of the potential consequences, the Executive
agrees that, notwithstanding anything contained herein to the contrary: (i) the
amount of the Annual Benefit shall be limited to that amount of the Annual
Benefit (as determined without regard to this Paragraph) which will be
deductible by the Employer under the Code in the year in which payment is to be
made to the Executive; (ii) the Annual Benefit amount shall be deemed to be the
last payment made to the Executive and the first for which an income tax
deduction, if any, has been disallowed; and (iii) any compensatory amounts for
which a deduction is denied to the Employer shall, at the Employer's election,
serve to first reduce the Employer's obligation to make the Annual Benefit
payments otherwise due and payable to the Executive under the terms of this
Agreement. The Executive recognizes that, in this regard, limitations on
deductibility may be imposed under, but not limited to, Code Section 280G.
Consistent with the foregoing, and in the event that any payment or benefit
received or to be received by the Executive, whether payable pursuant to the
terms of this Agreement or any other plan, arrangement or agreement with the
Employer (together with the Annual Benefit, the "Total Payments"), will not be
deductible (in whole or in part) as a result of Code Section 280G, the Annual
Benefit shall be reduced until no portion of the Total Payments is nondeductible
as a result of Section 28OG of the Code (or the Annual Benefit is reduced to
zero (0)). For purposes of this limitation:
<PAGE>
(a) No portion of the Total payments, the receipt or enjoyment of
which the Executive shall have effectively waived in writing prior to the date
of payment of any future Annual Benefit payments, shall be taken into account;
(b) No portion of the Total Payments shall be taken into account,
which in the opinion of the tax counsel selected by the Employer and acceptable
to the Executive, does not constitute a "parachute payment" with the meaning of
Section 28OG of the Code;
(c) Future Annual Benefit payments shall be reduced only to the extent
necessary so that the Total Payments (other than those referred to in clauses
(a) or (b) above in their entirety) constitute reasonable compensation for
services actually rendered within the meaning of Section 280G of the Code, in
the opinion of tax counsel referred to in clause (b) above; and
(d) The value of any non-cash benefit or any deferred payment or
benefit included in the Total Payments shall be determined by the Employer's
independent auditors in accordance with the principles of Section 280G of the
Code.
IN WITNESS WHEREOF, the Employer and the Executive have executed this Agreement
on the date first above-written in the City of Hemet, Riverside County,
California.
THE BANK OF HEMET __________________________
"Employer" "Executive"
- -------------------------- --------------------------
John J. McDonough
Chairman of the Board
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF COMPLETE
YEARS OF SERVICE APPLICABLE
WHICH HAVE ELAPSED PERCENTAGE
- ------------------- -----------
<S> <C>
1 or more years 100%
</TABLE>
<PAGE>
SCHEDULE B
BENEFICIARY DESIGNATION
TO: THE ADMINISTRATOR OF
THE BANK OF HEMET
EXECUTIVE SALARY CONTINUATION AGREEMENT
Pursuant to the provisions of my Executive Salary Continuation Agreement with
The Bank of Hemet permitting the designation of a beneficiary or beneficiaries
by a participant, I hereby designate the following persons and entities as
primary and secondary beneficiaries of any benefit under said Agreement payable
by reason of my death:
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE
AND THE EXACT DATE OF THE TRUST AGREEMENT.
IN THE EVENT THE PRIMARY BENEFICIARY IS NOT THE SPOUSE OF THE EXECUTIVE, THE
SPOUSE OF THE EXECUTIVE WILL NEED TO SIGN THE SPOUSAL CONSENT BELOW AND SUCH
SIGNATURE MUST BE NOTARIZED.
PRIMARY BENEFICIARY:
- ------------------- ---------------- --------------
Name Address Relationship
SECONDARY (CONTINGENT) BENEFICIARY:
- --------------------------------------------
- ------------------- ---------------- --------------
Name Address Relationship
THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED.
ANY PRIOR DESIGNATION OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES IS
HEREBY REVOKED.
The Administrator shall pay all sums payable under the Agreement by reason of my
death to the Primary Beneficiary, if he or she survives me, and if no Primary
Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named
beneficiary survives me, then the Administrator shall pay all amounts in
accordance with the terms of my Executive Salary Continuation Agreement. In the
event that a named beneficiary survives me and dies prior to receiving the
entire benefit payable under said Agreement then and in that event, the
remaining unpaid benefit payable according to the terms of my Executive Salary
Continuation Agreement shall be payable to the personal representatives of the
estate of said beneficiary who survived me but died prior to receiving the total
benefit provided by my Executive Salary Continuation Agreement.
________________
"Executive"
Dated: 3/22/95
------------- -------------------------
<PAGE>
SCHEDULE B
BENEFICIARY DESIGNATION
TO: THE ADMINISTRATOR OF
THE BANK OF HEMET
EXECUTIVE SALARY CONTINUATION AGREEMENT
Pursuant to the provisions of my Executive Salary Continuation Agreement with
The Bank of Hemet permitting the designation of a beneficiary or beneficiaries
by a participant, I hereby designate the following persons and entities as
primary and secondary beneficiaries of any benefit under said Agreement payable
by reason of my death:
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE
AND THE EXACT DATE OF THE TRUST AGREEMENT.
IN THE EVENT THE PRIMARY BENEFICIARY IS NOT THE SPOUSE OF THE EXECUTIVE, THE
SPOUSE OF THE EXECUTIVE WILL NEED TO SIGN THE SPOUSAL CONSENT BELOW AND SUCH
SIGNATURE MUST BE NOTARIZED.
PRIMARY BENEFICIARY:
- ------------------- ---------------- --------------
Name Address Relationship
SECONDARY (CONTINGENT) BENEFICIARY:
- -----------------------------------
- ------------------- ---------------- --------------
Name Address Relationship
THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED.
ANY PRIOR DESIGNATION OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES IS
HEREBY REVOKED.
The Administrator shall pay all sums payable under the Agreement by reason of my
death to the Primary Beneficiary, if he or she survives me, and if no Primary
Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named
beneficiary survives me, then the Administrator shall pay all amounts in
accordance with the terms of my Executive Salary Continuation Agreement. In the
event that a named beneficiary survives me and dies prior to receiving the
entire benefit payable under said Agreement then and in that event, the
remaining unpaid benefit payable according to the terms of my Executive Salary
Continuation Agreement shall be payable to the personal representatives of the
estate of said beneficiary who survived me but died prior to receiving the total
benefit provided by my Executive Salary Continuation Agreement.
_______________
"EXECUTIVE"
Dated: 3/22/95
-------------- -------------------------
<PAGE>
FORM OF AMENDMENT NO. 1
TO
EXECUTIVE SALARY CONTINUATION AGREEMENT (JAQUA)
This Amendment No. 1 to the Executive Salary Continuation Agreement
("Amended Agreement") is made and entered into as of this 16th day of July, 1998
by and between The Bank of Hemet, a California banking corporation (the
"Employer") and ______________, an individual residing in the State of
California (hereinafter referred to as "Executive").
RECITALS AND UNDERTAKINGS
A. WHEREAS, the Executive is an employee of the Employer and is serving
as its President and Chief Executive Officer;
B. WHEREAS, the Executive's experience and knowledge of the affairs of
the Employer and the banking industry are extensive and valuable;
C. WHEREAS, the Employer has provided Executive with certain salary
continuation benefits as set forth in the Salary Continuation Agreement
("Original Agreement") between Employer and Executive dated March 21, 1998; and
D. WHEREAS, Executive has further shown his value to the Employer since
the date of the Original Agreement, it is deemed to be in the best interests of
the Employer to amend this agreement to provide that no "golden parachute"
payments will be made.
NOW, THEREFORE, the parties hereto agree to amend the Original Agreement as
follows:
1. A new Section 12A is added to the Original Agreement and shall
read in the entirety as follows:
12A. NO PAYMENT OF BENEFITS RESULTING IN GOLDEN
PARACHUTE TAXES UNDER SECTION 280G OF THE CODE. No payment
shall be made to Executive pursuant to this Agreement to the
extent that such payment when aggregated with all other
payments considered for purposes of calculating a parachute
payment results in an excess parachute payment as defined
under Section 280G of the Code. Furthermore to the extent
that the Internal Revenue Service or other applicable
governmental taxing authority determines that there has been
an "excess parachute payment" and a notice of deficiency or
similar notice has been issued, then the Employer or its
successor agrees to pay all expenses associated with
<PAGE>
professional fees (legal and tax accounting) in connection with the
protest, challenge, and defense of any such notice and the appeal of
any decision on such matter. The Employer or its successor agrees not
to settle the matter short of the appellate level without the written
consent of the Executive. In the event that the Internal Revenue
Service or other applicable governmental taxing authority ultimately
determines that, in fact, there has been an "excess parachute payment"
by the Employer, then the amount necessary to reduce the total
payments such that there would be no "excess parachute payment" would
be immediately and retroactively characterized as a loan from the
Employer or its successor to Executive with interest at a rate equal
to the ten year Treasury Bond (or if the Employer or its successor is
a bank subject to Regulation O then the loan shall be at substantially
the same terms as credit underwriting procedures that are not less
stringent than, those prevailing at the time the loan would have been
made for comparable transactions of the Employer or its successor and
shall be subject to the other conditions of Regulation O). The loan
shall be subject to repayment at the demand of the Employer or its
successor.
2. Except as amended hereby, the provisions of the Original
Agreement remain in full force and effect and the enforceability thereof is
not affected by this Amended Agreement.
IN WITNESS WHEREOF, the parties to this Amended Agreement have duly
executed this Amended Agreement as of the day and year first above written.
THE BANK OF HEMET
By:
---------------------------------
John J. McDonough, Chairman
----------------------------
By:
---------------------------------
<PAGE>
FORM OF AMENDMENT NO. 2
TO
EXECUTIVE SALARY CONTINUATION AGREEMENT (JAQUA)
This Amendment No. 2 to the Executive Salary Continuation Agreement
("Amended Agreement") is made and entered into as of this 29th day of July, 1998
by and between The Bank of Hemet, a California banking corporation (the
"Employer") and _______________, an individual residing in the State of
California (hereinafter referred to as "Executive").
RECITALS AND UNDERTAKINGS
A. WHEREAS, the Executive is an employee of the Employer and is serving
as its President and Chief Executive Officer;
B. WHEREAS, the Executive's experience and knowledge of the affairs of
the Employer and the banking industry are extensive and valuable;
C. WHEREAS, the Employer has provided Executive with certain salary
continuation benefits as set forth in the Salary Continuation Agreement
("Original Agreement") between Employer and Executive dated March 21, 1995; and
amended on July 16, 1998; and
D. WHEREAS, Employer and Executive desire to adopt a specific procedure
to determine the present value of the Annual Benefit for a fifteen (15) year
period in the event Executive terminates employment with Employer after a sale
of Business.
NOW, THEREFORE, the parties hereto agree to amend the Original Agreement as
follows:
1. Section 5-2 is amended to the Original Agreement and shall read
in the entirety as follows:
5.2 TERMINATION IN A SALE OF BUSINESS. In the event
there is a Sale of Business, the Executive shall be entitled
to be paid in a lump sum the present value (using the annual
discount rate equal to the annual interest rate of a ten
year treasury bond) of the Annual Benefit for a period of
fifteen (15) years with the Applicable Percentage being 100%
to be paid on the first day of each month, beginning with
the month following the month in which the Executive for any
reason terminates employment with Employer or a successor of
Employer after a Sale of Business.
<PAGE>
The annual interest rate of a ten year treasury bond will be the
yield on the 10 Year Treasury Note as shown in the "Morning
Economic Notes" provided daily to Employer by Paine Webber on the
date of the Sale of Business. In the event this source is no
longer available on the date of the Sale of Business, then the
source of the rate will be selected by mutual agreement of the
Employer and Executive.
The payment of the lump sum will be made to the Executive by the
Employer via wire transfer to the Executive's choice of bank
account as soon as practicable after the earlier of a) the Sale
of Business (assuming the Executive's termination date has been
contractually or officially established by the Employer), or b)
the effective date of the Executive's termination by Employer or
a successor of Employer after a Sale of Business.
2. Except as amended hereby, the provisions of the Original
Agreement remain in full force and effect and the enforceability thereof is
not affected by this Amended Agreement.
IN WITNESS WHEREOF, the parties to this Amended Agreement have duly
executed this Amended Agreement as of the day and year first above written.
THE BANK OF HEMET
By: /s/ John J. McDonough
--------------------------------
John J. McDonough, Chairman
--------------------------
--------------------------------
2
<PAGE>
EXHIBIT 10.9
TBOH Head Office Lease
<PAGE>
OFFICE LEASE
ARTICLE I
IDENTIFICATION OF PARTIES AND PROPERTY
1.1. PARTIES. This lease ("Lease") is entered into between TDE
INCORPORATED, a California corporation, as landlord (called "Landlord" in this
Lease), and THE BANK OF HEMET, a California corporation as tenant (called
"Tenant" in this Lease), and the parties agree to the terms specified below.
1.2. PROPERTY. The property which is the subject of this lease (called
"the Property" in this Lease) is located in the County of Riverside, State of
California, and is commonly known as Units 111 through 120 of The Bank of Hemet
Professional Building, 1600 E. Florida Avenue, Hemet, California 92344. The
Property is approximately 7,210 square foot bank office together with remote
drive-through teller islands located generally northwest of The Property, the
roof over the islands and structural supports and all machinery and equipment
either above or underground which operates or is part of the remote teller
locations, all of which are outlined in red on Exhibit A, attached to and made a
part of this Lease by this reference together with all easements appurtenant
thereto. The Property is part of The Bank of Hemet Professional Building (called
"The Building" in this Lease).
1.3. USE OF ADDITIONAL AREAS. Landlord gives to Tenant and its authorized
representatives and invitees the non-exclusive right to use The Building common
areas, with others who are
<PAGE>
entitled to use the common areas, subject to Landlord's rights set forth in this
Lease.
Landlord further gives to Tenant and its authorized representatives and
invitees the full and unimpaired access to The Property, including access
through the Florida Avenue entrance and the Girard Street entrance, at all times
except as provided in Article VII of this Lease.
The term "common areas" means all areas, space, equipment, and special
services provided to the Landlord by The 1600 Professional Building Owners
Association, a non-profit corporation (called "the owners association" in this
Lease) pursuant to Declaration of Restrictions, amended as of August 14, 1978
and recorded August 15, 1978 as Instrument No. 171582 in Official Records of
Riverside County, California (called "the declaration" in this Lease) for
parking and ingress and egress, and/or for the common and joint use and benefit
of the occupants, tenants and their respective authorized representatives and
invitees, of The Building as the owners association may in the future designate,
and may change, except as limited by the terms of the Lease or the declaration,
at any time during the terms hereof, including, without limitation, parking
area, access roads, driveways, retaining walls, landscaped areas, truck
serviceways or tunnels, loading docks, pedestrian malls, courts, stairs, ramps,
and sidewalks, comfort and first aid stations, washrooms and parcel pick up
stations.
The Property was originally owned by Tenant and has been sold by Tenant to
Landlord and that Tenant is aware of all
2
<PAGE>
provisions of the condominium plan including, without limitation, all provisions
of the declaration, the recorded condominium plan, the owners association
documentation, etc.
ARTICLE II
TERM OF LEASE
2.1. TERM OF LEASE. Landlord leases The Property to Tenant for a term
of fifteen (15) years, beginning on 12:01 A.M. March 17, 1988, and ending on
12:01 A.M. March 17, 2003.
ARTICLE III
RENT
3.1. RENT. During the term of this Lease, Tenant agrees to pay Landlord
a minimum monthly rent of $7,210.00 (7,210 square feet x. $1.00 per sq. ft. -
$7,210.00), called "the Rent" in this Lease), subject to adjustment as specified
below, for the use and occupancy of the Property.
3.2. ADJUSTMENT FOR COST OF LIVING INCREASE.
3.2.1. SCHEDULED ADJUSTMENTS. The rent provided for in paragraph
3.1 shall be subject to adjustment at the commencement of the second year of
the term and each year thereafter ("the adjustment date") as follows:
The basis for computing the adjustment is the revised Consumer
Price Index for All Urban Consumers for Los Angeles - Long Beach - Anaheim,
California for All Items (1967 = 100), published by the United States
Department of Labor, Bureau of Labor Statistics ("Index"), which is in effect
on the date of the commencement of the term ("Beginning Index"). The Index
most immediately preceding the adjustment date in question ("Extension
3
<PAGE>
Index") is to be used in determining the amount of the adjustment. If the
Extension Index has increased over the Beginning Index, the rent for the
following year (until the next rent adjustment) shall be set by multiplying the
rent set forth in paragraph 3.1 by a fraction, the numerator of which is the
Extension Index and the denominator of which is the Beginning Index. In no
event shall the rent be less than the rent set forth in paragraph 3.1. On
adjustment of the rent as provided in this Lease, the parties shall immediately
execute an amendment to this Lease, stating the new rent.
In the event the Index is either unavailable, is no longer
published, or is calculated on a significantly different basis following the
date of this Lease, the most comprehensive official index published which most
closely approximates the rate of inflation shall be substituted in place of the
Index.
3.3. ADJUSTMENT FOR COMMON AREA COSTS. Tenant shall pay to Landlord, in
addition to the rental heretofore specified, as further and additional rent, The
Property's proportionate share of the common area operating costs as billed to
the Landlord by the owners association. Operating costs mean the real property
taxes and assessments and other taxes and assessments, including but not limited
to liens or bonds, of any nature levied and assessed against the common areas,
or assessed against the owners association as a result of the common areas; all
sums expended by the owners association for the maintenance, repair,
replacements, and operation of the common areas; and an allowance to the owners
association for the owners association supervision, maintenance
4
<PAGE>
and operation of the common areas. Costs for maintenance and operation of the
common areas shall include, without limitation, cost of resurfacing, repainting
and restriping, cleaning, sweeping, and other janitorial services, policing,
purchase, construction, and maintenance of refuse receptacles, painting and
relandscaping, directional signs and other markers, car stops, lighting and
other utilities, reasonable depreciation allowance on improvements, machinery,
and equipment used in connection with the common areas, premiums on public
liability and property damage insurance, fire and earthquake insurance, if any,
and other costs necessary in the owners association's judgment for the
maintenance and operation of the common areas.
Landlord will designate its agent for the sole purpose of obtaining
information and other data from the owners association on all matters relating
to the common areas, including operating costs of the common areas and asserting
all rights which Landlord may have under the declaration to object to or modify
the expense of the operating costs.
3.4. MANNER OF PAYMENT. The Rent is due and payable in advance in
monthly installments commencing on the date the term of this Lease begins. In
the event that any installment of the Rent is not paid within ten (10) days of a
due date, a late penalty shall be added to such installment in the amount of
five percent (5%) of such installment. In the event the Lease term shall
commence on a date other than the first day of the month, the Rent shall be
prorated to the end of such month in order that
5
<PAGE>
the Rent thereafter becomes due on the first day of each month of the term of
the Lease. The Rent and all other amounts due under this Lease shall be paid,
without prior notice or demand, to Landlord at the address specified for notices
to Landlord in this Lease, or at such other address as Landlord may from time to
time specify by written notice to Tenant.
3.5. PERSONAL PROPERTY TAXES. Tenant agrees to pay all taxes,
assessments, or other charges imposed by any government entity on personal
property placed on The Property by Tenant, whether or not the personal property
may, or will be, removed at the termination of this Lease.
3.6. REAL PROPERTY TAXES. Tenant agrees to pay to Landlord, prior to
delinquency, all "taxes applicable to the Property," which shall include taxes,
assessments, bonds and other charges imposed by any government entity on The
Property, any special assessments imposed on The Property for the construction
or improvement of public works for the benefit of The Property, and any tax,
fee, or excise levied, assessed, and/or based on rent, on the square footage of
The Property, on the act of entering into this Lease, or on Tenant's occupancy,
or any other tax, fee, or excise, however described, in substitution or in
addition to taxes applicable to The Property, including, without limitation, a
so-called value added tax; provided, however, that Tenant shall not be required
to pay any municipal, county, state, or federal income or franchise taxes of
Landlord or transfer taxes of Landlord.
6
<PAGE>
With respect to any assessments which may be levied against or on The
Property and which under the laws then in force may be evidenced by improvement
or other bonds or may be paid in annual installments, there shall be included
within the definition of "taxes applicable to The Property," with respect to any
tax fiscal year, only the current annual installment for such tax fiscal year.
In the event The Property is not separately assessed, then the taxes,
assessments and other charges shall be apportioned upon the ratio of total
number of square feet in The Property to the total number of square feet in all
offices in The Building.
Within a reasonable time after the date Landlord receives each tax bill
covering The Property, Landlord shall notify Tenant in writing of the following:
(1) the total taxes applicable to The Property for the tax fiscal year in
question; and (2) the basis for calculating the taxes applicable to The
Property.
Tenant's liability to pay taxes applicable to The Property shall be
prorated on the basis of a 365-day year to account for any fractional portion
of a tax fiscal year included in the term at its commencement and expiration.
After expiration or termination of the term, Tenant shall pay to Landlord,
immediately on demand, the amount remaining unpaid toward Tenant's obligation
to pay taxes applicable to The Property for the partial tax fiscal year
included in the term at its end, or Landlord shall pay to Tenant any excess
amounts Tenant shall have paid to Landlord for such last tax fiscal year
included in the term at its end, provided Tenant is not in default.
7
<PAGE>
3.7. UTILITIES AND SERVICES. Tenant agrees to pay all charges whatsoever
for the furnishing of utilities, including, but not necessarily limited to, gas,
electricity, water, and telephone service to The Property and for removal of
garbage from The Property.
ARTICLE IV
PREPARATION AND MAINTENANCE
4.1. CONDITION OF PROPERTY. Tenant accepts The Property, including the
appurtenant facilities and improvements, in their present condition. Tenant has
inspected The Property and stipulates that The Property and appurtenant
facilities and improvements are in good, clean, safe, and tenantable condition
as of the date of signing this Lease.
4.2. TRADE FIXTURES. Tenant may, at Tenant's expense, install trade
fixtures on The Property for use in Tenant's business to be conducted on The
Property. All trade fixtures, goods, effects, personal property, machinery, and
equipment owned by Tenant, or installed at Tenant's expense, on The Property
shall remain the personal property of Tenant and may be removed by Tenant at any
time, and from time to time, during the term of this Lease; provided, that
Tenant shall, in removing any such property, repair all damage to The Property
caused by such removal and shall restore The Property to its original condition
at the commencement of the term, reasonable wear and tear excepted.
4.3. ALTERATIONS TO PROPERTY. Tenant shall not make any alterations or
additions on the demised premises nor make any
8
<PAGE>
contract therefore without first procuring Landlord's written consent, except
for nonstructural interior alterations and/or improvements made by Tenant to or
upon the demised premises.
All work with respect to alterations, additions, and changes must be done
in a good and workmanlike manner and diligently prosecuted to completion to the
end that the improvements on the demised premises shall at all times be a
complete unit except during the period of work.
Any changes, alterations, and improvements shall be performed and done
strictly in accordance with the laws and ordinances relating thereto, and with
the requirements of all carriers of insurance on the demised premises and the
Board of Underwriters, Fire Rating Bureau, or similar organization. In
performing the work of any such alterations, additions or changes, Tenant shall
have the work performed in such a manner so as not to obstruct the access to The
Building of any other tenant in The Building.
Before commencing any such work or construction in or about the demised
premises, Tenant shall notify Landlord in writing of the expected date of
commencement thereof. Landlord shall have the right at any time and from time to
time to post and maintain on the demised premises such notices as Landlord deems
necessary to protect the demised premises and Landlord from the liens of
mechanics, laborers, materialmen, suppliers or vendors.
4.4. SIGNS. Tenant may not install, or permit any other person to
install, any sign, awning, canopy, marquee, or other advertising on any exterior
wall, door, or window of The Property
9
<PAGE>
or The Building without Landlord's prior written consent, which shall not be
unreasonably withheld or delayed. The parties acknowledge that Tenant from time
to time may engage in promotional advertising which includes the use of signs or
other advertising affixed to the interior side of exterior windows. In such
instances, Tenant shall not be required to obtain the Landlord's prior written
consent before installing such signs. On the expiration or sooner termination
of this Lease, Tenant shall remove any items which were permitted to be
installed according to the terms of this paragraph.
4.5. LANDLORD'S MAINTENANCE DUTY. Landlord shall participate with the
owners association as required by all the CC&R's and amendments in keeping in
good order, condition and repair, including replacement if required, the roof,
the foundations, bearing and exterior walls (excluding the interior of all
walls, and any exterior or interior of any windows, doors, plateglass, display
windows, and interior ceiling of The Property), subflooring, unexposed
electrical, plumbing and sewage systems, including, without limitation, those
portions of the system lying outside The Property, except for (a) any damage
thereto caused by any act, negligence or omission of Tenant or its agents,
contractors, servants, or employees, (b) reasonable wear and tear and (c) for
any structural alterations or improvements required by a governmental agency by
reason of Tenant's use and occupancy of The Property. Tenant shall reimburse
Landlord for the costs which Landlord incurs in performing its obligations as
aforesaid, with respect to the
10
<PAGE>
building of which The Property are a part, and which is identified as 1600 E.
Florida Avenue, Hemet, California. Said costs and expenses shall be paid to
Landlord within ten (10) days of receipt of an invoice for the costs of same
from Landlord.
Landlord, where permitted by law and the CC&R's and amendments, shall
have fifteen (15) days after written notice from Tenant to commence
performance of Landlord's obligation under this paragraph, except that
Landlord, where permitted by law and the CC&R's and amendments, shall perform
its obligations immediately, if the nature of the problem presents a hazard
or emergency. Tenant waives the provisions of any law permitting Tenant to
make repairs at Landlord's expense. Tenant expressly agrees that the use of
roof area shall be limited to ingress for maintenance purposes only, and that
said roof areas shall not be used for storage, inventory and other similar
uses.
4.6. TENANT'S MAINTENANCE DUTY.
(1) Except as provided in paragraph 4.5, Tenant shall, during the
term of this Lease, keep the demised premises in good order, condition and
repair, including the improvements constructed by Tenant therein, and including
the interior surface of exterior walls, ceiling, all windows, doors, door frames
and door closures, plateglass, storefronts, and showcases, all heating and
electrical equipment, air conditioning equipment and plumbing systems, if any,
installed therein, and shall as necessary, or when required by governmental
authority, make modifications or replacements thereof. Furthermore, Tenant shall
keep in good order, condition and repair, including replacement as
11
<PAGE>
required, the remote drive-through teller building and all its related areas.
Upon Tenant's request, Landlord shall assign to Tenant all
warranties applicable to the equipment, machinery and portions of The Property
which Tenant is obligated to maintain or replace pursuant to this paragraph 4.6.
(2) If Tenant refuses or neglects to make repairs and/or maintain
the demised premises, or any part thereof, in a manner reasonably satisfactory
to Landlord, Landlord shall have the right but shall not be obligated to make
such repairs or perform such maintenance on behalf of and for the account of
Tenant without liability to Tenant for any loss or damage that may accrue to
Tenant's business by reason thereof. In such event, such work shall be paid for
by Tenant as additional rent promptly upon demand.
(3) Tenant shall contract with a service company for the
maintenance of the heating and air conditioning equipment.
4.7. ENTRY BY LANDLORD. Landlord, and Landlord's agents and
representatives, shall have the right to enter and inspect The Property at any
reasonable time, for the purpose of ascertaining the condition of The Property,
of exercising any right or performing any obligation of Landlord under this
Lease, or of exhibiting The Property to prospective tenants, purchasers,
mortgagees, or insurers of Landlord's interest in The Property. In case of
emergency, Landlord shall have the right to enter The Property at any time; and,
if Tenant is not present to permit such entry, Landlord may forcibly enter The
Property and any such
12
<PAGE>
entry shall not in any circumstances be construed or deemed to be a forcible or
unlawful entry onto or a detainer of The Property or any portion of The
Property. No entry by Landlord, permitted under this paragraph, shall be deemed
a re-entry nor shall Tenant be entitled to compensation or abatement of rent for
any inconvenience, nuisance, or discomfort occasioned by such entry.
ARTICLE V
USE OF PROPERTY
5.1. PERMITTED USE. Tenant agrees to use The Property for the sole
purpose of operating a full-service bank branch and offering related financial
services, during normal and customary business hours within the financial
community of Hemet during the term of this Lease. Tenant may not use The
Property for any other purpose than the primary purpose, or uses normally
incident to the primary purpose, without Landlord's prior written consent, which
shall not be unreasonably withheld. Tenant shall, at Tenant's own cost and
expense, obtain any and all licenses and permits necessary for such use of The
Property.
5.2. PROHIBITED USE. Tenant agrees not to do or permit to be done on or
about The Property, nor to bring or keep or permit to be brought or kept on or
about The Property, anything which is prohibited by or will in any way conflict
with any law, statute, or government regulation now or hereafter in effect,
which is prohibited by the standard form of fire insurance, or which will in any
way increase the existing rate of, cause the cancellation of, or otherwise
affect fire or any other insurance on The Property or any of its contents.
Tenant agrees not to use or
13
<PAGE>
allow The Property to be used for residential purposes or for any improper,
immoral, unlawful, or objectionable purpose. Tenant agrees not to cause,
maintain, or permit any nuisance on or about The Property and further agrees not
to commit or suffer to be committed any waste on The Property.
5.3. COMPLIANCE WITH GOVERNMENT REGULATIONS. Tenant agrees to comply
with all statutes, ordinances, regulations, and requirements, whether now in
force or enacted during the term of this Lease, of all government entities
having jurisdiction over Tenant's use and occupancy of The Property. Landlord
may terminate this Lease immediately if Tenant is found to be in violation of
any statute, ordinance, regulation, or requirement of any government entity and
does not cure such violation within ninety (90) days of such violation. The
judgment of any court, or the Tenant's admission of violation in any proceeding
brought by a government entity, shall be conclusive proof between Landlord and
Tenant of Tenant's violation. Such termination shall not relieve Tenant from any
and all obligations under this Lease.
ARTICLE VI
INDEMNITY AND INSURANCE
6.1. INDEMNITY. Landlord shall not be liable to Tenant for any loss or
damage to person or property caused by theft, fire, act of God, acts of the
public enemy, riot, strike, insurrection, war, court order, requisition or
order of governmental body or authority, or other causes beyond Landlord's
reasonable control. Tenant shall indemnify Landlord and hold Landlord
harmless of and from any and all loss, cost, damage, injury, or expense
arising
14
<PAGE>
out of or related to claims of injury to or death of persons or to claims of
damage to property occurring or resulting directly or indirectly from Tenant's
use or occupancy of The Property or from Tenant's activities on or about The
Property, such indemnity to include, but without limitation, the obligation to
provide all costs of defense against any such claims; provided, that such
indemnity shall not extend to any such loss arising from Landlord's negligence.
In addition, Tenant shall hold and save Landlord harmless and indemnify Landlord
of and from any and all loss, cost, damage, injury, or expense arising out of or
in any way related to claims for work or labor performed or to claims for
materials or supplies furnished to or at the request of Tenant or in connection
with performance of any work done for the account of Tenant on The Property.
6.2. LIABILITY INSURANCE. Tenant agrees to secure and maintain a broad
form comprehensive coverage policy of public liability and property damage
insurance, with a limit of not less than $3,000,000 combined single limit bodily
injury and property damage coverage, issued by an insurance company acceptable
to Landlord, insuring against loss or liability resulting from Tenant's use or
occupancy of The Property or from Tenant's activities on or about The Property.
Tenant agrees to name Landlord as an additional insured under the policy for the
purpose of assuring Tenant's performance of the indemnity provisions set forth
in paragraph 6.1 of this Lease, but Tenant's duty to indemnify Landlord is not
limited to the amount of insurance procured pursuant to the terms of this
paragraph 6.2.
15
<PAGE>
6.3. ALL RISK INSURANCE. Tenant agrees to secure and maintain an all
risk replacement cost insurance policy with agreed amount endorsement, issued by
an insurance company acceptable to Landlord, covering any improvements, and
Tenant's trade fixtures, equipment, and personal property of every description
located on The Property, in an amount equal to the full replacement value
thereof.
6.4. WAIVER OF SUBROGATION. The parties agree to release each other, and
their respective authorized representatives, from any claims for damage to any
person, The Property or any improvements on The Property, or Tenant's trade
fixtures, equipment, or personal property located on The Property, caused by or
resulting from risks insured against under any insurance policies carried by the
parties pursuant to this Lease that are in force at the time of any such damage
to the extent of the available insurance proceeds. Each party shall cause each
insurance policy carried pursuant to this Lease by that party to be written to
provide that the insurance company waives all right of recovery by way of
subrogation against either party in connection with any damage covered by the
policy.
6.5. EVIDENCE OF INSURANCE. Tenant agrees to deliver to Landlord a
certificate of insurance, evidencing all insurance required to be maintained
by Tenant under this Lease, prior to Tenant's occupancy of The Property.
Notwithstanding any other provision of this Lease to the contrary, Landlord
shall have no obligation to deliver possession of The Property to Tenant
until Landlord has received the certificate of insurance. Upon request
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of Tenant, Landlord shall provide to tenant a certificate of insurance
evidencing all insurance required to be maintained by the Landlord under this
Lease.
ARTICLE VII
DESTRUCTION OR CONDEMNATION
7.1. LANDLORD'S OBLIGATION TO RESTORE THE PROPERTY.
Subject to the provisions of paragraphs 7.2, 7.3, and 7.4 of this Article, in
case of damage to The Property by fire or other casualty against which Landlord
is insured pursuant to paragraph 6.3 of this Lease or through the owners
association, Tenant shall give immediate notice in writing of the damage to
Landlord, who shall, on receipt of the notice, rebuild and restore The Property
to its former condition or cause the owners association to do so, with
reasonable speed, at Landlord's expense, subject to delays which may arise by
reason of adjustment of loss under insurance policies and for delays beyond
Landlord's reasonable control. To the extent that any part of The Property is
rendered untenantable as a result of the damage, the rent shall abate
proportionately from the date of the damage until the restoration of The
Property is completed. Untenantable as used in this section shall be interpreted
to mean that Tenant cannot use that portion of The Property in Tenant's normal
business operation or is precluded from using it by operation of law.
7.2. LANDLORD'S OPTION TO TERMINATE THE LEASE. If The Property is
damaged or destroyed by any cause whatsoever, and if, in Landlord's reasonable
opinion, The Property cannot be rebuilt or made fit for Tenant's purposes within
180 days after the
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damage or destruction, instead of rebuilding and restoring The Property Landlord
may terminate this Lease by giving notice of termination to Tenant within 30
days after such damage or destruction. On giving such notice, the rent shall be
apportioned and paid to the date of the damage, and Tenant shall immediately
deliver up possession of The Property to Landlord.
7.3. DAMAGE DURING LAST YEAR OF TERM. If The Property is substantially
destroyed by fire or other causes at any time during the last year of the term
of this Lease, either Landlord or Tenant may terminate this Lease on written
notice to the other party given within 60 days of the date of such destruction.
Termination shall be effective within 30 days after the notice is given, the
rent shall abate proportionately from the date of the destruction until the date
of termination, and Tenant shall deliver up possession of The Property to
Landlord on the date of termination.
7.4. NO CLAIMS. Any insurance proceeds received by Landlord because of
damage to or destruction of all or a portion of The Property shall be the
Landlord's sole property, and Tenant agrees to make no claim against the
proceeds. No damages, compensation, or claim in excess of any insurance proceeds
shall be payable by Landlord to Tenant for inconvenience, loss of business, or
annoyance arising from any repair or restoration of any portion of The Property
pursuant to paragraph 7.1 of this Lease. Landlord shall use best efforts to
effect such repairs or restoration promptly and in such manner as not to
interfere unreasonably with Tenant's occupancy.
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7.5. TOTAL TAKING. In the event that the whole or substantially the
whole of The Property is lawfully condemned or taken in any manner for public or
quasi-public use, this Lease, and the term and estate granted by this Lease,
shall cease forthwith and terminate as of the date of taking of possession of
The Property for such public or quasi-public use.
7.6. PARTIAL TAKING. If more than 50 percent of The Property is
condemned or taken, either party may elect at any time within 30 days of the
date of the condemnation or taking to cancel this Lease on written notice to the
other, and this Lease shall terminate on the date specified in the notice, which
date shall be no earlier than the date of the condemnation or taking. If this
Lease continues in force as to any part of The Property following any such
condemnation or taking, the rent shall be diminished by an amount representing
the part of the rent that is properly applicable to the portion of The Property
which is condemned or taken. If less than fifty percent (50%) of The Property is
condemned or taken and if the condemnation or taking renders the remaining
portion of The Property unsuitable for Tenant's continued use of The Property,
either party may, on 30 days written notice to the other, terminate this Lease
as of the date of the condemnation or taking.
7.7. TERMINATION OF THE LEASE ON TAKING. In the event of the termination
of this Lease pursuant to the provisions of paragraph 7.5 or 7.6, this Lease,
and the term and estate granted by this Lease, shall expire as of the date of
such termination in the same manner and with the same effect as if that were the
date
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set for the normal expiration of the term of this Lease, and the rent shall be
apportioned as of that date.
7.8. CONDEMNATION AWARD. Except as otherwise provided in paragraph 7.9
of this Lease, Landlord shall be entitled to receive the entire award in any
condemnation proceeding without deduction therefrom for any estate vested in
Tenant by this Lease, and Tenant shall receive no part of such award. Tenant
expressly assigns to Landlord any and all of Tenant's right, title, and interest
in or to such award or any part of such award. Notwithstanding the foregoing,
Tenant shall be entitled to appear, claim, prove, and receive in the
condemnation proceeding such award as may be made that represents the loss or
damage to Tenant's trade fixtures and removable personal property located on The
Property, removal or relocation costs, and the unamortized balance of any
improvements or alterations installed on The Property at Tenant's expense.
7.9. TEMPORARY TAKING. If the temporary use or occupancy of all or any part
of The Property is condemned or taken for any public or quasi-public use during
the term of this Lease, this Lease shall remain unaffected by such condemnation
or taking, and Tenant shall continue to pay in full all sums payable by Tenant
under this Lease. In the event of any such condemnation or taking, Tenant shall
be entitled to appear, claim, prove, and receive in the condemnation proceeding
such award as may be made that represents compensation for the use and occupancy
of The Property during the term of this Lease and Landlord shall be entitled to
appear, claim, prove, and receive such award as may
20
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be made that represents compensation for the use and occupancy of The Property
after the end of the term of this Lease.
7.10. RESTORATION OF THE PROPERTY. In the event of any condemnation or
taking of less than the whole of The Property, and this Lease shall continue in
effect, in whole or in part, or in the event of a condemnation or taking for a
temporary use or occupancy of all or any part of The Property, Landlord, to the
extent that the condemnation award shall be sufficient for the purpose, shall
restore the remaining part of The Property to substantially its former condition
to the extent that this is feasible.
ARTICLE VIII
ASSIGNMENT AND SUBLEASING
8.1. LIMITATION ON ASSIGNMENT OR SUBLEASING. Tenant may not assign,
encumber, or otherwise transfer all or any part of Tenant's interest in The
Property, sublease all or any part of The Property, or allow any person except
Tenant's authorized agents or employees, to occupy or otherwise use all or any
part of The Property, without Landlord's prior written consent. The occupancy of
The Property by any successor firm of the Tenant, or any firm into which the
Tenant may become merged, and any entity controlling, under common control with,
or controlled by, Tenant shall not be deemed an assignment of this Lease. Any
assignment, transfer, encumbrance, or sublease without Landlord's prior written
consent is voidable by Landlord. This Lease shall continue in effect for so long
as Landlord does not terminate Tenant's right to possession, and Landlord may
enforce all rights
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and remedies under this Lease, including the right to recover the rent as it
becomes due.
8.2. CONSENT NOT TO BE UNREASONABLY WITHHELD. Landlord's consent to any
assignment, transfer, encumbrance, or sublease may not be unreasonably
withheld, provided that any transferee (assignee or sublessee, as
appropriate) shall execute Landlord's form of lease, assuming all terms,
covenants, and conditions of this Lease. A consent given to a particular
assignment, transfer encumbrance, or sublease shall not constitute a consent
to any subsequent assignment, transfer, encumbrance, or sublease, or a waiver
of the provisions of this Article.
8.3. ASSIGNMENT OF RENTS ON SUBLEASING. If Landlord's consent to a
sublease is obtained as provided above, Tenant shall immediately and
irrevocably assign to Landlord all rent from the sublease. However, so long
as Tenant is not in default with regard to the payment of rent under this
Lease, Tenant may collect the rents from any subtenants. If at any time after
the assignment is made, Tenant defaults in the payment of rent, Landlord may
collect the rent due from any subtenants and apply it toward Tenant's
obligations under this Lease. However, Landlord's acceptance of rent from any
transferee of Tenant shall not constitute a consent to the transfer or a
waiver of Tenant's breach of the covenants contained in this Article.
8.4. TRANSFER OF RIGHTS NOT DEEMED AN ASSIGNMENT. If Tenant, or any
permitted assignee or subtenant of Tenant, is a corporation, and if at any
time during the term of this Lease any part or all of the corporate shares or
voting rights of
22
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shareholders shall be transferred by sale, assignment, bequest, inheritance,
trust, operation of law, or other disposition, or treasury shares be issued so
as to result in a change in the control of the corporation by reason of
ownership of greater than 50 percent of the voting shares of the corporation or
otherwise, then such transfer or issue shall not be deemed an assignment for the
purposes of this Article. Tenant shall, however, notify Landlord in writing of
any such changes and, on Landlord's request, shall make available to Landlord
for inspection appropriate books and records of Tenant which, alone or with
other data, provide Landlord with adequate information concerning the change of
control.
8.5. EFFECT OF TERMINATION OF LEASE ON SUBTENANTS. In the event of a
termination of this Lease, at Landlord's option, each subtenant of space on The
Property shall attorn to Landlord and shall be deemed to have agreed to the
provisions of this paragraph.
ARTICLE IX
TERMINATION OF LEASE
9.1. TERMINATION ON TENANT'S DEFAULT. In the event that (i) Tenant defaults
in the payment of rent and such default continues for a period of 10 consecutive
days, or (ii) Tenant vacates or abandons The Property for a continuous period in
excess of 10 days, or (iii) Tenant defaults in the performance of any obligation
required to be performed by Tenant under this Lease (other than abandonment or
the payment of rent) and fails for a period of 20 days after written notice from
Landlord
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specifying such default to cure the default (unless the default cannot be cured
within this 20-day period, in which case Tenant shall commence to cure the
default within the 20-day period and shall cure the default with all reasonable
dispatch), or (iv) Tenant is adjudicated bankrupt, or a petition by or against
Tenant for reorganization or adjustment of Tenant's obligations under the
Bankruptcy Act or any other existing or future insolvency or bankruptcy statute
is approved, or Tenant makes a general assignment of Tenant's property for the
benefit of creditors, or a receiver or trustee is appointed to take control
of Tenant's business or assets, then, and in each such case, Landlord may, at
Landlord's option, terminate Tenant's right to possession and thereby terminate
this Lease, or without terminating this Lease, Landlord may re-enter The
Property and for the account of Tenant re-let The Property, or any portion or
portions of The Property, for all or any part of the unexpired term of
this Lease on such terms and conditions as Landlord may elect.
9.2. DAMAGES RECOVERABLE ON TERMINATION. In the event of a termination
of this Lease by Landlord pursuant to paragraph 9.1, Landlord shall be entitled
to recover from Tenant (i) the worth at the time of award of the unpaid rent
which had been earned at the time of termination, (ii) the worth at the time of
award of the amount by which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided, (iii) the worth at the time of
award of the amount by which the unpaid rent for the balance of the term after
the time
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<PAGE>
of award exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided, and (iv) any other amount necessary to compensate Landlord
for all detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease, or, which in the ordinary course of things, would
be likely to result from Tenant's failure to perform. Efforts by Landlord to
mitigate the damages caused by Tenant's breach of this Lease shall not
constitute a waiver by Landlord of Landlord's right to recover damages under
this Lease.
9.3. "WORTH AT THE TIME OF AWARD". The "worth at the time of award" of
the amounts referred to in subsections (i) and (ii) of paragraph 9.2 shall be
computed with interest at the lesser rate of 18 percent per year or the maximum
rate allowed by law. The "worth at the time of award" of the amount referred to
in subsection (iii) of paragraph 9.2 shall be computed by reference to competent
appraisal evidence or the formula prescribed by and using the lowest discount
rate permitted under applicable law.
9.4. LANDLORD'S RIGHT TO RE-LET THE PROPERTY ON TENANT'S DEFAULT. In the
event that Landlord re-lets The Property, without terminating this Lease,
pursuant to paragraph 9.1, Landlord shall be entitled to recover monthly from
Tenant the difference between the monthly installments of Basic Rent and such
other amounts as may be payable by Tenant to Landlord pursuant to the provisions
of this Lease over the total monthly rental received by Landlord on such
re-letting, after first deducting therefrom all expenses reasonably incurred by
Landlord in such re-letting and in repairing, renovating, remodeling, and
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<PAGE>
altering The Property for the purpose of such re-letting. Landlord shall not be
deemed to have elected to terminate this Lease, the liability of Tenant to pay
rent, or the liability of Tenant for damages under any of the provisions of this
Lease by any such re-letting or by any action in unlawful detainer or otherwise
to obtain possession of The Property, unless Landlord shall have notified tenant
in writing that Landlord has so elected to terminate this Lease.
For purposes of this Article, the following shall not constitute
termination of Tenant's right to possession: (1) acts of maintenance or
preservation or efforts to re-let The Property; or, (2) the appointment of a
receiver on Landlord's initiative to protect Landlord's interest under this
Lease. Nothing contained in this Article shall be construed as obligating
Landlord to re-let the whole or any part of The Property. In the event of any
re-letting of The Property, Landlord shall have the right, but not the
obligation, to remove from The Property all or any part of the personal
property located on The Property and may place such personal property in
storage at a public warehouse selected by Landlord, at the expense and risk
of the owner or owners of such personal property.
9.5. ADDITIONAL REMEDIES. The remedies provided to Landlord by this
Article shall be cumulative and shall be in addition and supplemental to all
other rights or remedies which Landlord may lawfully pursue in the event of any
breach or threatened breach by Tenant of any of the provisions of this Lease.
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ARTICLE X
MISCELLANEOUS PROVISIONS
10.1. NOTICES AND RENT PAYMENTS. Except as otherwise expressly required
by law, all rent payments are deemed tendered, and all notices required to be
given by this Lease are deemed duly served, either when personally delivered to
the party to whom it is addressed, or when mailed by registered or certified
mail addressed as follows:
Landlord: TDE, INCORPORATED
5602 East Second Street
Long Beach, California 90803
Tenant: THE BANK OF HEMET
1600 E. Florida Avenue, Suite 211
Hemet, California 92344
Landlord and Tenant may change their respective addresses by giving written
notice to the other in the manner specified in this paragraph. Any notice
mailed, as provided in this paragraph, shall be effective at the expiration
of 72 hours after deposit of the notice, with postage prepaid, in the United
States mail at any place within the State of California.
10.2. INTERPRETATION. This Lease is to be construed and interpreted in
accordance with the laws of the State of California. If any provision of this
Lease is held either invalid, void, or unenforceable by a court of competent
jurisdiction, the remaining provisions of this Lease remain in full force and
effect. This instrument constitutes the entire agreement between Landlord and
Tenant, and correctly sets forth the obligations and rights of Landlord and
Tenant with respect to each other and The Property as of the date of signing
this Lease. Any
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<PAGE>
agreements or representations not expressly set forth in this Lease are null and
void. This Lease has been drafted on the basis of the parties' mutual
contributions of language and it is not to be construed against any party as
being the drafter (or causing the drafting) of this Lease.
10.3. HEADINGS. The headings of the articles and paragraphs of this Lease
are inserted for convenience only and do not constitute part of this Lease and
may not be used in its construction.
10.4. ATTORNEYS' FEES. If either Landlord or Tenant commences any legal
action or proceeding against the other party to enforce the provisions of this
Lease, the prevailing party is entitled to recover reasonable attorneys' fees
and costs of suit, including attorneys' fees and costs on appeal.
10.5. COUNTERPARTS. For the convenience of the parties, this Lease may be
executed in one or more counterparts, which must each be considered an original.
All of the counterparts constitute one and the same instrument.
10.6. QUIET ENJOYMENT. So long as Tenant is not in default under any of
the covenants and agreements of this Lease, Tenant's quiet and peaceful
enjoyment of The Property shall not be disturbed or interfered with by Landlord
or by any person claiming by, through, or under Landlord.
10.7. HOLDING OVER. In the event Tenant shall hold The Property after the
expiration of the term of this Lease with the express or implied consent of
Landlord, such holding over shall be deemed to have created a tenancy from month
to month,
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terminable on 30 days notice by either party to the other, at a monthly Rent
equal to the monthly rent then in effect.
10.8. TRANSFERS BY LANDLORD. Landlord shall have the right to transfer
and assign, in whole or in part, all of Landlord's rights and obligations under
this Lease and in The Property, and in such event and on assumption by
Landlord's transferee of Landlord's obligations under this Lease, no further
liability or obligations shall accrue against Landlord under this Lease, and
Landlord shall be entirely relieved of all agreements and conditions of this
Lease to be performed by Landlord. Tenant agrees to attorn to any such
transferee or assignee.
10.9. ESTOPPEL CERTIFICATES. Tenant agrees, from time to time, within
20 days after Landlord's request, to deliver to Landlord, or Landlord's
designee, an estoppel certificate stating that this Lease is unmodified and
in full force and effect (or if there have been modifications, that the Lease
is in full force and effect as modified and stating the modifications), the
date to which rent and other charges have been paid, the unexpired term of
this Lease, whether there are any defaults or rent abatements or offsets
claimed by Tenant, and such other matters pertaining to this Lease as may be
reasonably requested by Landlord or Landlord's mortgagee, assignee, or
transferee, it being intended that any such statement delivered pursuant to
this paragraph may be relied on by any prospective purchaser of all or any
part of Landlord's interest in The Property or by any mortgagee or assignee
of any mortgage on all or any part of Landlord's interest in The
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Property and their respective successors and assigns.
10.10. MODIFICATION. This Lease may not be altered, changed, or amended
except by an instrument in writing signed by Landlord and Tenant.
10.11. TIME IS OF THE ESSENCE. Time is of the essence of this Lease, and
all provisions of this Lease relating thereto shall be strictly construed.
10.12. RELATIONSHIP OF PARTIES. Nothing contained in this Lease shall be
deemed or construed by Landlord and Tenant, nor by any third party, as creating
the relationship of principal and agent, of partnership, or of joint venture by
Landlord and Tenant, it being understood and agreed that no provision contained
in this Lease, nor any acts of Landlord and Tenant, shall be deemed to create
any relationship other than the relationship of landlord and tenant.
10.13. COVENANTS AND CONDITIONS. All of the obligations of Landlord and
Tenant under this Lease shall be deemed and construed to be conditions as
well as covenants, as though the words specifically expressing or importing
covenants and conditions were used in each separate instance.
10.14. SALE OF PROPERTY. Notwithstanding any of the provisions of this
Lease, Landlord may:
(1) assign in whole or in part Landlord's interest in
this Lease; and
(2) sell all or any part of The Building or the leased
premises.
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10.15. BINDING ON SUCCESSORS. The covenants and agreements herein
contained shall bind and inure to the benefit of Landlord and Tenant's
successors and assigns, and Tenant, and each of its partners, their heirs,
personal representatives, successors and assigns, subject to the provisions of
this Lease.
10.16. AUTHORITY OF TENANT CORPORATION. A certified copy of the resolution
of the board of directors of Tenant which authorizes the signatories to this
Lease on Tenant's behalf to enter into and execute this Lease and to take all
further actions necessary to implement the provisions of this Lease is contained
in Exhibit B which is attached to and made a part of this Lease by this
reference.
10.17. USE OF TENANT'S NAME. So long as Tenant remains as tenant in The
Bank of Hemet Professional Building, the Landlord covenants and agrees, if
Landlord hereafter acquires fee ownership of The Building or ownership
interest of a majority of the condominium units in The Building, The Building
shall be known as The Bank of Hemet Professional Building and so designated
in all advertising for The Building. In any event, Landlord further covenants
and agrees that it shall use its best efforts to preserve use of the name The
Bank of Hemet Professional Building for The Building so long as Tenant
remains a tenant in said building.
In addition, so long as Tenant remains a tenant in The Bank of Hemet
Professional Building, the Landlord may, upon written consent of the Tenant,
incorporate in its signs Tenant's logo, a
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copy of which is attached hereto as Exhibit B and incorporated herein by
reference.
Landlord shall submit to Tenant for review and approval, before
fabrication, a detailed drawing covering the location, size, layout, design
and color, including all lettering and graphics, of any proposed sign which
incorporates the words, "The Bank of Hemet," or The Bank of Hemet logo.
Tenant's approval shall not be unreasonably withheld.
In the event Tenant is acquired by, merges or consolidates with another
business entity and, as a result, changes its name but remains a tenant under
its new name, then Landlord covenants and agrees, if Landlord hereafter
acquires fee ownership of The Building, that the name of The Building shall
be changed to Tenant's new name for so long as Tenant remains a tenant in The
Building. Tenant shall pay all costs of modifying signage and other
identifying features of The Building to reflect The Building's new name.
This covenant shall survive assignment of this Lease by Landlord or Tenant
and shall be binding upon the successors and assigns of Landlord.
10.18. PARKING AND TRAFFIC CIRCULATION. In addition to the parking rights
conferred on Tenant pursuant to the common area provisions of the lease, the
Tenant shall be entitled to the exclusive use of the parking spaces subject to
approval of owners association and entrance and exit traffic lanes to the
drive-through remote tellers, all of which are highlighted in charcoal grey on
Exhibit A, attached.
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The traffic circulation in the parking areas, as it exists as of the date
of execution of this Lease, is an integral part of the efficient functioning of
customer access to Tenant and use of the drive-through remote teller islands. In
the event Landlord hereafter acquires fee ownership of The Building or ownership
interest of a majority of the condominium units in The Building, Landlord shall
not rearrange or redesignate the existing traffic circulation, as of the date of
this Lease, without the prior written consent of Tenant, which shall not be
unreasonably withheld. In any event, Landlord further covenants and agrees that
it shall use its best efforts to preserve the existing traffic circulation, as
of the date of this Lease, without the prior written consent of Tenant, which
shall not be unreasonably withheld.
10.19. TENANT TO ABIDE BY RULES. Tenant agrees to observe, abide by and
conform to the rules and regulations pertaining to the use and occupancy of The
Property and The Building, and acknowledges receipt of a copy of the rules and
regulations and amendments thereto.
Tenant understands that the property is part of a project which is subject
to the provisions of a Declaration, Articles of Incorporation, and Bylaws
("project documents"). In addition, the project is subject to the rules and
regulations as adopted by the board of directors of the owners association. In
the event of any conflict between project documents and this Lease, the project
documents shall control. Tenant hereby acknowledges receipt of a copy of each of
said documents, represents that is
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has read the same and agrees to abide by all of the terms, provisions and
conditions of said documents, and further agrees to abide by any and all rules
and regulations not now in effect but hereafter adopted by the board of
directors of the owners association or by the association itself. Breach of this
covenant by Tenant shall be grounds for termination of the Lease.
Executed on March 15, 1988, at Hemet, California.
LANDLORD: TDE, INCORPORATED.
A California Corporation
By: /s/ Norene E. Scott
-------------------------------------
NORENE E. SCOTT, President
TENANT: THE BANK OF HEMET
By: /s/ James B. Jaqua
-------------------------------------
JAMES B. JAQUA, President
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Exhibit A
[FLOOR PLAN]
<PAGE>
[FLOOR PLAN]
BANK OF HEMET PROFESSIONAL BUILDING
-----------------------------------
BASEMENT PARKING
SPACE ALLOCATION
ASSIGNMENTS
<PAGE>
ADDENDUM TO LEASE
Pursuant to that Lease dated March 15, 1988 between THE BANK OF HEMET, a
California Corporation as tenant ("Tenant in said Lease), and TDE INCORPORATED,
a California Corporation, as Landlord ("Landlord" in said Lease), both parties
here agree to modifications to the Lease as follows:
ARTICLE III
Section 3.4 MANNER OF PAYMENT
Paragraph one, line five, strike out the word "Penalty" and substitute
"Charge".
Section 3.6 REAL PROPERTY TAXES
In the last sentence of the first paragraph, strike out "transfer taxes of
Landlord" and substitute "any taxes imposed on income from the sale of the
property by Landlord".
ARTICLE IV
Section 4.4 SIGNS
Paragraph one, line ten, to the sentence ending "before installing such
signs," add ", Provided tenant obtains prior approval from the Condominium
Association".
Section 4.6.(1) TENANT'S MAINTENANCE DUTY
Second paragraph, second line, strike "all warranties applicable to" and
substitute "any warranties, held by Landlord applicable to".
Article 4.6.(3) TENANT'S MAINTENANCE DUTY
Delete existing sentence and substitute the following sentence: Tenant
shall contract for and pay the costs of maintenance of all heating and air
conditioning equipment not maintained by the owners association.
ARTICLE V
Section 5.1 PERMITTED USE
In the first sentence after the word "bank" add "or savings and loan".
<PAGE>
Strike the second sentence and substitute the following sentence: Tenant
may not use the Property for any other purpose than the sole purpose set
forth above, or uses incident thereto, without the prior written consent of
Landlord, which shall not be unreasonably withheld.
ARTICLE VIII
Section 8.1 LIMITATION ON ASSIGNMENT OR SUBLETTING
In the third sentence strike "is voidable by Landlord" and substitute
"shall be void".
Section 8.2 CONSENT NOT TO BE UNREASONABLY WITHHELD
At the point in the first sentence after the word "appropriate" add
"provided that any transferee shall operate a full service Bank branch or
savings and loan branch office offering related financial services and".
At the end of Paragraph one add the sentence "Landlord's consent to any
assignment, transfer, encumbrance, or sublease, however, shall not release
Tenant from its obligation under this Lease".
ARTICLE X
Section 10.19 TENANT TO ABIDE BY RULES
Paragraph two, last sentence reads "Breach of this covenant by Tenant shall
be grounds for termination of the Lease" which shall be modified as
follows; "Breach of this covenant by Tenant shall be considered an event of
default pursuant to Article IX, Section 9.1 of this Lease".
Section 10.20 NON WAIVER (to be added to ARTICLE X)
No covenant, term or condition, or breach thereof, shall be deemed waived
except if expressly waived in a written instrument executed by Landlord,
and any such waiver of such breach shall not be deemed to be a waiver of
any preceding or succeeding breach. Acceptance of all or any portion of
rent at any time shall not be deemed to be a waiver of any covenant, term
or condition, except as to the rent payment accepted.
<PAGE>
Executed on March 17, 1988
Tenant: THE BANK OF HEMET
By: /s/ James B. Jaqua
-----------------------------------
James B. Jaqua, President
Landlord: TDE, INCORPORATED
a California Corporation
By: /s/ Norene E. Scott
-----------------------------------
NORENE E. SCOTT, PRESIDENT
<PAGE>
EXHIBIT 10.10
Form of Executive Employment Agreement (M. Lentini
dated September 26, 1996 N. Douglas Mills
between B. Parrott and
Certain executives and Valley Bank M. Nugent)
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement is made and entered into this 26 day of
Sept. 1996, by and between VALLEY BANK, a corporation organized and existing
under the laws of the State of California (hereinafter called the
"Corporation"), and ____________________ (hereinafter called the "Executive").
RECITALS
A. Executive has been in the employ of the Corporation serving as
its ________________________________, since ____________________;
B. The Corporation wishes to continue to retain Executives services
on the terms and conditions set forth in this Agreement: and
C. Executive wishes to continue in the employ of the Corporation on
the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the services to be performed in the
future as well as the mutual promises and covenants herein contained, it is
agreed as follows:
AGREEMENT
ARTICLE I
1.1 EMPLOYMENT - Corporation agrees to employ the Executive as its _______
________________________, and Executive agrees to serve in that
capacity. Corporation shall employ Executive in such capacity and with such
duties and responsibilities as may be assigned to Executive from time-to-time by
the Corporation. Executive will be compensated at a salary commensurate to peer
industry standards. Said salary shall not be less than $______. per annum and
may be increased periodically to maintain parity with peer industry standards,
as determined in the discretion of the Corporation's Board of Directors.
1.2 FULL EFFORTS - The Executive agrees to devote Executive's full time and
attention exclusively to the business and affairs of Corporation, except during
vacation periods, and to use Executive's best efforts to furnish faithful and
satisfactory services to the Corporation.
1.3 TERM OF AGREEMENT - Unless renewed or extended by the mutual, written
consent of the parties, this Agreement shall automatically expire five (5) years
from the date above, unless terminated earlier pursuant to Article 2. In the
event Corporation elects to extend, renew, or renegotiate this Agreement with
Executive, in no instance may its term be extended beyond Executive's
________________ birthday, which is _________________.
<PAGE>
ARTICLE 2
2.1 TERMINATION OF EMPLOYMENT BY EXECUTIVE - If the Executive terminates
Executive's employment prior to the expiration of the employment term specified
in Article 1, Executive shall give Corporation 15 days advance notice of such
termination. The obligations of Corporation under this Agreement shall end upon
termination of Executive's employment.
2.2 TERMINATION OF EMPLOYMENT BY CORPORATION FOR CAUSE - Corporation may
terminate this Agreement, and Executive's employment, for "cause", which for
purposes of this Article shall include willful material breach by Executive of
any material provision of this Agreement, willfully engaging in any business
activities that materially conflict with Executive's duties to Corporation,
willful failure to perform Executive's duties under this Agreement, or any
criminal, unlawful, fraudulent or dishonest act. In the event this Agreement,
and Executive's employment, are terminated for cause, Executive shall not be
entitled to receive any compensation hereunder, except such base salary as shall
have been earned prior to the date of such termination.
2.3 TERMINATION OF EMPLOYMENT BY CORPORATION OTHER THAN CAUSE -
Corporation reserves the right to terminate the employment of Executive at
any time, without cause, upon notice to Executive. Such termination shall be
effective upon Corporation giving notice to Executive. In the event the
employment of Executive shall be terminated by Corporation other than for
cause or disability, Corporation shall pay Executive an amount equal to one
(1) year of Executive's then current annual salary, multiplied by a factor of
140%, plus such base salary as shall have been earned prior to the date of
such termination.
2.4 REMEDIES OF EXECUTIVE FOR EMPLOYMENT TERMINATION - Executive
acknowledges and agrees that the provisions of this Article 2 and of Article 4
state Executive's entire and exclusive rights, entitlements and remedies against
Corporation, its employees and representatives for termination of employment
and/or termination of this Agreement.
ARTICLE 3
3.1 BENEFIT PLANS AND OTHER BENEFITS - During Executive's employment under
this Agreement, Executive shall be eligible to participate in all retirement,
profit sharing, group insurance, bonus, ESOP, 401-K, vacation or similar
employee benefit plans which Corporation may now have or hereafter make
generally available to its executive staff, subject to the terms and conditions
of such plans and programs.
ARTICLE 4
4.1 REORGANIZATION - The Corporation shall not sell, merge, consolidate into
or with another corporation, firm, or person, or transfer controlling ownership
of the Corporation, unless and until such succeeding entity agrees to assume
and discharge the obligations of the Corporation under this agreement Upon the
occurrence of such event, the term "Corporation" as used in this agreement shall
be deemed to refer to such successor or survivor corporation. In the event the
succeeding entity refuses to assume and discharge the obligations of Corporation
under this Agreement, Corporation
<PAGE>
may terminate this Agreement, and all obligations to Executive, by paying to
Executive an amount equal to _________ years of Executive's then current annual
salary, multiplied by a factor of 140%, before consummating such sale, merger,
consolidation or transfer.
ARTICLE 5
5.1 ENTIRE AGREEMENT - This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and supersedes all other
written or oral agreements, understandings or negotiations on the subject matter
addressed herein.
IN WITNESS WHEREOF, Corporation has caused this agreement to be duly executed by
its Chairman of the Board and Executive has hereunder set his hand at Moreno
Valley, CA., the day and year first above written.
EXECUTIVE VALLEY BANK
By: /s/ Marion V. Ashley
- ---------------------------------- ---------------------------------------
Marion V. Ashley, Chairman of the Board
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement is made and entered into this 26 day of
Sept., 1996, by and between VALLEY BANK, a corporation organized and existing
under the laws of the State of California (hereinafter called the
"Corporation"), and N. Douglas Mills (hereinafter called the "Executive").
RECITALS
A. Executive has been in the employ of the Corporation serving as its
President & Chief Executive Officer, since July 6, 1992;
B. The Corporation wishes to continue to retain Executives services on
the terms and conditions set forth in this Agreement; and
C. Executive wishes to continue in the employ of the Corporation on the
terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the services to be performed in the
future as well as the mutual promises and covenants herein contained, it is
agreed as follows:
AGREEMENT
ARTICLE I
1.1 EMPLOYMENT - Corporation agrees to employ the Executive as its President &
Chief Executive Officer, and Executive agrees to serve in that capacity.
Corporation shall employ Executive in such capacity and with such duties and
responsibilities as may be assigned to Executive from time-to-time by the
Corporation. Executive will be compensated at a salary commensurate to peer
industry standards. Said salary shall not be less than $140,000. per annum and
may be increased periodically to maintain parity with peer industry standards,
as determined in the discretion of the Corporation's Board of Directors.
1.2 FULL EFFORTS - The Executive agrees to devote Executive's full time and
attention exclusively to the business and affairs of Corporation, except during
vacation periods, and to use Executive's best efforts to furnish faithful and
satisfactory services to the Corporation.
1.3 TERM OF AGREEMENT - Unless renewed or extended by the mutual, written
consent of the parties, this Agreement shall automatically expire five (5) years
from the date above, unless terminated earlier pursuant to Article 2. In the
event Corporation elects to extend, renew, or renegotiate this Agreement with
Executive, in no instance may its term be extended beyond Executive's
sixty-fifth (65th) birthday, which is July 28, 2004.
<PAGE>
ARTICLE 2
2.1 TERMINATION OF EMPLOYMENT BY EXECUTIVE - If the Executive terminates
Executive's employment prior to the expiration of the employment term specified
in Article I, Executive shall give Corporation 15 days advance notice of such
termination. The obligations of Corporation under this Agreement shall end upon
termination of Executive's employment.
2.2 TERMINATION OF EMPLOYMENT BY CORPORATION FOR CAUSE - Corporation may
terminate this Agreement, and Executive's employment, for "cause", which for
purposes of this Article shall include willful material breach by Executive of
any material provision of this Agreement, willfully engaging in any business
activities that materially conflict with Executive's duties to Corporation,
willful failure to perform Executive's duties under this Agreement, or any
criminal, unlawful, fraudulent or dishonest act. In the event this Agreement,
and Executive's employment, are terminated for cause, Executive shall not be
entitled to receive any compensation hereunder, except such base salary as shall
have been earned prior to the date of such termination.
2.3 TERMINATION OF EMPLOYMENT BY CORPORATION OTHER THAN CAUSE - Corporation
reserves the right to terminate the employment of Executive at any time, without
cause, upon notice to Executive. Such termination shall be effective upon
Corporation giving notice to Executive. In the event the employment of
Executive shall be terminated by Corporation other than for cause or disability,
Corporation shall pay Executive an amount equal to two (2) years of Executive's
then current annual salary, multiplied by a factor of 140%, plus such base
salary as shall have been earned prior to the date of such termination.
2.4 REMEDIES OF EXECUTIVE FOR EMPLOYMENT TERMINATION - Executive acknowledges
and agrees that the provisions of this Article 2 and of Article 4 state
Executive's entire and exclusive rights, entitlements and remedies against
Corporation, its employees and representatives for termination of employment
and/or termination of this Agreement.
ARTICLE 3
3.1 BENEFIT PLANS AND OTHER BENEFITS - During Executive's employment under this
Agreement, Executive shall be eligible to participate in all retirement, profit
sharing, group insurance, bonus, ESOP, 401-K, vacation or similar employee
benefit plans which Corporation may now have or hereafter make generally
available to its executive staff, subject to the terms and conditions of such
plans and programs.
ARTICLE 4
4.1 REORGANIZATION - The Corporation shall not sell, merge, consolidate into or
with another corporation, firm, or person, or transfer controlling ownership of
the Corporation, unless and until such succeeding entity agrees to assume and
discharge the obligations of the Corporation under this agreement. Upon the
occurrence of such event, the term "Corporation" as used in this agreement shall
be deemed to refer to such successor or survivor corporation. In the event the
succeeding entity refuses to assume and discharge the obligations of Corporation
under this Agreement, Corporation
<PAGE>
may terminate this Agreement, and all obligations to Executive, by paying to
Executive an amount equal to three (3) years of Executive's then current annual
salary, multiplied by a factor of 140%, before consummating such sale, merger,
consolidation or transfer.
ARTICLE 5
5.1 ENTIRE AGREEMENT - This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and supersedes all
other written or oral agreements, understandings or negotiations on the
subject matter addressed herein.
IN WITNESS WHEREOF, Corporation has caused this agreement to be duly executed
by its Chairman of the Board and Executive has hereunder set his hand at
Moreno Valley, CA., the day and year first above written.
EXECUTIVE VALLEY BANK
/s/ N. Douglas Mills By: /s/ Marion V. Ashley
- --------------------------------- ----------------------------------------
N. Douglas Mills (###-##-####) Marion V. Ashley, Chairman of the Board
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT - Amendment
The Executive Employment Agreement made and entered into the 26th day of
September, 1996, by and between VALLEY BANK, a corporation organized and
existing under the laws of the State of California (hereinafter called the
"Corporation"), and Doug Mills (hereinafter called the "Executive"), is hereby
amended pursuant to action taken by the Corporation's Board of Directors on
October 27, 1997, to wit:
BE IT RESOLVED THAT ARTICLE 4 is amended to read as follows:
4.1 - REORGANIZATION - THE CORPORATION MAY ELECT TO SELL, MERGE, CONSOLIDATE
INTO OR WITH ANOTHER CORPORATION, FIRM, OR PERSON, OR TRANSFER CONTROLLING
OWNERSHIP OF THE CORPORATION. IN THE EVENT OF A SALE, MERGER, CONSOLIDATION
INTO OR WITH ANOTHER CORPORATION, FIRM, OR PERSON, OR TRANSFER OF CONTROLLING
OWNERSHIP OF THE CORPORATION, THE CORPORATION WILL, AT THE CONSUMMATION OF
SUCH REORGANIZATION EVENT, TERMINATE THIS AGREEMENT, AND ALL OBLIGATIONS TO
EXECUTIVE, BY PAYING TO EXECUTIVE AN AMOUNT EQUAL TO THREE (3) YEARS
EXECUTIVE'S THEN CURRENT ANNUAL SALARY, MULTIPLIED BY A FACTOR OF 140%.
This amendment is the first, and only, amendment of the Agreement referenced
above.
IN WITNESS WHEREFOR, Corporation has caused this amendment to be duly executed
by its Chairman of the Board. The Chairman of the Board and Executive have
hereunder set their hand at Moreno Valley, CA this 30th day of October, 1997.
EXECUTIVE VALLEY BANK
/s/ Doug Mills By: /s/ Marion V. Ashley
- --------------------------------- ----------------------------------------
Doug Mills (###-##-####) Marion V. Ashley, Chairman of the Board
<PAGE>
EXHIBIT 10.12
Executive Salary Continuation Agreement
dated October 19, 1995,
amended October 30, 1997
between
N. Douglas Mills and VB
<PAGE>
EXECUTIVE SALARY CONTINUATION AGREEMENT
AGREEMENT, made and entered into this ____ day of __________, by and
between VALLEY BANK, a corporation organized and existing under the
laws of the State of California hereinafter called the "Corporation"),
and ________________ (hereinafter called the "Executive").
WITNESSETH:
WHEREAS, the Executive is in the employ of the Corporation serving as its
________________________________; and
WHEREAS, the experience of the Executive, his knowledge of the affairs
of the Corporation, his reputation and contacts in the industry are so
valuable that assurance of his continued service is essential for the
future growth and profits of the Corporation and it is in the best interests
of the Corporation to arrange terms of continued employment for the
Executive so as to reasonably assure his remaining in the Corporation's
employment during his lifetime or until the age of retirement; and
WHEREAS, it is the desire of the Corporation that his services be retained
as herein provided; and
WHEREAS the Executive is willing to continue in the employ of the
Corporation provided the Corporation agrees to pay to him or his
beneficiaries certain benefits in accordance with the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the services to be performed in the
future as well as the mutual promises and covenants herein contained, it
is agreed as follows:
ARTICLE I
1.1) Employment - The Corporation agrees to employ the Executive in such
capacity as the Corporation may from time to time determine. The Executive
will continue in the employ of the Corporation in such capacity and with such
duties and responsibilities as may be assigned to him, and such compensation
as may be determined from time to time by the Board of Directors of the
Corporation.
1.2) Full Efforts - The Executive agrees to devote his full time and
attention exclusively to the business and affairs of the Corporation, except
during vacation periods, and to use his best efforts to furnish faithful and
satisfactory services to the Corporation.
1.3) Fringe Benefit - The salary continuation benefits provided by this
Agreement are granted by the Corporation as a fringe benefit to the Executive
and are not part of any salary reduction plan or any arrangement deferring a
bonus or salary increase. The Executive has no option to take any current
payment or bonus in lieu of these salary continuation benefits.
<PAGE>
ARTICLE 2
2.1) Retirement - If the Executive shall continue in the employment of the
Corporation until he attains the age of sixty-five (65), he may retire from
active daily employment as of the first day of the month next following
attainment of age sixty-five (65) or upon such later date as may be mutually
agreed upon by the Executive and the Corporation.
2.2) Payment - The Corporation agrees that upon such retirement it will
pay to the Executive the annual sum of seventy thousand dollars ($70,000.00),
payable monthly on the first day of each month following such retirement
until he attains the age of eighty (80); subject to the conditions and
limitations hereinafter set forth. The seventy thousand dollars ($70,000.00)
annual payment amount will be adjusted as of the first year in which it is to
be paid to reflect changes in the federally determined cost-of-living index
and will be adjusted annually for each payment year thereafter to reflect
further changes in said federally, determined cost-of-living index.
2.3) Death Benefit - The Corporation agrees that if the Executive shall so
retire, but shall die before receiving the full amount of monthly payments to
which he is entitled hereunder, it will continue to make such monthly payments
to the Executive's surviving spouse for the remaining period as defined in
Section 2.2 above. If the Executive is not survived by any spouse, said payments
shall be made to the duly qualified personal representative, executor or
administrator of his estate.
ARTICLE 3
3.1) Consulting - It is mutually agreed that during the fifteen (15) year
period following retirement from active daily employment upon attainment of age
sixty-five (65), or such later date as may be mutually agreed upon, the
Executive shall, at the request of the Corporation, be available at reasonable
times and places as may be mutually agreed upon, to render services to the
senior executives of the Corporation at its offices in an advisory or
consulting capacity.
3.2) Informed - The Executive will keep himself informed concerning the
affairs of the Corporation through reports which the Corporation will supply,
and such other means as may be agreed upon. The Executive shall not be required
to travel from whatever place he may be then living or staying for the purposes
of such consultation unless all expenses incurred by him shall be paid by the
Corporation.
3.3) Disability - Breach of this condition shall not be considered to have
occurred if the Executive is unable to consult because of his mental or
physical disability.
3.4) Not Employee - In furnishing such consultative services, the Executive
shall not be an employee of the Corporation, but shall act in the capacity of an
independent contractor,
3.5) No Competition - During the said fifteen (15) year period following
retirement from active daily employment, the Executive shall not become the
owner of, nor engage, directly or indirectly, in any business which is
substantially similar to or competes with the business of the Corporation,
either as proprietor, partner, stockholder, officer, director, or employee
within the County of Riverside, unless the Corporation has first consented in
writing thereto.
<PAGE>
3.6) Forfeiture - The payments provided under Article 2 are conditioned
upon the Executive fulfilling the foregoing requirements of this Article 3 and,
in the event the Executive shall at any time materially breach the foregoing
requirements, the Board of Directors of the Corporation may, by a Resolution, at
any regular or special meeting, suspend or eliminate payment during the period
of such breach. What constitutes a material breach shall be within the sole
determination of the Board of Directors.
3.7) Termination of Payments - In the event the Board of Directors by such
Resolution terminates further payments to the Executive as provided in this
Article 3, all amounts then remaining unpaid under this Agreement shall be
forfeited and the Corporation shall have no further liability to the Executive
or any other persons hereunder.
ARTICLE 4
4.1) Death Prior to Retirement - In the event the Executive should die
while actively employed by the Corporation at any time after the date of this
Agreement but prior to his attaining the age of sixty-five (65) years, the
Corporation will pay the annual sum of Seventy Thousand Dollars ($70,000.00) per
year, to the Executive's surviving spouse in equal monthly installments for a
period of one hundred eighty (180) months. If the Executive is not survived by
any spouse, said payment shall be made to the duly qualified personal
representative, executor or administrator of his estate. The said monthly
payments shall begin the first day of the month following the month of the
decease of the Executive. Notwithstanding any other provisions of this
Agreement, no benefits shall be payable hereunder to Executive, or his Spouse,
or estate, if his death occurs as a result of a suicide, while sane or insane,
within two years after (i) the date of this agreement and/or (ii) the date of
any Subsequent change in the benefits for said executive.
4.2) Disability Prior to Retirement - In the event the Executive should
become disabled while actively employed by the Corporation at any time after
the date of this Agreement but prior to his attaining the age of sixty-five
(65) years, the Corporation will pay the annual sum of Seventy Thousand
Dollars ($70,000.00) per year to the Executive, his spouse, or if no spouse,
said payment shall be made to the duly qualified representative. The said
monthly payments shall begin the first day of the month following the month of
disability of the Executive. For purposes of this paragraph, the definition of
the term "disability" shall be the same as required for eligibility or
disability payments under the Social Security Act.
ARTICLE 5
5.1) Voluntary Termination of Service or Discharge - In the event that the
employment of the Executive shall be terminated, either voluntarily or
involuntarily, as a result of any criminal, unlawful, fraudulent, or dishonest
action or any action determined to be detrimental to the interests of the
Corporation, which determination shall be made in the sole discretion of its
Board of Directors, prior to his attaining the age of sixty-five (65) years,
this Agreement shall terminate upon the date of such termination of employment
and no benefits or payments of any kind shall be made hereunder.
<PAGE>
5.2) Other Termination of Service- The Corporation reserves the right to
terminate the employment of the Executive at any time prior to retirement. In
the event that the employment of the Executive shall terminate prior to his
attaining the age sixty-five (65), other than for reasons stated in Section 5.1
hereof, or by reason of his disability or his death, then this Agreement shall
terminate upon the date of such termination of employment. Provided, however,
that the Executive shall be entitled to the following benefits under the
following circumstances:
(a) If the Executive has been employed by the Corporation for a
period of three (3) years Subsequent to July 1, 1992, the executive will be
considered vested in sixty percent (60%) of the annual benefit amount and shall
become vested in an additional percent (20%) of said amount for each succeeding
year thereafter until he becomes one hundred percent (100%) vested. If the
Executive's employment is terminated under the provisions of this Section 5.2,
the Corporation will pay the Executive's vested amount upon such terms and
conditions and commencing within three (3) months after the date of termination.
(b) Anything hereinabove to the contrary notwithstanding, if the
Executive is not fully vested in the amount to which he is entitled under this
plan, he will become fully vested in the event of a transfer of the controlling
ownership or sale of the Corporation and shall be entitled to the full amount,
upon the terms and conditions hereof, if termination of employment thereafter
occurs under this Section 5.2.
ARTICLE 6
6.1) Termination of Agreement by Reason of Changes in Law - The
Corporation is entering into this Agreement upon the assumption that certain
existing tax laws will continue in effect in substantially their current form.
In the event of any changes in federal law relating to and allowing the
tax-free accumulation of earnings within a life insurance policy, the income
tax-free payment of proceeds from life insurance policies or the deduction from
income of interest payments on certificates of deposit issued by banking
institutions, or other change which in the sole discretion of the Board of
Directors has a material adverse tax impact on the Corporation, the
Corporation shall have an option to terminate or modify this Agreement.
Provided, however, that the Executive shall be entitled to the same amount and
under the same terms as he would have been entitled to under Sections 2.2,
4.1, 4.2 and 5.2. The payment of said amount shall be made under the same
terms and conditions set forth in Sections 2.2, 4.1, 4.2, and 5.2.
ARTICLE 7
7.1) Alienability - Neither the Executive, his spouse, nor any other
beneficiary under this Agreement shall have any power or right to transfer,
assign, anticipate, hypothecate, mortgage, commute, modify, or otherwise
encumber in advance any of said benefits payable hereunder, nor shall any of
said benefits be subject to seizure for the payment of any debts, judgments,
alimony or separate maintenance, owed by the Executive or his beneficiary or any
of them, or be transferable by operation of law in the event of bankruptcy,
insolvency or otherwise. In the event the Executive or any beneficiary attempts
assignment, commutation, hypothecation, transfer, or disposal of the benefits
hereunder, the Corporation's obligations hereunder shall forthwith cease and
terminate.
<PAGE>
ARTICLE 8
8.1) Participation in Other Plans - Nothing contained in this Agreement
shall be construed to alter, abridge, or in any manner affect the rights and
privileges of the Executive to participate in and be covered by any pension,
profit sharing, group insurance, bonus or similar employee plans which the
Corporation may now have or hereafter adopt.
ARTICLE 9
9.1) Funding - The Corporation reserves the absolute right, at its sole
and exclusive discretion, either to fund the obligations of the Corporation
undertaken by this Agreement or to refrain from funding the same, and to
determine the extent, nature, and method of such funding. Should the Corporation
elect to fund this Agreement, in whole or in part, through the medium of life
insurance or annuities, or both, the corporation shall be the owner and
beneficiary of the policy. The Corporation reserves the absolute right, in its
sole discretion, to terminate such life insurance or annuities, as well as any
other funding program, at any time, in whole or in part. At no time shall the
Executive be deemed to have any right, title, or interest in or to any specified
asset or assets of the Corporation, including but not by way of restriction,
any insurance or annuity contract or contracts or the proceeds therefrom.
9.2) Unsecured - Any such policy shall not in any way be considered to be
security for the performance of the obligations of this Agreement. It shall be,
and remain, a general, unpledged, unrestricted asset of the Corporation.
9.3) Cooperation - If the Corporation purchases a life insurance or
annuity policy on the life of the Executive, he agrees to sign any documents
that may be required for that purpose and to undergo any medical examination or
tests which may be necessary.
9.4) Right as Creditor - This Agreement shall not be construed as giving
the Executive or his beneficiary any greater rights than those of any other
unsecured creditor of the Corporation.
ARTICLE 10
10.1) Reorganization - The Corporation shall not merge or consolidate into
or with another corporation, or reorganize, or sell substantially all of its
assets to another corporation, firm, or person unless and until such succeeding
or continuing corporation, firm, or person agrees to assume and discharge the
obligations of the Corporation under this Agreement. Upon the occurrence of such
event, the term "Corporation" as used in this Agreement shall be deemed to refer
to such successor or survivor corporation.
ARTICLE 11
11.1) Benefits and Burdens - This Agreement shall be binding upon and inure
to the benefit of the Executive and his personal representatives, and the
Corporation and any, successor organization which shall succeed to substantially
all of its assets and business.
<PAGE>
ARTICLE 12
12.1) Not a Contract of Employment - This Agreement shall not be deemed to
constitute a contract of employment between the parties hereto, nor shall any
provision hereof restrict the right of the Corporation to discharge the
Executive, or restrict the right of the Executive to terminate his employment.
ARTICLE 13
13.1) The Fiduciary of the Plan and for purpose of the claims procedure
under the Agreement is the Chief Financial Officer of the Corporation. The
business address of the Fiduciary is 24010 Sunnymead Blvd., Moreno Valley, CA
92553. The Corporation shall have the right to change the Fiduciary of the Plan
created under this Agreement. The Corporation shall give the Executive written
notice of a change of the Fiduciary, or any change in the address or telephone
number of the Fiduciary.
13.2) Claims Procedure - Benefits shall be paid in accordance with the
provisions of this Agreement. The Executive, or a designated recipient or any
other person claiming through the Executive shall make a written request for
benefits under this Agreement, This written claim shall be mailed or delivered
to the Fiduciary. Such claim shall be reviewed by the Fiduciary.
If the claim is denied, in full or in part, the Fiduciary shall
provide a written notice within ninety (90) days setting forth the specific
reasons for denial, specific reference to the provisions of this Agreement
upon which the denial is based, and any additional material or information
necessary to perfect the claim, and an explanation of why such material or
information is necessary, and appropriate information and explanation of the
steps to be taken if a review of the denial is desired.
If the claim is denied and a review is desired, the Executive (or
beneficiary) shall notify the Fiduciary in writing within sixty (60) days [a
claim shall be deemed denied if the Fiduciary does not take any action within
the aforesaid ninety (90) day period] after receipt of the written notice of
denial. In requesting a review, the Executive or his beneficiary may request a
review of the Plan Document or other pertinent documents with regard to the
employee benefit plan created under this Agreement, may submit any written
issues and comments, may request an extension of time for such written
submission of issues and comments, and may request that a hearing be held, but
the decision to hold a hearing shall be within the sole discretion of the
Fiduciary.
The decision on the review of the denial claim shall be rendered by
the Fiduciary within sixty (60) days after the receipt of the request for review
(if a hearing is held) or within sixty (60) days after the hearing if one is
held. The decision shall be written stating the specific reasons for the
decision and shall include reference to specific provisions of this Agreement on
which the decision is based.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be duly
executed by its Chairman of the Board of Directors and its Corporate
Secretary, and the Executive has hereunder set his hand at Moreno Valley, CA,
the day and year first above written.
EXECUTIVE: VALLEY BANK, by
/s/ N. Douglas Mills /s/ Marion V. Ashley
- ----------------------------------- ------------------------------------
N. Douglas Mills (###-##-####) Marion V. Ashley, Chairman
/s/ Dianna Williams
------------------------------------
Dianna Williams, Corporate Secretary
<PAGE>
EXECUTIVE SALARY CONTINUATION AGREEMENT - Amendment
The Executive Salary Continuation Agreement made and entered into the 19th day
of October, 1995, by and between VALLEY BANK, a corporation organized and
existing under the laws of the State of California (hereinafter called the
"Corporation"), and N. Douglas Mills (hereinafter called the "Executive"), is
hereby amended pursuant to action taken by the Corporation's Board of Directors
on October 27, 1997, to wit:
BE IT RESOLVED THAT ARTICLE 10 is amended to read as follows:
10.1 REORGANIZATION - THE CORPORATION MAY ELECT TO MERGE, CONSOLIDATE INTO OR
WITH ANOTHER CORPORATION, REORGANIZE, OR SELL SUBSTANTIALLY ALL OF ITS ASSETS TO
ANOTHER CORPORATION, FIRM, OR PERSON. UPON THE OCCURRENCE, AND CONSUMMATION OF
SUCH REORGANIZATION EVENT, THE CORPORATION WILL TERMINATE THIS AGREEMENT, AND
THE EXECUTIVE SHALL BE ENTITLED TO THE FULL AMOUNT OF BENEFITS AS DESCRIBED IN
SECTION 2.2 AND SECTION 5.2 OF THIS AGREEMENT.
This amendment is the first, and only, amendment of the Agreement referenced
above.
IN WITNESS WHEREFOR, Corporation has caused this amendment to be duly executed
by its Chairman of the Board. The Chairman of the Board and Executive have
hereunder set their hand at Moreno Valley, CA this 30th day of October, 1997.
EXECUTIVE VALLEY BANK
/s/ N. Douglas Mills /s/ Marion V. Ashley
- ----------------------------------- ---------------------------------------
N. Douglas Mills (###-##-####) Marion V. Ashley, Chairman of the Board
<PAGE>
EXHIBIT 10.13
Second Amendment to
Executive Employment Agreement
between
N. Douglas Mills and Valley Bank
<PAGE>
SECOND AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT
This Second Amendment to Executive Employment Agreement is made this ____
day of ______ 199_, between Valley Bank, (hereinafter the "Corporation") and N.
Douglas Mills (hereinafter the "Executive").
RECITALS
WHEREAS, the Corporation has entered into an Executive Employment Agreement
with Executive dated September 26, 1996, amended October 30, 1997; and
WHEREAS, the Corporation and Pacific Community Banking Group, a California
corporation ("PCBG") entered into that certain First Restatement of Agreement
and Plan of Reorganization dated as of _______________, 1999 (the
"Reorganization Agreement") whereby the Corporation will be acquired and become
a wholly-owned subsidiary of PCBG; and
WHEREAS, Executive is currently a shareholder of the Corporation, and
President, Chief Executive Officer and a Director of the Corporation; and
WHEREAS, following the consummation of the acquisition of the Corporation
by PCBG, Executive desires to be retained by the Corporation in accordance with
this amended Executive Employment Agreement; and
WHEREAS, unless otherwise provided in this Agreement, capitalized terms
shall have the meanings given to them in the Reorganization Agreement.
NOW THEREFORE, in consideration of the mutual representations, warranties and
covenants, agreements and conditions contained herein and in the Reorganization
Agreement, and intending to be legally bound hereby, the Corporation and
Executive agree as follows:
1. Paragraph 1.1 is deleted in its entirety, and the following is
substituted, which shall read as follows:
"EMPLOYMENT - The Corporation shall employ the Executive in
an executive position with the Corporation as determined by
the Corporation with such duties and responsibilities as may
be assigned to Executive from time to time by the
Corporation. Executive agrees to serve in such capacity.
Executive shall be compensated at the annual rate of
$160,000, payable in amounts
1
EXHIBIT 2.1(d)(i)(a)
<PAGE>
consistent with regular payroll periods of Corporation. This
Executive Employment Agreement shall not generally be assignable or
transferable without the consent of Executive; provided, however,
that Executive hereby consents to the assignment and assumption of
this Executive Employment Agreement by The Bank of Hemet, Pacific
Community Banking Group or their successors or assigns, so long as
such successor or assignee has sufficient financial resources and
capabilities to honor the terms and conditions of this Executive
Employment Agreement."
2. Paragraph 1.3 is deleted in its entirety, and a new paragraph 1.3 is
substituted, which shall read as follows:
"TERM OF AGREEMENT - The term of this Agreement shall be for
not less than one year from the date of consummation of the
Reorganization Date, but shall automatically renew for
successive one year periods thereafter unless terminated as
provided herein. If this Executive Employment Agreement is
terminated by the Corporation, the Consulting Agreement
attached hereto as EXHIBIT "A," and which is hereby executed
and agreed to by the Corporation and Executive (the
"Consulting Agreement"), shall become effective as of such
date of termination. If this Executive Employment Agreement
is terminated by Executive, the Consulting Agreement shall
become effective as of the date of such termination by
Executive or one year from the date of consummation of the
Reorganization Agreement, whichever is later."
3. Paragraph 2.3 is deleted in its entirety, and a new paragraph 2.3 is
substituted, which shall read as follows:
"CONSUMMATION OF REORGANIZATION AGREEMENT - Upon
consummation of the Reorganization Agreement, the
Corporation shall pay Executive the sum of $393,992."
4. Paragraph 2.5 is added, which shall read as follows:
"TERMINATION OF EMPLOYMENT BY CORPORATION OTHER THAN CAUSE
- The Corporation reserves the right to terminate the
employment of Executive at any time, without cause, upon
notice to Executive, prior to the expiration of the Term of
the Agreement in Section 1.3. Such termination
2
<PAGE>
shall be effective upon the Corporation giving notice to
Executive. In the event the employment of Executive shall be
terminated by the Corporation other than for cause or
disability, the Corporation and Executive shall then enter
into the Consulting Agreement attached hereto as EXHIBIT "A."
In the event the employment of Executive shall be terminated
by the Corporation other than for cause or disability, the
Consulting Agreement shall become effective as of the date
of such termination as provided in paragraph 1.3 above."
5. Paragraph 3.2 is added, which shall read as follows:
"SALARY CONTINUATION AGREEMENT - Executive and Corporation
agree that Pacific Community Banking Group will not become
liable for any obligations under Executive's Salary
Continuation Agreement dated October 19, 1995, as amended
October 30, 1997, ("Salary Continuation Agreement") unless
Pacific Community Banking Group becomes assignee or
transferee of the Salary Continuation Agreement. Executive
and Corporation hereby further agree that, notwithstanding
the consummation of the Reorganization Agreement, Section
10.1 of the Salary Continuation Agreement will not require
the Corporation to accelerate payments due to Executive
thereunder until expiration or termination of this Executive
Employment Agreement, at which time such payments shall then
accelerate and the Consulting Agreement will become
effective."
6. Paragraph 4.1, as amended, is hereby deleted in its entirety.
Except as amended hereby, Executive Employment Agreement between Mr. N.
Douglas Mills and the Corporation dated September 20, 1996, amended October 30,
1997, shall remain in full force and effect.
3
<PAGE>
IN WITNESS WHEREOF, this Second Amendment has been executed as of the date
first hereinabove written.
EXECUTIVE
_____________________________________
N. Douglas Mills
VALLEY BANK
BY: __________________________________
Marion V. Ashley
Chairman of the Board
4
<PAGE>
CONSULTING AGREEMENT
I. PARTIES
The parties to this Consulting Agreement (the "Agreement") are
VALLEY BANK, a California banking corporation (the "Bank"), and N. Douglas
Mills, an individual ("Consultant").
II. RECITALS
Consultant is possessed of experience and talents in the
management field which will be useful to the Bank in the conduct of its
commercial banking enterprise (the "Business").
III. HIRING
Upon the terms and conditions set forth herein, the Bank hereby
hires Consultant as an independent contractor of the Bank, not as an employee,
and Consultant agrees to provide services to Bank as described herein.
IV. DUTIES OF CONSULTANT
Consultant agrees to provide business development, customer
retention, customer development, and management consulting services as requested
by the Chairman and Chief Executive Officer of the Bank. Consultant agrees to
devote such time as is reasonably required for the performance of these
services, including but not limited to attendance at Board meetings and such
committee meetings as requested by the Board of Directors or the Chairman and
Chief Executive Officer, review of such credit files as may be requested by the
Chairman and Chief Executive Officer, develop collection strategies for such
loans as may be requested by the Chairman and Chief Executive Officer, work with
the officers of the Bank to develop and implement customer retention and
business development strategies as requested by the Chairman and Chief Executive
Officer, participate in individual consultations with the officers of the Bank
as required by the Chairman and Chief Executive Officer, join any advisory board
of the Bank, attend all meetings of such advisory board, and assist the Bank in
increasing the size of the advisory board with qualified individuals, and
provide other services as requested from time to time by the Chairman of the
Board of the Bank from time to time. Consultant agrees that, to the best of his
ability and experience, he will at all times loyally and conscientiously perform
all of the duties and obligations either expressly or implicitly required of him
by the terms of this Agreement.
1
EXHIBIT A
<PAGE>
V. TERM AND COMMENCEMENT DATE
Subject to "IX. TERMINATION" below, the term of this Agreement
shall commence on _________, ____ ("Commencement Date") as provided in the
Executive Employment Agreement and will terminate on ___________, ____ (the
"Term"), a term of five (5) years, subject to renewal upon such terms and
conditions as shall be agreed upon by the Board and Consultant.
VI. DEATH
If Consultant shall die during the Term, Bank will continue to
make such monthly payments to the Consultant's surviving spouse for the
remaining Term as provided in Paragraph V above. If the Executive is not
survived by any spouse, said payments shall be made to the duly qualified
personal representative, executor or administer of his estate.
VII. COMPENSATION
Bank agrees to pay Consultant and Consultant agrees to accept as
payment for his services to be performed in accordance with this Agreement a
consulting fee in the amount of Four Thousand Six Hundred Fifty Dollars ($4,650)
per month, or $55,800 per year ("Base Annual Compensation") commencing on the
Commencement Date. Bank agrees to pay Consultant and Consultant agrees to
accept the consulting fee under this consulting arrangement with the Bank as
payment for his services to be performed in accordance with this Agreement.
VIII. TIME
Consultant shall be required to devote such time as is necessary
to the performance of his duties as Consultant of Bank. Consultant may, without
the prior written consent of Bank, render services directly or indirectly, of a
business or commercial nature, to any other person or organization, provided
such other person or organization does not compete, directly or indirectly with
the Business of the Bank.
IX. TERMINATION
AUTOMATIC TERMINATION. This Agreement automatically terminates
if Bank is closed by or taken over by the California Commissioner of Financial
Institutions, the Federal Deposit Insurance Corporation or any other supervisory
authority; but in no event shall Consultant's obligations under this Agreement
terminate as a result of a sale of assets, acquisition, merger or other like
transaction involving Bank, whether or not Bank is the surviving or resulting
bank following such a transaction.
2
<PAGE>
X. OWNERSHIP OF CUSTOMER RECORDS
All records of the accounts of customers, and any other records
and books relating in any manner whatsoever to the customers of the Bank,
whether prepared by Consultant or otherwise coming into his possession, shall be
the exclusive property of Bank regardless of who actually purchased the original
book or record. All such books and records shall be immediately returned to the
Bank by Consultant upon the termination of this Agreement.
XI. CONFIDENTIAL INFORMATION
Without the prior written permission of the Bank in each case,
Consultant shall not publish, disclose or make available to any other person,
firm or corporation, either during or after the termination of this Agreement,
any confidential information which Consultant may obtain during the Employment
Period, or which Consultant may create prior to the end of the Term relating to
the business of the Bank, or to the business of any customer or supplier of any
of them; provided, however, Consultant may use such information during the Term
for the benefit of the Bank. Prior to or at the termination of this Agreement,
Consultant shall return all documents, files, notes, writings and other tangible
evidence of such confidential information to the Bank.
XII. COVENANT NOT TO SOLICIT CUSTOMERS OR EMPLOYEES
Consultant agrees that for a period of twelve (12) months
following the termination of this consulting agreement hereunder, consultant
will not solicit the banking business of any customer with whom the Bank had
done business during the preceding one year period. Consultant further agrees
not to solicit the services of any officer or employee of the Bank during such
twelve (12) month period.
XIII. MISCELLANEOUS
A. ASSIGNMENT AND MODIFICATION. This Agreement and the rights
and duties hereunder may not be assigned by any party hereto without the prior
written consent of the other and the parties expressly agree that any attempt to
assign the rights of any party hereunder without such consent will be null and
void.
B. FURTHER ASSURANCE. From time to time each party will
execute and deliver such further instruments and will take such other action as
any other party reasonably may request in order to discharge and perform their
obligations and agreements hereunder.
3
<PAGE>
C. FORM OF DOCUMENTS. All instruments, certificates, and other
documents to be executed and delivered under this Agreement by any party to the
other party shall be in a form satisfactory to the other party.
D. SUCCESSORS. This Agreement shall be binding upon, and shall
inure to the benefit of, the successors and assigns of the parties.
E. ENTIRE AGREEMENT. Except as provided herein, this Agreement
is the entire agreement between the parties, and all prior negotiations,
representations, or agreements between the parties are merged into this
Agreement.
F. GOVERNING LAW. This Agreement shall be construed in
accordance with California law.
G. EXECUTED COUNTERPARTS. This Agreement may be executed in
one or more counterparts, all of which together shall constitute a single
agreement and each of which shall be an original for all purposes.
H. SECTION HEADINGS. The various section headings are inserted
for convenience of reference only, and shall not affect the meaning or
interpretation of this Agreement or any section thereof.
I. CALENDAR DAYS; CLOSE OF BUSINESS. Unless the context
otherwise requires, all periods terminating on a given day, period of days, or
date shall terminate on the close of business on that day or date and references
to "days" shall refer to calendar days.
J. SEVERABILITY. In the event that any of the provisions, or
portions thereof, of this Agreement are held to be unenforceable or invalid by
any court of competent jurisdiction, the validity and enforceability of the
remaining provisions or portions thereof, shall not be affected thereby.
K. ATTORNEYS' FEES. In the event that any party shall bring an
action in connection with the performance, breach, or interpretation hereof,
then the prevailing party in such action as determined by the court having
jurisdiction, shall be entitled to recover from the losing party in such action,
as determined by the courts having jurisdiction, all reasonable attorney's fees,
court costs, costs of investigation and other costs reasonably related to such
litigation, in such amounts as may be determined in the discretion of the court
having jurisdiction.
4
<PAGE>
XIV. EXECUTION
This Agreement is executed at Moreno Valley, California, to be
effective as of the Commencement Date.
BANK: VALLEY BANK
a California banking corporation
BY: _________________________________
E. Lynn Caswell
Chairman of the Board
CONSULTANT: ________________________________
N. Douglas Mills
5
<PAGE>
Exhibit 10.14
[FORM OF FRONT OF PROXY CARD]
PROXY
THE BANK OF HEMET
3715 SUNNYSIDE DRIVE
RIVERSIDE, CALIFORNIA 92506
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF THE SHAREHOLDERS OF THE BANK OF HEMET TO BE HELD ON ______ __, 1999.
The undersigned hereby appoints James B. Jaqua and John J. McDonough, each
with full power of substitution, as proxy of the undersigned, to attend the
Annual Meeting of the shareholders of The Bank of Hemet to be held at The Anchor
Restaurant, 2524 East Florida Avenue, Hemet, California, at __:__ _.m. on
_______ __, 1999, and at any and all adjournments or postponements thereof, and
to vote all common stock of The Bank of Hemet, as designated on the reverse side
of this proxy, with all powers the undersigned would possess if personally
present at the meeting. The undersigned hereby revokes any and all proxies
heretofore given by the undersigned to vote at the annual meeting.
The holders of this proxy will vote it or withold it from voting in
accordance with the instructions specified. WHERE NO CHOICE IS SPECIFIED, THIS
PROXY WILL CONFER DISCRETIONARY AUTHORITY AND WILL BE VOTED FOR THE APPROVAL OF
THE PROPOSALS SET FORTH ON THE REVERSE SIDE HEREOF. This proxy confers authority
for the above named persons to vote in his discretion with respect to amendments
or variations to the matters identified in the notice of meeting accompanying
this proxy and other matters which may properly come before the meeting.
DETAILS OF THE FIRST RESTATED AGREEMENT AND PLAN OF REORGANIZATION AND OTHER
IMPORTANT INFORMATION CONCERNING THE PROPOSALS AT THE ANNUAL MEETING APPEAR IN
THE JOINT PROXY STATEMENT/PROSPECTUS. PLEASE READ THAT MATERIAL CAREFULLY.
-----------------------------------------------------
(Continued and to be Signed on Reverse Side)
<PAGE>
[FORM OF BACK OF PROXY CARD]
PLEASE MARK YOUR
/X/ VOTES AS IN THIS
EXAMPLE
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL NO. 1, FOR
PROPOSAL NO. 2, AND FOR THE ELECTION OF THE NOMINATED DIRECTORS IN PROPOSAL
NO. 3.
<TABLE>
<S> <C> <C> <C>
PROPOSAL NO.1. To approve the First Restated Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization between The Bank of Hemet and Pacific Community Banking Group, / / / / / /
which provides for the merger of a subsidiary of Pacific Community Banking Group
with and into The Bank of Hemet, with The Bank of Hemet to be the surviving
entity, and for each outstanding share of The Bank of Hemet's common stock,
exclusive of shares held by The Bank of Hemet's shareholders who exercise
dissenters' rights, to be converted into the right to receive 3.4 shares of the
common stock of Pacific Community Banking Group and one ten-year warrant.
PROPOSAL NO.2. To amend the Bylaws of The Bank of Hemet to increase the range of FOR AGAINST ABSTAIN
the number of corporate directors from a range of five to nine to a range of / / / / / /
seven to thirteen to accommodate the terms of the First Restated Agreement and
Plan of Reorganization.
PROPOSAL NO. 3 Election of seven directors (or if any nominee is not available FOR AGAINST ABSTAIN
for election, such substitute as the board of directors or the proxy holders may / / / / / /
designate). Nominees: JOHN B. BRUDIN, JACK E. GOSCH, E. KENNETH HYATT, JAMES B. FOR, EXCEPT VOTE WITHHELD
JAQUA, JOHN J. MCDONOUGH, JOSEPH D. PEHL and CLAYTON A. RECORD, JR. FROM THE FOLLOWING NOMINEES:
----------------------------
----------------------------
Please sign, date and return the proxy card promptly in the enclosed envelope.
_________________________ _________________________________DATE____________________________, 1999
Please Sign Here Signature (if held jointly)
</TABLE>
NOTE: Please sign exactly as name appears. When signing as executor,
administrator, attorney, trustee or guardian please give your full title as
such. If a corporation, please sign in full corporation name by president or
other authorized officer. If a partnership, please sign in partnership name by
authorized person. If a joint tenancy, please have both tenants sign.
/ / I DO / / I DO NOT EXPECT TO ATTEND THE ANNUAL MEETING.
<PAGE>
Exhibit 10.15
[FORM OF FRONT OF PROXY CARD]
PROXY
VALLEY BANK
24010 SUNNYMEAD BOULEVARD
MORENO VALLEY, CALIFORNIA 92553
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF THE SHAREHOLDERS OF
VALLEY BANK TO BE HELD ON ______ __, 1999.
The undersigned hereby appoints Jesse Washington, George Wilson, Helga
Wolf and Eugene Wood, each with full power of substitution, as proxy of the
undersigned, to attend the Annual Meeting of the shareholders of Valley Bank
to be held at The Best Western Image Suites Hotel, 24840 Elder Avenue, Moreno
Valley, California, at 3:00 p.m. on _______ __, 1999, and at any and all
adjournments or postponements thereof, and to vote all common stock of Valley
Bank, as designated on the reverse side of this proxy, with all powers the
undersigned would possess if personally present at the meeting. The
undersigned hereby revokes any and all proxies heretofore given by the
undersigned to vote at the annual meeting.
The holders of this proxy will vote it or withhold it from voting in
accordance with the instructions specified. WHERE NO CHOICE IS SPECIFIED, THIS
PROXY WILL CONFER DISCRETIONARY AUTHORITY AND WILL BE VOTED FOR THE APPROVAL OF
THE PROPOSALS SET FORTH ON THE REVERSE SIDE HEREOF. This proxy confers authority
for the above named persons to vote in his discretion with respect to amendments
or variations to the matters identified in the notice of meeting accompanying
this proxy and other matters which may properly come before the meeting.
DETAILS OF THE FIRST RESTATED AGREEMENT AND PLAN OF REORGANIZATION AND OTHER
IMPORTANT INFORMATION CONCERNING THE PROPOSALS AT THE ANNUAL MEETING APPEAR IN
THE JOINT PROXY STATEMENT/PROSPECTUS. PLEASE READ THAT MATERIAL CAREFULLY.
----------------------------------------------------------
(Continued and to be Signed on Reverse Side)
<PAGE>
[FORM OF BACK OF PROXY CARD]
/X/ PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL NO. 1 AND
AUTHORITY GIVEN FOR THE ELECTION OF THE NOMINATED DIRECTORS IN PROPOSAL NO. 2.
<TABLE>
<S> <C> <C> <C>
PROPOSAL NO.1. To approve the First Restated Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization between Valley Bank and Pacific Community Banking Group, which / / / / / /
provides for the merger of Valley Bank into Interim Valley Bank, a subsidiary of
Pacific Community Banking Group, with Interim Valley Bank to be the surviving
entity, and for every one outstanding share of Valley Bank's common stock,
exclusive of shares held by Valley Bank's shareholders who exercise dissenters'
rights, to be converted into the right to receive 2/3 of a share of the common stock
of Pacific Community Banking Group and, for every three shares of Valley Bank
common stock, one ten-year warrant.
PROPOSAL NO. 2 Election of eight directors (or if any nominee is not available AUTHORITY AUTHORITY
for election, such substitute as the board of directors or the proxy holders may GIVEN WITHHELD
designate). Nominees: MARION V. ASHLEY, WILLOW I. DECKER, N. DOUGLAS MILLS, / / / /
JUAN RENTERIA, JESSE WASHINGTON, GEORGE E. WILSON, HELGA WOLF, and EUGENE H. AUTHORITY GIVEN, EXCEPT VOTE
WOOD. WITHHELD FROM THE FOLLOWING
NOMINEES:
------------------------------------
------------------------------------
Please sign, date and return the proxy card promptly in the enclosed envelope.
________________________ ___________________________________________DATE___________________, 1999
Please Sign Here Signature (if held jointly)
</TABLE>
NOTE: Please sign exactly as name appears. When signing as executor,
administrator, attorney, trustee or guardian please give your full title as
such. If a corporation, please sign in full corporation name by president or
other authorized officer. If a partnership, please sign in partnership name by
authorized person. If a joint tenancy, please have both tenants sign.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Orange County, California
April 15, 1999
<PAGE>
Exhibit 23.4
McGladrey & Pullen LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 filed
on or about April 14, 1999 of our report, dated January 15, 1999, relating to
the financial statements of Valley Bank. We also consent to the reference to
our firm under the caption "Experts" in the Prospectus.
McGladrey & Pullen LLP
Pasadena, California
April 13, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 395,948
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 601,046
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 94,429
<LONG-TERM> 0
0
0
<COMMON> 2,500
<OTHER-SE> 504,117
<TOTAL-LIABILITIES-AND-EQUITY> 601,046
<INTEREST-LOAN> 0
<INTEREST-INVEST> 0
<INTEREST-OTHER> 11,326
<INTEREST-TOTAL> 11,326
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 525,568
<INCOME-PRETAX> 514,242
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 513,442
<EPS-PRIMARY> 51.34
<EPS-DILUTED> 51.34
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
CONSENT
The undersigned hereby consents to his nomination to serve as a Director of
Pacific Community Banking Group, a California corporation, and to all
references to him and to his professional history, including but not limited
to his biography in the joint proxy statement prospectus that is included or
made a part of this Registration Statement on Form S-4 filed with the
Securities and Exchange Commission, and any amendment thereto.
Dated as of _________________, 1999.
/s/ James B. Jaqua
-------------------
By: James B. Jaqua
<PAGE>
CONSENT
The undersigned hereby consents to his nomination to serve as a Director of
Pacific Community Banking Group, a California corporation, and to all
references to him and to his professional history, including but not limited
to his biography in the joint proxy statement prospectus that is included or
made a part of this Registration Statement on Form S-4 filed with the
Securities and Exchange Commission, and any amendment thereto.
Dated as of _________________, 1999.
/s/ N. Douglas Mills
---------------------
By: N. Douglas Mills
<PAGE>
CONSENT
The undersigned hereby consents to his nomination to serve as a Director of
Pacific Community Banking Group, a California corporation, and to all
references to him and to his professional history, including but not limited
to his biography in the joint proxy statement prospectus that is included or
made a part of this Registration Statement on Form S-4 filed with the
Securities and Exchange Commission, and any amendment thereto.
Dated as of _________________, 1999.
/s/ Marion V. Ashley
---------------------
By: Marion V. Ashley
<PAGE>
[LOGO]
BAXTER
FENTRISS
AND COMPANY
9100 ARBORETUM PARKWAY SUITE 280 RICHMOND, VIRGINIA 23236
(804) 323-7640 FAX (804) 323-7457
March 3, 1999
The Board of Directors
The Bank of Hemet
3715 Sunnyside Drive
Riverside, CA 92506
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Board of The
Bank of Hemet as Exhibit __ to the Pacific Community Banking Group
Registration Statement on Form S-4 relating to the proposed acquisition of The
Bank of Hemet by Pacific Community Banking Group, and references thereto in
such Registration Statement under the captions "SUMMARY - Fairness Opinion of
Baxter Fentriss & Company" and "THE ACQUISITIONS - Opinion of Baxter Fentriss
& Company."
BAXTER FENTRISS & COMPANY
By: /s/
---------------------
Title:
------------------
<PAGE>
CONSENT
The undersigned hereby consents to his nomination to serve as a Director of
Pacific Community Banking Group, a California corporation, and to all
references to him and to his professional history, including but not limited
to his biography in the joint proxy statement prospectus that is included or
made a part of this Registration Statement on Form S-4 filed with the
Securities and Exchange Commission, and any amendment thereto.
Dated as of _________________, 1999.
/s/ Harold R. Williams, Jr.
----------------------------
By: Harold R. Williams, Jr.
<PAGE>
QUESTIONS AND ANSWERS FOR SHAREHOLDERS OF THE BANK OF HEMET
ABOUT THE
SHAREHOLDER DOCUMENTS
Q: I AM A SHAREHOLDER OF THE BANK OF HEMET. WHY MUST I COMPLETE THESE
DOCUMENTS?
A: Pacific Community Banking Group has agreed to acquire The Bank of Hemet.
You have received a joint proxy statement/prospectus that describes Pacific
Community Banking Group and the acquisition. If the shareholders approve
the acquisition, The Bank of Hemet needs the shareholder documents to
complete the acquisition and to arrange for you to receive the cash and/or
stock and warrants you will be entitled to receive.
Q: WHAT IS THE CUSTODY AGREEMENT, LETTER OF TRANSMITTAL, POWER OF ATTORNEY AND
OFFER OF SALE
A: You should read the entire document. But in summary, the Custody
Agreement, Letter of Transmittal, Power of Attorney and Offer of Sale is a
binding agreement by you that principally provides the following:
- You appoint a custodian, which will hold your shares and deliver them
as necessary to complete the acquisition and the public offering.
- You provide your name, address and other necessary information to
ensure that you receive the cash or stock to which you are entitled,
and you state a preference to receive a greater amount of cash or of
stock after the close of the acquisition and the public offering. You
also promise that you own your shares and have the power to sell them.
- You give a special power of attorney to two individuals, referred to
as the "Attorneys-in-Fact," who will take limited legal actions on
your behalf to establish the final price of your Pacific Community
Banking Group stock and sell some or all of that stock to the
underwriters.
- You offer the shares of Pacific Community Banking Group common stock
you will receive in the acquisition to the underwriters. The
underwriters will be able to purchase some or all of the shares for
resale at a price to the public of at least $15 per share.
Q: WHO IS THE CUSTODIAN AND WHAT WILL THE CUSTODIAN DO?
A: U.S. Stock Transfer Company will be the custodian. You should send your
certificates to the custodian now, along with the selling shareholder
documents. Or you may surrender the certificates and present the selling
shareholder documents at a branch of The Bank of Hemet. If the acquisition
closes, the custodian will surrender the certificates for your
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<PAGE>
shares of The Bank of Hemet common stock. In exchange for each share so
surrendered you will receive 3.4 shares of Pacific Community Banking Group
common stock. The custodian will keep custody of your shares of Pacific
Community Banking Group for the brief period until the public offering
closes, then deliver the shares you sell to the underwriter, send you the
money received from the sale and send you certificates for the shares you
don't sell and the warrants.
Q: WHO ARE THE "ATTORNEYS-IN-FACT" AND WHAT POWER WILL THEY HAVE?
A: An individual that has the power to act on your behalf under the Power of
Attorney is called an "Attorney-in-Fact." You will authorize any of two
persons, James B. Jaqua and John J. McDonough, to act in this capacity.
They will negotiate the final price to the public of the shares of Pacific
Community Banking Group common stock you sell, with a minimum price of $15.
They will sell your shares of Pacific Community Banking Group common stock
to the underwriters on those terms. The Attorneys-in-Fact will consider
the preference for cash or stock that you have stated. But they will have
the discretion to designate some or all of your stock to be sold to the
public, in order to meet the terms of the acquisition agreement. They can
also execute any documents necessary to complete the sale, on your behalf,
without further consultation with you.
Q: CAN I ELECT TO RECEIVE CASH ONLY OR PACIFIC COMMUNITY BANKING GROUP COMMON
STOCK ONLY?
A: No. You will be able to indicate your preference to have cash or stock of
Pacific Community Banking Group after the close of the acquisitions and the
initial public offering. The Attorneys-in-Fact will consider this when
determining how much of your Pacific Community Banking Group common stock
to sell to the underwriters. But even if you indicate a preference for
stock, it is likely that most of your shares will be sold because the
acquisition agreement requires that the underwriters purchase and resell
between 75% and 88% of the total shares received by shareholders of The
Bank of Hemet.
Q: WHAT OTHER KINDS OF INFORMATION WILL I NEED TO PROVIDE?
A: In addition to your name and address, you will give instructions for where
the transfer agent should send the money received from the sale and any
remaining shares and your warrants. If you have more than one certificate,
or have a number of separate purchases on your brokerage account, you can
indicate which of them you prefer to sell first, which can affect the
amount of taxable capital gain you realize if you paid different amounts
per share in your original purchases. You will also need to return a
completed form W-9 for tax reporting purposes. Please consult your tax
advisor if you have questions about the tax effects of designating
particular shares for sale.
Q: WHAT IF I DON'T HAVE PHYSICAL CERTIFICATES FOR MY SHARES, BUT HOLD THEM
THROUGH AN ACCOUNT AT MY BROKER?
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<PAGE>
A: If you don't have certificates, but hold your shares of The Bank of
Hemet common stock "in street name," that is, through a brokerage
account, you should still complete all of the enclosed shareholder
documents and return them in the provided envelope. Then the surrender
and exchange of certificates, and the sale of stock, will take place on
your behalf. You will receive the cash proceeds from the sale of your
Pacific Community Banking Group common stock. Any remaining shares of
Pacific Community Banking Group Common Stock and your warrants will be
recorded on your brokerage account.
Q: WHAT IF THE ACQUISITION OR THE PUBLIC OFFERING IS NOT COMPLETED?
A: If either the acquisition or the public offering fails to take place, the
custodian will return to you the certificates for the shares of The Bank of
Hemet common stock you surrendered, or send you replacement certificates.
Q: WHAT IF I LOST THE CERTIFICATES FOR MY SHARES?
A: If you have lost the certificates for your shares, please complete and
return the enclosed Lost Certificate Declaration, along with the other
applicable shareholder documents.
Q: IS IT SAFE TO SEND MY CERTIFICATES BY MAIL OR BY OVERNIGHT EXPRESS?
A: Please do NOT send endorsed stock certificates by mail or by overnight
express. Rather than endorsing the stock certificates, sign one of the
enclosed Stock Powers for each of your certificates. Then send the
certificates and the stock powers IN SEPARATE ENVELOPES.
Q: WILL I BE RESPONSIBLE FOR ANY OF THE COSTS OF THE PUBLIC OFFERING?
A: No. You will receive the public offering price for each share that you
sell in the public offering, without deduction for any costs.
[Q: WHAT IS THE DIFFERENCE BETWEEN SELLING MY SHARES IN THE PUBLIC OFFERING AND
SELLING MY SHARES OF PACIFIC COMMUNITY BANKING GROUP AT A LATER DATE?
A: You will be able to freely trade any shares of Pacific Community Banking
Group common stock that you retain, unless you are an "affiliate" of The
Bank of Hemet. The Bank of Hemet and Pacific Community Banking Group
cannot predict whether the price you would receive in such a later trade
would be more or less than the public offering price. You will likely have
to pay a broker's commission to make a later trade, while Pacific Community
Banking Group will pay all commissions for the sale of your shares in the
public offering. ]
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<PAGE>
INSTRUCTIONS
(For completing the
Custody Agreement, Letter of Transmittal, Power of Attorney and Offer of Sale)
A. You have been sent five copies of the Custody Agreement, Letter of
Transmittal, Power of Attorney and Offer of Sale (the "Agreement"). Please
complete and return four copies of the Agreement and stock certificate(s) as set
forth in paragraph D below. PLEASE BE SURE TO INDICATE YOUR PREFERENCE FOR CASH
OR STOCK IN SECTION 4 OF THE AGREEMENT. A fully executed copy of the Agreement
will be returned to you.
B. Complete Schedule I attached hereto.
C. You must sign each copy of the Agreement and for each stock
certificate you deposit along with this Agreement you must either (a) sign each
stock certificate or (b) sign a separate stock power (stock power forms are
provided with this Agreement). ALL OF YOUR SIGNATURES MUST BE MEDALLION
GUARANTEED by an eligible guarantor institution, such as a bank, a stock broker,
savings and loan association, or credit union, with membership in an approved
medallion signature program. PLEASE SIGN THE STOCK CERTIFICATE(s) OR STOCK
POWER AND THE AGREEMENT EXACTLY AS YOUR NAME APPEARS ON YOUR STOCK
CERTIFICATE(s).
D. Endorsed stock certificate(s) or stock certificate(s) with stock
powers attached along with all four executed copies of the completed Agreement
should be promptly returned by hand delivery [to a branch of The Bank of Hemet]
or by hand delivery or certified mail appropriately insured to:
U.S. Stock Transfer Company
____________________
____________________
____________________
If sending through the mail or courier, it is recommended that you do not
endorse the certificate(s), but send an executed stock power or powers in a
separate envelope from the certificate(s).
E. You may elect to retain shares of Pacific Community Banking Group
common stock rather than offering to sell them to the Underwriters. Also, each
shareholder may be required to retain some shares of Pacific Community Banking
Group common stock to satisfy the terms of the First Restatement of the
Agreement and Plan of Reorganization between The Bank of Hemet and Pacific
Community Banking Group. In either case, the Custodian will cause to be
delivered to you in due course, but not earlier than ten days after the closing
for the purchase of firm shares by the Underwriters, a certificate for the
number of shares of Pacific Community Banking Group common stock and warrants
that you have received but that were not sold in the public offering.
4
<PAGE>
_________________________
(Name of Shareholder)
CUSTODY AGREEMENT, LETTER OF TRANSMITTAL, POWER OF ATTORNEY AND OFFER OF SALE
FOR CUSTODY AND EXCHANGE OF COMMON STOCK OF
THE BANK OF HEMET
AND FOR CUSTODY AND SALE OF COMMON STOCK OF
PACIFIC COMMUNITY BANKING GROUP
James B. Jaqua
John J. McDonough
As Attorneys-in-Fact
c/o The Bank of Hemet
[address]
U.S. Stock Transfer Company
As Custodian
[Address of U.S. Stock Transfer Company]
Sutro & Co. Incorporated
As Representative of the several Underwriters
c/o Sutro & Co. Incorporated
11150 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025
Ladies and Gentlemen:
The undersigned (the "Shareholder") is a shareholder of The Bank of Hemet
("The Bank of Hemet"), a California corporation. Pacific Community Banking
Group, a California corporation, and The Bank of Hemet have signed a First
Restatement of Agreement and Plan of Reorganization (as amended, the
"Acquisition Agreement") providing for the acquisition of The Bank of Hemet by
Pacific Community Banking Group. If the acquisition is completed, the
Shareholder's shares of The Bank of Hemet will automatically convert into a
right to receive shares of Pacific Community Banking Group. Pacific Community
Banking Group and the
1
<PAGE>
Shareholder proposes to sell some or all of the shares of Pacific Community
Banking Group common stock received by the Shareholder to underwriters (the
"Underwriters") for whom Sutro & Co. Incorporated will act as representative
(the "Representative" ), for distribution under a Registration Statement on Form
S-1 (the "Registration Statement") to the public at a price and on terms to be
hereafter determined. It is understood that at this time there is no commitment
on the part of the Underwriters to purchase any shares of Pacific Community
Banking Group common stock and no assurance that an offering of Pacific
Community Banking Group common stock will take place. The shares of Pacific
Community Banking Group common stock received by the Shareholder in exchange for
shares of The Bank of Hemet common stock, all of which the Shareholder will
hereby offer to sell to the Underwriters, are referred to herein as the
"Shares."
1. APPOINTMENT AND POWERS OF ATTORNEYS-IN-FACT.
A. The Shareholder irrevocably constitutes and appoints James B.
Jaqua and John J. McDonough (the "Attorneys-in-Fact"), and each of them, its
agent and attorney-in-fact, with full power of substitution, with respect to all
matters arising in connection with the public offering and sale of the Shares,
including, but not limited to, the power and authority on behalf of the
Shareholder to do or cause to be done any of the following things:
(i) to instruct the Custodian (as defined below) to surrender
certificates for all of the Shareholders' shares of common
stock of The Bank of Hemet in exchange for shares of
Pacific Community Banking Group as provided in the
Acquisition Agreement;
(ii) to negotiate, determine and agree upon (a) the price at
which the Shares will be initially offered to the public
by the Underwriters, provided that the price shall not be
less than $15 per share, and (b) the price at which the
Shares will be sold to the Underwriters;
(iii) to allocate the number of shares of Pacific Community
Banking Group common stock owned by the Shareholder that
shall be sold to the Underwriters and the number of shares
of Pacific Community Banking Group common stock that shall
be retained by the Shareholder, in satisfaction of the
terms of the Acquisition Agreement. Notwithstanding the
statement of preference made by the Shareholder herein,
the Attorneys-in-Fact are authorized, in their sole
discretion, to sell up to the total number of shares of
Pacific Community Banking Stock owned by the Shareholder.
(iv) to sell, assign, transfer and deliver the Shares to the
Underwriters and deliver to the Underwriters certificates
for the Shares so sold;
(v) take any and all steps deemed necessary or desirable by
the Attorneys-in-Fact in connection with the registration
of the Shares under the Securities Act of 1933, as amended
(the "Securities Act" ), the Securities Exchange Act of
1934, as amended, and under the securities or "blue sky"
laws of various states and jurisdictions, including,
without limitation, the giving or making of
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<PAGE>
such undertakings, representations and agreements and the
taking of such other steps as the Attorneys-in-Fact may
deem necessary or advisable;
(vi) instruct Pacific Community Banking Group and the Custodian
(as hereinafter defined) on all matters pertaining to the
sale of the Shares and delivery of certificates therefor;
and
(vii) otherwise take all actions and do all things necessary or
proper, required, contemplated or deemed advisable or
desirable by the Attorneys-in-Fact in their discretion,
including the execution and delivery of any documents, and
generally act for and in the name of the Shareholder with
respect to the sale of the Shares to the Underwriters and
the reoffering of the Shares by the Underwriters as fully
as could the Shareholder if then personally present and
acting.
B. Each Attorney-in-Fact may act alone in exercising the rights and
powers conferred on the Attorneys-in-Fact by this Custody Agreement, Letter of
Transmittal, Power of Attorney and Offer of Sale (this "Agreement"), and the act
of any Attorney-in-Fact shall be the act of the Attorneys-in-Fact. Each
Attorney-in-Fact is hereby empowered to determine, in his sole and absolute
discretion, the time or times when, the purposes for which, and the manner in
which, any power herein conferred upon the Attorneys-in-Fact shall be exercised.
C. The Custodian, the Representatives, Pacific Community Banking
Group and all other persons dealing with the Attorneys-in-Fact as such may rely
and act upon any writing believed in good faith to be signed by one or more of
the Attorneys-in-Fact.
D. The Attorneys-in-Fact shall not receive any compensation from the
Shareholder for their services rendered hereunder.
2. APPOINTMENT OF CUSTODIAN; DEPOSIT OF SHARES.
A. In connection with and to facilitate the exchange of shares of
The Bank of Hemet common stock and the sale of the Shares to the Underwriters,
the Shareholder hereby appoints U.S. Stock Transfer Company as custodian (the
"Custodian") and herewith deposits with the Custodian one or more certificates
for The Bank of Hemet common stock which represent the total number of the
shares of The Bank of Hemet common stock held by the Shareholder, and which
number is set forth on Schedule I hereto. Each such certificate so deposited is
in negotiable and proper deliverable form and either (a) has been endorsed in
blank with the signature of the Shareholder thereon, medallion guaranteed by an
eligible guarantor institution, such The Bank of Hemet or another bank, a stock
broker, savings and loan association, or credit union, with membership in an
approved medallion signature program, or (b) is accompanied by a duly executed
stock power or powers in blank, bearing the signature of the Shareholder,
medallion guaranteed in the same manner. The Custodian is hereby authorized and
directed, subject to the instructions of the Attorneys-in- Fact, to act as
follows:
3
<PAGE>
(i) to surrender the certificates for Shareholder's shares of
The Bank of Hemet in exchange for certificates of Pacific
Community Banking Group common stock in accordance with
the Acquisition Agreement;
(ii) to hold in custody the certificate or certificates
deposited herewith and any other certificates or
instruments exchanged therefor;
(iii) to deliver or to authorize Pacific Community Banking
Group's transfer agent to deliver the certificates of
Pacific Community Banking Group common stock received in
exchange for the certificates deposited herewith (or
replacement certificate(s) for the Shares) to or at the
direction of the Attorneys-in-Fact; and
(iv) to return or cause Pacific Community Banking Group's
transfer agent to return to the Shareholder cash in lieu of
fractional shares and in new certificate(s) for the shares
of Pacific Community Banking Group common stock and
warrants that are received in exchange for any certificate
deposited hereunder but that are not sold to the
Underwriters.
B. Until the shares of The Bank of Hemet common stock deposited
hereunder have been exchanged for Pacific Community Banking Group common stock,
the Shareholder shall retain all rights of ownership with respect to the shares
of The Bank of Hemet common stock deposited hereunder, including the right to
vote and to receive all dividends and payments thereon, except the right to
retain custody of or dispose of such Shares, which right is subject to this
Agreement. Until the Shares have been delivered to the Underwriters against
payment therefor, the Shareholder shall retain all rights of ownership with
respect to the Shares, including the right to vote and to receive all dividends
and payment thereon, except the right to retain custody of or dispose of such
Shares, which right is subject to this Agreement.
3. IRREVOCABLE OFFER TO SELL SHARES OF PACIFIC COMMUNITY BANKING GROUP
COMMON STOCK.
The Shareholder offers for sale to the Underwriters any and all shares
of Pacific Community Banking Group common stock received in exchange for the
shares of The Bank of Hemet common stock transmitted herewith. This offer is
made without conditions, except as provided in this Agreement, and may be
accepted and executed without prior notice to the Shareholder. The Shareholder
may not revoke this offer; however, this offer will expire if not accepted in
whole or in part by the Underwriter on or before July 28, 1999.
4. PREFERENCE TO RECEIVE CASH OR SHARES OF PACIFIC COMMUNITY BANKING
GROUP COMMON STOCK
The Shareholder hereby instructs the Attorney-in-Fact that the
shareholder prefers to receive consideration for the surrendered shares of The
Bank of Hemet common stock as follows. The Shareholder acknowledges that this
preference is subject to the power of the Attorney-in-Fact to allocate the
number of Shareholders' shares sold to the Underwriters to satisfy the terms of
the Acquisition Agreement, in the sole discretion of the Attorney-in-Fact.
4
<PAGE>
CHECK THE BOX BELOW THAT APPLIES.
{ A. I prefer to sell all of the shares of Pacific Community
Banking Group common stock that I will receive in the
acquisition.
{ B. I prefer to retain all of the shares of Pacific
Community Banking Group common stock that I will receive in
the acquisition.
{ C. I prefer to sell ___% of the shares of Pacific Community
Banking Group common stock that I will receive in the
acquisition. IF YOU CHECK THIS BOX, PLEASE FILL IN THE
PERCENTAGE; OTHERWISE, WE WILL CONSIDER YOU TO HAVE MADE NO
ELECTION.
5. SALE OF SHARES; REMITTING NET PROCEEDS.
The Attorneys-in-Fact are hereby authorized and directed to deliver or
cause the Custodian or Pacific Community Banking Group's transfer agent to
deliver certificates for the Shares to the Representatives, against delivery to
the Attorneys-in-Fact, for the account of the Shareholder, of the purchase price
of the Shares. The Attorneys-in-Fact are authorized, on behalf of the
Shareholder, to accept and acknowledge receipt of the payment of the purchase
price for the Shares and shall promptly deposit such proceeds with the
Custodian. The Custodian shall promptly remit to the Shareholder his or her
share of the proceeds.
6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Shareholder
represents and warrants to, and agrees with, Pacific Community Banking Group,
the Attorneys-in-Fact, the Custodian and the Underwriters as follows:
A. The Shareholder has full legal right, power and authority to
enter into and perform this Agreement. If the Shareholder is acting as a
fiduciary, officer, partner or agent, the Shareholder is enclosing with this
Agreement certified copies of the appropriate instruments pursuant to which the
Shareholder is authorized to act hereunder. If the Shareholder is an individual
and is married, and the spouse is not named as an owner on the stock
certificate, the Shareholder is enclosing with this Agreement a duly completed
and executed consent of his or her spouse, in the form attached to this
Agreement as Annex A.
B. The Shareholder is not directly or indirectly an affiliate of or
associated with any member of the National Association of Securities Dealers,
Inc.
C. The Shareholder agrees to deliver to the Attorneys-in-Fact such
documentation as the Attorneys-in-Fact, The Bank of Hemet, Pacific Community
Banking Group or the Underwriters or any of their respective counsel may
reasonably request in order to effectuate any of the provisions hereof, in form
and substance satisfactory in all respects to the Attorneys-in-Fact.
5
<PAGE>
D. The foregoing representations, warranties and agreements are made
for the benefit of, and may be relied upon by, the Attorneys-in-Fact, The Bank
of Hemet, Pacific Community Banking Group, the Custodian, the Underwriters and
their respective representatives, agents and counsel.
7. IRREVOCABILITY OF INSTRUMENTS; TERMINATION OF THIS AGREEMENT.
A. This Agreement, the deposit of The Bank of Hemet common stock
pursuant hereto and all authority hereby conferred, is granted, made and
conferred subject to and in consideration of (a) the interests of the
Attorneys-in-Fact, the Underwriters, The Bank of Hemet and Pacific Community
Banking Group in and for the purpose of completing the transactions contemplated
hereunder and by the Acquisition Agreement and the Underwriting Agreement
between Pacific Community Banking Group, certain other selling shareholders and
the Underwriters, and (b) the completion of the registration of Pacific
Community Banking Group common stock pursuant to the Registration Statement and
the other acts of the above-mentioned parties from the date hereof to and
including the time the Shares are purchased by the Underwriters, and the
Attorneys-in-Fact are hereby further vested with an estate, right, title and
interest in and to the Shares deposited herewith for the purpose of irrevocably
empowering and securing to them authority sufficient to consummate said
transactions. Accordingly, this Agreement and the offer of the Shares made
herein shall be irrevocable prior to July 28, 1999, and shall remain in full
force and effect until that date. The Shareholder further agrees that this
Agreement shall not be terminated by operation of law or upon the occurrence of
any event whatsoever, including the death, disability or incompetence of the
Shareholder or, if the Shareholder is not a natural person, upon any
dissolution, winding up, distribution of assets or other event affecting the
legal existence of the Shareholder. If any event referred to in the preceding
sentence shall occur, whether with or without notice thereof to the
Attorneys-in-Fact, any of the Underwriters or any other person, the
Attorneys-in-Fact shall nevertheless be authorized and empowered to deliver and
deal with the Shares deposited under the Agreement by the Shareholder in
accordance with the terms and provisions of this Agreement as if such event had
not occurred.
B. If the transactions contemplated in the Acquisition Agreement are
not completed by July 28, 1999, this Agreement shall terminate (without
affecting any lawful action of the Attorneys-in-Fact or the Custodian prior to
such termination), and the Attorneys-in-Fact shall cause the Custodian to return
to the Shareholder all certificates for The Bank of Hemet common stock deposited
hereunder.
8. LIABILITY AND INDEMNIFICATION OF THE ATTORNEYS-IN-FACT AND CUSTODIAN.
The Attorneys-in-Fact and the Custodian assume no responsibility or liability to
the Shareholder or to any other person, other than to deal with The Bank of
Hemet common stock deposited hereunder, the Pacific Community Banking Group
common stock exchanged therefor, the proceeds from the sale of the Shares and
any other shares of Pacific Community Banking Group common stock deposited with
the Custodian pursuant to the terms of this Agreement in accordance with the
provisions hereof. The Shareholder hereby agrees to indemnify and hold harmless
the Attorneys-in-Fact and the Custodian, and their respective officers, agents,
successors, assigns and personal representatives with respect to any act or
omission of or by any of them in good faith in
6
<PAGE>
connection with any and all matters contemplated by this Agreement or the
Underwriting Agreement.
9. INTERPRETATION.
A. The representations, warranties and agreements of the Shareholder
contained herein shall survive the sale and delivery of the Shares and the
termination of this Agreement.
B. The validity, enforceability, interpretation and construction of
this Agreement shall be determined in accordance with the laws of the State of
California applicable to contracts made and to be performed within the State of
California, and this Agreement shall inure to the benefit of, and be binding
upon, the Shareholder and the Shareholder's heirs, executors, administrators,
successors and assigns, as the case may be.
C. Wherever possible each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any such provision shall be prohibited by or invalid under applicable
law, it shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
D. The use of the masculine gender in this Agreement includes the
feminine and neuter, and the use of the singular includes the plural, wherever
appropriate.
THE NEXT PAGE IS THE SIGNATURE PAGE.
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<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Custody Agreement, Letter
of Transmittal, Power of Attorney and Offer of Sale this ___ day of _________,
1999.
Signature of Shareholder _______________________________
Medallion Guaranteed by:
_______________________________
(Please sign exactly as your name appears
on your stock certificate(s).)*
Name and address to which
notices, funds and stock
certificates shall be sent.
______________________________
(NAME)
______________________________
(STREET)
______________________________
(CITY) (STATE) (ZIP)
Name and address to which
notices, funds and stock
certificates shall be sent.
______________________________
(NAME)
______________________________
(STREET)
______________________________
(CITY) (STATE) (ZIP)
* The signature MUST BE MEDALLION GUARANTEED by an eligible guarantor
institution, such as a bank, or a stock broker, savings and loan
association, or credit union, with membership in an approved medallion
signature program.
ACCEPTED by the Attorneys-in-Fact ACCEPTED by the Custodian as of the
as of the date above set forth: of the date above set forth:
[ATTORNEY IN FACT] [CUSTODIAN]
_________________________ By: _______________________________
Name: _______________________________
Its: _______________________________
[ATTORNEY IN FACT] ACCEPTED by the Custodian as of the
of the date above set forth:
_________________________
[CUSTODIAN]
[ATTORNEY IN FACT]
By: _______________________________
_________________________
Name: _______________________________
Its: _______________________________
8
<PAGE>
SEE THE ATTACHED INSTRUCTIONS
9
<PAGE>
SCHEDULE I
Certificate(s) for Shares of Common Stock of
THE BANK OF HEMET
deposited under
Custody Agreement, Letter of Transmittal, Power of Attorney and Offer of Sale
[PROVISION FOR STREET NAME ]
<TABLE>
<CAPTION>
Certificate
Number Number of Shares of
(or purchase The Bank of Hemet Common Stock
date if held in Represented by Certificate
street name) (or purchase date)
----------------- -------------------
<S> <C>
___________ . . . . . . . . ._____________________
___________ . . . . . . . . ._____________________
___________ . . . . . . . . ._____________________
___________ . . . . . . . . ._____________________
___________ . . . . . . . . ._____________________
___________ . . . . . . . . ._____________________
</TABLE>
Total Shares: _____________________
The underwriters may not sell all of the Pacific Community Banking Group
common stock received in exchange for your shares listed above. If you wish to
do so for income tax purposes, please give the order in which you would like
your shares sold, listing by the date of purchase, in order from those you want
the underwriters to sell first to those you want sold last.
1.__________________ 2.__________________ 3.__________________
4.__________________ 5.__________________ 6.__________________
7.__________________ 8.__________________ 9.__________________
10.__________________
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<PAGE>
ANNEX A
INSTRUCTION: See Section 6, paragraph A, of the Custody Agreement, Letter
of Transmittal, Power of Attorney and Offer of Sale.
CONSENT OF SPOUSE
I am the spouse of _________________. On behalf of myself, my heirs,
legatees, and assigns, I hereby join in and consent to the terms of the
foregoing Custody Agreement, Letter of Transmittal, Power of Attorney and Offer
of Sale (the "Agreement"), and I agree to the sale of the shares of common stock
of Pacific Community Banking Group, Inc., a California corporation, to be
received in exchange for the shares of common stock of The Bank of Hemet
registered in the name of my spouse or otherwise registered, which my spouse has
offered to sell in the Agreement.
Dated:_________________, 1999
__________________________________
(Signature of Spouse)
<PAGE>
STOCK POWER
FOR VALUE RECEIVED, ______________________________ hereby sells, assigns
and transfers unto _____________________, _______________ shares of the Common
Stock of The Bank of Hemet, and does hereby irrevocably constitute and appoint
______________________________________________________________________________
attorney to transfer such shares on the books of The Bank of Hemet with full
power of substitution in the premises.
Dated: ______________, 1999
_____________________________*
_____________________________
(Please sign exactly as your name appears on
your stock certificate(s).)
Signature medallion guaranteed by:
By: _____________________________
_______________
* The signature MUST BE MEDALLION GUARANTEED by an eligible guarantor
institution, such as The Bank of Hemet, another bank, a stock broker,
savings and loan association, or credit union, with membership in an
approved medallion signature program.
<PAGE>
QUESTIONS AND ANSWERS FOR SHAREHOLDERS OF VALLEY BANK
ABOUT THE
SHAREHOLDER DOCUMENTS
Q: I AM A SHAREHOLDER OF VALLEY BANK. WHY MUST I COMPLETE THESE DOCUMENTS?
A: Pacific Community Banking Group has agreed to acquire Valley Bank. You
have received a joint proxy statement/prospectus that describes Pacific
Community Banking Group and the acquisition. If the shareholders approve
the acquisition, Valley Bank needs the shareholder documents to complete
the acquisition and to arrange for you to receive the cash or stock and
warrants you will be entitled to receive.
Q: WHAT IS THE CUSTODY AGREEMENT, LETTER OF TRANSMITTAL, POWER OF ATTORNEY AND
OFFER OF SALE
A: You should read the entire document. But in summary, the Custody
Agreement, Letter of Transmittal, Power of Attorney and Offer of Sale is a
binding agreement by you that principally provides the following:
- You appoint a custodian, which will hold your shares and deliver them
as necessary to complete the acquisition and the public offering.
- You provide your name, address and other necessary information to
ensure that you receive the cash or stock to which you are entitled,
and you state a preference to receive a greater amount of cash or of
stock after the close of the acquisition and the public offering. You
also promise that you own your shares and have the power to sell them.
- You give a special power of attorney to two individuals, referred to
as the "Attorneys-in-Fact," who will take limited legal actions on
your behalf to establish the final price of your Pacific Community
Banking Group stock and sell some or all of that stock to the
underwriters.
- You offer the shares of Pacific Community Banking Group common stock
you will receive in the acquisition to the underwriters. The
underwriters will be able to purchase some or all of the shares for
resale at a price to the public of at least $15 per share.
Q: WHO IS THE CUSTODIAN AND WHAT WILL THE CUSTODIAN DO?
A: U.S. Stock Transfer Company will be the custodian. You should send your
certificates to the custodian now, along with the selling shareholder
documents. Or you may surrender the certificates and present the selling
shareholder documents at Valley Bank's head office at 24010 Sunnymead
Boulevard, Moreno Valley, California. If the acquisition
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closes, the custodian will surrender the certificates for your shares of
Valley Bank common stock. In exchange for each share so surrendered you
will receive 2/3rds of a share of Pacific Community Banking Group common
stock and 1/3rd of a warrant. The custodian will keep custody of your
shares of Pacific Community Banking Group for the brief period until the
public offering closes, then deliver the shares you sell to the
underwriter, send you the money received from the sale and send you
certificates for the shares you don't sell, and your warrants.
Q: WHO ARE THE "ATTORNEYS-IN-FACT" AND WHAT POWER WILL THEY HAVE?
A: An individual that has the power to act on your behalf under the Power of
Attorney is called an "Attorney-in-Fact." You will authorize any of two
persons, Marion V. Ashley and N. Douglas Mills, to act in this capacity.
They will negotiate the final price to the public of the shares of Pacific
Community Banking Group common stock you sell, with a minimum price of $15.
They will sell your shares of Pacific Community Banking Group common stock
to the underwriters on those terms. The Attorneys-in-Fact will consider
the preference for cash or stock that you have stated. But they will have
the discretion to designate some or all of your stock to be sold to the
public, in order to meet the terms of the acquisition agreement. They can
also execute any documents necessary to complete the sale, on your behalf,
without further consultation with you.
Q: CAN I ELECT TO RECEIVE CASH ONLY OR PACIFIC COMMUNITY BANKING GROUP COMMON
STOCK ONLY?
A: No. You will be able to indicate your preference to have (a) 100% cash or
(b) 100% stock of Pacific Community Banking Group or (c) 60% cash and 40%
stock of Pacific Community Banking Group after the close of the
acquisitions and the initial public offering. The Attorneys-in-Fact will
consider this when determining how much of your Pacific Community Banking
Group common stock to sell to the underwriters. But even if you indicate a
preference for 100% stock, it is likely that some of your shares will be
sold because the acquisition agreement requires that the underwriters
purchase and resell 60% of the total shares received by shareholders of
Valley Bank.
Q: WHAT OTHER KINDS OF INFORMATION WILL I NEED TO PROVIDE?
A: In addition to your name and address, you will give instructions for where
the transfer agent should send the money received from the sale and any
remaining shares and your warrants. If you have more than one certificate,
or have a number of separate purchases on your brokerage account, you can
indicate which of them you prefer to sell first, which can affect the
amount of taxable capital gain you realize if you paid different amounts
per share in your original purchases. You will also need to return a
completed form W-9 for tax reporting purposes. Please consult your tax
advisor if you have questions about the tax effects of designating
particular shares for sale.
Q: WHAT IF I DON'T HAVE PHYSICAL CERTIFICATES FOR MY SHARES, BUT HOLD THEM
THROUGH AN ACCOUNT AT MY BROKER?
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A: If you don't have certificates, but hold your shares of Valley Bank common
stock "in street name," that is, through a brokerage account, you should
still complete all of the enclosed shareholder documents. Then the
surrender and exchange of certificates, and the sale of stock, will take
place on your behalf. You will receive the cash proceeds from the sale of
your Pacific Community Banking Group common stock. Any remaining shares of
Pacific Community Banking Group common stock and the warrants will be
recorded on your brokerage account.
Q: WHAT IF THE ACQUISITION OR THE PUBLIC OFFERING IS NOT COMPLETED?
A: If either the acquisition or the public offering fails to take place, the
custodian will return to you the certificates for the shares of Valley Bank
common stock you surrendered, or send you replacement certificates.
Q: WHAT IF I LOST THE CERTIFICATES FOR MY SHARES?
A: If you have lost the certificates for your shares, please complete and
return the enclosed Lost Certificate Declaration, along with the other
applicable shareholder documents.
Q: IS IT SAFE TO SEND MY CERTIFICATES BY MAIL OR BY OVERNIGHT EXPRESS?
A: Please do NOT send endorsed stock certificates by mail or by overnight
express. Rather than endorsing the stock certificates, sign one of the
enclosed Stock Powers for each of your certificates. Then send the
certificates and the stock powers IN SEPARATE ENVELOPES.
Q: WILL I BE RESPONSIBLE FOR ANY OF THE COSTS OF THE PUBLIC OFFERING?
A: No. Pacific Community Banking Group will pay the underwriters' commissions
and other costs of the public offering. You will receive the gross amount
obtained for your shares in the public sale.
Q: WHAT IS THE DIFFERENCE BETWEEN SELLING MY SHARES IN THE PUBLIC OFFERING AND
SELLING MY SHARES OF PACIFIC COMMUNITY BANKING GROUP AT A LATER DATE?
A: You will be able to freely trade any shares of Pacific Community Banking
Group common stock that you retain, unless you are an "affiliate" of Valley
Bank. Valley Bank and Pacific Community Banking Group cannot predict
whether the price you would receive in such a later trade would be more or
less than the public offering price. You may have to pay a broker's
commission to make a later trade, while Pacific Community Banking Group
will pay all commissions for the sale of your shares in the public
offering.
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INSTRUCTIONS
(For completing the
Custody Agreement, Letter of Transmittal, Power of Attorney and Offer of Sale)
A. You have been sent five copies of the Custody Agreement, Letter of
Transmittal, Power of Attorney and Offer of Sale (the "Agreement"). Please
complete and return four copies of the Agreement and stock certificate(s) as set
forth in paragraph D below. PLEASE BE SURE TO INDICATE YOUR PREFERENCE FOR CASH
OR STOCK IN SECTION 4 OF THE AGREEMENT. A fully executed copy of the Agreement
will be returned to you; a fully executed copy of the Agreement and your stock
certificate(s) will be retained by the Custodian; a fully executed copy of the
Agreement will be delivered to the Attorneys-in-Fact; and a fully executed copy
of the Agreement will be delivered to the Representatives.
B. Complete Schedule I attached hereto.
C. You must sign each copy of the Agreement and for each stock certificate
you deposit along with this Agreement you must either (a) sign each stock
certificate or (b) sign a separate stock power (stock power forms are provided
with this Agreement). ALL OF YOUR SIGNATURES MUST BE MEDALLION GUARANTEED by an
eligible guarantor institution, such as a bank, a stock broker, savings and loan
association, or credit union, with membership in an approved medallion signature
program. PLEASE SIGN THE STOCK CERTIFICATE(s) OR STOCK POWER AND THE AGREEMENT
EXACTLY AS YOUR NAME APPEARS ON YOUR STOCK CERTIFICATE(s).
D. Endorsed stock certificate(s) or stock certificate(s) with stock powers
attached along with all four executed copies of the completed Agreement should
be promptly returned by hand delivery to Valley Bank's head office at 24010
Sunnymead Boulevard, Moreno Valley, California or by hand delivery or certified
mail appropriately insured to:
U.S. Stock Transfer Company
--------------------
--------------------
--------------------
If sending through the mail or courier, it is recommended that you do not
endorse the certificate(s), but send an executed stock power or powers in a
separate cover from the certificate(s).
E. You may elect to retain shares of Pacific Community Banking Group
common stock rather than offering to sell them to the Underwriters. Also, each
shareholder may be required to retain some shares of Pacific Community Banking
Group common stock to satisfy the terms of the First Restatement of the
Agreement and Plan of Reorganization between Valley Bank and Pacific Community
Banking Group. In either case, the Custodian will cause to be delivered to you
in due course, but not earlier than ten days after the closing for the purchase
of firm shares by the Underwriters, a certificate for the number of shares of
Pacific Community Banking Group common stock and warrants that you have received
but that were not sold in the public offering.
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-----------------------------
(Name of Shareholder)
CUSTODY AGREEMENT, LETTER OF TRANSMITTAL, POWER OF ATTORNEY AND OFFER OF SALE
FOR CUSTODY AND EXCHANGE OF COMMON STOCK OF
VALLEY BANK
AND FOR CUSTODY AND SALE OF COMMON STOCK OF
PACIFIC COMMUNITY BANKING GROUP
Marion V. Ashley
N. Douglas Mills
As Attorneys-in-Fact
c/o Valley Bank
24010 Sunnymead Boulevard
Moreno Valley, CA 92553
U.S. Stock Transfer Company
As Custodian
[Address of U.S. Stock Transfer Company]
Sutro & Co. Incorporated
As Representative of the several Underwriters
c/o Sutro & Co. Incorporated
11150 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025
Ladies and Gentlemen:
The undersigned (the "Shareholder") is a shareholder of Valley Bank
("Valley Bank"), a California corporation. Pacific Community Banking Group, a
California corporation, and Valley Bank have signed a First Restatement of
Agreement and Plan of Reorganization (as amended, the "Acquisition Agreement")
providing for the acquisition of Valley Bank by Pacific Community Banking Group.
If the acquisition is completed, the Shareholder's shares of Valley Bank will
automatically convert into a right to receive shares of Pacific Community
Banking Group.
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Pacific Community Banking Group and the Shareholder propose to sell some or all
of the shares of Pacific Community Banking Group common stock received by the
Shareholder to underwriters (the "Underwriters") for whom Sutro & Co.
Incorporated will act as representative (the "Representative" ), for
distribution under a Registration Statement on Form S-1 (the "Registration
Statement") to the public at a price and on terms to be hereafter determined.
It is understood that at this time there is no commitment on the part of the
Underwriters to purchase any shares of Pacific Community Banking Group common
stock and no assurance that an offering of Pacific Community Banking Group
common stock will take place. The shares of Pacific Community Banking Group
common stock received by the Shareholder in exchange for shares of Valley Bank
common stock, all of which the Shareholder will hereby offer to sell to the
Underwriters, are referred to herein as the "Shares."
1. APPOINTMENT AND POWERS OF ATTORNEYS-IN-FACT.
A. The Shareholder irrevocably constitutes and appoints Marion V.
Ashley and N. Douglas Mills (the "Attorneys-in-Fact"), and each of them, its
agent and attorney-in-fact, with full power of substitution, with respect to all
matters arising in connection with the public offering and sale of the Shares,
including, but not limited to, the power and authority on behalf of the
Shareholder to do or cause to be done any of the following things:
(i) to instruct the Custodian (as defined below) to surrender
certificates for all of the Shareholders' shares of common
stock of Valley Bank in exchange for shares of Pacific
Community Banking Group as provided in the Acquisition
Agreement;
(ii) to negotiate, determine and agree upon (a) the price at
which the Shares will be initially offered to the public
by the Underwriters, provided that the price shall not be
less than $15 per share, and (b) the price at which the
Shares will be sold to the Underwriters;
(iii) to allocate the number of shares of Pacific Community
Banking Group common stock owned by the Shareholder that
shall be sold to the Underwriters and the number of shares
of Pacific Community Banking Group common stock that shall
be retained by the Shareholder, in satisfaction of the
terms of the Acquisition Agreement. Notwithstanding the
statement of preference made by the Shareholder herein,
the Attorneys-in-Fact are authorized, in their sole
discretion, to sell up to the total number of shares of
Pacific Community Banking Stock owned by the Shareholder.
(iv) to sell, assign, transfer and deliver the Shares to the
Underwriters and deliver to the Underwriters certificates
for the Shares so sold;
(v) take any and all steps deemed necessary or desirable by
the Attorneys-in-Fact in connection with the registration
of the Shares under the Securities Act of 1933, as amended
(the "Securities Act" ), the Securities Exchange Act of
1934, as amended, and under the securities or "blue sky"
laws of various
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states and jurisdictions, including, without limitation,
the giving or making of such undertakings, representations
and agreements and the taking of such other steps as the
Attorneys-in-Fact may deem necessary or advisable;
(vi) instruct Pacific Community Banking Group and the Custodian
(as hereinafter defined) on all matters pertaining to the
sale of the Shares and delivery of certificates therefor;
and
(vii) otherwise take all actions and do all things necessary or
proper, required, contemplated or deemed advisable or
desirable by the Attorneys-in-Fact in their discretion,
including the execution and delivery of any documents, and
generally act for and in the name of the Shareholder with
respect to the sale of the Shares to the Underwriters and
the reoffering of the Shares by the Underwriters as fully
as could the Shareholder if then personally present and
acting.
B. Each Attorney-in-Fact may act alone in exercising the rights and
powers conferred on the Attorneys-in-Fact by this Custody Agreement, Letter of
Transmittal, Power of Attorney and Offer of Sale (this "Agreement"), and the act
of any Attorney-in-Fact shall be the act of the Attorneys-in-Fact. Each
Attorney-in-Fact is hereby empowered to determine, in his sole and absolute
discretion, the time or times when, the purposes for which, and the manner in
which, any power herein conferred upon the Attorneys-in-Fact shall be exercised.
C. The Custodian, the Representatives, Pacific Community Banking
Group and all other persons dealing with the Attorneys-in-Fact as such may rely
and act upon any writing believed in good faith to be signed by one or more of
the Attorneys-in-Fact.
D. The Attorneys-in-Fact shall not receive any compensation from the
Shareholder for their services rendered hereunder.
2. APPOINTMENT OF CUSTODIAN; DEPOSIT OF SHARES.
A. In connection with and to facilitate the exchange of shares of
Valley Bank common stock and the sale of the Shares to the Underwriters, the
Shareholder hereby appoints U.S. Stock Transfer Company as custodian (the
"Custodian") and herewith deposits with the Custodian one or more certificates
for Valley Bank common stock which represent the total number of the shares of
Valley Bank common stock held by the Shareholder, and which number is set forth
on Schedule I hereto. Each such certificate so deposited is in negotiable and
proper deliverable form and either (a) has been endorsed in blank with the
signature of the Shareholder thereon, medallion guaranteed by an eligible
guarantor institution, such Valley Bank or another bank, a stock broker, savings
and loan association, or credit union, with membership in an approved medallion
signature program, or (b) is accompanied by a duly executed stock power or
powers in blank, bearing the signature of the Shareholder, medallion guaranteed
in the same manner. The Custodian is hereby authorized and directed, subject to
the instructions of the Attorneys-in- Fact, to act as follows:
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(i) to surrender the certificates for Shareholder's shares of
Valley Bank in exchange for certificates of Pacific
Community Banking Group common stock in accordance with
the Acquisition Agreement;
(ii) to hold in custody the certificate or certificates
deposited herewith and any other certificates or
instruments exchanged therefor;
(iii) to deliver or to authorize Pacific Community Banking
Group's transfer agent to deliver the certificates of
Pacific Community Banking Group common stock received in
exchange for the certificates deposited herewith (or
replacement certificate(s) for the Shares) to or at the
direction of the Attorneys-in-Fact; and
(iv) to return or cause Pacific Community Banking Group's
transfer agent to return to the Shareholder new
certificate(s) for the shares of Pacific Community Banking
Group common stock and warrants that are received in
exchange for any certificate deposited hereunder but that
are not sold to the Underwriters.
B. Until the shares of Valley Bank common stock deposited hereunder
have been exchanged for Pacific Community Banking Group common stock, the
Shareholder shall retain all rights of ownership with respect to the shares of
Valley Bank common stock deposited hereunder, including the right to vote and to
receive all dividends and payments thereon, except the right to retain custody
of or dispose of such Shares, which right is subject to this Agreement. Until
the Shares have been delivered to the Underwriters against payment therefor, the
Shareholder shall retain all rights of ownership with respect to the Shares,
including the right to vote and to receive all dividends and payment thereon,
except the right to retain custody of or dispose of such Shares, which right is
subject to this Agreement.
3. IRREVOCABLE OFFER TO SELL SHARES OF PACIFIC COMMUNITY BANKING GROUP
COMMON STOCK.
The Shareholder offers for sale to the Underwriters any and all shares
of Pacific Community Banking Group common stock received in exchange for the
shares of Valley Bank common stock transmitted herewith. This offer is made
without conditions, except as provided in this Agreement, and may be accepted
and executed without prior notice to the Shareholder. The Shareholder may not
revoke this offer; however, this offer will expire if not accepted in whole or
in part by the Underwriter on or before July 31, 1999.
4. PREFERENCE TO RECEIVE CASH OR SHARES OF PACIFIC COMMUNITY BANKING
GROUP COMMON STOCK
The Shareholder hereby instructs the Attorney-in-Fact that the
shareholder prefers to receive consideration for the surrendered shares of
Valley Bank common stock as follows. The Shareholder acknowledges that this
preference is subject to the power of the Attorney-in-Fact to allocate the
number of Shareholders' shares sold to the Underwriters to satisfy the terms of
the Acquisition Agreement, in the sole discretion of the Attorney-in-Fact.
4
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CHECK THE BOX BELOW THAT APPLIES.
- --------------------------------------------------------------------------------
{ A. I prefer to sell 100% of the shares of Pacific Community
Banking Group common stock that I will receive in the acquisition.
- --------------------------------------------------------------------------------
{ B. I prefer to retain all of the shares of Pacific Community
Banking Group common stock that I will receive in the acquisition.
- --------------------------------------------------------------------------------
{ C. I prefer to sell 60% and retain 40% of the shares of Pacific
Community Banking Group common stock that I will receive in the
acquisition.
- --------------------------------------------------------------------------------
5. SALE OF SHARES; REMITTING NET PROCEEDS.
The Attorneys-in-Fact are hereby authorized and directed to deliver or
cause the Custodian or Pacific Community Banking Group's transfer agent to
deliver certificates for the Shares to the Representatives, against delivery to
the Attorneys-in-Fact, for the account of the Shareholder, of the purchase price
of the Shares. The Attorneys-in-Fact are authorized, on behalf of the
Shareholder, to accept and acknowledge receipt of the payment of the purchase
price for the Shares and shall promptly deposit such proceeds with the
Custodian. The Custodian shall promptly remit to the Shareholder his or her
share of the proceeds.
6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Shareholder
represents and warrants to, and agrees with, Pacific Community Banking Group,
the Attorneys-in-Fact, the Custodian and the Underwriters as follows:
A. The Shareholder has full legal right, power and authority to
enter into and perform this Agreement. If the Shareholder is acting as a
fiduciary, officer, partner or agent, the Shareholder is enclosing with this
Agreement certified copies of the appropriate instruments pursuant to which the
Shareholder is authorized to act hereunder. If the Shareholder is an individual
and is married, and the spouse is not named as an owner on the stock
certificate, the Shareholder is enclosing with this Agreement a duly completed
and executed consent of his or her spouse, in the form attached to this
Agreement as Annex A.
B. The Shareholder is not directly or indirectly an affiliate of or
associated with any member of the National Association of Securities Dealers,
Inc.
C. The Shareholder agrees to deliver to the Attorneys-in-Fact such
documentation as the Attorneys-in-Fact, Valley Bank, Pacific Community Banking
Group or the Underwriters or any of their respective counsel may reasonably
request in order to effectuate any of the provisions hereof, in form and
substance satisfactory in all respects to the Attorneys-in-Fact.
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<PAGE>
D. The foregoing representations, warranties and agreements are made
for the benefit of, and may be relied upon by, the Attorneys-in-Fact, Valley
Bank, Pacific Community Banking Group, the Custodian, the Underwriters and their
respective representatives, agents and counsel.
7. IRREVOCABILITY OF INSTRUMENTS; TERMINATION OF THIS AGREEMENT.
A. This Agreement, the deposit of Valley Bank common stock pursuant
hereto and all authority hereby conferred, is granted, made and conferred
subject to and in consideration of (a) the interests of the Attorneys-in-Fact,
the Underwriters, Valley Bank and Pacific Community Banking Group in and for the
purpose of completing the transactions contemplated hereunder and by the
Acquisition Agreement and the Underwriting Agreement between Pacific Community
Banking Group, certain other selling shareholders and the Underwriters, and (b)
the completion of the registration of Pacific Community Banking Group common
stock pursuant to the Registration Statement and the other acts of the
above-mentioned parties from the date hereof to and including the time the
Shares are purchased by the Underwriters, and the Attorneys-in-Fact are hereby
further vested with an estate, right, title and interest in and to the Shares
deposited herewith for the purpose of irrevocably empowering and securing to
them authority sufficient to consummate said transactions. Accordingly, this
Agreement and the offer of the Shares made herein shall be irrevocable prior to
July 31, 1999, and shall remain in full force and effect until that date. The
Shareholder further agrees that this Agreement shall not be terminated by
operation of law or upon the occurrence of any event whatsoever, including the
death, disability or incompetence of the Shareholder or, if the Shareholder is
not a natural person, upon any dissolution, winding up, distribution of assets
or other event affecting the legal existence of the Shareholder. If any event
referred to in the preceding sentence shall occur, whether with or without
notice thereof to the Attorneys-in-Fact, any of the Underwriters or any other
person, the Attorneys-in-Fact shall nevertheless be authorized and empowered to
deliver and deal with the Shares deposited under the Agreement by the
Shareholder in accordance with the terms and provisions of this Agreement as if
such event had not occurred.
B. If the transactions contemplated in the Acquisition Agreement are
not completed by July 31, 1999, this Agreement shall terminate (without
affecting any lawful action of the Attorneys-in-Fact or the Custodian prior to
such termination), and the Attorneys-in-Fact shall cause the Custodian to return
to the Shareholder all certificates for Valley Bank common stock deposited
hereunder.
8. LIABILITY AND INDEMNIFICATION OF THE ATTORNEYS-IN-FACT AND CUSTODIAN.
The Attorneys-in-Fact and the Custodian assume no responsibility or liability to
the Shareholder or to any other person, other than to deal with Valley Bank
common stock deposited hereunder, the Pacific Community Banking Group common
stock exchanged therefor, the proceeds from the sale of the Shares and any other
shares of Pacific Community Banking Group common stock deposited with the
Custodian pursuant to the terms of this Agreement in accordance with the
provisions hereof. The Shareholder hereby agrees to indemnify and hold harmless
the Attorneys-in-Fact and the Custodian, and their respective officers, agents,
successors, assigns and personal representatives with respect to any act or
omission of or by any of them in good faith in connection with any and all
matters contemplated by this Agreement or the Underwriting Agreement.
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<PAGE>
9. INTERPRETATION.
A. The representations, warranties and agreements of the Shareholder
contained herein shall survive the sale and delivery of the Shares and the
termination of this Agreement.
B. The validity, enforceability, interpretation and construction of
this Agreement shall be determined in accordance with the laws of the State of
California applicable to contracts made and to be performed within the State of
California, and this Agreement shall inure to the benefit of, and be binding
upon, the Shareholder and the Shareholder's heirs, executors, administrators,
successors and assigns, as the case may be.
C. Wherever possible each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any such provision shall be prohibited by or invalid under applicable
law, it shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
D. The use of the masculine gender in this Agreement includes the
feminine and neuter, and the use of the singular includes the plural, wherever
appropriate.
THE NEXT PAGE IS THE SIGNATURE PAGE.
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IN WITNESS WHEREOF, the undersigned has executed this Custody Agreement, Letter
of Transmittal, Power of Attorney and Offer of Sale this ___ day of _________,
1999.
Signature of Shareholder
-------------------------------
Medallion Guaranteed by:
-------------------------------
(Please sign exactly as your name appears
on your stock certificate(s).)*
Name and address to which
notices, funds and stock
certificates shall be sent.
------------------------------
(NAME)
------------------------------
(STREET)
------------------------------
(CITY) (STATE) (ZIP)
* The signature MUST BE MEDALLION GUARANTEED by an eligible guarantor
institution, such as a bank, or a stock broker, savings and loan
association, or credit union, with membership in an approved medallion
signature program.
ACCEPTED by the Attorneys-in-Fact ACCEPTED by the Custodian as of the
as of the date above set forth: of the date above set forth:
[ATTORNEY IN FACT] [CUSTODIAN]
By:
-------------------------- --------------------------
Name:
--------------------------
Its:
--------------------------
[ATTORNEY IN FACT]
--------------------------
[ATTORNEY IN FACT]
--------------------------
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SEE THE ATTACHED INSTRUCTIONS
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<PAGE>
SCHEDULE I
Certificate(s) for Shares of Common Stock of
VALLEY BANK
deposited under
Custody Agreement, Letter of Transmittal, Power of Attorney and Offer of Sale
[PROVISION FOR STREET NAME ]
Certificate
Number Number of Shares of
(or purchase Valley Bank Common Stock
date if held in Represented by Certificate
street name) (or purchase date)
---------------- -------------------
___________ . . . . . . . . . . . ._____________________
___________ . . . . . . . . . . . ._____________________
___________ . . . . . . . . . . . ._____________________
___________ . . . . . . . . . . . ._____________________
___________ . . . . . . . . . . . ._____________________
___________ . . . . . . . . . . . ._____________________
Total Shares: _____________________
The underwriters may not sell all of the Pacific Community Banking Group
common stock received in exchange for your shares listed above. If you wish to
do so for income tax purposes, please give the order in which you would like
your shares sold, listing by the date of purchase, in order from those you want
the underwriters to sell first to those you want sold last.
1.__________________ 2.__________________ 3.__________________
4.__________________ 5.__________________ 6.__________________
7.__________________ 8.__________________ 9.__________________
10.__________________
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ANNEX A
INSTRUCTION: See Section 6, paragraph A, of the Custody Agreement, Letter
of Transmittal, Power of Attorney and Offer of Sale.
CONSENT OF SPOUSE
I am the spouse of _________________. On behalf of myself, my heirs,
legatees, and assigns, I hereby join in and consent to the terms of the
foregoing Custody Agreement, Letter of Transmittal, Power of Attorney and Offer
of Sale (the "Agreement"), and I agree to the sale of the shares of common stock
of Pacific Community Banking Group, Inc., a California corporation, to be
received in exchange for the shares of common stock of Valley Bank registered in
the name of my spouse or otherwise registered, which my spouse has offered to
sell in the Agreement.
Dated:_________________, 1999
__________________________________
(Signature of Spouse)
<PAGE>
STOCK POWER
FOR VALUE RECEIVED, ______________________________ hereby sells, assigns
and transfers unto _____________________, _______________ shares of the Common
Stock of Valley Bank, and does hereby irrevocably constitute and appoint
______________________________________________________________________________
attorney to transfer such shares on the books of Valley Bank with full power of
substitution in the premises.
Dated: ______________, 1999
_____________________________*
_____________________________
(Please sign exactly as your name appears on
your stock certificate(s).)
Signature medallion guaranteed by:
By: _____________________________
_______________
* The signature MUST BE MEDALLION GUARANTEED by an eligible guarantor
institution, such as Valley Bank, another bank, a stock broker, savings and
loan association, or credit union, with membership in an approved medallion
signature program.
